Sand Processing

The NEG: is it a viable energy policy?

Dr Kerry Schott is the independent chair of the Energy Security Board (ESB), the body established by the Energy Council of the Council of Australian Governments (COAG) to provide a whole of system oversight for energy security and reliability to drive better outcomes for businesses and consumers.

She is the chair of Moorebank Intermodal Company, the chair of the Sydney Metro Board, a director of the National Broadband Network, and a director of Tcorp NSW.

Dr Schott was an investment banker for 15 years. In this period, she was the managing director of Deutsche Bank and executive vice president of Bankers Trust Australia. She was also the managing director and CEO of Sydney Water from 2006 to 2011.

She was recently conferred with the Order of Australia for distinguished service to business and commerce through a range of public and private sector finance roles.

Dr Schott holds a doctorate from Oxford University and has also been awarded honorary doctorates by the University of Sydney and the University of Western Sydney.

The Energy Security Board formulated the National Energy Guarantee (NEG). The NEG’s primary focus was to ensure the reliability of the national electricity market (NEM) is maintained and electricity sector emissions reduced – all at the lowest cost.

Quarry interviewed Dr Schott in mid-August, a month ahead of her presentation at CMIC 18 in Sydney, and a week before the tumultuous events in Canberra that saw the former Prime Minister Malcolm Turnbull – a strong supporter of the NEG and Australia’s Renewable Energy Target – ousted from office and succeeded by Scott Morrison.

What is the key message you are hoping to impart to the audience at the Construction Materials Industry Conference?

What I thought might be helpful is to start with an explanation of what the National Energy Guarantee is all about. Its principal task is to ensure that we have enough dispatchable power to keep the system reliable, particularly with the increase in wind and solar generation. As wind and solar are not able to operate all the time, the system needs power to dispatch when they’re not there. This dispatchable power can come from coal, gas, hydro or batteries.

What is the National Energy Guarantee? And if implemented, what will it mean for industry in general and the construction materials sector in particular?

The National Energy Guarantee ensures that there’s sufficient electrical power to complement the generation of renewable energy. The NEG also operates through a wholesale market that encourages more contracting in that market and therefore more capacity and generation coming into the system, as well as driving downwards pressure on electricity prices. It’s very important for consumers to know that there’s available power and that it will be more affordable.

{{quote-A:R-W:300-I:2-Q:"The National Energy Guarantee ensures that there’s sufficient electrical power to complement the generation of renewable energy."-WHO:Kerry Schott, Independent chair of the Energy Security Board}}One of the benefits for businesses under the National Energy Guarantee is that if you voluntarily are willing to cut back your demand, particularly in peak periods, you will get a reward for that. Therefore, if extractive operations are willing to cut their use during peak periods, or asked to do so, then they can be paid. There could be some opportunities there that assist the extractive industry. You have some people in your industry who are intensive energy users, in the cement manufacturing space, for example.

Even with residential customers, there are companies now aggregating households together and being able to automatically turn off everybody’s pool pumps for the afternoon, if required. If you have quite a big load and you have the capacity to cut your load or turn it off completely, you can find that you can make some money. It’s structured in exactly the same way as if you’re were selling energy. You get paid to supply energy and you get paid for not using energy, especially in peak periods.

The exact details of payment are still being hammered out because they would be measured depending on the time of day it was. If it’s 5pm, it’s going to be worth a great deal more than if it’s sunny or windy, or if it’s 3am. The cost of power varies at different times in the day.

The NEG has had the broad support of some environmental, union and business groups. Of the 150 submissions to the consultation paper earlier this year, what were some of the key concerns aired about the NEG model and the energy market in general?

There was certainly support for the NEG. There was general discussions about the mechanism because the way that it works is if the Australian Energy Market Operator (AEMO) thinks that there’s likely to be a shortage of power three years out from a particular period, then they will put everyone on notice to make sure they have their full load contracted in three years’ time.

There was a lot of discussion about whether the trigger should be three years out or whether there should even be a trigger at all. There were detailed suggestions about how to run the emissions registry to make it as efficient as possible. Everyone, without exception, was keen for the NEG to work as simply and cost-effectively as possible.

Critics of the NEG are arguing that it will have negligible impact on Australia’s ability to meet its emissions target, and in fact could force other industries such as mining, agriculture and manufacturing to reduce their emissions to make up the shortfall. What assurances are there for the extractive industry that the NEG will comply with the emissions target and will not lead to regulation on other industries to reduce emissions?

That’s a matter for the Commonwealth Government, which has the responsibility for setting the emissions target and also the responsibility for meeting the commitments Australia has made overseas and through the Paris Agreement1.

There are three industries that are our main emitters – electricity, agriculture and transport. The target that the electricity industry has been set – and which the NEG is modelled around – gives electricity one-third of the share of the Paris target.

The Commonwealth Government has set the target for the electricity industry at the Paris requirement levels, so we aren’t doing anything extra for the other two sectors and we’re also not doing more than what’s implied in the Paris commitment.

The point that some people have been making is that it may be easier for electricity to save on emissions than it is with agriculture and transport, and if that’s the case, perhaps the electricity industry should be carrying more. That’s for the Commonwealth Government to decide.

