NATIONAL ENERGY GUARANTEE - ENERGY SECURITY BOARD FINAL DETAILED DESIGN 1 August 2018 - COAG Energy Council
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ENERGY SECURITY BOARD
NATIONAL ENERGY
GUARANTEE
FINAL DETAILED DESIGN
1 August 2018
Dr Kerry Schott INDEPENDENT CHAIR Energy Security Board Clare Savage INDEPENDENT DEPUTY CHAIR Energy Security Board Paula Conboy CHAIR Australian Energy Regulator John Pierce CHAIRMAN Australian Energy Market Commission Audrey Zibelman CEO & MANAGING DIRECTOR Australian Energy Market Operator
Contents
Executive Summary 1 4 Reliability requirement 35
Step 1: Forecasting the
reliability requirement 37
1 Introduction and next steps 4
Step 2: Updating the reliability
Background to this paper 5 requirement 37
Process 5 Step 3: Triggering the reliability
Structure of final detailed obligation 37
design paper 6 Step 4: Liable entities 38
Step 5: Qualifying contracts 39
2 Context 7
Step 6: Procurer of Last Resort 41
The status quo is not an option 9
Step 7: Compliance 41
Longer term price signals at
the heart of the Guarantee 10 Step 8: Penalties 41
Reducing electricity prices
and improving affordability 10
5 Governance 42
Managing reliability risks 15
Implementation through NEM
Reducing emissions 17 governance arrangements 43
Safeguarding competition 19 Review of operation of aspects
of the Guarantee mechanism 44
Relevant Commonwealth
3 Emissions reduction requirement 20 legislation 44
Electricity emissions
intensity targets 21
6. Modelling 45
Entities covered by the emissions
reduction requirement 21 Modelling framework 46
Applying the emissions reduction Assumptions and approach 47
requirement 22
Scenario 1 ‘No policy’ 49
Flexible compliance options 29
Scenario 2 ‘Guarantee’ 51
Reporting and compliance 31
Technology cost assumptions 54
Other considerations 34
Projected jurisdictional outcomes 54
Operation of the Guarantee under
different circumstances 59
List of committed projects
to 2020-21 59
A Abbreviations and defined terms 61
COAG Energy Council Dear Ministers I am pleased to enclose the Final Design of the National Energy Guarantee (the Guarantee) for your consideration. The Guarantee integrates energy and emissions policy in a way that encourages new investment in both low emissions technologies and in dispatchable energy such that the electricity system achieves its share of emissions reduction targets and operates reliably. It is designed to deliver long-term policy confidence and stability to reduce investment risk and bring down electricity prices. The Guarantee has five key drivers that will work together to lower retail prices: • policy stability unlocking new investment • policy stability reducing the risk (and therefore the cost) of new investments • increased contracting unlocking new investment • increased contracting in deeper and more liquid contract markets to reduce the level and volatility of spot prices, and • increased voluntary demand response. The final design is the culmination of almost a year’s work and a collaborative effort by people and organisations from across the energy sector and the community. Stakeholders have been clear with the Energy Security Board (ESB) that the status quo is simply not acceptable and have demonstrated a commitment to work together to respond to the changes that are underway in the energy market. Many stakeholders have stressed that at least some of the existing pipeline of new investment is predicated on the assumption that integrated energy and climate policy is now within reach. Any delay, or worse a failure to reach agreement, will simply prolong the current investment uncertainty and deny customers more affordable energy. The strength of the Guarantee mechanism reflects the open and constructive input we have received via written submissions, technical working groups, and public forums at each step of the process. The ESB has designed the Guarantee mechanism to be fuel and technology neutral and provide a clear investment signal so that the cheapest, cleanest and most reliable generation (or demand response) gets built in the right place at the right time. There is no revenue collected from the Guarantee and there is no certificate trading scheme. The design incorporates specific measures to safeguard competition, and to enhance liquidity and pricing transparency in retail and wholesale markets. Importantly, the Guarantee is a flexible mechanism that can accommodate different levels of emissions ambition over time, and work with state and territory emissions targets and renewable energy schemes to create greater confidence for the industry.
The attached final design includes extensive, updated modelling led by the ESB, in partnership with the Australian Energy Market Commission, drawing on expert advice and capability from ACIL Allen consulting. The modelling by ACIL Allen (as with the modelling previously conducted for the ESB by Frontier Economics) uses an economic model of the wholesale electricity market and prices to forecast likely changes in the generation mix under different policy settings and the consequential impact on customer bills. This is in contrast to the Australian Energy Market Operator’s Integrated System Plan modelling which is a cost-based engineering assessment focused on long-term transmission planning and investment. The most recent Guarantee modelling by ACIL Allen validates the conclusions of the modelling previously undertaken by Frontier Economics on the Guarantee. This analysis confirms that the mechanism can deliver much needed savings for households and businesses that have been impacted by rising energy prices and can ensure the electricity sector contributes its share towards Australia’s international emissions reduction commitments, all while ensuring we have sufficient dispatchable resources for reliable power. The average household bill is expected to be $550 lower each year through the 2020s than it is now, and $150 of those savings are because of the Guarantee. Should the Energy Council choose to proceed, the Guarantee would be implemented through existing governance arrangements for the National Electricity Market. The Energy Security Board looks forward to discussing this with you at the next Energy Council meeting on Friday 10 August 2018. Yours sincerely Kerry Schott AO Chair, Energy Security Board 1 August 2018
Executive
Summary
The National Energy Guarantee (the Guarantee) is a • increased voluntary demand response.
mechanism designed to integrate energy and emissions NEM average wholesale prices are, on average,
policy in a way that encourages new investment in both low expected to be over 20 per cent lower over the
2020s under the Guarantee than without it. Lower
emissions technologies and in dispatchable energy such that wholesale prices are expected to translate into
the electricity system operates reliably. Providing long-term lower bills for all consumers. The average
NEM-connected household is estimated to save
policy confidence is critical to lowering investment risk in
around $550 dollars a year (real $2018) on their
the National Electricity Market (NEM) and bringing down retail bill over the 2020s relative to 2017-18. Of
electricity prices. this, nearly $150 per year (real $2018) is forecast
additional savings as a result of the Guarantee.
