Anthony Arrow of Pinsent Masons, the law firm behind Out-Law.com, said that the proposed National Energy Guarantee (NEG) policy was “potentially a sound long-term solution to the challenge of ensuring reliability, security and affordability of our energy system”. The policy would require energy retailers, and some large energy users, to meet a reliability target of dispatchable energy from ready-to-use sources, while meeting an emissions target set at a level that will enable Australia to meet its international climate change commitments.
The policy is intended to be technology neutral, and will require retailers to source power from a variety of sources including coal, gas, wind, solar, hydro and battery storage, according to the independent Energy Security Board (ESB). The government does not intend to introduce new subsidies for renewable energy generation once the existing Renewable Energy Target (RET) programme ends in 2020.
The proposals will, however, require bipartisan support and the support of state-level governments through the Coalition of Australian Governments (COAG) if they are to be successful, Arrow said. The opposition Labour party in particular has criticised the package for prioritising reliability at the expense of a clean energy target proposed by chief scientist Dr Alan Finkel in his recommendations to the government in June.
“On the one hand, the policy provides investors in the energy sector with a level of long-awaited certainty with respect to government policy and the energy mix,” said Arrow. “On the other hand, the policy is a step backwards for the wind and solar sectors who, under the clean energy target proposed by Dr Finkel would have locked down a healthy mid-term investment pipeline.”
“But all is not lost. The cost advantages of wind and solar technologies over coal and gas fired plants will keep them at the forefront of new generation investment. Further, the policy will mandate emissions reduction in accordance with the Paris commitments on an ongoing basis, thereby ensuring that renewable energy remains strongly in the mix,” he said.
The Australian government commissioned its chief scientist to review the electricity market last year, after South Australia suffered state-wide power blackouts due to transmission system faults caused by extreme weather. In his report, Finkel called on the government to adopt a single, nationally agreed plan to manage the national electricity market (NEM) and help the transition to lower emissions.
The government has already committed to some of the Finkel Review recommendations, and is in the process of taking them forward with state and territory governments. These include the creation of the independent ESB to oversee the health, security and reliability of the NEM; the creation of a new ‘energy security obligation’ to help stabilise a system which is increasingly reliant on intermittent generation and less reliant on coal; and a new requirement for large generators to provide three years’ notice of closure plans.
The proposed NEG comes in two parts: a reliability guarantee, which would be set per state by the Australian Energy Market Commission (AEMC) and the Australian Energy Market Operator (AEMO); and an emissions guarantee, which would be set by the government and enforced by the Australian Energy Regulator (AER). It would be up to individual retailers to choose how they meet the requirements, whether through investment in new generation capacity or contracts with other retailers and generators.
The Australian government has set a target of reducing emissions by between 26 and 28% of 2005 levels by 2030 as part of its ratification of the Paris Agreement. It has already brought forward a number of proposals to assist in meeting this target, including legislative measures to enable investment in carbon capture and storage (CCS) technology, and further investment in the Snowy Mountains pumped hydro energy storage scheme, which will add up to 350,000 megawatt hours of electricity a year to the grid.
Anthony Arrow said that the reliability guarantee proposed as part of the NEG would encourage energy retailers and generators to commit investment of their own to battery storage projects.
“The requirement for retailers to ensure sufficient reliable dispatchable energy means that retailers and generators will be increasingly motivated to invest in both stand alone battery energy storage systems as well as hybrid generation assets, which combine wind or solar with battery storage systems,” he said.
“We think these policy settings are likely to drive consolidation within the energy sector, as players seek to maintain market share of generation activity and capitalise on advancements in technology which enhance their own existing market offerings,” he said.