Queensland, Victoria, Tasmania and South Australia all have more ambitious emissions targets [than the Commonwealth] that have implications for the reliability obligations in their jurisdictions. So, in South Australia, they are running on close to 50 per cent renewables and because of that, their reliability obligation would be higher than in Queensland, where they’re running on about 26 per cent.

So, the reliability obligation goes up and down depending on how you’ve set your emissions target. So, Victoria, Queenland, Tasmania and South Austalia are already ahead of the Paris requirement levels in their jurisdictions. The target that has been set, given the economics of renewable energy, will continue to 2030, so the 26 per cent target will not be too difficult to meet nationally.


Does the reliability obligation mean there is a greater onus on the states with more ambitious emissions targets to provide more dispatchable power?

In states where there’s a higher amount of renewables – and South Australia will always have a lot of renewables because it has enormously good wind resources – they will always have a higher electricity obligation just because they have a higher percentage of intermittent renewables in their mix. Tasmania has a lot of other renewables in its mix as well, but it’s pumped hydro, so it can be turned off and on, as required.

In the consultation paper, there were discussions about the blackout in South Australia that occurred in September 2016. It was clear to us that had the NEG been in place before the Northern power station was closed, it would have stayed open longer, because it was needed for reliability, and there wouldn’t have been a sudden loss of supply in South Australia. The adjustment to renewable energy would have been more gradual.

Does that mean states with higher emissions targets need to look at investing in in a mix of different power sources?

The NEG is technology-neutral. It basically says to the market that we need more dispatchable power and we can make that through coal, gas, wind, solar, hydro or even batteries. Just take your pick, but it has to be something that we can dispatch when we need it.

What is the political process behind the approval of the NEG?

The law behind the National Energy Guarantee comes in two pieces. The first is the legislation that changes the national electricity law. That’s state government-based and it’s implemented through legislation in the South Australian Parliament. The process is that the draft legislation was approved to be sent out for further comment [circa 15 August, 2018]. It has to be out for four weeks2. Following that, there could be some “tweaking” – you’d normally expect to see a few changes to the exposure draft but nothing that drastically changes the policy.

The other piece of legislation is the one that’s been controversial – the Commonwealth legislation. It deals with a number of matters, in particular the emissions target. (The Commonwealth legislation was withdrawn from the parliament.)3

Obviously it’s now up to the Federal Parliament to decide what happens to the federal part of the legislation. Do you anticipate that you may have to revise the model if it’s defeated in the parliament?

If the Commonwealth legislation is defeated, the South Australian legislation could still be passed but obviously the emissions target will be ineffectual. What other state governments then want to do with their own emissions targets is up to them.

Australia has had a tumultuous decade with lots of “to-ing” and “fro-ing” on environmental and energy policy. Are you confident that the NEG represents a turning point, and (while not popular now) may eventually lead to a bipartisan approach to environmental and energy policy?

I think if we can get the reliability obligation in place at least, we can ensure we have a reliable power system that puts pressure downwards on prices.

Although the NEG imposes no obligation on other industries to reduce their electricity consumption or carbon emissions, what can various industries do to share the load? How can quarries and concrete plants pitch in to reduce their power prices and their own emissions?

There’s a couple of ways they can do that. One is by demand management and using less power. As I mentioned, if you’re willing to voluntarily cut your demand, if the operator was to ask you to cut your load, that can be very helpful. The other way that some quarries and mines have been used overseas is for pumped hydro and storage at the end of their working lives.

Dispatchable power is certainly going to be very valuable, so I encourage people to have a think about working with other companies on that. A lot of the renewable energy companies are in the market for firm dispatchable power to match up with, so there could be opportunities there.

Should extractive operators be encouraged by regulators to partner with the electricity market to reduce electricity costs and emissions, especially as their quarries near the end of their working lives?

Yes, I think there’s quite a lot of innovative stuff around. People should keep an eye on the Clean Energy Finance Corporation website [] and also trials that the Australian Renewable Energy Agency (ARENA) runs because they’re doing some quite innovative things in that space.

Dr Kerry Schott presented on energy security and policy at CMIC 18 in Sydney on 20 September, 2018.

Editor's notes

1. In the Paris Accords, Australia pledged to reduce its carbon emissions by 26 per cent on 2005 levels to 2030.

2. At time of writing, the period for comment on the exposure draft for changes to the NEM was still open and there was no implication that the South Australian legislation could not be implemented.

COAG agreed the SA legislation is mirror legislation and the other states will adopt the laws automatically once the legislation is passed in the SA Parliament.

3. Former Prime Minister Malcolm Turnbull did not submit the emissions legislation for the NEG to the Federal Parliament, conceding on 20 August that strong opposition within his own government meant it did not necessarily have the numbers in the House of Representatives to pass.

In an interview in The Weekend Australian, dated Saturday, 8 September, new Prime Minister Scott Morrison confirmed that the NEG had been axed.

“The NEG is dead, long live reliability guarantee, long live default prices, long live backing new power generation,” he said.

The new Treasurer and former energy minister Josh Frydenberg told ABC’s Insiders program on 9 September that while he was disappointed the NEG had been axed, the government was focused on ensuring electricity generation was reliable.

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