The Guarantee requires retailers to contract with The Guarantee is specifically designed so that
generation, storage or demand response so that: it does not undermine, and may indeed boost,
competition through measures that enhance
• there are contracts in place to support a market liquidity and pricing transparency in
minimum amount of dispatchable energy to retail and wholesale electricity markets. Under
meet consumer and system needs (reliability the emissions reduction requirement, smaller
requirement), and retailers are supported through the exemption
• the average emissions level of the electricity of the first 50,000 MWh of load and with
sold to consumers meets the electricity relatively greater flexibility to carry forward
sector’s share of Australia’s international any over-achievement. Under the reliability
emissions reduction commitments, as set requirement, when the reliability obligation is
by the Australian Government (emissions triggered, a Market Liquidity Obligation will
reduction requirement). require the largest participants to offer to buy
and sell contracts with all participants.
The emissions reduction and reliability
The emissions requirements work together so that the market It is possible that higher emissions reduction
reduction has a fair opportunity to deliver adequate targets may be set in the future by the Australian
requirement is an reliability while lowering emissions. The Government. In this case, the Guarantee
Guarantee is fuel and technology neutral and mechanism and framework will automatically
annual obligation
provides a clear investment signal, so the accommodate the new targets. Further, the
on market cleanest, cheapest and most reliable generation design of the Guarantee does not limit the ability
customers in the (or demand response) gets built in the right place of States and Territories to set and meet their
NEM. at the right time. own emissions reduction or renewable energy
targets.
The Guarantee has five key drivers that will work
together to lower retail prices:
• policy stability unlocking new investment Emissions reduction requirement
• policy stability reducing the risk (and therefore The emissions reduction requirement is an
the cost) of new investments annual obligation on market customers in
the NEM. Market customers must ensure the
• increased contracting unlocking new
average emissions intensity of their load is at
investment
or below the prescribed ‘electricity emissions
• increased contracting in deeper and more intensity target’ for the compliance period.
liquid contract markets to reduce the level and
volatility of spot prices, and
1 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE
Executive Summary
Compliance with the emissions reduction allocate all generation and associated emissions,
requirement is assessed annually by the a requirement against unreasonably withholding
Australian Energy Regulator (AER), based allocations, and a general anti-avoidance
on a financial year compliance period. The regime. These elements are not included in the
first compliance year proposed is 2020-21. final design. The AER will actively monitor the
An emissions registry, administered by the behaviour of registry participants and, if required,
Australian Energy Market Operator (AEMO), will the ESB will reconsider the need for a general
be established to facilitate efficient compliance. anti-avoidance regime and/or an unreasonable
withholding provision.
The registry allows market customers to be
allocated a share of a generator’s output and
its associated emissions, for which they have Reliability requirement
obtained the rights. The registry automatically
matches emissions to each market customer The reliability requirement is designed to
based on the generation allocated against incentivise retailers and other market customers
their load. Market customers that do not have (liable entities) to support the reliability of the
generation allocated for some or all their load NEM through their contracting and investment in
will be assigned the average emissions intensity resources.
of all unallocated generation in the registry, to AEMO will forecast annually whether the
cover their unallocated load. reliability standard is likely to be met (or not)
The AER will compare each market customer’s in each NEM region1 over a 10-year period.
average emissions intensity against the electricity Where a reliability gap is identified, the market
emissions intensity target to assess compliance. will have the opportunity to invest to close that
To provide flexibility, market customers can carry gap. However, if a material gap persists or
forward a limited amount of over-achievement for emerges three years from the period in question,
use in the next compliance year. Similarly, limited then AEMO will apply to the AER to trigger the
deferral is allowed. reliability obligation.
Some elements of the final design have been If the reliability obligation is triggered, liable
revised from the draft detailed design of 15 June entities may be required to demonstrate future
2018, based on stakeholder feedback through compliance by entering into sufficient qualifying
the consultation process. These are: contracts for dispatchable capacity (including
demand response) to cover their share of a one
• The emissions reduction requirement in two-year system peak demand at the time of
has been designed as a whole-of-market the gap.
mechanism, in that every megawatt-hour (MWh)
of generation that occurs in a compliance year One year from the forecast reliability gap, if
will be recorded in the registry for allocation the AER confirms a material gap in resources
against every MWh of market customer load in remains, AEMO will use its safety-net Procurer
that compliance year. This includes pre-1997 of Last Resort to close the remaining gap. At
renewable generation (such as Snowy Hydro this point, liable entities must disclose their
The reliability and Hydro Tasmania). contract positions to the AER. If actual system
requirement peak demand in the compliance year exceeds
• The approach to over-allocations of generation that which would be expected to occur once
is designed to has been revised. Market customers have an
incentivise retailers in every two years, then the AER will assess
incentive to reallocate generation in advance the compliance of liable entities. Those whose
and other market of the reporting deadline. Over-allocation will required share of load is not covered by
customers (liable not attract a civil penalty. qualifying contracts for the specified period
entities) to support • The carry forward limit has increased, to up are non-compliant.
the reliability of to 10 per cent of the first year’s electricity
the NEM through Some elements of the final design have been
emissions intensity target per MWh of load
their contracting revised from the draft detailed design of 15 June
plus a fixed amount of 60,000 tCO2-e.
and investment in 2018, based on stakeholder feedback through the
• In the first year, market customers can defer consultation process. These are:
resources. their full compliance obligation, but any
• Large customers will be provided the flexibility
deferral must be made up in the following
to ‘opt-in’ to manage their own reliability
years.
obligation, if they consider this is the most
The Energy Security Board (ESB) reconsidered cost-effective and efficient approach.
the need for a requirement that generators
1 The regions of the National Electricity Market include Queensland, New South Wales, Victoria, Tasmania and South Australia.
