Over the past fifteen years the energy sector has undergone a significant transformation. New and evolving technologies are changing the way we consume and produce electricity. This transformation of the sector continues with many technologies currently maturing and competing with traditional technologies while new and emerging technologies (for example, batteries) look likely to further revolutionise the sector. While undergoing this transition has had many positive benefits, it has also left our energy system vulnerable to escalating prices while being both less reliable and secure.
The National Energy Guarantee (Guarantee) provides the opportunity to resolve fifteen years of energy and climate policy instability. It is designed to integrate energy and emissions policy in a way that will encourage new investment in clean and low emissions technologies while allowing the electricity system to continue to operate reliably. The Guarantee will provide a clear investment signal, so the cleanest, cheapest and most reliable generation (or demand response) gets built in the right place at the right time.
Alone the Guarantee cannot solve all the challenging policy issues that the electricity sector currently faces. As recommended in the Finkel review, Energy Security Board members are also continuing to explore a range of other complementary measures including strategic reserve/s, demand response and day ahead markets to ensure we have the operational flexibility we need in the rapidly changing electricity market.
A well-designed Guarantee will bring together climate and energy policy for the first time in Australia contributing towards resolving all three aspects of the ‘policy trilemma’ – maintaining reliability, lowering emissions in line with international commitments, and improving affordability. Providing long-term policy confidence is critical to lowering investment risk in the NEM and ultimately bringing down electricity prices.
The Guarantee will require retailers to support a range of different generation technologies through their contracting. Increased contracting in deeper and more liquid contract markets is expected to reduce the level and volatility of spot prices.
In general, the greater the extent of competition in the retail and generation sectors, the more likely consumers are to benefit from all three objectives of the Guarantee. The Guarantee has been specifically designed to ensure it does not undermine but rather enhances the liquidity, transparency and level of competition in the retail and wholesale electricity markets.
The reliability and emissions reduction components complement one another, working together to ensure the market has a fair opportunity to deliver adequate reliability whilst lowering emissions. Retailers are expected to contract in a variety of ways to meet both of these requirements. Cognisant of the risks to liquidity and transparency in the contract market the ESB has sought to ensure that the contracting approach to meet compliance remains flexible.
Please note: Alongside this design document prepared by the ESB, the Commonwealth Government has prepared a document on the design elements that are its responsibility – setting the emissions target under the Guarantee, the treatment of emissions-intensive trade-exposed industries and the role of external offsets. This paper outlines the Commonwealth Government’s updated position on these design elements in response to the feedback received through the consultation process and can be accessed via the Download Resource button.