NEG Must Be Abandonned

In previous Commentary I have drawn attention to the apparent strengthening in The Australian’s critique of the Turnbull government’s NEG. Two days ago the paper published a Newspoll showing that only 24% opt for the Turnbull policy of obtaining a 26-28 % reduction in carbon emissions by 2030 rather than keeping energy prices down and that 48% now favour Australia pulling out of Paris. Yesterday it gave publicity to the report by the Australian Energy Market Operator (AEMO) and the CEO’s call ”for Australia’s fleet of coal-fired power plants to be operated for as long as possible to prevent a ­future price shock in the transition to renewables, claiming the ageing plants will still deliver the cheapest electricity for the next 20 years” (see CEO AEMO). It also referred to Turnbull’s welcoming of the report and his telling to radio 3AW listeners that “there’s no question that getting more megawatt hours out of an existing coal-fired power station is cheaper than the megawatt hours that’d come out of a new one. No question about that at all”.

In the Commentary I argued that it is not possible to keep the existing generators going and at the same time reduce carbon emissions so that they become 26-28 per cent lower than in 2005. This important reality led me to suggest that the Turnbull/Frydenberg clique is close to panic mode. It is trying to emphasize the importance of reducing power prices but is facing the prospect of rising prices if usage of coal is reduced and more expensive renewable are substituted .

Today’s Australian takes the issue further by again quoting some concerns with NEG by big power users and also by some backbenchers (see NEG Concessions?). The possibility that last minute concessions to users will have to be made has led the Energy Security Board’s chairwoman to (out of the blue) acknowledge that the ESB has received “some helpful ideas” (one might be excused from asking why there had not previously been adequate consultation with users).

Possible “concessions” on NEG aside, the question of what happens to prices under NEG is now being given much more attention. All that ESB CEO Schott seemed able to say was “I don’t understand their concerns on prices. The modelling we did on the previous version showed wholesale prices would come down. And there is no particular reason why the world has changed,” she said. Frydenberg went further and made the astonishing prediction that “the wholesale price of electricity would decline by 23 per cent on average over the decade to 2030 and he referenced modelling undertaken for the ESB. “For households, it means they will be some $300 a year better off under the Coalition when compared to Labor’s plan,” Mr Frydenberg said.

So, just as the believers in dangerous global warming have modeled large increases in global temperatures unless the government acts to reduce usage of fossil fuels – predictions which have almost all not been anywhere near actual – we are told that modeling of NEG shows falls in prices –and we’d better accept the modeling!

It is difficult to try to assess here whether this modeling has any credibility. For a start we do not yet know whether, contrary to the AEMO’s advice, Turnbull’s policy will in fact involve a major reduced usage of coal (and what the States would do). Unless there is a major reduced coal usage, the modeling of prices is irrelevant because the reduction is what it assumes up to 2030.

My judgement is that, in circumstances where coal usage is to be progressively reduced in order to meet the 2030 Paris accord, its replacement with more expensive renewable (including the additional back-ups from coal or gas when the wind doesn’t blow), would lead to progressive increases in prices. However, the Advice document issued by ESB in November 2017 (this very large document has not been attached) predicts a “steep decline in wholesale prices from 2018 to 2022 … due to the committed entry of almost 6,000 MW of renewable capacity across the NEM”. No mention is made of the higher cost of renewable but the Advice document assumes that “the reliability requirement (under NEG) leads to more competitive bidding from coal and gas, which reduces prices somewhat” (page 12). This is not explained and no mention is made in this analysis of the higher cost of renewable. The analysis seems to be by Frontier Economics, whose modeling results are sometimes said to produce a desired outcome. Consistent with competition in assessing future prices, it clearly needs to be checked with other modelers.

In summary, the Turnbull/Frydenberg clique now seems to face uncertainty about how to resolve the need to keep coal generation going in order to reduce power prices and how to meet the accord in Paris; and how to explain the modeling which produces lower prices in the future when text book economics would suggest increases in prices. As I have already suggested, its time to withdraw from Paris.

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