2 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE
Executive Summary
• Retailers can adjust their contract position
National Energy National Energy
within the compliance year when they take Guarantee - Guarantee -
on new commercial and industrial customer scheme mechanics emissions
sites with historic peak load less than 30 MW. reduction target
• Large vertically integrated retailers will be
covered by a Market Liquidity Obligation COAG Energy Australian
when the reliability obligation is triggered. Council - all Government
Obligated entities will be determined based governments
on a size threshold and required to perform
a market making function for the duration of
New legislation
the gap period. Qualifying contracts will not be
to set targets
required to be recorded in a trade repository
with associated trade reporting for the National National Greenhouse
Electricity Law and Energy
purposes of the Guarantee. Reporting Act
• Liable entities found to be non-compliant with National
Electricity Rules Australian
their contracting obligations will be charged National Registry
an amount that contributes to the costs of of Emissions
AEMO exercising its Procurer of Last Resort Units Act
function. This will be a proportionate cost
contribution commensurate with the non-
compliance, determined after the event and Mechanism to Emissions reduction
capped at $100 million. deliver emissions target and trajectory
reduction including extension
requirement process
and reliablity
Governance requirement Surrender of offsets
and EITE exemptions
The Guarantee is to be implemented through
two legislative routes. The first route is through
the existing governance arrangements for the If the COAG Energy Council approves the
NEM, agreed by all the Governments that are final design of the Guarantee at its 10 August
party to the NEM in the Council of Australian 2018 meeting, there will be a period of public
Governments (COAG). The majority of the consultation on the draft NEL legislation, which
Guarantee mechanism is implemented through is anticipated to occur from around mid-August
amendments to the National Electricity Law to around mid-September. It is expected that the
(NEL) and the National Electricity Rules (Rules). draft NEL legislation will then be finalised for
• The NEL will set out who is liable under the introduction to the South Australian Parliament
emissions reduction and reliability obligations, by the end of 2018.
the key aspects of those obligations, and
The necessary Rules to implement the Guarantee
the compliance and penalty framework. It
will be made by the South Australian Energy
will also include a new emissions objective
Minister in mid-2019.
to guide rule-making in relation to Rule
changes relevant to the emissions reduction Limited aspects of the operation and
requirement. implementation of the Guarantee will be reviewed
• Detailed aspects of the mechanism (as set out after three years to ensure that it is working
in the final detailed design document) will be smoothly.
included in the Rules. After the initial package of changes to the
The second route of legislation is via the Rules are made, the Australian Energy Market
Australian Government. Australian Government Commission (AEMC) is the rule-maker
legislation sets the intensity targets, provisions in response to rule change proposals and in
for emissions-intensive trade-exposed (EITE) accordance with its current functions under
exemptions, the surrender of offsets, and the NEL.
emissions reporting and related information Using an established framework, with clear
sharing and gathering powers. accountabilities and change processes, will give
The responsibilities of the COAG Energy Council businesses and investors the confidence and
and the Australian Government, as they relate certainty they need to invest in the long-term
to the Guarantee, are set out as follows. and deliver cheaper, cleaner and more reliable
electricity for Australian consumers.
3 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE
1 Introduction and next steps
I ntroduction
and next steps
1.1 Background to this paper 1.2 Process
On 24 November 2017, the COAG Energy Council Designing the Guarantee has been an iterative
requested the ESB provide further advice on the and inclusive process. Inception to final design
Guarantee. has taken almost a year with input through
multiple consultation processes.
The ESB’s high-level design for the Guarantee
was presented to the 20 April 2018 COAG Energy The detailed design outlined in this document
Council meeting. It was agreed that the ESB builds on:
would progress development of the detailed • the model the ESB initially proposed in its
design of the Guarantee, for determination at the November 2017 advice
COAG Energy Council’s 10 August 2018 meeting.
• the draft design consultation paper published
The Guarantee comprises changes to the NEM on 15 February 2018
and its legislative framework which seek to:
• the high-level design published on 20 April
• maintain the reliability of the system 2018, and
• achieve the emissions reductions required • the draft detailed design released for public
from the electricity sector to meet Australia’s consultation on 15 June 2018.
overall international commitments, and
The ESB has benefited greatly from the
• meet the above objectives at the lowest overall engagement and feedback from a range of
costs. stakeholders on the detailed design of the
This paper sets out the details of how the Guarantee.
Guarantee will be structured and work in • The ESB convened Technical Working
practice. Groups to advise on certain detailed design
The electricity emissions reduction target, elements. The Technical Working Groups were
trajectory and its subsequent review is the comprised of a broad range of stakeholders
responsibility of the Australian Government. with relevant expertise from more than
The Australian Government is also responsible 30 organisations.
for whether external offsets may be used, and • The draft detailed design was released
whether EITE load is exempt. for public consultation on 15 June 2018.
• A stakeholder forum was held in Melbourne
on 2 July 2018.
• More than 90 submissions on the consultation
paper were received from a range of
stakeholders, including a number of retailers,
generators, and large energy users.
The ESB thanks stakeholders for their
participation in the consultation process.
