National Energy ‘Guarantee’: can our power ‘trilemma’ become a policy trifecta – or quinella?

The ends-means framework behind the National Energy 'Guarantee' (NE'G')?

The Government has announced a new policy to address Australia's electricity market 'trilemma': achieving reliability, affordability and sustainability (now called 'responsibility'). The details need work, and it's largely up to the States and Territories to agree to manage and deliver.

What can we glean from this latest Government 'announceable'?

The NE'G' prescribes two policy instruments for the three objectives in the 'trilemma'.

First, retail electricity suppliers must use enough dispatchable generation to support reliability: the 'reliability guarantee'. Electricity suppliers must also use enough renewables to support 'responsibility': the 'emissions' guarantee'. Third, there are some assertions about cost reductions from the NE'G'. But relative to what, and based on what analysis, is not clear.

Will the 'trilemma' be transformed into a quinella, if not a trifecta?

Government claims for what the NE'G' will deliver

The Commonwealth bases its assertions on an 'advice' letter, dated 13 October 2017, from the Energy Security Board (ESB) to the Environment and Energy Minister. The ESB letter notes the Government's request for advice on the three 'trilemma' conditions that (i) the reliability of the system is maintained; (ii) emissions reductions required to meet Australia's international commitments are achieved; and (iii), objectives (i) and (ii) are met at lowest overall costs.

The States are yet to agree. The Commonwealth claims that, if they do, the following will be achieved.

1. Reliability (governments can prescribe, monitor and enforce standards, if they want to)

Reliability will be maintained.

Maintaining reliability is quantifiable. Since 1998, within the NEM, this has been that no more than 0.002% of the annual consumption of a region, as noted in the ESB letter, will be at risk of not being supplied. Will this standard be continued?

In the ESB letter, I can't find a 'yes' answer.

The ESB proposes:

• Finalising the details of the 'reliability guarantee' by end-2018.
• Implementation of the 'reliability guarantee' in 2019.
• Reliability standards should be, 'as defined by the Reliability Panel at the AEMC'.

The ESB advice says nothing about what reliability standards will apply.

There is no guarantee the existing NEM reliability standard will be retained, and, if not, no information about what might replace it.

2. Responsibility – the new word for sustainability (governments can prescribe, etc, standards here too, if they want to)

The words in the ESB letter about the 'emissions guarantee' boil down to arrangements, (finalised in 2018 and put in place in 2020), to ensure we meet our Paris Agreement commitments.

There's a 'lower energy intensity' flavour to the ESB words.

Australian carbon credit units (ACCUs) and 'international units', to be traded to meet 'responsibility' commitments, are mentioned in the letter.

The existing RET is 'grandfathered' to new investments (definition?) by 2020 ('tho, thanks to ex-PM Rudd, these attract RET benefits until 2030).

Could the NE'G' announcement itself induce a rush of new projects to beat the RET deadline, costing us all more?

There are some open-ended words: 'Once new investment under the RET finishes in 2020, the emissions guarantee on the retailers will require them to contract with low or zero emissions generators to meet their guarantee, but only where necessary to meet the emission reduction targets set by the Commonwealth. (Italics added.)

The 'emissions guarantee' target is in the hands of current and future governments, who set emissions targets. The gap between those and where Australia is, sets renewable investment requirements. What those targets will be post-2020 is unknown.

3. Affordability (this depends on demand and supply and policy effects thereon, not government regulations)

The NE'G' includes no 'guarantee' on electricity affordability. It has no regulatory instrument to do so.

Governments trying to 'guarantee' reliability (whatever its definition) and 'responsibility', cannot also 'guarantee' affordability.

Attempts to suppress prices in this context only induce more quantity restrictions (blackouts), undermining reliability, at least.

Affordability outcomes depend heavily on the investment environment. No 'guarantees' can be given.

4. What does the NE'G' really mean right now? No Energy Guarantee?

We need a lot more detail about what the NE'G' really means.

But at this stage, if we don't know what the precise objectives are, 'No Energy Guarantee' is the best elaboration of the NE'G' acronym.

The missing ingredient: new investment in capacity expansion

Its authors claim the NE'G' will restore investment certainty, induce a flood of new energy projects, and as supply blooms, lower prices.

This is an empirical question, so let's see the evidence. What can we say up-front?

First, unlike regulations prescribing reliability standards and use of renewables, investment effects will depend on the investment environment.

Second, if all RET subsidies cease, and are 'grandfathered' to existing/approved projects (albeit out to 2030 even though the RET ends in 2020), then new renewable energy projects, presumably needed for 'responsibility' target reasons, won't be so subsidised. So will they actually be forthcoming? Many assert that such energy investments don't need subsidies now, so presumably they conclude the answer is 'yes'. The Greens try to have it both ways, saying such energy is cheapest but needs subsidies for 'investment certainty'! Best case scenario might be to assume no further subsidies are needed, so costs will fall by the amount of the implicit RET subsidies, only to the extent new investments occur.

