The Commonwealth’s proposed National Energy Guarantee is vague and confusing, and is based on dated engineering and economic ideas. But it may allow an economically responsible government, if we elect one, to reshape it into a set of policies that honour our environmental responsibilities and modernise our energy sector.
The most surprising aspect of the Commonwealth’s proposed National Energy Guarantee has been the so-far muted reaction from those who are usually strident about energy matters.
The proposal is outlined in two documents: one is a turgid briefing from the “Energy Security Board” (if you haven’t heard of it before that’s because it was created only in August); the other is a slightly clearer but more partisan government response. Unsurprisingly the documents do not differ in substance.
Turnbull seems to have used complexity and obfuscation as a deliberate strategy to confuse his opponents – his opponents in the National and Liberal Parties. John Hewson suggests that “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 emission trading scheme, or having a carbon price dimension”.
It is a framework rather than an integrated policy: its effectiveness in reducing emissions, providing security and reducing prices will depend on specific measures and targets to be included in whatever requirements are put on energy retailers.
Although the media, including the ABC, have treated the NEG as if it is an achieved policy, it is only a proposal that has to be taken to the Council of Australian Governments. The governments of SA, Victoria, Tasmania, ACT, NSW and Queensland – the states comprising the interconnected National Electricity Market (NEM) – have to come on board.
Let’s consider the NEG in terms of those three objectives, in the order in which the Government has framed them.
Providing security – a dated model
Security has been prioritised, possibly as an end in itself, but more likely as a way to give some hope to the coal industry, for there is nothing more secure (or wasteful) than a coal-fired power station running 24/7. As an analogy imagine a restaurant that keeps on the same number of staff every night, just to cope with the weekend surge.
The documents assert that retailers will have to have “a minimum amount of flexible dispatchable capacity” as if flexibility and despatchability are one and the same, but coal and gas, particularly coal, are highly inflexible. Only sources with batteries, hydro and other fast-response components can truly be described as “flexible” and “dispatchable”. As John Quiggin explains, coal-fired power stations are anything but flexible.
But the dispatchability requirement as spelled out in the documents de facto supports fossil fuel, mainly by loading a storage requirement (battery, hydro or thermal inertia) on to renewable sources. At first sight such a requirement appears to be reasonable, but it ignores two other means to provide reliability.
The first path to reliability is to have multiple renewable sources with different technologies and in different regions. The Germans for example rely on sunshine in Bavaria and the wind in the North Sea, which are linked through north-south high voltage transmission lines, and which contribute to one system.
Even within the NEM footprint we have a vast land mass many times larger than Germany’s, with different climates and at any one time very different weather. For example, even in mid-winter, when its 6 pm in Sydney there is still almost an hour of sunshine in northwest South Australia – an area with not only plenty of insolation but also promising geothermal resources.
Our transmission network, however, is weak. Although there has been heavy investment in transmission, it has been in the wrong places. It’s similar the road system we had fifty years ago, with adequate roads around the state capitals, but with terrible interstate highways and with no alternatives when those weak links were cut. Yet the documents don’t raise the possibility of investment in transmission to provide national hedging between geographically-separated sources and sources with different technologies, with and without storage. Rather than seeing the NEM as a system, to be managed by bringing all components together, it sees each component as having to stand on its own.
The other ignored possibility is demand management. The model in the documents is about supply having to meet demand as if demand cannot be influenced. It’s model from the 1960s when a large amount of redundant spinning capacity was maintained to cope with ever-changing demand, over which the utilities had no control.
But dynamic demand management is not some pie-in-the sky idea. The crudest form is the SMS asking people to turn off their air conditioners for half an hour – which Turnbull has already foreshadowed. More sophisticated versions are ones consumers don’t even notice because they are controlled by smart appliances connected to the Internet – for example the commuter who arrives home to find her well-insulated apartment is a perfect 20 degrees, even though the air conditioner is now turned off, because between 2 pm and 4 pm, when there was an excess of solar power, her apartment was brought down to 17 degrees.
Price – a beat up
Disappointingly but unsurprisingly the initial reaction in the press and from the Opposition has been a “what’s in it for me” response, grasping on to the vague statement about “a reduction in residential bills in the order of $100-115 per annum over the 2020-2030 period.” If that statement was included to distract the press and the Labor Party from considering more serious issues, it has worked. (That statement doesn’t even say whether those trivial savings are to result from lower prices or less usage.)
