Reflections on the National Energy Guarantee

More detail needed but what if this ends the energy policy wars?

Two months after Matt Zema, then Managing Director of the Australian Energy Market Operator died in July 2016, South Australia underwent those unprecedented blackouts that shifted the national energy debate into new territory.

I used to talk to Matt while I was an adviser to Western Australia's Minister for Energy and afterwards, once I'd returned to the private practice of energy law, about electricity markets, political obstacles, carbon reduction policy and the merits or otherwise of a capacity mechanism. We didn't always agree, but he had a pretty impressive perspective on things.

Dogged, relentless and right most of the time, you'd be forgiven for thinking that Matt could have held the NEM together by heart and I guess he did, until his heart gave out. He was only 56.

Matt was one of the panelists for the Abbott Government's 2014 independent review of the Renewable Energy Target Review. The review was widely perceived as anti-RET and recommended its truncation and limitation.

Like many others in the governance bodies of the NEM, Matt opposed the prospect of a capacity mechanism of the kind WA has had for over a decade being adopted in the NEM. During the course of the Barnett government's Electricity Market Review, the phase one report prepared recommended that WA adopt the wholesale market arrangements of the NEM and for the capacity mechanism to be phased out. Matt was happy with the idea but the Barnett government instead decided to retain the capacity mechanism, albeit in a modified form.

After I left the Minister's office, Matt's Australian Energy Market Operator edged out the Western Australian Independent Market Operator and took on responsibility for gas and electricity market operations on this side of the Nullabor. Western Australia lost and gained good people in that transition.

Not being a part of the NEM or the east coast gas markets, WA takes pride in its energy sector. Recent events show that pride is for good reason.

The domestic gas reservation policy instituted by the WA Labor Carpenter government and supported by subsequent governments of both stripes has avoided the sort of forecast gas shortages that plague the current energy crises in East Coast gas markets and the NEM. At least so far. It also avoided the chilling effect on exploration predicted by many and domestic gas prices never achieved LNG net-back.

And a South-Australian-style total system meltdown seems unlikely, given that Western Australia's capacity mechanism and state government owned Synergy's wholesale contracting has driven investment in generation capacity. Western Australia has prized reliability of supply highly, above nearly anything else.

But earlier this week, WA's energy sector had another reason to be proud.

The Prime Minister's National Energy Guarantee might end up killing the RET but it might end up being better. It's hard to say with much certainty, given the lack of details.

The NEG comprises:

• a reliability guarantee or capacity mechanism: these mechanisms essentially require retailers to pay standing payments to generators in return for them being available to provide energy when called. Separate payments are made for energy, as is the case in Western Australia's market; and
• an emissions intensity scheme: the political importance of this step to the Prime Minister shouldn't be understated, given the price he paid for supporting the Carbon Pollution Reduction Scheme nearly a decade ago when he lost the Liberal leadership to Tony Abbott.

How this plays out is not yet clear but let's hope this represents the beginning of a much needed truce in the energy policy wars. It might even spell their end.

Western Australia's government will need to decide whether it will await a Federal Labor Government to continue the RET or go it alone, whether by a state-based clean energy target or a state-based emissions intensity scheme. You'd think that there's not much call for the reliability guarantee, given that WA already has the capacity mechanism.

The WA government has skilled advisers and a supportive industry ready to consult and lend support. It also has an energy literate opposition leader who understands the importance of reform.

There is room for optimism but I still wonder what Matt would say.

See some great analysis from Tony Wood and the team at the Grattan Institute: How the National Energy Guarantee Could Work Better than a Clean Energy Target

The ABC has some good coverage of Minister Ben Wyatt's options and implications for Western Australia here.