Green paper sends carbon signal

Unlike the Federal Government’s recent energy-related announcements, the NSW Productivity Commission’s Green Paper appeared quietly. While it did not attract the same high-profile focus, it put forward recommendations that could impact on the energy landscape.

The 269-page paper, “Continuing the productivity conversation”, was wide ranging, and amongst the 56 recommendations and policy options it canvasses, six are aimed at the energy sector.

Prominent amongst them is a recommendation that NSW pursue a state-specific emissions intensity scheme in the absence of a national approach and the emissions intensity component of the previously proposed National Energy Guarantee (NEG).

A state-based approach carries its own challenges, but the paper does outline the logic behind a carbon signal for energy sector developments.

The emissions intensity scheme recommendation stems from familiar concerns: there is a need for the right signals to support private investment; the impact prolonged policy uncertainty has had on new generation investment; and the potential impact of this lack of investment on wholesale prices.

The green paper points to the lack of a carbon emissions reduction mechanism “endangering” the reliability and affordability of NSW’s power supply given the investment required to maintain and supplement generation capacity in the state. This, it argues, will only happen if investors have confidence in how governments, current and future, will meet emissions reductions commitments under the Paris Accord. The resulting inability to adequately assess potential future cost structures has already caused deferrals of private investment.

Optimal

The Australian Energy Market Operator’s Integrated System Plan identified that the optimal way to replace retiring coal plants would be a portfolio of renewables, batteries and flexible peaking gas plants and, coupled with energy efficiency improvements and demand response, would provide the lowest cost approach.

The green paper notes earlier increases in wholesale prices, which would normally flag the need for additional supply, had not driven investment because the private sector “will only invest in long lived assets if it is confident these investments are viable under a range of conditions” and the absence of a carbon price “is holding back investment in new capacity. And this lack of new capacity will ensure wholesale prices remain higher than otherwise for years to come”.

In response, governments could intervene to expand coal-fired generation capacity or extend their lives, as has been considered at a Federal level, but, warns the NSW Productivity Commission, this “risks further distorting the competitive landscape, requiring higher returns for the private sector and dissuading investment in cost-effective new generation assets”.

Instead, governments should maintain a technology-neutral approach which would let the market determine the best way to meet supply and environmental objectives.

The Green Paper notes various options have been suggested, including the following from the Grattan Institute:

  • A state-based scheme, like the former NSW greenhouse gas reduction scheme (GGAS) or a renewable energy target
  • An emissions reduction scheme for the NEM implemented with other participating states, and similar to the emissions reduction element of the abandoned NEG
  • A national and economy-wide emissions policy developed with other states and territories.

For the NSW Productivity Commission it points to a state-based approach absent a national one. Ideally, that development could be with other participating National Electricity Market (NEM) states through changes to the National Electricity Law, but even where interstate cooperation is not successful or could take too long, the commission expects the benefits of a state-based emissions intensity scheme to exceed the costs, but with a significant caveat: it would need broad state-based political support.

The suggestion for a state-based approach obviously reflects some frustration at the lack of a national climate policy.  There is no doubt that emissions abatement should be done nationally and across all sectors of the economy, rather than at a state and electricity generation level. That is simply because it will be inherently less efficient and ultimately likely to cost the state economy more by going-it-alone. The approach would potentially be disruptive to investment, leading to higher customer prices and falling energy supply reliability. There is also a risk the lone approach could prove not to be ideal from an environmental perspective given the potential for “carbon leakage”, i.e. high emissions would be displaced to other states, but although NSW’s emissions would reduce, national emissions would remain the same.

Other areas canvassed by the Green Paper include:

  • Revisiting NSW’s Energy Security Target. The target was part of the state’s Electricity Strategy released late last year and, if it imposes greater reliability requirements, the NSW Productivity Commission suggests it needs to be shown that it is consistent with consumers’ willingness to pay for the added reliability. Under the state proposal where a capacity shortfall is projected and there is a risk it will go unaddressed, the NSW Government would step in. While the paper sees the move as well-intentioned, it also flags that it “somewhat duplicates” national reliability measures. The risk is that reliability carries an additional cost if not set appropriately, and the Productivity Commission notes that all submissions made to its discussion paper agreed that consumers’ willingness to pay should be the appropriate benchmark for reliability. A number of submissions also highlighted the system may have gone too far in demanding reliability at the risk of affordability. The Commission’s view is “New South Wales should not be creating additional investment risk and pushing up electricity costs by adding extra reliability measures to the ones the NEM already has”.
  • Considering ways to speed up the roll out of smart meters to all consumers and evaluate time-of-use tariffs. It sees a shift to full cost-reflective pricing as helping better manage challenging demand peaks. While smart meters can assist with demand response, the NSW Productivity Commission’s paper highlights that the current rollout, with consumers able to opt out, is slowing progress and creating an obstacle to the wider use of cost-reflective pricing.
  • Consolidating and simplifying the state’s energy support programs which are often overlapping. It suggests a stocktake to help reduce this overlap and complexity.
  • Consolidating governance of the energy sector in the state and establishing a single NSW Energy Regulator, removing the Independent Pricing and Regulatory Tribunal’s responsibility for regular monitoring of the retail electricity market.