ERM Power has released a submission, jointly signed by 10 retailers, on the National Energy Guarantee (NEG) urging policy makers to get the design right to drive investment in the right resources in the right locations while supporting competition and reducing costs.

The Energy Security Board (ESB) discussion paper opens up the conversation on how to deliver affordable energy, well-placed and well-timed dispatchable resources, such as batteries, demand response and fast-ramping generation, while also reducing Australia’s carbon emissions.

ERM Power CEO, Jon Stretch, said the NEG needed to break the policy nexus to drive investment.

“The ESB has been genuinely consultative and keen to explore options. It’s also refreshing to see the Prime Minister recognise the importance of deep and liquid markets in saying that the NEG would ‘use the existing dynamics of competitive markets, its contracts and trading, to deliver reliability and meet our climate commitments’.

“We believe deep and liquid markets are the key to price transparency, competition and lower costs.”

Mr Stretch said a transparency and competition model with a procurement safety net was the recommended solution to align reliability and emissions obligations with cost-effective and well-placed investment, and this should be the alternative, not an addition, to obligations sitting with retailers.

“We suggest a lighter touch safety net model which would ensure the benefits that liquid markets bring to price transparency and hedging efficiency remain for competition and consumer outcomes. It would avoid the risks and costs associated with change in law complexities to existing retail and wholesale electricity contract arrangements. Our model requires no penalties or costly compliance mechanism.

“The model we have proposed to the ESB firstly allows the market to solve the problem economically without intervention. The central procurement safety net would only take effect in the unlikely event that the market didn’t first invest in the required solutions. Similar mechanisms exist in energy markets globally, including in Western Australia, where the market has always invested ahead of a need for intervention.

“Like the current NEG proposal, our alternative involves a degree of centralist planning and procurement that isn’t ideal but our proposal addresses the fact that loss of market liquidity and market power abuse are greater risks under the current option than is the risk of over-build.”

The model ERM propose includes:

  • Will not exacerbate generator market power issues by tilting the balance of power further in favour of the large incumbents
  • Will not put all the risk on retailers who have no control over generation, dispatch and reliability
  • Will not increase cost through the risk of economic withholding by generators
  • Will not push out smaller retailers who bring innovation and build competitive tension in retailing

In whatever way the guarantee evolves, there are several critical design considerations:

  • Competition cannot be undermined. Generator market concentration and gentailers pose added risk under the proposed policy which places high value on the resource of reliability i.e. firm generation. This hands more market and pricing power to large, incumbent generators so there will have to be mechanisms to ensure generators and gentailers provide access to reliability products and don’t undertake discriminatory pricing
  • Retailers must be able to access deep and liquid contract markets. The design must support existing financial markets and allow any new obligations to be met through generic, fungible, traded products. Energy is key to our economy and we’d be taking an enormous risk by hoping that new, liquid, secondary markets form to facilitate energy contracts and supply
  • Prices for reliability and emissions must be transparent and open to the market. Customers expect and demand this
  • Tagging and tracing emissions on contracts is complex, probably impossible. Emissions calculations would have to be aggregated quarterly or annually at generator level and allocated to retailers due to the fact that electrons cannot be tagged and traced on a contract without imposing prohibitive costs on the market and consumers, particularly in a five-minute settlement market. Any compliance regime under the NEG must be effective and low cost
  • Forecasting the reliability shortfall or gap should target real periods of system shortfall to guard against over-build and mass over-investment i.e. gold plating which drives up cost for energy users

The joint submission can be found here.

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