5 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEENext steps 1.3 Structure of final detailed
The COAG Energy Council will be asked to agree
to the final design of the Guarantee mechanism design paper
at its 10 August 2018 meeting. Subsequently, This paper is structured as follows:
jurisdictions will be asked to approve the release
• Chapter 2 explains the context for and
of an exposure draft of the Bill to amend the
expected outcomes of the Guarantee.
NEL. Following a four-week consultation period,
the Bill will be finalised for introduction to the • Chapter 3 describes the ESB’s detailed design
South Australian Parliament before the end of for the emissions reduction requirement.
2018. The amendments to the NEL deal with • Chapter 4 describes the ESB’s detailed design
the mechanism of the Guarantee and the way in for the reliability requirement.
which reliability and emissions are considered
together to achieve the three objectives of • Chapter 5 outlines the governance approach
affordability, reliability and emissions reduction. for the Guarantee.
Draft rule changes will be presented to the COAG • Chapter 6 outlines the market modelling
Energy Council at its April 2019 meeting, after undertaken to support the analysis in this
a period of development and consultation. If paper.
agreed, these Rules will be made by the South To make it easier to track how the Guarantee has
Australian Energy Minister in 2019. developed, this paper is set out in a similar way
The national emissions target and trajectory from to the earlier papers.
2020 to 2030, the review points for that target, the
process for extending targets, and the treatment
of offsets and emissions-intensive trade-exposed
industries are matters in the jurisdiction of the
Australian Government. These matters are
all dealt with separately in Commonwealth
legislation, which will be introduced into
Parliament if COAG agrees to proceed with the
Guarantee.
Some State and Territory governments have,
or are proposing, emissions reduction schemes
and programs in their jurisdictions. These
are matters for those governments and their
legislation. If the Guarantee is implemented
these schemes will coexist with it.
6 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE2 Context
Context
Fifteen years of climate policy instability has impeded long-term “We are broadly supportive of the proposed
investments in the NEM and this has compromised system security and National Energy Guarantee design as per the
reliability. It has also impacted electricity prices and added to affordability draft detailed design consultation paper. We
problems for consumers. As the Finkel Review noted, our energy system believe it appropriately addresses stakeholder
has been vulnerable to escalating prices while being both less reliable and concerns, while also integrating energy and
emissions policy in a way that encourages
secure. Increased market intervention has been necessary to maintain
new investment in clean and low emissions
the security and reliability of the system and this has further distorted
technologies and a dynamic energy market.”
price signals to producers and consumers. In short, the uncertainty about – St Vincent de Paul and South Australian Council
climate change policy has severely damaged the electricity industry and of Social Service (SACOSS)4
its household and business consumers. This cannot continue.
“Origin supports the objectives of the NEG to
bring together energy and climate change policy
The Guarantee brings together climate and and provide a clear investment signal for low
energy policy for the first time in Australia. It emissions and reliable generation sources at
ensures we can meet the electricity sector’s least cost to Australian homes and businesses.”
share of our international obligation to reduce – Origin5
emissions, while supporting the reliability of our
“When we saw the draft design… we liked
electricity system. Providing long-term policy
what we saw and we decided to invest in more
confidence will lower investment risk in the
generation on top of the generation we had
NEM and bring down electricity prices.
at that time, so we bought three hydro power
Submissions to the ESB’s consultation process stations and entered into a bunch of power
were widely supportive of the objectives and purchase agreements to support new build and
design of the Guarantee. that has now translated into lower prices for
our customers… and we are in discussion with
“The Business Council believes that the
several parties about long-term contracts to
Guarantee will put in place a durable mechanism
support dispatchable power. …
that appropriately balances our economic
growth, energy security, and environmental So the point there is that at least some of the
The Guarantee
sustainability.” – The Business Council of benefit of the NEG is already built in to the forward
brings together Australia2 price and consumers are already starting to see
climate and energy some of the benefit on their bills. So what that
policy for the first “In our view, the importance of acting to rebuild
means is if the NEG is not approved – I don’t know
time in Australia. the confidence of consumers in the sector and
what’s going to happen, but I think it’s reasonably
trust in the energy system cannot be overstated.
likely wholesale prices will increase. If wholesale
Consumers understand that there is a generation
prices increase, we’ll see some reversals of the
“supply” problem, with the ageing of the coal
positive situation we’re in now where we see flat or
fired power station fleet, and the need for a
declining price for consumers in the most recent
minimum amount of dispatchable energy to be
price changes, and I think that just gets us into
available to meet consumer and system needs,
a spiral that I don’t think is healthy for anyone.”
in the transition to a lower emissions economy.”
– Ed McManus, CEO of Powershop Australia,
– Energy Consumers Australia3
2 July 2018 stakeholder forum
2 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Business%20Council%20of%20Australia%20
Consultation%20Paper.pdf, p.7.
3 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Energy%20Consumers%20Australia%20
Consultation%20Paper.pdf, p.3.
4 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/St%20Vincent%20de%20Paul%20and%20South%20
Australian%20Council%20of%20Social%20Service%20%28SACOSS%29%20Consultation%20Paper.pdf, p.1.
5 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Origin%20Consultation%20Paper.pdf, p.1.
