What is the national energy guarantee and is it really a game changer?

Climate and energy policy is confusing, and it’s been a toxic mess for more than a decade. Malcolm Turnbull says his national energy guarantee is a “game changer” and represents genuine opportunity to end the climate wars. So what is this policy, and is the prime minister right?

What is the national energy guarantee?

The government wants to impose a reliability obligation and an emissions reduction on energy retailers and a small number of large electricity users. Reliable generation means dispatchable generation – power that can be ramped up within minutes as needs be. The emissions reduction requirement will force retailers to meet their obligations from power generation with a specified level of emissions intensity.

In plain English, this means retailers will have to have a mix in their portfolio: generation from dispatchable sources ready to fire up at the drop of a hat, and from low-emissions sources, to meet their regulatory obligations.

If energy retailers don’t meet their obligations after a reasonable period of time, there will be penalties. The government has flagged deregistering non-complying companies.

How does it work?

Part of the problem with the new policy is a lack of detail.

While energy policy changes in the past have been generally accompanied by white papers – Kevin Rudd’s carbon pollution reduction scheme was outlined in 2008 in two volumes spanning 820 pages, and the recent Finkel review was more than 200 pages – the detail for this proposal in the public domain is an eight-page letter from the Energy Security Board, a 12-page glossy, and a press release of a page and a half.

So what we have in the public domain at the moment are broad concepts, with details to be worked out in due course. If you were in an architect’s office, you’d be at the stage of a pencil sketch in a notebook for your new house, minus any of the dimensions.

Guardian Australia has also seen a background paper from the Australian Energy Market Commission which gives us a bit more information. That paper explains that retailers will need to establish a portfolio of contracts spanning their dual reliability and emissions reduction obligations, which is where it gets a bit technical.

The reliability obligation will require energy retailers to hold hedges in the form of forward contracts totalling a percentage of their forecast peak load. The amount of hedges required will be based on a system-wide reliability standard to be determined in the new framework. That process, which will be done state-by-state and carried out annually on a five-year forward planning basis, will identify capacity gaps.

The emissions reduction obligation adds to the reliability framework. In addition to the requirement to hedge their load, there will be a further requirement for energy consumption to meet a set emissions intensity target for the electricity sector.

That target will be set by the government. The government has signalled it will be in the order of a 26% reduction on 2005 levels by 2030. Tony Abbott willing. Yes, that’s a joke, but not a very funny one, given this legislation will have to clear the parliament, and Abbott is still naysaying.

Is this a stupid idea?

As a concept (and that’s all we can judge at the moment), the idea could have merit.

There are problems with it, but as a concept, it’s a lot like an emissions intensity trading scheme designed by a regulator so you can tell people it isn’t a carbon price.

It is a carbon price, this system, with a market mechanism to deliver emissions reduction. It’s just not very transparent.

There is also potential in this model for a future government to scale up the level of ambition about emissions reduction, which is a bonus.

When we consider whether or not something is stupid in climate and energy policy, unfortunately we have to make that assessment in context. The deep stupid of Australia’s climate and energy debate for the past decade means most of the sensible policy options have been trashed by politics and ruled out.

Given the deep stupid has already killed explicit carbon pricing, explicit emissions trading, and a carbon tax that wasn’t actually a carbon tax – carbon pricing by regulation is pretty much all you have left that hasn’t been muddied up by zero sum politics. So at this point it looks like the policy is not stupid, just not optimal.

So what are the problems with it?

There are a number.

The first problem is the model recommended by the Energy Security Board requires cooperation from state governments. They will need to pass legislation to change the operation of the national electricity market. Whether they will cooperate at this point is very much moot.

Leading on from that point, industry needs a bipartisan solution to the climate wars, otherwise the problems will continue. New investment in generation assets requires policy certainty, not for 10 minutes, but for 10 years. It’s not clear whether Labor will back this plan.

There is also an issue that this policy doesn’t cover the entire country. Western Australia and the Northern Territory aren’t in the national electricity market, so those two jurisdictions could end up being covered by a federal electricity emissions reduction target for electricity, but unable to participate in the market mechanisms to help deliver it. It’s possible those two jurisdictions might fix the obvious problem by opting in in some capacity, but we’ll have to wait and see.

This is a complicated policy, and it’s difficult to explain and, in fact, sell to voters, particularly when key details are yet to be determined.

Even if a miracle happens, and everyone can rally around this option, translating the specifics will be a challenge. Policies that are hard to explain are hard to implement with strong public support.

Now to a couple of specific problems that voters very clearly understand, and are very focussed on.

Will it bring power prices down?

The Energy Security Board has produced a couple of figures the government has grabbed. It says wholesale prices are expected to decline by 20% to 25% a year between 2020 and 2030 and residential bills will go down “in the order of” $100 to $115 per year over the same period.

“In the order of” is a substantial clue. Don’t bet the house on these numbers. Truly. They don’t represent proper modelling as that concept is generally understood in government policy-making exercises, and even proper modelling is little more than the sum of the various assumptions that have been fed into the exercise.

Perhaps providing an end to policy uncertainty delivers a price dividend, but that is slightly in astrology territory.

Energy regulators say they will produce more detailed work in the lead up to the Council of Australian Governments meeting in November.

Will it allow Australia to meet the Paris target?

As well as being worried about their rising energy costs, Australians are worried about climate change, and the polling indicates they want their government to be contributing to a global effort to mitigate the risks.

An emissions reduction target for electricity of 26% on 2005 levels by 2030 is a lowball target.

What this means in practice is other sectors of the Australian economy will have to do more of the heavy lifting on emissions reduction to meet the Paris climate target if electricity makes only a modest contribution, and it may well be more expensive to drive emissions reductions in other sectors of the economy.

At the moment, emissions are falling in the electricity sector because coal assets are leaving the system, but they are rising in other quarters of the economy. Emissions from industrial energy, transport, industrial heat and agriculture are rising.

A target of 26% on 2005 levels by 2030 for electricity suggests we really aren’t serious about meeting the Paris commitment, we just want to say we are serious without doing the work.

There are other factors to bear in mind too. The government is going to allow international permits to be used, so retailers will be able to buy abatement to meet a proportion of the emissions reduction guarantee (which might be fine, or might be dodgy, depending on design). The government is also proposing to exempt emissions-intensive, trade-exposed industries from the environmental obligation, which means the liability will fall on other sectors of the economy.

The prime minister has also signalled that the government might go softly on the emissions reduction target in the first instance, and back-end load at the end of the decade (which is a message to appease government conservatives who think we shouldn’t be in the Paris agreement at all).