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What will the NEG mean for your business?

The Federal Government recently announced that it is recommending the establishment of a Reliability Guarantee and an Emissions Guarantee - which together will form a National Energy Guarantee.

NEG

As has been widely expected, the Turnbull Government has rejected a Clean Energy Target in favour of a National Energy Guarantee (NEG). The NEG has been recommended by the Energy Security Board (ESB) and consists of two obligations that are placed on electricity retailers and any large energy users that buy their electricity directly from the wholesale market.

The two parts of the NEG are:

1.         A reliability guarantee is proposed to apply to electricity retailers (not electricity generators) and large electricity customers who purchase directly from the National Electricity Market (NEM), by requiring them to guarantee that a pre-determined percentage of their forecast peak electricity load will be sourced from dispatchable energy resources*. In essence, the reliability guarantee appears to be aimed at ensuring that generation supply can always meet consumer demand in each region of the NEM.

*whilst not yet fully determined, 'dispatchable energy resources’ are expected to include coal and gas fired generation as well as pumped-hydro and battery installations that can be controlled by the Australian Energy Market Operator (AEMO) to respond in real time to electricity demand in each region of the NEM.

2.         An emissions guarantee, under which electricity retailers and large users registered in the NEM will be required to meet individual emissions profiles to comply with a nationwide emissions target to be set by the Australian Government that will replace Australia’s existing Renewable Energy Target (RET). It is not clear if the target under the emissions guarantee will require retailers to acquire a percentage of their portfolio from renewable energy sources, or if the total portfolio must have a carbon intensity below an agreed threshold. Either way, it is expected that the emissions guarantee should continue to encourage continued investment in renewable energy.

The ESB, in their letter to the Government claimed that under this scheme, the wholesale price would be lower relative to today’s prices, and lower compared to a certificate-based scheme. Additionally, given that retailers will need to contract with new low emissions and dispatchable generators, the increased supply should place downward pressure on wholesale prices. The expectation of the ESB is that the guarantee could lead to a reduction in residential bills in the order of $100-115 per annum, and wholesale prices to decline by 20-25% per annum over the 2020-2030 period.

Businesses know that electricity is often one of their biggest costs and many have in recent years tried to offset sharply rising electricity prices by reducing their consumption, using electricity more efficiently and the adoption of new energy-saving technologies. Household electricity prices as at June 2017 have more than doubled over the past decade driven by network costs and, more recently, generation costs due to high gas prices.

increases 

Source: Australian Bureau of Statistics

In light of the sharply rising electricity prices, the Government has requested that the ESB undertake detailed modelling of the impact of the NEG on retail and wholesale electricity prices. This modelling is due to be completed by mid-November 2017, and will hopefully provide businesses and residential consumers with some indication of what they can expect from their electricity prices if the NEG is implemented.

It is proposed that the policy, which will only apply to the National Electricity Market, (so not Western Australia and the Northern Territory), will be finalised in 2018, with the reliability guarantee expected to become effective by the end of 2019. The emissions guarantee is expected to become effective by the end of 2020.

With few details published by the Government to date, the full implications for participants in the NEM, or electricity consumers more broadly, remains to be seen. Electricity consumers may need to assess how any Change of Law clauses in their electricity or green electricity agreements might be impacted by the NEG. For example, does your agreement provide the capacity to adjust prices agreed under that agreement?

We will provide further updates as the details emerge.