This opinion article by Jennifer Westacott was published in The Australian on 3 August 2018.
Promising cheaper power and emissions cuts, NEG is a positive for the economy
For more than a decade the political debate over energy and climate change policy has plagued this country. It has resulted in higher electricity prices and a less stable and reliable energy system for households and businesses.
Australians now are paying the price for this political impasse.
Australia's economy was shaped by access to low-cost energy. We are blessed with natural energy resources.
However, the Australian and global energy landscape is changing rapidly. To manage this transition and regain our competitive advantage, we need an approach to energy policy that strikes a better balance between promoting economic growth, energy security and environmental sustainability.
In recent years this balance has not been struck and our energy system faces a trilemma.
First, under the renewable energy target there has been an influx of renewable generation.
Since 2012, more than 5000 megawatts of ageing and inefficient coal-fired generation capacity has been withdrawn from the National Electricity Market, with a further 2000MW scheduled to close in 2022. In contrast, since 2016 more than 6500MW of new renewable capacity has been announced under the RET. Most of this is from intermittent energy sources such as wind and solar, which can't be relied on for consistent baseload power. As a result, there is an inherent reliability risk looming over the grid.
Second, the uncertainty around how we intend to treat emissions has been a dampener on investment in baseload and dispatchable generation. This is particularly problematic as Australia has several ageing coal-fired power stations that require investment in upgrades if they are going to continue to provide the cheap, consistent energy supply - together with other forms of dispatchable energy such as gas and hydro that powers our cities and industries. The incentive to make this investment is absent.
Third, these two issues have led to higher electricity prices.
Retail prices have doubled in a decade. And although there recently has been a modest decrease in wholesale prices, we risk further price spikes if these other issues are not resolved.
That's why the national energy guarantee is a game changer. For the first time we have a policy that puts both affordability and reliability at the centre of the debate, alongside reducing emissions to meet our international commitments.
The carbon pollution reduction scheme did not do this; neither did the carbon tax. The RET does not do this, and an emissions trading scheme wouldn't do this.
The mechanism creates twin obligations on electricity retailers and other liable entities to meet emissions reduction as well as reliability targets, to ensure grid stability as we decarbonise our economy. The NEG has several advantages.
First, it is technology neutral.
Australia has made an important commitment to significantly reduce its emissions by 2050.
Unlike previous policies, how we get there will be a commercial decision for the market. The NEG requires retailers and other liable entities to contract with a mix of low-emission and dispatchable generation to meet their obligations.
Renewable energy, no doubt, will play a pivotal role in the transition of our energy system, particularly as technology improves and the cost of renewables continues to fall.
However, coal-fired generation still represents about 65-70 per cent of generation in Australia and will continue to do so for years. Building new coalfired generators or upgrading our existing fleet to make these assets more flexible and efficient will remain a commercial decision. The benefit of the NEG is that one method of generation will not be favoured over another. It levels what has been an uneven playing field.
Second, it will drive investment in the energy sector.
Policy uncertainty has paralysed investment in dispatchable generation for a decade. The NEG can be a circuit-breaker. It will provide a clear investment signal to build dispatchable electricity generation and encourage a portfolio of lowestcost technologies to meet targets.
Indeed, by providing certainty around how we intend to treat emissions, business and industry will have the confidence to make decisions about building long-term generation assets.
Investment in efficient new capacity will help put downward pressure on power prices.
Finally, by harnessing existing market structures and contracting arrangements, the NEG will ensure there are no new instruments, no new certificates, no new permits that risk driving up prices or giving preference to a particular fuel source. Instead, the obligations will send signals to the market to build new generation when needed and at the lowest cost.
Next week, federal, state and territory leaders will meet to decide whether to support the final design of the policy framework. For business, the choice couldn't be clearer.
There have been rumblings about the level of ambition under the emissions reduction obligation. But differences of opinion about the target are no excuse for opposing the NEG mechanism. Besides, the 26 per cent target is an achievable and sensible starting point. The government has announced a review of this target in 2024, for the period 2025-30, and will legislate for a five-yearly review and target-setting process thereafter.
This aligns with the five yearly "review and refine" cycle under the Paris Agreement and will ensure future targets are properly considered in the context of Australia's economic prosperity, competitiveness and social welfare.
In the past, destructive ideological wars have prevented progress on energy and climate change policy. As a nation, we cannot afford any further delays or to return to ground zero.
The voice of business is united on this - we must work together to implement the NEG and deliver policy certainty in the energy sector.
Jennifer Westacott is chief executive of the Business Council of Australia.