Electricity prices have been rising in real terms over this century so far: we didn’t need an ACCC report to tell us that. So too have real incomes, but household expenditure data suggests we are spending about the same proportion of our household budgets on domestic energy as we were in 2000. For most households there is no problem.
Those price rises have probably prompted us to use electricity a little more wisely: just in the three years from 2011 to 2014 average household electricity use fell by 12.5 per cent. It’s a pity, and an indictment of the governments that set the rules of the NEM and abolished the Gillard Government’s modest carbon price, that the price rise was a result of privatisation and lax regulation. Had it resulted from a market mechanism to account for the externalities of burning fossil fuel – i.e. carbon pricing – it would have done some good for the world, and we would have made enough renewable investment so as not to be facing a summer of possible blackouts.
It’s probably fortuitous that electricity prices will stay high, because that will encourage investment in capacity. Even if we overshoot now, in a few years electric vehicles will be a new source of demand, and with their batteries they will provide some demand smoothing.
The rapid price rise has left two groups vulnerable, however. One group is low-income households, many of whom are renters who don’t have the option to engage in demand reduction enjoyed by house owners who can install solar power and invest in insulation. This group needs particular policy attention. According to the Australian Energy Regulator, for example, only a third of households have wall insulation. Yet ever since gaining office the Coalition has missed no opportunity to misrepresent and denigrate the Rudd Government’s home insulation program. Investment in insulation would be much cheaper than trying to keep decrepit old power stations running.
The other vulnerable group is trade-exposed industries who cannot pass on price rises. They too may need particular policy attention, particularly in terms of competition policy. Some of their “take or pay” contracts with retailers are not only burdensome; they also discourage firms from investing in their own renewable sources.
As for industries with domestic markets, they should be able to pass their costs on to customers. If we have to pay a little more for a croissant or a café latte, that $110 saving will surely compensate us.
Reducing emissions – the sacrificed objective
Whichever way the issue is framed, this has been a huge backdown on our responsibility to the rest of the world. The NEG as described would see renewables making up only 28 per cent of power generation by 2030. Under Finkel’s recommendation for a clean energy target that would have been 42 per cent. Labor has been promising a 50 per cent target, and even that is weak in view of our nation’s disproportionately large contribution to greenhouse gases.
An ambitious renewable target for electricity makes good economic sense, because it is the area where we have the lowest-cost means of reducing emissions. Just as our land mass gives an opportunity to reduce emissions from electricity generation, so does it give us particular problems in reducing transport emissions – the next area for attention.
It also makes good economic sense to retain or reinstate what the Coalition calls “subsidies” to renewable energy. To abolish them entrenches an economic distortion favouring coal. Maybe technologies such as standard solar panels can stand on their own, but there is still a strong economic case for supporting new technologies, such as solar-to-hydrogen conversion and new materials for panels. And of course the subsidy so seldom mentioned is the subsidy to fossil fuels that are not paying for the damage caused by their pollution – their “negative externalities” in economic terms. That’s the real subsidy that should be abolished for the sake of providing a neutral economic environment for renewable energy.
Politically a strong renewable energy target seems to be attractive: 62 per cent of voters (including more than half of Coalition voters) support Labor’s 50 per cent clean energy target, while only 18 per cent disapprove. Even though some nutters may say global warming (like coal) is good for humanity, hurricanes in the Carribean, fires in Europe, flooding in India and at home an increasingly early bushfire season remind us of what’s at stake. Unless we are as selfish or ill-informed as some politicians assume, we are unlikely to be dissuaded from such views by a $2 weekly saving in our electricity bills.
The framework Turnbull has announced, however, seems to have some scope for modification without adding uncertainty. And (shhh!) it may allow for the emergence of a carbon price. Any investor who believes that it gives a go-ahead for a new or refurbished coal plant would be taking the huge risk that policies to privilege coal will stay in place for twenty years or more.
If, after the next election, we have an economically responsible government – either a Labor Government or a Coalition Government without extremists blocking sensible economic policies – this framework, because it is so open, could allow a government to make a meaningful contribution to dealing with climate change.
Ian McAuley’s first professional employment was in electrical engineering. He is amazed, fifty years on, to see how slowly the electricity industry has adopted new technologies.