8 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE“EnergyAustralia considers that the main barrier These developments have encouraged
to efficient investment in dispatchable capacity deployment of renewable generation in the NEM
has been the policy uncertainty around emissions and these trends are expected to continue.
reduction. If this is resolved through the
The introduction of solar and wind into the
Guarantee, or another policy, then it will help end
NEM at this scale is a challenge that will require
the paralyses of decision making that confronts
adaptations to the existing framework. The
long term investment and divestment decisions
variable nature of wind and solar PV means it
for assets worth hundreds of millions of dollars
cannot be dispatched on demand. This requires
which have lives of 15-20 years or more.”
complementary capacity that is capable of rapidly
– EnergyAustralia6
increasing or decreasing output in response to
changes in system demand or output from wind
2.1 The status quo is not an option and solar PV.
Until recently, almost all of the NEM’s generation Developments in behind the meter technologies
was supplied by large thermal generators (coal including rooftop solar, battery storage and
or gas), or from hydro. Other forms of generation, electric vehicle charging are changing the shape
such as solar or wind power, were not economic of daily demand, resulting in sharper peaks
without significant subsidies. This is no longer and shallower troughs in average time-of-day
the case. Substantial cost reductions in wind demand. This means much sharper increases
and solar generation have occurred. These cost in output from the grid will be required in the
reductions have been technology driven and have afternoon as demand increases and output from
improved with manufacturing scale. solar PV drops. Over the period to 2030, flexible
generation resources that can rapidly ramp up to
Customer preferences have also changed and the evening peak will be critical.
encouraged increased deployment of wind and
solar PV. Many large-scale solar and wind projects These changes underway in the NEM cannot be
are underpinned by power purchase agreements reversed. They are now more market driven than
from Australian businesses – reflecting the policy driven. The operating procedures and rules
attractive electricity costs these agreements can governing the NEM must also adapt and do so in
now offer and a preference from some businesses a coordinated way that supports the transition
for low emissions electricity. Voluntary action while ensuring electricity is affordable. An
schemes such as GreenPower and State based unstable and uncoordinated policy environment
renewable schemes add to this demand. exacerbates these issues.
Nationally, more than 17 per cent of households National electricity prices have more than
have either solar PV or solar hot water or both, doubled over the past decade – growing
with almost 1.9 million small-scale solar PV much more rapidly than general inflation and
systems now installed.7 lowering the purchasing power of all Australian
households, especially the most vulnerable
Recent increases in export coal and gas prices have (Chart 1). While much of the price increase over
added to the challenges for thermal generators the past 10 years has been caused by network
making it more difficult for these technologies to or retail pricing, the more recent increases have
compete. In the last two years thermal coal export been largely attributable to increased wholesale
prices, for example, have increased from around prices. These price increases have also been
$73 per tonne to around $115 per tonne,8 and an impost on Australian businesses, potentially
between 2015 and 2018 gas-fired generators’ fuel undermining their international competitiveness
costs have risen from almost $5 per gigajoule to and weighing on economic growth.
around $8 per gigajoule.9
Chart 1: Cumulative increase in the price of Australian consumer goods
120 Cumulative percentage
110 Electricity
increase in nominal prices
100
90
80
70
60
50 Average of all
40 consumer
30 goods
20
10
0
Mar 08 Mar 10 Mar 12 Mar 14 Mar 16 Mar 18
Source: Australian Bureau of Statistics, Catalogue Number 6401.07
6 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/EnergyAustralia%20Consultation%20Paper.pdf, p.11.
7 Clean Energy Regulator Postcode data for small-scale installations and ABS 6523.0 - Household Income and Wealth, Australia, 2015-16.
8 Resources and Energy Quarterly – June 2018, Department of Industry, Innovation and Science.
9 ACCC Retail Electricity Pricing Inquiry—Final Report (2018), p.71.
9 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEEThe Australian Competition and Consumer Increased contracting in deeper and more liquid
Commission’s (ACCC) recently released Retail contract markets is expected to reduce the level
Electricity Pricing Inquiry—Final Report10 is a and volatility of spot prices.
comprehensive study into the drivers of retail
The Guarantee has been specifically designed
electricity prices with a wide-ranging package
to ensure it does not undermine but rather
of recommendations to reduce prices. The
enhances the liquidity, transparency and the
ESB welcomes this report and looks forward
level of competition in the retail and wholesale
to working with the COAG Energy Council to
electricity markets.
consider how these recommendations are best
responded to and implemented. A cornerstone
of the ACCC’s recommendations to reduce 2.3 Reducing electricity prices
wholesale electricity prices is the adoption and
implementation of the Guarantee.
and improving affordability
In the advice presented to the COAG Energy
Lowest cost outcomes for consumers will be
Council in November 2017, the ESB included
achieved by creating a stable policy environment
initial estimates of the effects of the Guarantee
which appropriately values an optimal mix of
based on detailed market modelling.
capacity and creates clear incentives for the
private sector to deliver it. This section presents updated estimates of the
effects of the Guarantee, reflecting the final
policy design as well as developments in the
2.2 Longer term price signals at NEM over the past nine months. The updated
the heart of the Guarantee modelling results are detailed further in
Chapter 6.
Spot market prices for electricity are for the
very near-term, that is, the next 30 minutes. Current high wholesale electricity prices, as
In contrast, the agreements struck between well as the Australian Government’s Renewable
retailers and generators in the contract market Energy Target (RET) scheme, have incentivised
have a much longer-time horizon, sometimes a large pipeline of renewable generation. Already
spanning many years. committed projects and the first stages of the
Victorian Renewable Energy Target (VRET) and
The Guarantee addresses the market for
Queensland Renewable Energy Target (QRET)
wholesale electricity contracts. Derived from
schemes means that around 7,800 MW of
market expectations of future spot prices, these
large-scale wind, solar and battery capacity
contract markets focus on the longer term and
is expected to be added to the NEM between
deliver key signals for new investment.
2018-19 and 2020-21.
