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National Energy Guarantee (NEG) puts fossil plants on life support

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  • NEG expected to increase high inertia energy availability
  • Business to remain under price pressure in the near term despite potential downward pressure on contract prices until scheme commences
  • Spot and contract prices could diverge if the additional costs of holding fossil plants are passed through to retail contracts

The proposed introduction of the National Energy Guarantee (NEG) by the Coalition Government has a number of potential impacts for commercial and industrial energy users. The move will effectively place fossil power plants on life support for the duration of the scheme, according to Energy Action. 

While Energy Action welcomes any advancement that can assist its clients to better manage energy reliability and higher prices over the longer term, it recognises the proposed National Energy Guarantee scheme could delay an inevitable end to fossil generation until the big question of how to manage system reliability in a renewables world is solved.

With the scheme slated for commencement in 2019, many business energy users will continue to encounter substantial cost pressures in the interim, albeit that there is the potential for downward pressure on contract prices from now until the scheme comes into effect.

In addition, Energy Action cautions that the proposed scheme could impact spot prices through holding plant on the system that otherwise wouldn’t be in place. If the associated costs of holding plant are passed on through retail contracts, this could see a significant divergence where spot prices underperform retail contracts. 

Energy Action’s Chief Executive Officer, Ivan Slavich, said: “The Government has moved to shore up reliability by keeping high inertia plant open through the retailer purchasing requirements. This should lead to greater availability and potentially increased high inertia generation. While reliability is important, the duration to commencement provides little short term reprieve to businesses that continue to face a substantial cost impost from higher, and more volatile, energy prices.”

“While the scheme may also slow renewables growth, it won’t stop it all together. Renewables projects will just need to be smarter now that they won’t be able to transfer their system security impact to the AEMO. If anything, as the Large Renewable Energy Scheme closes its books, there will be rush towards renewable generation approval before the scheme closes in 2020.”

“We may also see moderate downward pressure on energy contract prices until the scheme comes into effect, but we don’t expect a large reduction once the scheme commences as old coal will remain on costly life support while renewables growth will be limited under the scheme. Importantly, we may see spot prices become irrelevant to retail pricing as more fossil costs are recovered through the contract with the end user.

“From a procurement perspective, we expect little change. We would recommend anyone coming out of contract in the next six months to contract out for two to three years as that would bridge the scheme’s introduction and provide greater certainty,” Mr Slavich concluded.