Could the NEG bring down power prices? It’s hard to be confident that it will


Salim Mazouz, Australian National University; Frank Jotzo, Crawford School of Public Policy, Australian National University, and Hugh Saddler, Australian National University

The final design document for the National Energy Guarantee (NEG), released this week, contains a range of claims about the policy’s ability to drive down both greenhouse emissions and electricity prices. But still there is precious little detail on how exactly these assertions are backed up.

Specifically, two claims in the new document released by the Energy Security Board (ESB) are difficult to reconcile with other reputable modelling results.

First is the claim that greenhouse emissions will fall further under the NEG than they would in the policy’s absence. But a fine-grained analysis published a week earlier by the Australian Energy Market Operator (AEMO) suggests that the target of cutting emissions by 26% will be met regardless of whether the NEG is implemented or not.

The ESB predicts that emissions will fall further under the NEG (purple line) than without it (orange line). But according to the AEMO’s forecast (blue line), emissions will drop by more than this, even without the NEG. NEG modelling data are approximate, derived from measuring graphics provided in the ESB report.
Hugh Saddler, Author provided

If the AEMO analysis is right, the NEG in its currently proposed form will do nothing to cut emissions.




Read more:
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The second claim is that wholesale electricity prices will fall by a further 20% under the NEG. But it is hard to see how this will happen, given that the policy is not expected to trigger large changes to the energy landscape. The ESB’s document provides no raw data on this, but if we squint hard at the graphs provided in its modelling summary, we get the following:

Forecast changes to electricity generation capacity under the NEG. Modelling data are approximate, derived from measuring graphics provided in the ESB report.
Hugh Saddler, Author provided

This is not just a technical quibble. Much of the political justification for the NEG rests on the hope that it will deliver cheaper electricity. But how?

Taking the assumptions provided in the ESB’s document, we can attempt to deduce what will be the main drivers of price changes, in rough order of importance:

Contract coverage

The modelling assumes that contract coverage – electricity retailers and generators currently use electricity contracts to manage their exposure to fluctuating prices in the spot market – will increase by 5% under the NEG.

This is based on the notion that the NEG’s reliability requirement – which would require electricity retailers to hold an appropriate portfolio of electricity contracts in dispatchable sources of generation – would incentivise retailers to buy more electricity contracts.

Whether this would indeed drive an additional 5% of contract coverage is rather difficult to ascertain given the information provided. On the face of it, 5% seems a lot given that the reliability requirement is not expected to be triggered, noting that no reliability issues have been identified in the AEMC’s recent reliability standard and settings review and that even the base cases in AEMO’s Integrated System Plan do not trigger reliability problems.

Even if contracting does increase by 5%, how does that push down prices? This is a crucial point and yet it is not backed up by adequate analysis or evidence in the ESB report.

The ESB’s chain of reasoning appears to be: the NEG will result in a greater share of electricity output being sold under contract in anticipation of the reliability requirements kicking in; this will lead to lower spot market prices; this in turn will also pull down prices in the contract markets, reducing average wholesale prices overall.

So it all hinges on retailers changing their wholesale purchasing habits so as to ensure they meet the reliability requirement – even though, as discussed above, the reliability requirement is unlikely to be triggered Moreover, it is hard to believe that contract prices would fall as a result; it seems just as likely that the generating companies that sell those contracts (and which wield significant market power) would raise their prices, not lower them.

More renewables

The ESB assumes that the NEG will deliver an extra 1,000 megawatts of renewable capacity.

But this is an assumption, rather than a modelled outcome. The only justification offered is the ESB’s assertion that “recent renewable investment trends have been in part supported by the likelihood of an agreement to implement the guarantee”.

This is surprising, given that the NEG’s emissions target is so weak as to be ineffective, and ESB’s assumption that the policy will drive down power prices (and therefore profits for renewables generators). Any direct incentive for investment in renewables is highly unlikely to be coming from the NEG; the only plausible reasons would be greater confidence and lower financing costs.

Demand response

Demand response – in which consumers alter their power consumption so as to reduce peaks in electricity demand in exchange for payment – can potentially make a big difference to power prices by reducing the incidence of high-price events.

The use of this strategy is already growing strongly among electricity market participants. But once again, the ESB has given us little evidence to back up its assumption that the no policy case will have lower demand response than under the NEG. It all again hinges on the effect of the reliability requirement on contract coverage and on the extent to which emerging demand response products can take advantage of this. Very little analysis and no evidence to back up the choice of assumptions is contained in the ESB’s policy document.




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Financing cost

The ESB assumes that the NEG will reduce the uncertainty premium – an additional amount required to finance projects in the face of policy uncertainty – by 3 percentage points. It is clear that a policy uncertainty premium currently exists, although it is unclear how high it might be. The Finkel Review assumed it is 3%. So does that mean investment uncertainty would completely disappear once the NEG is legislated?

