NEG – Energy Breakthrough or Smoke and Mirrors?

  • NEG – Energy Breakthrough or Smoke and Mirrors?

    The National Energy Guarantee (NEG) is designed to deliver reliability and emission reduction at the lowest cost. It has 2 parts: an Emissions Guarantee and a Reliability Guarantee. Let me clarify each of these elements.

    It is worth adding that the NEG proposal has none of the rigour that normally precedes such an important piece of policy.  Many issues have still not been considered or tested. It turns out that this may be an advantage.

    The Emissions Guarantee

    A NEG obligation would be imposed on retailers to meet their share of targeted emissions, with the emissions target under the market rules.

    There would need to be an accounting of spot and contract purchases and sales of carbon emissions that would need to be provided to demonstrate compliance with the target by retailers. The proposal envisages carbon emissions being stapled to contracts. Whether this occurs or not, financial markets will quickly adapt to the trading of carbon emissions that is required.

    This scheme is an emissions intensity scheme where Retailers manage carbon intensity rather than Generators.

    While a Generator based scheme is simpler, this model can be made to work quite effectively and should result in the same outcomes, namely the same wholesale prices and the same mix of generation.

    Reliability Guarantee

    The reliability guarantee par of the NEG is conceptually simple; to create a separate market in dispatchable generation.

    “The guarantee will be calculated based on the system wide Reliability Standard translated into a minimum level and type (fast or slow starting) of dispatchable capacity for each region.”

    “If the retailer did not have sufficient dispatchable capacity available to meet the predetermined percentage of their peak load, they will face compliance action.“

    In my recent blog Renewable Energy versus Reliability. Can we have both? .

    I explained how the market rules deliver reliability.  They do so by exposing Retailers to extreme financial penalties if they do not contract to meet the demand of their customers at times of tight supply and Generators to similar penalties at the same time if they do not generate.  This mechanism provides an income stream mainly to reliable generation, but also to other generation that is consistently running at times of system stress, for example solar generation that tracks the sun.

    Dispatchable generation is certainly necessary for the foreseeable future, but is a separate mechanism needed to achieve it?

    Dispatchable generation is not all the same: e.g. very slow start and slow ramping brown coal, faster but still slow black coal, slow start combined cycle gas, fast start open cycle gas, immediate start (but often limited duration): hydro, batteries, demand.

    The reliability guarantee will need to be backed up by detailed rules to qualify generation and specify the required mix.  That means cautious bureaucrats will likely drive additional capacity into the electricity system, even possibly sustaining coal beyond what’s needed.

    Essentially this mechanism is not needed to drive reliability and its introduction requires extensive rules and administration.

    Conclusion

    Should we accept an unnecessary complication and a whiteboard proposal as the price for the end of the climate wars?

    Perhaps so.

    Be aware that if we say no, we will probably be waiting another 3 years, while the chaos and investment strike continues.

    We should be clear that the ‘Reliability Guarantee’ is a political ‘imperative’ not one that is needed for the market to deliver a reliable system.

    Despite that I think we have run out of time and should accept this proposal and work to minimize the adverse impacts of the reliability guarantee in implementation.

    For example: 1. If the reliability guarantee worked like a hedging contract, then adverse impacts would be small and there would be minimal new rules. 2. The guarantee could focus initially on SA where there is a need for additional capacity.

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