The NEM is designed so that price signals provide
But a failure, again, to agree and implement
the necessary information for market participants
an integrated energy and climate policy will
to make investment or retirement decisions
be disruptive and could result in a continued
concerning their physical assets and their
and potentially extended environment of policy
efficient operation. These price signals are borne
uncertainty. In this environment, it is reasonable
out in wholesale spot market outcomes and
to assume that only those projects currently
financial contract markets, both of which provide
financially committed would proceed to build.11
participants with strong incentives to deliver
In an environment of continued policy uncertainty,
electricity when it is needed. If participants fail
it is also reasonable to assume that financing
to manage their financial exposure to either low
costs and the associated hurdle for new
or high spot prices or make a poor investment
investment will be higher than under the
Lowest cost decision (for example, in a new generator that
Guarantee.
outcomes for is under utilised), they alone face the financial
consumers will consequences, not consumers or taxpayers. Chart 2 outlines the expected build profile over
be achieved by the years to 2030 should the Guarantee not
The Guarantee builds on the existing pricing and
proceed. Only new-build projects that have
creating a stable risk management frameworks used in the NEM
reached financial close or that will be funded
policy environment to signal the need for investment in new sources
under Stage 1 of the VRET or QRET are expected
which appropriately of generation.
to be constructed in the short-term. The
values an optimal Market participants are expected to contract Australian Government’s Snowy 2.0 project is
mix of capacity in a variety of ways to meet both the emissions anticipated to commence generation in
and creates clear reduction and reliability requirements. Through 2023-24. Some black coal generation is expected
incentives for their contracting, market customers will to withdraw in line with announced closures or
the private sector support a range of different generation and key contracting and technical milestones. Rooftop
to deliver it. demand-side technologies. This will result in solar PV is expected to continue to expand
increased contracting levels, which in turn will through to 2030 in line with AEMO forecasts.
create deeper and more liquid contract markets.
10 Available at https://www.accc.gov.au/regulated-infrastructure/energy/electricity-supply-prices-inquiry/final-report.
11 This estimate is consistent with the ESB’s market intelligence and supported by stakeholder submissions to the policy development process,
see for example the Powershop and EnergyAustralia comments published at the begining of this chapter.
10 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEEChart 2: Change in NEM generation capacity by fuel type without the Guarantee
5 GW, year on year change
4
Battery
3
Utility solar
2
Wind Snowy 2.0 Rooftop solar
1
0
Liquid fuel Gas
-1 Black
QLD black coal
Black coal Coal
-2 (Liddell)
-3
18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
The continued connection of additional renewable generation projects to the NEM in coming years is
projected to see prices fall from today’s elevated levels (Chart 3). The modelled short-term wholesale
price reductions are comparable to those currently implied by futures contracts.
Chart 3: NEM wholesale prices without the Guarantee
100 real 2018 $ / MWh
90
Current futures
80 pricing
70
60
50
40
NEM wholesale prices
30 without the Guarantee
NEM wholesale prices
20 (modelled)
(historical)
10
0
99-00 02-03 05-06 08-09 11-12 14-15 17-18 20-21 23-24 26-27 29-30
Sources: ACIL Allen Consulting, ASX Energy futures, ABS Catalogue 6401.0, AEMO, Energy Security Board
While the closure (as announced) of the Liddell The Guarantee will lower prices in five key ways:
The Guarantee coal-fired power plant in NSW in 2022-23 puts • policy stability unlocking new investment
will provide some upwards pressure on prices, in NSW in
stakeholders with particular, the addition of around 2,000 MW of • policy stability reducing the risk (and therefore
policy confidence capacity with the completion of the Australian the cost) of new investments
by comprehensively Government’s Snowy 2.0 pumped hydro project • increased contracting unlocking new
integrating energy in 2023-24 is expected to extend this period of investment
and climate policy lower prices. However, prices are expected to
• contract markets becoming deeper and more
rise again over the decade as the supply-demand
to guide an orderly liquid and reducing the level and volatility of
balance tightens and real gas prices are assumed
transition for the spot prices, and
to rise. Little further investment is required
electricity sector. before 2030 under this scenario which assumes • increased voluntary demand response.
no unexpected closures of major thermal
The Guarantee will provide stakeholders with
plant. There is a further slight increase in the
policy confidence by comprehensively integrating
price trajectory in 2029-30 associated with the
energy and climate policy to guide an orderly
modelled withdrawal of some black coal capacity
transition for the electricity sector. This will assist
in Queensland.
in bringing forward additional new investment
and reduce the cost of capital of those new
investments.
11 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEEThrough their contracting, retailers will support in contracted time-periods. In this way, higher
a range of different generation and demand-side levels of long-term contract cover also slightly
technologies to meet the emissions reduction mitigate the risk of short-notice generator
and reliability requirements of the Guarantee at closure.
the lowest possible cost.
The incentives and structures created by the
Increased long-term contracting is expected Guarantee are also expected to accelerate the
to further lower prices under the Guarantee development of the demand-side response
as all market customers (mostly retailers) market. This will give the NEM additional,
will be required to have a reliable level of firm potentially-lower cost, ways to respond to peaks
contracts in place at key times. This will lead in demand.
to more competitive bidding in the spot market
In aggregate these aspects of the Guarantee
as generators reduce their bids to increase
are expected to place significant additional
their chances of being dispatched to cover
downwards pressure on prices. NEM-average
their contracted capacity.12 Generators with
wholesale prices are, on average, expected to be
high levels of long-term contracts in place face
over 20 per cent lower over the 2020s under the
strong financial incentives to be able to generate
Guarantee than without it (Chart 4).
