The simple architecture of the National Energy Guarantee suggests it will not mark the end of the renewables industry, writes Walter Gerardi.

The Federal Government recently announced some reforms to the electricity sector under the banner of the National Energy Guarantee which will have implications for the electricity industry and the nature of the transformation of that sector.

The first main focus is a reliability guarantee requiring retailers and large wholesale customers to purchase dispatchable and flexible capacity to meet their peak demand needs. The other significant aspect is an emission obligation. This mechanism would set an emission intensity target that is in line with Australia meeting its obligations for greenhouse gas emission reduction under the Paris Agreement.

The reliability guarantee will require the purchase of generation capacity to meet a portion of forecast peak load requirements. AEMO will determine how much of this capacity will be required to be dispatched or available for each trading interval.

The advantages of this arrangement are numerous. It establishes a mechanism allowing the authorities to deal with reliability issues ahead of the adoption of high levels of variable renewable generation across the whole market.

The reliability guarantee will allow for the least cost mix of flexible and dispatchable plant to be utilised to meet the obligation. An active contract and forward market should develop around this requirement and encourage competition for least cost options.

The arrangement will also enhance support for renewable energy by alleviating a key concern around the adoption of high levels of renewable energy.

Under scrutiny

While the reliability guarantee may delay the retirement of some high emitting plant – by providing them with an additional and contracted source of revenue – in the long term they will still need to compete with firm and flexible capacity provided by new technologies such as battery storage, solar thermal, solar PV/wind with battery, biomass, etc.

Importantly, while the mechanism is designed to apply to the National Electricity Market, it is easily transferable to other markets in Australia, such the Wholesale Electricity Market in Western Australia and the Northern Territory Electricity Market.

The emission obligation requires retailers to meet an emission intensity standard. Even efficient – and relatively lower emitting – coal plant can be rewarded by displacing the high-emitting coal plant, under the proposed approach. In this sense, it is likely to cost less than the Clean Energy Target scheme proposed by the Finkel Review.

The impacts of the scheme could include placing downward pressure on wholesale prices because of the additional renewable energy (with low dispatch costs) entering the market, and because some existing low-emission fossil fuel generators will be effectively paid to dispatch into the market.

The scheme could incentivise retailers to contract with low-emission options to ensure adequate investment in low-emission capacity and to make up any shortfall to the investment cost of new generation that is not met through revenue from trades in the wholesale market.

It will likely lead to increased uptake of low-emission generation with the level of uptake determined by the emission targets. Although this uptake is expected to be a mix of technologies, if natural gas continues stay high then uptake is likely to be dominated by renewable energy technologies. Based on preliminary analysis, around 20,000GWh of additional low-emission generation will be required.

Retailers may be able to meet their obligations using domestic and international carbon credits. This could minimise the cost of the scheme and has the potential to require less low-emission generation. But as most countries will have to meet more stringent emission targets, the global demand for international credits will increase, which will increase their price.

Although the impact on the LRET scheme is unclear, it is likely there will be upward pressure on Large-scale Generation Certificates prices due to an expectation of lower wholesale prices for electricity.

The emission obligation could potentially reduce retail prices through the reduction in wholesale prices. Our modelling for similar schemes indicates that the downward impact on wholesale prices will outweigh any cost impost arising from retailers having to pay a premium to low-emission generators to cover their investment cost.

The actual impacts of the obligation will very much depend on the targets for emissions. In a sense this is a more important factor than the emission obligation, in that the target will determine the level of investment required in low-emission generation.

Walter Gerardi is technical director of energy markets at Jacobs. He has more than 25 years’ experience in economic and strategic analysis of energy and resource industries and has been involved in number of areas relating to energy economics, most recently the Finkel Review.