National Energy Guarantee Update

Last month, the National Energy Guarantee (NEG) got the amber light from the Coalition of Australian Governments (COAG) Energy Council to progress to the next stage of its development. The Energy Security Board (ESB) is now tasked with filling in the finer detail of the NEG in order to present its final design to the COAG Energy Council in August. Last week the ESB released a series of Issues Papers that will facilitate discussion with State representatives and the ESB Technical Working Groups on some of the most significant design issues. So, as the NEG begins this second design phase, it’s a good time to look back at how far the NEG has come and consider what the road ahead looks like.

Results of the Consultation Process

On 15 February 2018, the ESB released a Consultation Paper (the Consultation Paper) seeking input into the high level design of the NEG. The Consultation Paper gave the energy industry its first look at how the NEG could be implemented – see Corrs’ detailed breakdown of the Consultation Paper here.

The Consultation Paper received over 150 responses from stakeholders to the energy industry. Notable responses included:

• the Australian Competition and Consumer Commission response which flagged that the NEG could exacerbate existing competition issues in the electricity wholesale market;

• the Clean Energy Council response which emphasised that encouraging investment in renewable energy generation should be a primary goal of the NEG, and noted that some features of the NEG, such as the proposed carbon credit system, may discourage this investment; and

• the Tesla response which contended that the NEG’s 26% emissions reduction target is too modest and the NEG broadly overlooks the benefits that can be driven by battery storage systems.

The High Level Design Document

Last month, the ESB submitted the National Energy Guarantee: High Level Design Document (the Design Document) to the COAG Energy Council for consideration. The COAG Energy Council has accepted the Design Document and given the ESB its blessing to continue with the next stage of its design process.

The Design Document’s approach to the emissions guarantee

The Design Document clarifies that the NEG emissions guarantee will be facilitated through a central registry that uses the existing infrastructure of the National Greenhouse Energy and Reporting Scheme (NGERS). Each entity that is registered as a ‘Customer’ under the National Electricity Rules (Customers) will be required to submit a summary of MWh purchased on the wholesale spot market to the registry, which will then use the NGERS emissions data to develop an average emissions intensity for each Customer. The NEG’s regulator would compare this figure against the emissions target to assess each Customer’s compliance.

Significantly, the Design Document specifies that State based renewable energy schemes will be allowed to continue in parallel with the NEG. Further, any emissions reductions achieved by the States’ schemes will contribute to emissions reduction targets under the NEG. States with emissions reductions targets that are more aggressive than the 26% target proposed by the NEG have criticised this arrangement and continue to push for ‘additionality’ within the scheme.

The Design Document’s approach to the reliability guarantee

The procedure proposed in the Design Document for the reliability guarantee is similar to the 8 step process put forward in the Consultation Paper phase, but offers more detail on the timelines involved. The reliability guarantee is underpinned by 10 year forecasts submitted by the Australian Energy Market Operator (AEMO). The market will be expected to react to AEMO forecasts to remedy any looming reliability ‘gaps’. If, three years prior to an upcoming reliability gap the market has not remedied the gap, Customers’ NEG obligations are ‘triggered’ and Customers may be required to demonstrate future compliance plans to meet the reliability standard. If the gap persists one year prior to a forecast reliability gap, the AMEO can exercise its ‘procurer of last resort’ powers.

Interestingly, under the AEMO’s current forecast of the energy landscape, there are no reliability gaps identified for the next 10 years. If these forecasts hold, Customers’ NEG reliability obligations may not be triggered.

The Design Document’s unanswered questions

There are several critical NEG design details which remain unclear in the Design Document and will need to be fleshed out in the coming months. For example, the Design Document does not clarify when Customers will be permitted to carry forward ‘over-achievement’ of the emissions reduction target to the next compliance year. The Design Document also flags that there will be flexibility for Customers to defer compliance with the emissions reduction targets – but does not specify when Customers will be eligible for this deferral.

Further, as per the Consultation Paper, the Design Document confirms that the Commonwealth Government will be responsible for policy decisions on issues such as:

• how the national emissions target will be set;
• how external offsets may be used by Customers; and
• how Emissions-Intensive Trade-Exposed exemptions will be treated.

What’s next for the NEG?

The ESB will continue refining the NEG’s design over the coming months. The Issues Papers released by the ESB last week will allow the ESB to focus on some of the most significant decision points in the NEG’s final design. The ESB plans to release a draft final design document mid-June and submit its final design of the NEG to the COAG Energy Council for approval in August.

From there, the ESB’s proposed timeline has the NEG making its way through Federal Parliament in early 2019. The ESB aims to commence the reliability guarantee in 2019 and the emissions guarantee in 2020, but with many more hurdles on the horizon for the NEG, these timeframes are looking fairly ambitious.