The National Energy Guarantee: what does it mean for your business?

So what does the newly-announced National Energy Guarantee (NEG) mean for your business? If you've never heard of the NEG, read our accompanying piece on the NEG to understand the basics of this energy policy.

The policy announcement in relation the NEG provided very little information about how the policy would translate into changes to the National Electricity Market's (NEM) current regulatory framework. This means that, at this early stage, there is insufficient detail to accurately assess how the NEG will impact on participants in the NEM or electricity consumers more broadly. We will provide further updates as the detail emerges, but in the interim we wanted to bring you some initial high-level thoughts.

If you are an electricity retailer

Retailers currently source their electricity through the NEM, which is conducted as a wholesale spot market. Outside of that market, electricity retailers enter into electricity derivatives (financial hedging instruments, which are derivatives of the NEM spot market price) that have the effect of "setting" a fixed price for a specified quantity of electricity generation. Typically these electricity derivatives are entered into with generators that participate in the NEM, however, they may also be entered into with other financial institutions. Larger retailers often have access to physical generation which acts as a natural hedge to the NEM when those generators are being dispatched into the market. Retailers will generally not hedge all of their load.

Within this context, whether the NEG is effective at reducing retail price offerings to customers will depend on:

• how the reliability guarantee will impact on retailers' existing electricity derivative coverage; and
• the availability of generator counterparties that are willing to provide cost effective contracts under the NEG.

It remains unclear what the intended "interplay" is between the physical energy dispatched into the NEM spot market and the forward contracts that retailers will need to enter into in order to meet their reliability and emissions guarantees under the NEG. Once more details are released, it will be important to consider how the NEG will impact on the electricity prices that retailers can offer to their customers.

Of particular concern is the proposed introduction of obligations imposed on electricity retailers to "source" their electricity load obligations from a portfolio of generation resources with specified levels of dispatchable generation capacity, along with generation that meets an emissions level to be set by Government (which may or may not be consistent with Australia's international emissions reduction commitment). Dispatchable energy is energy which can be switched on or off, or ramp up or down, in response to changing demand for energy.

If you are an electricity generator

Renewable generators

Uncertainty around the detail of the NEG has the potential to slow investment in renewable generation in Australia until there is clarity around how the NEG policy announcement will be translated into future emissions targets that are sufficient to support and drive continued growth in renewable generation projects, as well as amendments to the National Electricity Law, National Electricity Rules and other regulatory instruments.

It seems likely that the impact of the NEG's move towards technology-neutral emissions abatement will differ between existing renewable generation projects depending on:

• the actual sunk cost of the initial project (and how that cost per MWh compares to newer lower cost renewable projects); and
• the particular long term offtake arrangements that those generators have entered into (if any).

From an environmental products perspective, the NEG is not intended to affect the Renewable Energy Target scheme (RET) and projects which are eligible to earn certificates under the RET will continue to do so until 2030. However, it has not been decided whether retailers will be able to contract with generators established under the RET to meet their obligations under the reliability and emissions guarantees which form part of the NEG.

In addition, the NEG will not preclude the operation of State-based emissions reduction schemes (such as the renewable energy reverse auction schemes in Victoria, the ACT and that proposed in Queensland). Accordingly, projects financed under State-based emissions reductions schemes up to the time of implementation will go towards meeting the national emissions reduction target.

Traditional generators

Lower cost per MWh coal fired power stations should continue to be dispatched into the NEM as they will provide for the security of supply required under the reliability guarantee. However, for the purposes of the emissions guarantee, each generating unit will be operating with an additional parameter, being the historic emissions level of that unit.

Safeguard mechanism

It remains unclear whether the Safeguard Mechanism, which currently applies a blanket sectoral emissions baseline to generators will interact with the NEG, if at all. If the current sectoral baseline is maintained, the Safeguard Mechanism is unlikely to contribute to Australia's emissions reduction trajectory. However, if the baseline is decreased (either at a sector or individual generator level), the Safeguard Mechanism could play a greater role in driving emissions reductions in the electricity sector, but this would appear to duplicate the role of the emissions guarantee mechanism under the NEG.

Bidding patterns

The requirement, to be introduced by the reliability guarantee under the NEG, that electricity retailers hold forward contracts to cover a pre-determined percentage of their forecast peak loads (and the availability and pricing of these contracts) could impact on actual generator bidding patterns in the NEM. Whether this will achieve the stated goal of the NEG to reduce the overall electricity price to consumers will require careful analysis once more information about its operation is provided.

If you are an electricity consumer

Electricity is often one of the biggest costs of any business. How will the NEG impact on the price of electricity? The Turnbull Government is confident that the NEG will lower electricity prices, and has requested that the Energy Security Board undertake detailed modelling on the impact of the operation of the NEG. It has requested that the modelling results reflect the impact of the NEG on retail and wholesale electricity prices.

This modelling is due to be completed by mid-November 2017, and will hopefully provide businesses and residential consumers with some indication of what they can expect from their electricity prices if the NEG is implemented.

Once more detail about the NEG is made available, electricity consumers will also be able to assess how any "change of law" clause in their electricity or green electricity product purchase agreement might be impacted by the NEG - in particular, could it re-open the prices agreed under that agreement or the products being delivered?

As with all proposals of this type, a detailed analysis of legislative and other regulatory changes required to implement the NEG, and the flow on impacts for various types of businesses within the electricity industry (and on consumers more broadly) will need to be carefully assessed when that detail is known. We will continue to monitor and report on these developments - watch this space.

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