Australia’s energy future in the balance: a deeper look at the NEG

17 October 2018 (Last Updated October 17th, 2018 14:12)

Australia’s much-discussed National Energy Guarantee is in disarray after the ousting of Prime Minister Malcolm Turnbull and a total lack of political consensus on making the country’s energy network cleaner, cheaper and more reliable for users. Is the political establishment in Canberra capable of finding common ground on some of the most important energy questions of the day?

Australia’s energy future in the balance: a deeper look at the NEG
An AEMO report has argued that a mix of utility-scale renewables, energy storage, gas-fired generation and other technologies will be the most cost-effective way to replace coal power. Credit: Jonathan Doig

The political waters in Canberra around energy and climate change policy have been muddy for years. There are miles of clear blue water between the energy and climate positions of the centre-left Australian Labor Party, currently in opposition, and the conservative Liberal-National coalition that controls the federal government.

While the majority of Labor politicians are pushing for assertive emissions targets and the continuing phase-out of coal-fired generation in favour of a massive expansion of renewable energy deployment, many of their conservative counterparts are reluctant to bid farewell to coal and fear the ramifications for Australian electricity prices – which are already some of the highest in the world – and supply reliability as a result of a climate-driven energy stance.

The result has been a decade of policy dithering and partisan backbiting on the topic of Australia’s energy future, leaving many consumers and businesses struggling to affordably keep the lights on without the benefit of a broadly-supported energy policy that could drive down prices, improve reliability and minimise environmental harm – the famed energy ‘trilemma’.

Labor-sponsored carbon prices and emission reduction schemes have come and gone, and the coalition government has had problems of its own, scrapping a proposal for a clean energy target in October last year. With the coalition controlling only a slim parliamentary majority, getting an energy policy framework passed with broad support from all stakeholders in the current climate will be a true test.

The National Energy Guarantee

The National Energy Guarantee (NEG), proposals for which materialised from the Energy Security Board after the demise of the clean energy target last year, represents former Prime Minister Malcolm Turnbull’s attempt to do just that. After a number of non-starters, it was widely considered that his legacy on leading Australia out of its energy stalemate would rest on its success.

In essence, the NEG is the government’s attempt to bring energy security, affordability and emissions reduction under a single banner for the electricity sector. The pillars of the NEG are a pair of obligations for energy companies in the National Electricity Market.

The first is a reliability obligation, requiring suppliers to provide reliable, dispatchable energy when it is needed, particularly at times of unusual peak demand or supply constraints. The emissions obligation, meanwhile, stipulates that energy suppliers and generator-retailers reduce emissions from their operations by a pre-defined amount between 2020 and 2030, with an initial target set at a carbon emissions cut of 26% compared to 2005 levels.

The plan promises to do away with subsidies, taxes and other state mechanisms in favour of a technology-neutral approach intended to provide investment certainty for any energy mix that can meet Australia’s needs while supporting its emissions obligations.

“Past energy plans have subsidised some industries, punished others and slugged consumers,” Turnbull said after the policy was announced in October last year. “The Turnbull Government will take a different approach. The National Energy Guarantee will lower electricity prices, make the system more reliable, encourage the right investment and reduce emissions without subsidies, taxes or trading schemes. It is truly technology-neutral, offering a future for investment in whatever technology the market needs – solar, wind, coal, gas, batteries or pumped storage. Unlike previous approaches, we are not picking winners, we are levelling the playing field.”

Political tensions around the NEG

While the policy proposal is not universally supported – many Labor MPs and environmental groups have taken issue with the lack of ambition of the NEG’s 26% emissions target – it has gathered broad support among powerful groups including the National Farmers’ Federation, as well as the energy industry, which has lauded the certainty it would provide for generation investments. Sydney-based energy firm Origin Energy praised the NEG’s attempt to “bring together energy and climate change policy and provide a clear investment signal for low emissions and reliable generation sources at least cost to Australian homes and businesses”.

The development and consultation period for the NEG this year has been a dominant theme in Australian politics. Unfortunately for Turnbull, instead of bringing political parties and industrial stakeholders together behind the scheme, the NEG has served to highlight the deep and seemingly insurmountable energy divisions both between and within Australia’s dominant parties. At the time of writing, it seems likely that these divisions could spell an ignoble end for a policy designed as a conciliatory first step towards a broader consensus on energy policy. So how did we get here?

Tension around the NEG’s implementation ramped up in August in the run-up to an all-important meeting of the Council of Australian Government (COAG) Energy Council, at which the leaders of state governments would need to agree to release the NEG exposure draft and bring the policy a step closer to implementation.

