The National Energy Guarantee (the Guarantee) is a mechanism designed to integrate energy and emissions policy in a way that encourages new investment in both low emissions technologies and in dispatchable energy such that the electricity system operates reliably. Providing long-term policy confidence is critical to lowering investment risk in the National Electricity Market (NEM) and bringing down electricity prices.
The Guarantee requires retailers to contract with generation, storage or demand response so that:
- there are contracts in place to support a minimum amount of dispatchable energy to meet consumer and system needs (reliability requirement), and
- the average emissions level of the electricity sold to consumers meets the electricity sector’s share of Australia’s international emissions reduction commitments, as set by the Australian Government (emissions reduction requirement).
The emissions reduction and reliability requirements work together so that the market has a fair opportunity to deliver adequate reliability while lowering emissions. The Guarantee is fuel and technology neutral and provides 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.
The Guarantee has five key drivers that will work together to lower retail prices:
- policy stability unlocking new investment
- policy stability reducing the risk (and therefore the cost) of new investments
- increased contracting unlocking new investment
- increased contracting in deeper and more liquid contract markets to reduce the level and volatility of spot prices, and
- increased voluntary demand response
NEM average wholesale prices are, on average, expected to be over 20 per cent lower over the 2020s under the Guarantee than without it. Lower wholesale prices are expected to translate into lower bills for all consumers. The average NEM-connected household is estimated to save around $550 dollars a year (real $2018) on their retail bill over the 2020s relative to 2017-18. Of this, nearly $150 per year (real $2018) is forecast additional savings as a result of the Guarantee.
The Guarantee is specifically designed so that it does not undermine, and may indeed boost, competition through measures that enhance market liquidity and pricing transparency in retail and wholesale electricity markets. Under the emissions reduction requirement, smaller retailers are supported through the exemption of the first 50,000 MWh of load and with relatively greater flexibility to carry forward any over-achievement. Under the reliability requirement, when the reliability obligation is triggered, a Market Liquidity Obligation will require the largest participants to offer to buy and sell contracts with all participants.
It is possible that higher emissions reduction targets may be set in the future by the Australian Government. In this case, the Guarantee mechanism and framework will automatically accommodate the new targets. Further, the design of the Guarantee does not limit the ability of States and Territories to set and meet their own emissions reduction or renewable energy targets.