Certainly not. Given the highly publicised political disagreements (even within the government’s own ranks) about the NEG’s emissions target, it seems likely that substantial policy uncertainty will still linger.

Regardless, this scarcely matters for the price outcomes modelled by the ESB, given that the model is predicting very little new electricity investment and the small amount of additional investment in the model attributed to the NEG is entirely assumption-driven, rather than a modelling outcome.




Read more:
The National Energy Guarantee is a flagship policy. So why hasn’t the modelling been made public?


Overall, the latest policy details don’t inspire confidence that the NEG will actually drive down power prices relative to what will happen anyway. We need a credible analysis of these assumptions, and modelling to tease out the effect of varying them.

It is helpful that the final report by the ESB does include at least a summary of the modelling. From here, it would be useful for the ESB, and the modellers it hired, to provide an investigation of the issues we have outlined here, or to undertake one if this has not yet been done.

The ConversationAs per this week’s open letter from energy analysts calling for the release of the modelling, independent researchers have offered to provide peer review. Let’s hope the ESB takes us up on it.

Salim Mazouz, Research Manager, Centre for Climate Economics and Policy, Australian National University; Frank Jotzo, Director, Centre for Climate Economics and Policy, Crawford School of Public Policy, Australian National University, and Hugh Saddler, Honorary Associate Professor, Centre for Climate Economics and Policy, Australian National University

This article was originally published on The Conversation. Read the original article.

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Tony Abbott loses traction in his fight on energy



File 20180626 112611 1a35dbv.jpg?ixlib=rb 1.1
Before the Coalition party room meeting Abbott had again publicly left the way open to cross the floor when legislation comes to parliament, assuming Frydenberg gets a deal at the COAG Energy Council in August.
Mick Tsikas/AAP

Michelle Grattan, University of Canberra

Malcolm Turnbull and Energy Minister Josh Frydenberg had clear Coalition party room support on Tuesday to decisively stare down a fresh sortie by Tony Abbott on the National Energy Guarantee.

The frustration many government MPs feel about the ongoing argument was epitomised by the comment of marginal seat holder Ann Sudmalis who told colleagues, “The more that people stuff around with this issue, the greater the risk I won’t be here”.

Before the meeting Abbott had again publicly left the way open to cross the floor when legislation comes to parliament, assuming Frydenberg gets a deal at the COAG Energy Council in August.

Asked whether, if the premiers sent back a plan he didn’t like, he was committed enough to cross the floor, Abbott said: “The short answer is yes. I think that I have an obligation to keep faith with the position that the government took to the people in 2013.”

“My anxiety about the national energy guarantee is that it’s more about reducing emissions than it is about reducing price,” he said.

But Frydenberg has been actively mobilising pro-NEG forces in the Coalition to counter Abbott – last week, several MPs spoke out publicly – as well as to lock in backbench support before the final push with the energy ministers.

Ahead of the party room, industry representatives briefed a backbench committee meeting attended by more than 30 government MPs. Their message was that the NEG was the only realistic option available to restore investment confidence.

Those present were Jennifer Westacott, CEO, Business Council of Australia;
Innes Willox, CEO, Australian Industry Group; Mark Vasella, CEO, BlueScope; Arnoud Balhuizen, Chief Commercial Officer, BHP; Vanessa Guthrie, chair, Minerals Council of Australia, and Fiona Simson, president, National Farmers Federation.

Government sources said the briefing, which saw many questions, went well for the NEG supporters.

At the later party meeting, 16 backbenchers spoke.

Two, including Abbott, wanted Frydenberg to bring the detail that he planned to take to the August meeting to the party room first. Two urged greater focus on pricing in the NEG. The four dissidents were Abbott, Eric Abetz, Craig Kelly and former deputy prime minister Barnaby Joyce.

Among the rest, according to the government briefer, there was strong support for both the policy and the process.

Turnbull stressed the importance of getting on with the policy and said that anything from the meeting with the states and territories would come back to the party room.

Frydenberg said the corner had been turned on prices. There was no silver bullet but the NEG was an important part of dealing with prices.

Turnbull declared Frydenberg had the confidence of the party room.

Abetz, speaking on Sky later, said his main concern was to keep prices down. He said the business leaders had told the backbenchers they were still sorting out details of the NEG with the government. Abetz said he didn’t like “signing blank cheques”.

He said that if there was to be a NEG there needed to be a reasonable place for coal, and urged that there should be “a commitment to retrofit some of our existing coal operations or build a new one”.

The ConversationAsked on Tuesday night whether he would cross the floor on legislation Joyce dodged the questioning, saying it was a hypothetical.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Grattan on Friday: Government celebrates on tax, fights on energy


Michelle Grattan, University of Canberra

The odds were always in the government’s favour in the battle to get its A$144 billion income tax package through parliament.

However much some Senate minnows might have objected to the package’s third stage – taking effect way out in 2024 and favouring the wealthy – they didn’t want to be blamed for denying middle and lower income earners early tax cuts.

