Recently, the Australian federal government declared a new energy policy, the National Energy Guarantee. In return, the Renewable Energy Target, designed to reduce greenhouse gas emissions in the electricity sector, has been dropped and will not continue past 2020.
The NEG contains two new obligations on electricity retailers. The first is to ensure we have enough electricity generation available to meet our needs (the Reliability Guarantee). The second is to drive down the sector’s greenhouse emissions (the Emissions Guarantee).
Lets take a look at this guarantee in more detail.
There are two broad goals under the NEG: the reliability guarantee, and emissions guarantee. With the reliability guarantee, energy retailers will have contracts with energy wholesalers that include dispatchable energy.
Dispatchable in this sense refers to electrical generation that can be modulated up or down in response to the supply and demand of electricity. This is a reliability obligation to prevent the occurrence of a blackout if demands of electricity can’t be met. The emissions guarantee also obligates the energy retailers to meet carbon emission limits.
By having more certainty, it is expected that energy contracts with wholesalers can bring down the cost of buying electricity as well as support construction of newer renewable and dispatchable generators. Under the NEG, the Liberal government quoted an average saving for each household of around $115 per year, from the certainty in electricity buying contracts.
However, the implication of this is the shift in negotiating power of the energy market. Wholesalers can use the increased necessities in the contract as a justification to surge the wholesale electricity price.
It is also assumed that a variety of dispatchable sources will be adopted. These sources of include gas, hydropower (and technically coal) which contrasts the fluctuations in solar or wind power generation. Ideally, the different sources will be used within reasonable proportions.
On the other hand, it could also mean that gas usage will dominate, since it is not only more flexible in terms of shifting the level of electricity production at the generator (in a sense, more ‘dispatchable’), but it is also the status quo among the energy landscape today.
Here's what it looks like at a glance:
Infographic: the National Energy Guarantee at a glance. Source: The Conversation.
These changes could impacts negatively on electrical prices, since gas is overwhelmingly expensive compared to other sources. So, ultimately the burden will fall onto the consumer to bear the cost.
The cost of household electricity consumption makes up only around 40% of an electricity bill. Therefore, any reductions in the price within the national energy market can translate very little along the value chain within the hands of the consumers. Reducing other charges, such as supply charge changes (the cost for the delivery of electricity via poles and wires), are not addressed in the Guarantee.
Renewable Energy Target scrapped means no more federal renewable incentives
The federal government will have a smaller role in climate change, once the electricity retailers receive certainty through the form of the NEG. With its adoption, the federal government will cease the Renewable Energy Target beyond 2020.
Along with it goes the large and small-scale grants or ‘certificates’ in renewable power. Installations of renewable energy that replace some of the building’s demand from the grid will no longer receive certificates. The consequence of this on the renewable energy sector is massive.
Incentives such as these enable more uptake of renewable energy by the consumer by making the technology more affordable. When the unit is installed, the certificate is given to the installer, in exchange for a cheaper purchasing price.
There are several benefits to this scheme. Australia’s emissions targets for the electricity sector should be met. And the scheme can theoretically be ramped up to meet more challenging targets over time, simply by lowering the emissions intensity limit for retailers.
It should also be reasonably cost-effective. Rather than the government imposing quotas or limits for various types of technology, retailers will be given a free hand to pick the cheapest mix of generation that will meet their emissions obligations. It is genuinely technology-neutral.
Many of the precise policy details are yet to be worked out, so the future is a little unclear. But, the good news is that addressing our energy crisis is top of mind for our politicians. We're still optimistic that something good can come out of this sector shake-up.