Chart 4: NEM wholesale prices under the Guarantee
90 real 2018 $/MWh
80
70
Without the Guarantee
60
50
40
30 With the Guarantee
20
10
0
17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
Lower wholesale prices are expected to lower over the 2020s relative to 2017-18 with network
bills for all consumers. The average NEM-connected costs held constant in real terms. Of this, nearly
household is estimated to save around $550 $150 per year (real $2018) of projected savings is
dollars a year (real $2018) on their retail bill directly attributable to the Guarantee (Chart 5).
Chart 5: Forecast average retail bill savings relative to 2017-18 for NEM-connected households
under the Guarantee
700 real 2018 $ / annum
Additional savings expected
Savings expected under the Guarantee
600
even with no
500 policy
400
300
200
100
0
18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
12 A generator typically offers contracted capacity at marginal cost (save for below marginal cost bids in respect of a minimum level
of generation required to safely continue operation) and offers remaining capacity to maximise net revenues.
12 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEEThe price savings from the Guarantee are hydro project in 2023-24 is projected to put
expected to be broad-based, with all NEM further downward pressure on prices, broadly
jurisdictions expected to benefit from lower offsetting the price effects of Liddell retiring
electricity prices as a result of the Guarantee. and extending a period of lower prices. Some
These savings are not directly comparable with Queensland black coal generation is projected
the estimated bill savings in the ACCC’s recent to withdraw in line with key contracting and
Retail Electricity Pricing Inquiry—Final Report – technical milestones around 2029-30 which
the estimated savings differ in scope and the time causes a further slight increase in the modelled
periods compared. wholesale price trajectory in Queensland at
this time. The modelling suggests that under
Wholesale prices are projected to fall in all NEM
this scenario, it will not be profitable for some
jurisdictions relative to 2017-18. Additional
Queensland black coal capacity to undergo
committed supply and moderation in coal prices
necessary refurbishments in 2029-30, a time
are projected to put downwards pressure on
which coincides with the expiration of a major
prices even without the Guarantee (Chart 6).
power purchase agreement. However, the
The closure (as announced) of the Liddell
modelling does not consider the potential for
coal-fired power plant in NSW in 2022-23 puts
particular commercial arrangements to be
some upward pressure on prices particularly
extended or assess the additional value that
in NSW. However, the replacement capacity
the flexibility of this type of plant might attract.
announced by the ownership of Liddell together
As with any modelling, particularly over such
with the addition of around 2,000 MW of capacity
The price savings long time horizons, this should not be read as a
with the completion of the Snowy 2.0 pumped
prediction of future events.
from the Guarantee
are expected to
be broad-based, Chart 6: Wholesale regional reference prices without the Guarantee
with all NEM
real 2018 $ / MWh
jurisdictions 140
expected to South Australia
benefit from lower 120
New South Wales
electricity prices Victoria
100 Tasmania
as a result of the
Guarantee. Queensland
80
60
40
20
0
17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
13 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEEWholesale prices are forecast to be lower in all NEM jurisdictions under the Guarantee than in its
absence (Chart 7).
Chart 7: Projected jurisdictional wholesale price outcomes
New South Wales Queensland
Real 2018 $ / MWh 100 Real 2018 $ / MWh
100
80 80
No policy No policy
60 60
40 40
Guarantee Guarantee
20 20
0 0
South Australia Tasmania
100 Real 2018 $ / MWh 100 Real 2018 $ / MWh
80 80
No policy
60 60 No policy
40 Guarantee
40
Guarantee
20 20
0 0
Victoria NEM
100 Real 2018 $ / MWh 100 Real 2018 $ / MWh
80 80
No policy No policy
60 60
40 40
Guarantee Guarantee
20 20
0 0
Source: ACIL Allen consulting
14 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE2.4 Managing reliability risks The reliability requirement is designed to
A portfolio of ensure that a portfolio of dispatchable power
resources is The reduction in dispatchable coal-fired is available when required as the system
required so generation and the greater penetration of transitions. Increased contracting will also
variable renewable technologies such as reduce the likelihood of unexpected closures.
that when wind
solar and wind generation present risks to For generators, greater levels of contracting will
and solar are
the reliability of our electricity supply. have the effect of increasing their commitment
not available,
Historically, most of the installed generation to future generation – as a failure to generate
alternative sources at times they are contracted would leave them
of power can be capacity has been dispatchable (that is, able to
generate as required) provided by coal, gas and exposed to significant financial risk. Transferring
dispatched. such liabilities is costly, and so being in a largely
hydro-electric plants. Provided these generating
units have sufficient fuel (that is, coal, gas, contracted position would increase a generator’s
stored water) and their operational positions incentive to keep the plant well-maintained
allow it – and assuming no unexpected outages and to quickly take action to respond to any
or transmission constraints – they can be called unplanned outages. The reliability requirement is
upon by AEMO to increase or decrease their expected to work in combination with the three-
output at any time in a predictable manner, given year notice of closure rule recommended by the
enough notice. Finkel Review to ensure market decisions are
made in a more orderly fashion.13
However, as Australia’s ageing generators retire
they are being replaced by cheaper variable The Guarantee also incentivises a more
renewable alternatives or increased output from developed demand response market, financially
gas-fired power stations. rewarding action by consumers, which will aid
reliability and capture value for consumers who
The proportion of available dispatchable choose to participate.
generation capacity in the NEM is therefore
declining. While some new wind and solar Neither the risk nor the effects of unanticipated
investments in Australia are seeking to make outages or closures should be underestimated,
themselves dispatchable by co-locating with a especially as the share of dispatchable
battery or storage such as pumped hydro, this generation in the NEM decreases. Without
is not true for the majority of these resources. the Guarantee, the market will have a less
Therefore, a portfolio of resources is required coordinated response to unanticipated events,
so that when wind and solar are not available, and such disruptions could increase prices and
alternative sources of power can be dispatched. threaten reliability as has been seen over the
past few years.
