INSIGHT

National Energy Guarantee enters critical consultation phase

By Anna Collyer
Energy Government Power Renewables

In brief

The Energy Security Board has released its Draft Detailed Design Consultation Paper. The paper flags some interesting developments from the April high-level design, with further detail expected in technical working group papers flagged for release one week into the four-week consultation period. Partner Anna Collyer discusses key aspects of the consultation paper.

On Friday, the Energy Security Board released its Draft Detailed Design Consultation Paper (the Paper). It is critical for stakeholders to engage in the forthcoming consultation period, which ends on 6 July for the Commonwealth design elements and 13 July for the Energy Security Board design elements. The consultation period is for settling on the design of the submission to August's COAG meeting. 
Below are some of the design's key aspects that have emerged from the Paper; we will provide further detailed analysis on some of these issues in the coming weeks.

Emissions guarantee
  • While the guarantee seeks to build on current contracting practices and promote flexibility in contracting, it is becoming apparent that the guarantee will require contracts to deal quite specifically with the allocation of physical generation for guarantee purposes, independently of the financial arrangements in those contracts for managing the wholesale price of electricity.
  • Consistent with issues raised in our article, the ESB has decided that the proposal of adopting the NGERS controlling corporation concept is too complex, and so instead, assessment will occur on a market participant by market-participant basis.
  • The developed thinking on embedded generation and solar PV allocates both the load and emissions intensity to the retailer who supplies any supplementary load, which appears to neutralise the impact of such generation – meaning the growth of this potential market will depend on price relativity as well as customer desire for greater control.
  • The Commonwealth has deferred making a decision on the ability to use offsets. A decision on the use of international offsets will not be made until sometime before 2020. It is not clear whether a decision regarding the use of ACCUs will be made sooner.
Reliability guarantee
  • The paper notes that, at this time, no breaching of reliability standards is forecast. Notwithstanding, the Paper builds a complex regime that may never be triggered but that will require market participants to establish systems and processes in case it is.
  • The design seeks to balance the requirement for a certain outcome with reliability, with the preference for avoiding having the market – and therefore customers – paying for over capacity. While checks and balances in relation to forecasts depend on decisions to be made by two independent bodies that have no financial skin in the game, the guarantee only bites if the forecasts are 'right', suggesting market participants still have the capacity to make commercial decisions based on their own views of the world. However, this position will be informed by and depend on the level of penalty to be applied if they get it wrong.
  • Uncertainty remains about liable entities. The Paper suggests the position of large customers remains under review, as some large customers have suggested the optionality created by imposing an obligation directly on those customers may not create a positive result for them. The Paper has defined large customers as those customers having sites with historical peak demand of more than 5MW – this accounts for approximately 100 of Australia's largest energy using sites, or 20% of the NEM load.
  • The Paper makes numerous mentions of the importance of demand response, and indicates that such a response must be 'in-market' if it is to count towards the reliability guarantee. The development of a supporting framework will be critical for facilitating this occurring.
Safeguarding competition
  • The ESB continues to hint at obligations to be imposed on large vertically integrated gentailers to provide capacity to the market. This includes the proposal of a legal requirement that market customers and generators do not unreasonably withhold allocations for the purposes of the emissions guarantee for anti-competitive purposes, and the Market Liquidity Obligation for the reliability guarantee, which potentially requires such participants to make contracts available on a centrally cleared platform.
AEMO and the AER
  • AEMO will be subject to greater scrutiny, particularly in relation to its forecasting. However, in the balance between certainty and market-driven solutions, it remains largely a facilitator. Further, its back-stop powers are reliant on a curious suggestion in relation to future rule changes. It is unclear whether the intention behind the '6 week rule change' to give AEMO greater powers in relation to RERT will be written into the regime, or if it is simply a non-binding indication of what may be possible under the current rule-change process.
  • The Paper continues to raise questions around whether the role of AEMO in administering the reliability requirement of the guarantee gives rise to potential financial services licensing issues for AEMO. In particular, it is not difficult to see how both the voluntary 'book-build' process and the potential role of AEMO as a 'procurer of last resort' could give rise to a requirement for AEMO to obtain (or obtain an exemption from the relevant minister) an Australian market licence under Part 7.2 of the Corporations Act, a CS facility licence under Part 7.3 of the Corporations Act and/or an Australian financial service licence under Part 7.6 of the Corporations Act.
  • The Paper creates a myriad of new activities for the AER, and some interesting challenges in its dual role as both facilitator and enforcer of the regime. On the one hand, it is suggested that compliance be encouraged through informing, educating and engaging stakeholders on the basis that compliance is a better outcome than enforcement for breach. On the other hand, the ESB is considering broad anti-avoidance provisions along the lines of the ATO's powers under income tax legislation. These requirements potentially create quite different dynamics in the relationship between the AER and industry participants.