In October last year, the Government announced the introduction of the National Energy Guarantee (NEG). Made up of two key components, it will require energy retailers across the NEM to deliver reliable and lower emissions generation.
Will require retailers to make available a portion of electricity from dispatchable sources including coal, gas, pumped hydro and batteries. The guarantee requires retailers to hold forward contracts that cover a predetermined percentage of their forecast peak load. Retailers will look to contract directly with baseload generators to ensure they meet the guarantee, likely creating a market for eligible generators to obtain a price premium.
Will require retailers to enter into contracts to supply energy at specified emission targets. Some participants may be unable to meet the target and therefore a secondary market will allow retailers to balance their portfolios. Similar to the reliability guarantee, low emission generators will look to obtain a price premium by contracting directly with retailers wanting to ensure they meet the emissions target.
New renewable projects that commence after 2020 will not be subsidised through the current Renewable Energy Target (RET) scheme as the government has concluded that advances in wind and solar technology will enable projects to proceed on their own financial merits. Pre-2020 renewable projects will continue to benefit from RET certificates until 2030 under the present scheme, which remains unchanged.
1. Retailers and high usage businesses will have more complex supply sources as the portfolio mix is managed to comply with the NEG through a combination of:
a. Bilateral contracts with generators;
b. Vertical integration with generators;
c. Spot market purchasing; and
d. Hedges to cover downside risks.
2. Retailers will more regularly enter bilateral contracts with generators which may reduce market liquidity and price transparency.
3. Retailers will need to ensure that the transition of their hedge portfolio is managed effectively in the leadup to the introduction of the NEG.
4. Any positive or negative wholesale pricing variation is likely to be passed from retailers through to consumers.
5. Retailers risk financial penalties or even deregistration if they get the portfolio mix wrong.
In late November 2017, the COAG Energy Council met to discuss the results of the financial modelling of the NEG. The Government's initial modelling indicated:
Whilst unanimous consensus was not achieved (with South Australia and ACT voting against) the NEG will now proceed to a design phase. A draft design paper consultation was released in mid-February 2018 with feedback from energy stakeholders to be considered by the COAG Energy council in April 2018.
The overall intention of the NEG is to smooth the variability of the spot price market, reducing peak demand events and leading to reduced electricity costs for businesses and consumers. It is recognised that the NEG cannot solve Australia's energy policy issues by itself. Complimentary measures including strategic reserves, demand response and day ahead markets will need to be considered to adequately cope with Australia's future energy requirements.
Over the coming months, the Ferrier Hodgson Energy Team will continue to consider the impact potential of the NEG and opportunities and risks of this new policy on stakeholders in the market.
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