13 The Finkel Review recommended that generators in the NEM be required to give at least three years’ notice to the market prior to closure
to support an orderly transition. The COAG Energy Council endorsed this recommendation on 14 July 2017 and the rule change request is
currently being considered by the AEMC: https://www.aemc.gov.au/rule-changes/generator-three-year-notice-closure.
15 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEECase study: The closure of the Northern Power station in
South Australia
The Northern Power Station (Northern) was a 540 MW coal fired generator located near Port
Augusta in South Australia that had historically provided up to 40 per cent of the region’s
electricity. In October 2015, Alinta announced it would be closing Northern in just five months’
time, bringing forward the closure date by two years, due to an increasingly challenging
operating environment and failure to secure support to remain open.
At the time of its retirement, Northern was over 30 years old, though not yet at the end of its
operational life. However, the mine that supplied the power station was running out of quality
coal and the mine would have required significant capital-intensive augmentation to continue
operation. Over the previous four and half years, Alinta had reportedly invested $200 million to
extend the operating life of the generator. The key reasons for the difficult trading conditions
faced by Northern included reduced electricity demand (partly driven by the uptake of rooftop
solar PV) and increased competition from zero marginal cost variable renewable energy
generation in South Australia.
Prior to the closure, Alinta was reportedly seeking to secure customers (particularly commercial
and industrial users) via long-term energy off-take agreements for the coming years to ensure
Northern’s continued operation. The prices sought for these contracts, while likely higher than
what commercial and industrial users were expecting to pay if they had otherwise remained
exposed to the wholesale spot price, look very good value in hindsight.
The closure of Northern in May 2016 resulted in a substantial reduction in supply in energy
and ancillary service markets, and in contract market liquidity in South Australia. Contributing
factors to these increased wholesale prices included a greater reliance on gas generators
at a time when gas prices were increasing on the east coast, interconnector constraints, as
well as limited availability of existing gas-fired generators due to mothballing. Had Northern
successfully secured customers via long-term contracts, it is likely that it would have continued
to operate through 2016 and 2017.
Following the closure of Northern, the majority of new generation capacity constructed in South
Australia has been variable renewable energy. As variable renewable energy traditionally does
not offer firm contract products, this has not improved contract liquidity in the region.
Counterfactual scenario
Drawing on AEMO’s observation in its Integrated System Plan that a key element of a least cost
approach to support an orderly transition of the energy system sees coal generators maintained
until the end of their technical lives, a counterfactual scenario was modelled where Northern
continues operating beyond May 2016 to assess the potential wholesale price outcomes.
The Guarantee is intended to increase long-term contracting and help lessen the likelihood
of unexpected sudden and early exits, where reliability is identified to be at risk. Increased
contracting will incentivise generators to defend their sold contract positions or face significant
financial liabilities. The reliability obligation will reinforce the value of firm contracts in times
and regions when supply of these contracts is at risk of becoming scarce.
The modelled price outcomes over the period May 2016 to December 2017 suggest that
wholesale prices would have been materially lower than those observed over the period. This
is particularly evident in the winter of 2016, where a series of high price events significantly
drove up average wholesale spot prices, and in the first half of 2017 where the supply-demand
balance was very tight. The average wholesale price in the counterfactual scenario is around
$79/MWh compared with the actual price observed of $102/MWh (representing a 23 per cent
reduction) (Chart 8).
16 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEEThe Guarantee can Chart 8: South Australian wholesale prices in 2016 and 2017
also accommodate
different levels
$250 Nominal $/MWh
of ambition over
time, and work with
State and Territory $200
schemes to create
greater confidence $150 Actual
for the industry.
$100
$50 Counterfactual
$0
Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17
Source: ACIL Allen Consulting, AEMO actuals
These higher wholesale prices flowed through the residential retail bills over the 2016 and 2017
period. A conservative estimate of the impact on typical South Australian residential retail bills
of the higher wholesale spot prices would be in the order of $200 to $250 for 2016-17.
In this counterfactual scenario, the continued operation of Northern displaces gas-fired
generation in South Australia, and also reduces the reliance on imported energy from Victoria.
2.5 Reducing emissions expected that cumulative emissions over the
decade will not reduce enough for the NEM to
The Australian Government has proposed to set meet its share of the national target (Chart 9).
an emissions reduction target for the electricity
sector consistent with achieving a 26 per cent The emissions reduction requirement is designed
reduction on 2005 levels by 2030. to ensure that the NEM evolves in a manner
that is consistent with the undertakings given
The currently committed pipeline of new by Australia under the Paris Agreement. The
renewable generation is expected to make a Guarantee can also accommodate different levels
substantial contribution to lowering emissions in of ambition over time, and work with State and
the NEM and the amount of additional abatement Territory schemes to create greater confidence
required. Annual NEM emissions are expected for the industry.
to fall by over 15 MtCO2-e between 2017-18 and
2020-21 reflecting the significant volume of The Guarantee is expected to deliver the
renewable energy committed to connect to the emissions reduction target for the NEM, with an
NEM over this period. By 2020-21, emissions in additional 38 MtCO2-e abatement over 2020-21
the NEM are expected to be around 24 per cent to 2029-30 relative to a scenario without the
below 2005 levels. Guarantee. The flexibility allowed by the carrying
forward of over-achievement and deferral
But without a specific policy commitment to between years will assist in lowering overall
achieve emissions reductions in the NEM, it is abatement costs.14
14 The modelling imposed a cumulative target for 2020-21 to 2029-2030 of around 1,320 MtCO2-e, consistent with the NEM achieving
a 26 per cent reduction on its historical 2005 emissions.
17 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEEYou can also read
