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The National Electricity Guarantee – dead or ‘deadish’?

12 November 2018

#Construction & Infrastructure

The National Electricity Guarantee – dead or ‘deadish’?

The last few months have been a tumultuous time for the renewables sector. The federal government has recently moved away from the proposed National Electricity Guarantee (NEG) and it is not clear what will replace it in the near future.

What was the NEG?

The Large-scale Renewable Energy Target (LRET) is intended to incentivise the development of renewable energy though the creation and sale of large-scale generation certificates (LGCs). Recent predictions indicate that, at the current rate of investment, a sufficient number of LGCs will exist to meet the requirements of the LRET by around 2020. The NEG was, amongst other things, intended to help drive renewable investment going forward and to compensate for a future slowing demand for LGCs.

The NEG was a long-term outcome of significant consultations by the Energy Security Board and a central policy platform of the Turnbull federal government. The NEG sought to unify energy and emissions policies and was composed of two elements:

  • Reliability guarantee: This was aimed at obliging retailers to provide a ‘mix’ of energy generation sources to avoid perceived issues concerning the delivery of renewable energy during peak periods. This was to be achieved through:
    • a range of reliability obligations on retailers and large scale users to ensure they held a sufficient volume of baseload forward contracts to meet certain peak load situations as determined by the Reliability Panel and the Australian Energy Market Operator (AEMO)‘compliance action’ against retailers and large scale users if they did not hold sufficient capacity to meet reliability levels.
  • Emission guarantee: From 2020 onwards, retailers and large-scale users would be subject to pre-defined emission targets, which would ‘tighten’ from 2020–2030 in line with Australia’s international commitments (with an initial target cut of 26 per cent from 2005 levels). In operation:
    • generators would effectively ‘sell’ electricity with an associated level of emissions per unit of generation, with retailers and large-scale users having to account for their total emission usage to the Australian Energy Regulator (AER)
    • a certain level of ‘banking’ and ‘borrowing’ of emissions would be permissible across the relevant compliance period to permit efficiencies in the market.

The NEG was intended to be source-agnostic and did not expressly favour a particular technology or energy source (fossil fuel or otherwise). However, the implication of having an emission target coupled with guaranteed baseload ensured that suppliers would likely need at least a partial blend of traditional and renewable generated energy for the respective targets to be met.

Life beyond 2020

The current status of the NEG remains uncertain. While the current federal government appears to no longer be pursuing the NEG as a policy, the ALP has recently announced that it will be taking it to the next federal election.

The LRET has been largely successful, with some stops and starts, in driving renewable investment in Australia. It is possible that it will not be replaced, in which case it is expected that renewable investment will remain to be driven by the following:

  • state-based renewable investment schemes such as the Victorian Renewable Energy Target (VRET)
  • the continuing downward trend in the cost of renewable energy
  • reduced cost of storage solutions (i.e. small and large scale battery storage, pumped hydro, etc) to enable renewable energy projects to start to guarantee at least a certain amount of baseload.

Why does this matter?

Renewable energy projects are commonly typified by long design lives (20-25 years, with options to operate beyond that period not uncommon). Coupled with the usual gestation period required to secure land rights, planning permissions, PPAs and finance, it is likely that the current gap in federal policy will lead to significant investor uncertainty going forwards. Participants in the renewable sector will readily recall the precipitous drop off in new large-scale renewable energy investment in 2014–2015 as a result of the then Abbott government’s views on the Clean Energy Funding Council and the Renewable Energy Target.

Known unknowns

Uncertain government policies (both now and future) appear to be one of the few certainties in the renewable energy sector going forwards. Participants should keep a close eye on the following over the short term:

  • the upcoming 2018 Victorian state election and, depending on who is elected, what will happen to the current VRET scheme
  • the 2019 federal election and what energy and emission policies are adopted by the major parties
  • the continuing role and presence of the national Wind Farm Commissioner following the 2019 federal election
  • trickle-down effects of all major party promises to deliver reduced electricity prices (some of the highest in the world according to recent research by Beyond Zero Emissions).

We look forward to keeping you across further regulatory developments in the renewable energy space.

Authors: Stephen Natoli & Scott Schlink

Contacts:

Melbourne
Stephen Natoli, Partner 
T: +61 3 9321 9796 
E: stephen.natoli@holdingredlich.com

Sydney
Scott Alden, Partner 
T: +61 2 8083 0419 
E: scott.alden@holdingredlich.com

Brisbane
Carl Hinze, Partner
T: +61 7 3135 0630
E: carl.hinze@holdingredlich.com

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