Former Energy Minister Josh Frydenberg adopted a threatening pose to persuade Labor-controlled states such as Victoria and Queensland to sign up to the plan, telling ABC Radio that “if the Labor states were seeking to delay or to obstruct the NEG, they will be held to blame for the high power prices.” State-level Labor leaders, meanwhile, signalled that concessions on the emissions target – including allowing it to be increased during 2020-2030 by regulation rather than legislation, the latter of which would require parliamentary debate before the target could be shifted.

The policy that brought down a PM

The NEG did squeeze through the COAG Energy Council, but immediately came up against more trouble, this time from within the coalition government itself. While Turnbull was able to announce later in August that the policy had received support from the coalition party room after a key meeting, a group of conservative MPs, led by disgruntled former Prime Minister Tony Abbott, remained in opposition and openly reserved the right to cross the floor in the House of Representatives and vote against the plan – a significant threat given the coalition’s one-seat majority in the lower house.

The major issue for the rebels was the government’s plan to include the NEG’s 26% emissions reduction target as legislation, which they saw as an unjust imposition of Paris Agreement targets on Australian law. “This is the big question that the party group didn’t really grapple with: when the big emitters are not meeting Paris [obligations], why should we?” Abbott said in a statement after the meeting.

To stave off backbench opposition and shore up support from Labor MPs, Turnbull announced on 17 August that the emissions reduction target would be ditched as a legislative component of the NEG, to be set and administered by regulation instead. The move was calculated to appease both coalition rebels objecting to a legislative requirement, and to the Labor Party, which is in favour of setting and updating the target by regulation to ensure that it can be increased without parliamentary approval.

Although some critics complained that removing the legislative emissions target negated much of the certainty the NEG was intended to provide for energy investments, it was a canny political decision that reflected Turnbull’s desperation to shore up support for the plan. Unfortunately for him, by this time the coalition’s knives were out, with the NEG acting as a focal point for a government revolt.

Within the space of a week, Turnbull survived one leadership challenge from the party’s conservative wing (led by former Home Affairs Minister Peter Dutton) and fall to another, which saw him replaced as Prime Minister and Liberal Party leader by erstwhile Treasurer of Australia Scott Morrison. It was the type of turbulent week that has come to typify the back-room power games of modern Australian politics, which has seen six leadership changes in just over a decade.

Is the NEG doomed?

The ousting of Turnbull has thrown the NEG’s prospects into disarray. Unless Morrison can succeed where Turnbull failed and sell the plan to his own party, it looks likely to get caught up in the coalition’s energy stalemate. The Labor Party, which has not yet declared its intentions on the NEG now that Turnbull is out, may help in Parliament if it decides to throw its weight behind the plan, which would create the surreal scene of the opposition party arguing for a proposal set out by the party in power.

In any case, Morrison’s stance on moving the NEG forward is similarly unclear. In a radio interview with 2GB in early September, the new Prime Minister declared that the electricity sector, conducting business as usual, can reach the 26% emissions reduction target “in a canter”, suggesting that the NEG may be permanently consigned to the back burner.

There are plenty of debates still to be had about the benefits and drawbacks of the NEG. The plan promises, for example, to reduce consumer energy bills by around A$150 a year, but a recent study published by the Australia Institute argues that any reductions would be severely impacted if the government subsidises the construction of new coal-fired plants or life extensions of existing coal plants, which is a sticking point in the NEG’s technology-neutral plan. The Australian Energy Market Operator (AEMO) has already stated, in its Integrated System Plan released in July, that extending coal would be cost-ineffective.

“When existing thermal generation reaches the end of its technical life and retires, the most cost-effective replacement of its energy production, based on current cost projections, is a portfolio of utility-scale renewable generation, energy storage, distributed energy resources, flexible thermal capacity including gas-powered generation, and transmission,” AEMO’s report reads.

But with the NEG balanced on a knife-edge and Canberra looking no closer to finding an acceptable compromise on energy policy and other factors – such as the Australian Competition and Consumer Commission’s (ACCC) recent report on lowering electricity prices – in play, arguing the finer points of the NEG has taken a back seat to some much more basic questions that remain unanswered.

Will Australia keep to its emissions pledges under the Paris Agreement? Does coal have a long-term future in the country’s energy mix? What’s the best way of improving system reliability and cutting costs for residential and business energy users? These questions, and more, need to be addressed, whether through the NEG debate, the ACCC’s price reduction recommendations or through the lens of climate change mitigation. Without finding the elusive common ground on these issues, the NEG – and by extension the fate of Australia’s long-term energy policy – will remain in a state of dangerous deadlock.