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NEG car is worth buying, even if tyres need pumping up

Imagine buying a new car, only to find the tyres are flat. The National Energy Guarantee (NEG) is a policy with much potential, but the target of 26 per cent emissions reduction for the electricity sector by 2030 is essentially useless. The boom in renewable energy under way between now and 2020 means the target will be met just as the policy starts. If the NEG is going to drive the new investment in energy that is crucial to lowering power prices, the target needs pumping up.

Energy consumers have paid a heavy price for 15 years of energy policy wars. The politicisation of energy policy has undermined investment confidence. While old coal-fired generation continued to close, Australia did not invest in enough new generation. Without enough new supply in energy generation to replace the plant leaving the market, wholesale power prices surged. We all paid for it.

This trend is now in reverse thanks to record levels of new investment driven by the Renewable Energy Target (RET). Over $10 billion in big solar, wind and battery projects has been committed in the last year. Never before have private investors invested so much in one year in new energy generation of any kind in the history of this country.

Renewable energy does not need new subsidies, but like any investment that is capital intensive and has a long life, investors need some certainty. The level of new investment could grind to a halt again if we don't land a new bipartisan energy policy with a real target. Australian energy consumers would be punished. Again.

There are two critical elements of the NEG: the design of the policy architecture being led by the Energy Security Board (ESB), and the emissions reduction target. The policy architecture will go to state and territory energy ministers at the end of his week for approval. The emissions target will be determined by the Commonwealth government and put to the Australian Parliament later in the year.

Firstly, to the policy architecture. It's not perfect, but the industry believes it can work.

There are a few areas that need a final tweak before it heads for implementation. While the target for the NEG is to be set in Commonwealth legislation, investors will have greater confidence if the policy architecture includes a backstop that prevents any future attempt to reduce the target. This should be accompanied by a commitment to more frequent reviews so it keeps pace with change in the energy sector.

The current proposal allocates the emissions reductions from household and business solar systems to be given to electricity retailers. This needs to be fixed so solar system owners can decide where their emissions are allocated. Finally, it is important that the role of energy storage in supporting reliability is fully recognised.

The NEG represents significant change to the energy market, so it's crucial this isn't rushed. We need to hasten slowly. Confronting these concerns at Friday's COAG Energy Council, while agreeing in principle to continue towards implementation would be a positive step forward. But it's the target that really matters.

The 26 per cent abatement target would support little to no new investment beyond the existing RET. Until a higher abatement target is adopted, new investment would largely be reliant on state and territory governments, energy customers and uncertain market dynamics.

The electricity sector has the potential to play a much greater role than other sectors of the economy – such as agriculture and transport – where emission reductions are far more difficult and expensive to achieve.

The 26 per cent target is made even more useless by two other critical factors: the inclusion of carbon offsets and the current exclusion of WA and NT from the target. Allowing retailers to meet a portion of their emissions obligations by purchasing carbon credits will result in less new energy generation and higher power prices.

And while the federal government's policy commitment is for a 26 per cent emissions reduction for the entire electricity sector, the NEG will not apply to WA and NT at this stage. The current proposal therefore equates to even less than 26 per cent when you look at the entire electricity sector.

The target will be put to the Australian Parliament later in the year, but there's not much point legislating a target that we will meet by default and which won't actually do anything. Particularly if the political negotiations to secure the NEG results in a government commitment to build new coal. Private investors will leave.

The NEG architecture has the potential to provide just that, but without a stronger abatement target, it will do little. Let's take the new car now, but we won't get very far until the tyres get pumped up.

This piece was originally published in the Australian Financial Review on 5 August 2018.