Pauline Hanson – of course – attracted the limelight but at no point voted against stage three. But the two Centre Alliance (former Nick Xenophon Team) senators epitomised the dilemma – they voted (successfully) to amend the bill to exclude the last stage, but when the government said it was the whole package or nothing, they folded.

In response, they copped a serve from Tim Storer, the South Australian independent who was on the NXT election-ticket in 2016. Storer was the only crossbencher to hold out.

Clearly the government has had a big victory and Labor has taken a risk in saying that if elected, it will (Senate permitting!) repeal the legislation’s second and third stages, while keeping, and building on, the initial tax cuts.

What’s less clear is the size of the risk for Labor.

If the whole package had been defeated, the ALP would have been exposed as tax-cut spoilers. As it is, middle and lower income voters will know that whoever wins the election, they have a guaranteed tax cut, indeed a rather bigger one under Labor.

From Labor’s point of view, committing to repeal the second stage, which moves the threshold at which the 37% rate cuts in from $90,000 to $120,000, is more of a gamble than saying it will kill the third stage, which flattens the scale, with benefits directed to high earners.

But stage two doesn’t start until mid 2022, so a Labor government would not be taking away a bird in the hand but one that was still on the wing. Some voters might apply a discount to a cut so far in the future, even though it has been legislated.

How voters react to Labor’s position will also depend on whether the government can convincingly sell its arguments that the ALP is dissing “aspiration”, engaging in “class warfare” and, via a range of policies, is the “high tax” party.

Also, the debate over tax cuts can’t be seen in isolation. The opposition has money to use and policies still to unveil. Polls show people have other priorities – fiscal consolidation, spending in certain areas. Voters at the election will look at the full menus before them, as well as the leaders and the government’s record.

Nevertheless, the results in the July 28 byelections will be interpreted as a referendum on the competing tax plans, though other factors will feed into those contests as well. Super Saturday will reset the political landscape in one way or another.

It would have been a huge setback if the government hadn’t secured its income tax package, which was the budget’s centrepiece. Politically, there’s less at stake in its intention to put to a Senate vote next week its tax cuts for big business. On current numbers this legislation is headed for defeat.

More crucial than the fate of the company tax cuts is the government’s long struggle to nail down its national energy guarantee (NEG), with the crunch coming when Energy Minister Josh Frydenberg meets his Council of Australian Government counterparts on August 10.

The tax win has further enhanced the reputation of Senate leader and chief negotiator Mathias Cormann. The outcome of the NEG negotiation will be important for Frydenberg’s reputation.

On tax, the battle was only with the parliament. On energy, Frydenberg has to wrangle state and territory ministers (the ACT is particularly challenging), and also fend off an insurgency from Tony Abbott and other sceptics, who ran interference at this week’s Coalition parties meeting. As well, unease seems to be growing among some Nationals, including frontbencher Keith Pitt.

After an earlier general discussion in the party room, the Abbott band had wanted the NEG plan returned there before the August meeting. This isn’t happening – the next broad party room consideration is due when the legislation comes forward. But that doesn’t prevent ad hoc sorties of Tuesday’s kind.

Abbott also launched public attacks covering not just the energy issue itself but the way Malcolm Turnbull runs the party room.

“I think the government is more interested in reducing emissions than it is in cutting prices,” he told 2GB on Wednesday. And it was “a big mistake for the Coalition to sub-contract out its energy policy to the Labor state governments”.

He left open the option of crossing the floor when legislation comes. It will formalise the emissions reduction target. The critics will cavil at any provision that would facilitate a Labor government moving to a more stringent target. Yet this flexibility might be needed to secure a deal for the package.

Abbott said he hoped things wouldn’t get to the floor-crossing stage but “the executive government needs to understand that you can’t take the party room for granted”.

He complained at Turnbull’s “practice of discussing legislation at enormous length every party room meeting before we actually get to backbenchers’ questions and comments”, declaring this “completely unprecedented”.

While by necessity, “the government spends an enormous amount of time negotiating with the crossbench”, it needed to “spend a bit more time talking to the backbench,” he said.

There are obvious retorts to Abbott’s criticisms. For example, on the “sub-contracting” to the states, it is the states that have the main responsibilities in this area.

As to party processes, while he contrasted Turnbull’s style with his own and that of Howard and others, some colleagues were quick to recall his notorious “captain’s calls”, especially the paid parental leave scheme.

By late Thursday, the pro-NEG forces were mobilised, with an assortment of backbench Liberals (Julia Banks, Trent Zimmerman, Trevor Evans, Tim Wilson) and Nationals (Mark Coulton, Andrew Broad) publicly rallying to its defence.

As the Coalition celebrates on tax, the internal heat over the NEG has suddenly been turned up to high, with the disunity going on full display.

The ConversationFrydenberg’s timetable means he doesn’t have to deliver on the NEG until after the byelections. But when it comes to the main election game, a credible (though inevitably disputed) energy policy is as crucial for the government as having its income tax plan in place.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.