In a reprise of the feeding of the 5000 with five loaves and two fish, the Energy Security Board has offered salvation for the Australian economy with the National Energy Guarantee (NEG).
A cunning scheme has been developed by the alphabet soup of acronymic agencies charged by the government to prepare a plan to regulate the electricity market. The objectives are to gradually remove the lowest cost (coal) generators, thereby reducing emissions, while lowering prices and raising reliability. All at the same time!
The NEG proposal remains confidential, (as does Minister Frydenberg’s subsequent offer to the state energy ministers) in spite of it being leaked to all major news outlets. Under the scheme, the existing generators are predicated to stay on line as long as needed – even though their economics is undermined by rival wind/solar generators. These are currently favoured by the $80 per MWh subsidy under the Renewable Energy Target (RET) ($40 for rooftop solar). To place this in perspective, the total price before the policy madness started to bite was $40 per MWh. Under the NEG, renewables – apparently, in a tax boost to government, including hydro – will benefit from an energy intensity scheme (aka a carbon tax).
The level of the carbon tax under the NEG is carefully disguised and is likely to fall both on generators and retailers, the former because the coal generators will have to accept a price discount on their contracts as a result of the increasing level of low emission electricity the retailers must source. Of course, like any other cost the new carbon tax will be passed on to customers. The fossil fuel generators also face a forced reduction in output as the “must run” renewable generators get priority.
As a result of these pliable coal generators being assumed to remain on-line, notwithstanding their losses, in a triumph of hope over experience, prices plummet from the stratospheric levels created by earlier versions of those same regulations. Here is the proof!
Unfortunately modelled forecasts of regulatory outcomes in this industry have been disastrously wrong. This is largely because, using pretentious econo-jargon, modellers focus on marginal costs and assume that these will drive firms to continue operating and renewing plant even after decades of losses. Hence, no modeller picked the fact that exiting firms would cause prices to double in 2017 from their 2015 levels of $40 per MWh and stay at those levels.
It is easy to demonstrate how incorrect and, to the degree that they have driven policy, damaging previous modelled forecasts have been.
- Jacobs for Climate Change Authority Nov 2016 envisaged the baseline (no regulation) price rising from $50 per MWh in 2020 to $80 per MWh by 2040. The RET subsidy comes to the rescue of this bleak scenario by reducing prices in 2020 to $30 per MWh, before they rise to around $67 per MWh in 2030 and hold at that level.
- Here are some prices forecast by Frontier in 2016, who argue:
The intuition behind the relative prices changes over time is as follows:
The REG approach is essentially to withdraw high emissions capacity from the market, which should result in a price signal for new low emissions generation to replace it. This suggests that prices should rise in the short/medium term before reverting to long run equilibrium.
The extended LRET approach is largely the opposite: this encourages entry of new low emissions generation via subsidies. This should lead to excess capacity, short-term (wholesale) price falls, which should encourage retirement of existing plant (crowding out). This suggests that wholesale prices should fall in the short/medium term before reverting to long run equilibrium.
The EIT involves a mix of credits (encouraging low emissions entry) and penalties (encouraging high emission exit), which suggests that short term wholesale prices should be between the other policy options.
- Here are the prices developed by Jacobs for Finkel. Note how the favoured Clean Energy Target brings dramatically lower prices over time, $40 per MWh by 2044, compared to $70 per MWh under the Emissions Intensity Scheme favoured by the ESB.
Summary 2020 and 2030 prices
Compared with the 2018/9 price of $82 per MWh (NSW), modellers offered the following forecasts.
|reference||emissions intensity (carbon tax)||RET|
|business as usual||emissions intensity (carbon tax)||LRET|
|business as usual||emissions intensity (carbon tax)||Clean Energy Target|
|ACIL 2018 (ESB, NSW)|
|price without Guarantee||price with Guarantee emissions intensity (carbon tax)|
Underlining the fragility of modelling, the “Guarantee” or emissions intensity carbon tax was estimated to result in a 2030 price of $115 per MWh by Jacobs in 2016, $52 by Frontier in 2017, $68 by Jacobs in 2017 and $48 by ACIL in 2018.
The rationale for the NEG is that it provides certainty on top of the supposed lower costs of wind/solar and as a result borrowing costs are lower and these get passed on in lower prices. There are several problems with this
- There is no way that the NEG will not be changed by a different government, even the same government if it sees a reason to do so
- Minister Frydenberg, in yet another leaked document, has signalled that the 10 year guarantee can be five years, undercutting the NEG’s supposed certainty
- The data underlying the ACIL forecasts is inconsistent with the certainty driven by the NEG: all the new generation is rooftop solar which, if the ACCC report is to be accepted, will see the subsidies removed from 2021; there is no new fossil fuel generation and AGL is assumed to maintain its price-boosting decision to withdraw the Liddell power station from the market rather than sell it to a rival.
The ostensible rationale behind this new intervention is the reduction of greenhouse gases, (the reliability provisions are unnecessary as retailers will pay insurance, “firming contracts”, without regulatory direction). Even as a greenhouse abatement , the NEG, on its own numbers fails. The model shows only a trivial reduction in emissions without the NEG because the costs of wind/solar are assumed to be cheap but not so much so that they can survive without the RET/carbon tax subsidies.
The farce is that this plan has nothing to do with climate change, its ostensible justification. There is no provision for emission obligations to be sold overseas to accredited (ahem!) sources and very limited, if any, possibility of firms acquitting their requirements by paying other sectors to do so more cheaply. The plan is concocted to pursue a 30 year dream under which renewable energy, always on the cusp of commerciality, displaces all that archaic and politically incorrect energy derived from fossil fuels and uranium.