Originally published on RenewEconomy
Leading energy industry analyst Bloomberg New Energy Finance says the federal government’s proposed National Energy Guarantee could deliver a 42% renewable energy share by 2030 – the same level forecast by the Finkel Review.
The assessment is significant because the prospect of a 42% share of renewables was clearly too much for the right wing of the Coalition government, which forced it to dump the Finkel Review’s proposed clean energy target because of it.
That caused the Coalition to seek a Plan B, and the hastily put together and as yet ill-defined NEG was unveiled on Monday, and not even shown to the states – even though the federal government needs their support through the COAG energy council to make it happen.
The NEG proposes two guarantees – reliability and environmental targets – be written into the National Energy Market rules, hence the need for support from the states.
Many industry participants are concerned about how this can be done, and the potential for it to reinforce the dominance of the big players in the industry, and its failure to meet emissions targets.
At its unveiling, the Turnbull government quoted an Energy Security Board letter that said the share of renewables by 2030 could be as low as 28%, or as high as 36%, meaning little real growth. But this could have been a “political” forecast to get it through the backbench.
In an analysis released on Friday, BNEF said the 42% share of renewables would depend on whether the planned closures of some large coal generators were delayed by the reliability guarantee.
It was not yet clear this was the case because of the lack of detail. And it says coal could be more cheaply substituted by gas, hydro and battery storage, but that would depend on the details of the scheme which have not yet been defined, and whether the design is focused on protecting coal or providing “dispatchable” generation.
But BNEF warned that the uptake of small-scale solar would likely crowd out large-scale renewable energy projects such as wind and solar, which could be limited to just 4.8GW of capacity additions over the 10 years from 2020 to 2030.
This graph above, with the light yellow, shows how rooftop solar will dominate renewable installations – largely because of the falling cost of solar, and the incredibly high cost of grid power.
“The ongoing uptake of small-scale PV uptake could do most of the heavy lifting on power sector emissions, crowding out the need for large-scale wind and solar projects,” analysts Kobad Bhavnagri and Leonard Quong said in their report.
“For greater large-scale renewable development, Australia would need to strengthen its 2030 emissions reduction target, which it will likely be under pressure to do in the next major round of international climate negotiations in 2020.”
It also warned that prices were unlikely to fall, because of a lack of competition, and the scheme – because it will create a highly regulated market – could also rely on forecasts for demand by Australian Energy Markets Operator, whose forecasts had been responsible for the massive over-build in networks, and the subsequent huge jumps in consumer prices.
“Given AEMO’s demand forecast has proven drastically wrong in the past, there is a significant risk of error,” BNEF says. “Dispatchable capacity overshoots will result in excessive investment that cannot be undone, and could open up claims for compensation if the assets are unprofitable.”
(Shame that consumers have not been able to make similar claims for compensation for their bills because of the over-built network!!!).
Still, despite this, the BNEF analysts described the concept as “innovative and elegant”, and even suggested that if it proved to be effective and efficient, it could even become a template for policymakers worldwide.
But they also warned that the NEG could reduce competitions, vest too much power in the major retailers, and create an opaque market.
“Australia’s energy contract markets are opaque, which makes it hard for participants to know what prevailing or efficient market prices are,” they said.
“This could increase the information a-symmetry and strategic advantage of large players. A possible remedy could be to force registration and public disclosure of all energy contracts with the regulator.
“This would be a generally advantageous development, but likely to be fiercely resisted by incumbents.”
The impact on competition has been shared by many other players in the market, who point out that the lack of competition will mean prices for consumers will not fall, and it will be difficult for large-scale renewable energy projects to get finance or contracts.
Labor has said that the NEG – based on the Energy Security Board’s own estimates of a renewable energy share of 28-36% in 2030 – could result in no new large-scale renewable generation being built over the next decade, and that assumes a fall in rooftop installations.
Labor’s climate spokesman Mark Butler says Labor will stick by its target of 50% renewable energy. BNEF’s analysis says that might be possible, but only if the emissions reduction targets are increased significantly.
BNEF’s other concerns focused on the fact that it could “hollow out” the spot market, and create a series of bilateral contracts, which would be dominated by big players. Smaller retailers may struggle to get the creditworthinesss to underwrite contracts for renewable energy plants.
And, after all that, it may not be scaleable.
“The mechanism may start to become ineffective with deeper emissions reductions targets. This is because the NEG does not penalise high emissions generation.
“For instance, with a strong emissions target, large amounts of gas and renewable generation are likely to be required. In order for these generators to dispatch, they would need to underbid competing generators (and be compensated instead with bilateral contracts.
“However, a fully depreciated emissions intensive generator with very low short-run marginal costs (such as brown coal) could underbid low-emissions generators (if it is otherwise compensated via reliability contracts or high spot-price periods) and prevent low emissions generators from dispatching in the required quantity to meet the emissions guarantee.
“There is also a potentially systemic risk, if all generators are contracted and bid at the same price (i.e. zero, or the market price floor to try and ensure dispatch) – there is currently no way for the operator to order dispatch in preference of emissions intensity.”
And there may still be carbon and technology risks. In summary, it all depends on the final design, and no one knows what that will be.
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