NEG to kill large scale wind and solar boom

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By Leith van Onselen

Modelling by Bloomberg New Energy Finance suggests the federal government’s proposed national energy guarantee (NEG) will deter investments in large renewable energy projects if the emission reductions target that the government prefers is not changed. This modelling comes as Energy Minister Josh Frydenberg and his state counterparts meet to discuss the NEG today. South Australia has indicated it will reject the NEG as it is currently proposed, whereas Queensland’s Energy Minister, Mark Bailey, says he will not agree to an NEG that does not meet the needs of his state. From The AFR:

The analysis by Bloomberg New Energy Finance shows that the lion’s share of new capacity under the NEG would instead come from rooftop solar and batteries “behind the meter” in people’s homes and business premises, and gas plants…

But the BNEF analysis says the renewables boom would continue if the emissions reduction goal under the NEG is increased from the government’s 26 to 28 per cent target to the 45 per cent reduction target favoured by federal Labor…

South Australia is concerned that the official modelling of the NEG by Frontier Economics shows it will increase the market power of the three big power retailers in the state and continue to expose South Australians to higher electricity prices.

Queensland’s energy minister Mark Bailey said the NEG still has too many unanswered questions – including the impact on jobs in the booming renewables industry – and his state is also concerned it may also miss out on lower prices…

Meanwhile, The Australia Institute (TAI) has issued an open letter (which you can sign) asking the Energy Ministers to set a higher, more realistic target to meet Australia’s Paris commitment. TAI claims the 26% target for the electricity sector makes no economic sense because it will mean other parts of the economy will have to do more and spend more to reduce their emissions at greater cost. TAI also argues that the failure to set a credible target increases the likelihood of future policy change – perpetuating uncertainty – which will lead to a lack of investor confidence, which in turn creates higher prices and less reliability:

The Turnbull Government’s National Energy Guarantee (NEG) is intended to end more than a decade of climate change-related policy uncertainty in the electricity sector and, in doing so, help drive investment in the sector and lower electricity prices for households and businesses. The success of the NEG will depend on the credibility of its ’emissions guarantee’, which will determine the emissions reductions required from the electricity sector.

The Turnbull Government currently plans to limit emissions reductions from the electricity sector to 26% below 2005 levels by 2030. This compares to Australia’s economy-wide target of 26-28% below 2005 levels by 2030 under the Paris Climate Change Agreement.

The proposed 26% target for the electricity sector is neither credible nor economically efficient.

All existing economic research suggests the cost of reducing greenhouse gas emissions are lower in the electricity sector in Australia than they are in most other sectors. Mature technology, falling costs of renewable generation and storage technologies, the opportunities for demand-side management and energy efficiency mean reductions can be made relatively cheaply in the electricity sector. In other sectors, the technologies are not as mature and the opportunities for cheap abatement are more limited.

Due to this, the evidence suggests meeting Australia’s emissions reduction targets at least cost requires the electricity sector to reduce its emissions by more than the economy-wide average.

Limiting emission reductions in the electricity sector will mean other sectors of the economy – where abatement is more expensive and difficult to access – will face a heavier burden. This will impose unnecessary costs on those sectors and the economy more broadly. The failure to set a credible target for the electricity sector also increases the likelihood of a subsequent policy change, thereby perpetuating the policy uncertainty the NEG is intended to resolve.

In order to restore investor confidence in the electricity sector, and meet Australia’s Paris commitments in a cost-effective manner, the emission reduction target for the electricity sector must be well-above the 26% proposed by the Turnbull Government.

We urge you to ensure the NEG’s emissions guarantee is consistent with Australia’s long-term interests.

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More ineffectual ‘policy on the run’ by this dying Do-Nothing Government.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.