Third, for reliability, at present we're talking mainly coal, diesel, petrol, gas, and the like. For coal, are we talking anything other than, critical, super-critical, or HELE plants (plus CCS)? With long investment horizons and expected carbon pricing, I suspect the answer is 'no'. So coal-based reliability costs rise, on average. Diesel and petrol might be cheaper. Gas looks more expensive, at least now. Batteries are coming, but storage is an issue for large scale base load, as is cost, and market penetration has a long way to go. Hard to see a price reduction soon.

Fourth, balancing needed investment in supply meeting both reliability and 'responsibility' targets, where do we end up? I suspect, from where we are now, we need a lot more 'reliability' investment than 'responsibility' investment to hit both targets.

This is an empirical question. Let's see the numbers. That said, a net cost reduction, at best, looks 'iffy' to me.

Government denials about what the NE'G' entails

The political argy-bargy about what the NE'G' means is well underway.

Labor says it looks like an emissions intensity scheme, and/or emissions trading, and/or pricing carbon.

The Coalition denies all three charges and asserts (on trading) that no certificates are involved, only trading contracts in physical volumes!

Oh please! The punter is not so dumb. Try a little honesty. The truth (even if politicians of all stripes can't handle it) is as follows.

First, any policy that is intended to reduce emissions puts a price on them, one way or another. That price may be obvious (a carbon tax, or an emissions trading price), or less and less transparent ('direct action', the 'shadow carbon price' arising from the RET, or an 'uncertain expected price' built into long term investment plans for new power plants after all the policy flip-flops, etc, on climate policy). Officials at the PM's press conference asserting no carbon price is involved in the NE'G' know better. If it cuts emissions, the NE'G' prices carbon. If there's no carbon price, there's no emissions reduction. Period.

Second, the NE'G' at least offers the prospect (if COAG agrees) that an emissions trading-type system will evolve. Governments (the Commonwealth, with agreement from the States?) are supposed to set (national?) reliability and emissions targets, and retailers are supposed to work out the most cost-effective way of delivering them. Prices will then reflect the private sectors' best efforts to deliver these targets as cheaply as possible. In doing so, their efforts on 'responsibility' (if not reliability) will tend to reduce emissions intensity in production. For those believing in anthropogenic (or other) global warming, isn't that a good thing? (Well it is, if taken in splendid national isolation and ignoring Australia's minuscule contribution – 1.4% and falling – to anthropogenic global emissions, themselves a fraction of total global emissions.)

Third, to ease costs even further, the ESB suggested that international trading in emissions permits might be allowed. This would be a useful way of using market arbitrage to spread the emissions reduction cost burden (and/or international hypocrisy in this area) globally.

But these are inconvenient truths to all politicians, it seems.

Labor, and the then Coalition Opposition led by the current Prime Minister, once pushed for a CPRS (as a response to Prime Minster Rudd's concern about 'the greatest moral challenge of our time'). Then Prime Minister Gillard introduced a carbon tax (after saying 'There will be no carbon tax under a government I lead.'). Now Labor attacks the Government for proposing a policy that has such elements. And, in true 'political football' spirit, Government politicians promptly deny these charges (and seek shelter behind recent COAG-appointed experts).

Blind Freddy can see Labor is now the 'pot calling the kettle black', and the Coalition is 'the kettle'. Black smoke all around, really.

Please stop this vacuous nonsense (and House 'doorstop' ice-cream and cheeseburger stunts from people whose credibility is shot).

Energy/climate policy has been a decade-plus wasteland of political football with no rules and perverse results. These are summarised in hard statistics. Australia's rapid transition from a low-cost energy world leader to a high and rising cost laggard is Exhibit A.

Today, political football, and the lies that go with it, is still the energy policy game.

Wake up. It's not a game. It's about fixing an energy mess undermining living standards, jobs, and security.

This is the 'trilemma' that really matters in the end.

Is apolicy quinella the best we can hope for (not necessarily in a good way)?

The NE'G' may be worth considering (unless you are a climate atheist or sceptic), but, if so, needs a massive amount of refining.

Ultimately, any agreement and action requires the 9 members of COAG to sign on.

Sure, any mix of national reliability and 'responsibility' targets is achievable, if we are prepared to pay the required cost.

What about affordability?

We can't deliver that as well without net new electricity investment for reliability and 'responsibility', and hope that, somehow, lowers prices.

How will such investment be delivered without increased costs? Please tell us. I think it's impossible with current technology.

If we end up with some sort of quinella solution to our electricity 'trilemma' problem, but miss the target on affordability, what then?

Households won't welcome more power bill shock (already high and possibly getting worse).

Business becomes even more uncompetitive as the cheap energy basis for our historical comparative advantage continues to disappear.

The NE'G' is still a national production-based scheme to reduce emissions, not a national consumption-based scheme. Competitiveness suffers.

Will 'responsibility' be delivered by slower economic growth – or worse – rather than lower emissions intensity? Is that really 'responsible'?

China wouldn't accept this option. Neither would India, or Indonesia, or many others.

Why should we?