Energy Guarantee a Clayton's emissions intensity scheme

Thursday 19 October 2017

This article originally appeared in the Sydney Morning Herald. Written by Honorary Professor John Hewson, a member of the ECI's Energy Economics and Policy research cluster and former Liberal opposition leader.

The Turnbull Government's National Energy Guarantee (NEG) is a Clayton's emissions intensity scheme – that is, the EIS that you are having when you have explicitly ruled it out previously.

While little detail has yet been released as to how the Paris emissions reduction target of 26-28 per cent will be met, moving beyond the Renewable Energy Target (RET) in 2020 towards 2030, it seems reasonable to speculate that the Paris target will be legislated, and the Energy Security Board would set, from time to time, the required "emissions intensity" as necessary to achieve that target. Energy retailers would then be required to supply the "dispatchable power" consistent with those specified intensity requirements.

Of course, even if the electricity sector makes its full contribution to necessary emissions reductions, much more will still need to be done in transport and other sectors to meet our overall national Paris commitment, as emissions from the electricity sector are only about one third of total emissions.

It should also be evident that while a "price on carbon" has become a dirty word in the climate wars of the last decade or so, the NEG will generate a carbon price in the "secondary market", as retailers seek to balance their portfolios – some will under achieve, and others over achieve, the required emissions profile thereby generating a secondary exchange at a "price".

It is quite ironic that the party pressure on Turnbull to develop an alternative to Finkel's Clean Energy Target (CET), and to appear to eliminate subsidies for renewables by ending the RET in 2020, came about because he had ruled out the first best solution of a market price on carbon (via an ETS), and the second best solution of a pure EIS. Yet, his solution of a "guarantee" only works if he takes key elements of both.

Being cynical, perhaps the initial vagueness of Turnbull/Frydenberg as to the details behind the NEG was designed to get the policy accepted by the party room without any recognition of it as a de facto EIS, or having a carbon price dimension. They also wanted to be able to say that the guarantee will be agnostic as to technology, allowing for coal, gas, hydro and dispatchable renewables all to be considered as a source of electricity by retailers.

Much of the government's confidence in the deliverability of its guarantees on both price and reliability, and its capacity to also meet the emissions reduction targets, is based on the recognition that the costs of renewables is declining fast. However, the example Frydenberg has quoted as evidence of "the declining cost of renewables" is the 530 MW Stockyard Hill Wind Farm near Ballarat, at some $60 per MWh (excluding LGCs), but this is not the price of "dispatchable power" from this wind farm, as it doesn't include the cost of battery storage. An electric, Musk-style battery, would add another $200-300 per MWh or 20-30 cents per KWh.

But, the government is right to concentrate on dispatchable power and to require retailers to supply it. This will deal directly with the "intermittency" (and other network management) problems created by both wind and solar without storage, which essentially leaves the morning and evening peaks with inadequate supply. It will also satisfy those advocates of dispatchable coal and gas who have been demanding a more "level playing field" with renewables.

It was most telling when Tony Abbott attempted to initiate a debate on the "politics of the guarantee" towards the end of this week's party room meeting, and that Turnbull stifled the attempt.

While Abbott would have welcomed the end of subsidies to renewables with the decision to abandon the RET in 2020, and not to embrace Finkel's CET, even though he may not have recognised the de facto EIS, he would have also wanted a commitment for the government to build or underwrite a new, super critical, coal-fired power plant, probably in North Queensland.

Abbott was a very effective Leader of the Opposition. He knows how to "wedge" the other side. Indeed, he has only ever acted as an opposition leader, even when he was PM, and ever since. He wants to draw a very sharp distinction between the positions of the government and opposition. He wouldn't believe that the "guarantee" would be enough.

So, how will Shorten respond? Butler, his shadow to Frydenberg, came out hard initially against the government position, although since they have simply asked for more detail, for modelling to validate the claimed reductions in both electricity prices and emissions, and mocked the "foreshadowed" (but not guaranteed) reduction of 50 cents per week in electricity prices post 2020.

While Shorten, and the Labor states, will be unlikely to abandon their RETs, Shorten might just argue that while this "guarantee" approach is not their preferred alternative, they won't seek to block the legislation to effect the Paris target, and will closely monitor the role of the Energy Security Board.

It may yet prove to have been clever politics by Turnbull, both within his government, and against Shorten, but any sort of medium-term guarantee is unlikely to impress voters who will have to live with further increases in their electricity prices, and face the insecurity of possible blackouts, for at least the next few years – certainly before the next election.

Updated:  15 December 2017/Responsible Officer:  Director, Energy Change Institute/Page Contact:  Webmaster