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Client Update: National Energy Guarantee on hold in favour of interventionist powers

21 August 2018

In brief: In a sharp turnaround over the weekend, the Government announced yesterday it would not introduce the emissions component of the National Energy Guarantee into Parliament, but instead would focus on delivering greater powers to intervene in electricity markets to protect customers from the effects of anti-competitive conduct. Partners Anna Collyer (view CV), Rob Walker (view CV) and Rosannah Healy (view CV) provide an update of the latest currents in energy policy.

Emissions Requirement

The Prime Minister announced that the Federal Government would not introduce the Emissions Requirement of the National Energy Guarantee (the Guarantee) into Parliament. He stated that, given a number of MPs had indicated they would cross the floor to vote against the legislation, it would not pass the House of Representatives in the absence of bi-partisan support from the Opposition.

In its modelling included with the Final Detailed Design dated 1 August 2018, the Energy Security Board indicated that the most important feature of the Guarantee was to provide investment certainty. The modelling suggests that, in the absence of that investment certainty, the current wave of investment in new power stations would come to an end with the expiry of the Renewable Energy Target scheme, following which prices would again rise in order to send investment signals.

The most recent period of extreme uncertainty in relation to renewables policy – the review of the RET in 2014 – saw a hiatus in new investment in the generation sector. However, the risk of this occurring again may be mitigated to some extent by ongoing state and territory renewable schemes.

It is also possible that, as the cost of renewables and storage continues to reduce and the accessibility of demand response resources to market participants increases, the market may respond to price signals with whichever form of generation is most cost competitive to meet the needs of the market.

Reliability Requirement

The Prime Minister proposed that the COAG Energy Council should nonetheless implement the reliability component of the Guarantee, which would address the need to ensure ongoing investment in ‘dispatchable power’. However, certain of the NEM jurisdictions positioned their support of the Guarantee on condition that the Commonwealth obtains support for its emissions targets. In the absence of that support, NEM jurisdictions could conceivably pursue the reliability guarantee as an appropriate balance to their own renewable targets. However, it is also possible that the Reliability Requirement will be abandoned with the Emissions Requirement.

Instead, it appears the Federal Government will provide some form of backstop offtake, as recommended in the ACCC Retail Electricity Pricing Inquiry report, to support the financing of new generation, and that this may be directed primarily to the type of 'dispatchable power' contemplated by the Reliability Requirement.

Market intervention

Since the South Australian blackouts in September 2016, expert reports have consistently recommended that, during this period of significant market transition, more Government intervention may be required to support the market operating. However, the Government has now moved further along the spectrum of the degree of market intervention proposed.

In addition to the mechanism described above, the Government has proposed significant new powers to intervene in the market where there are instances of abuse or misuse of market power. While the ACCC's report on the Retail Electricity Pricing Inquiry cites relative limited evidence of such behaviour, the Government has proposed that if such behaviour were to occur, the Government would have wide ranging powers, including the power to order a company to divest its assets. While a number of international jurisdictions do have such measures, they are sparingly used, and previous proposals to introduce similar powers in the Australian context have not been adopted, including most recently in the ACCC Retail Electricity Pricing Inquiry.

The Federal Government has also proposed that it would have broad powers to direct the operation of electricity assets. Such powers exist at state level in emergency powers legislation but are limited to extreme circumstances. It remains to be seen what threshold criteria may be set to allow additional intervention of this nature.

Price regulation

Turning its focus to the retail end of the sector, the Federal Government also proposes to adopt the ACCC Inquiry recommendation to adopt a default market offer.

The ACCC indicated that an important aspect of this default offer was to provide a clear benchmark for discounting behaviour, to assist consumers understand the relative merits of deals they are being offered. However, it did also indicate that the default offer would be set by the AER, having regard to the efficient cost of operating in each jurisdiction, and so as to allow a reasonable rate of return to energy retailers as well as an allowance for customer acquisition and retention costs. This approach seeks to avoid a mismatch between a regulated retail offer and unregulated wholesale prices, but does mean that the level at which the default offer is set will nonetheless depend upon wholesale prices which, in turn, depends on the investment activity in the wholesale market.

States and territories

Energy regulation has traditionally been the realm of the states and territories, particularly retail prices. The Prime Minister has stated that if the states and territories do not support the package of measures it is now proposing, the Federal Government will legislate for those measures. Depending on the attitude of the states and territories to the Federal Government’s package, or the relevant aspects of it traditionally within their domain, the constitutional powers of the Federal Government may come into focus in the next stage of this debate.

Allens will continue to monitor and provide updates on the ongoing development of energy policy – see our Energy Reform Hub for details.

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