National Energy Guarantee: pricing and the economy | KPMG | AU

The National Energy Guarantee: pricing and the Australian economy

National Energy Guarantee: pricing and the economy

In October 2017 the Turnbull Government released an outline of its energy policy for the period beyond 2020. Its centrepiece is the National Energy Guarantee (NEG), which is designed to target the three objectives of affordability, reliability and sustainability.

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At the time of release, comprehensive economic modelling of the NEG had not been performed. However, the government suggested that the NEG was capable of saving households of around $110-$115 per year over the period 2020-2030. The Turnbull Government has written to the states and territories seeking their input into the design of modelling.

KPMG has examined the NEG and has the following observations:

  1. The NEG, being a market mechanism, will enable electricity retailers to choose the generation mix that enables them to meet reliability and emissions reductions obligations at an efficient cost. KPMG anticipates that the NEG and other recent policy reforms are likely to assist in moderating wholesale electricity price increases into the future, however its precise design features and implementation will determine whether or not the NEG achieves these objectives.
  2. KPMG’s analysis of electricity usage reveals that households and businesses in recent years have adapted to sharply rising electricity prices by reducing their consumption. This has been achieved by using electricity more efficiently and by the adoption of new energy-saving technologies. Efficiency in electricity usage and demand management are capable of playing an important role; however, it is clear that Australia’s needs for additional dispatchable sources of energy generation/storage remains a priority to meet our current and future energy needs. These will be combined with growth in intermittent renewables sources in the years ahead while we continue with an orderly transition to an increasing share of renewables. Ultimately, additional supply will help curb pressure on energy price rises.
  3. The importance to the Australian economy of moderating electricity prices is critical. To illustrate this, KPMG Economics has used its national Computable General Equilibrium model (KPMG-CGE) to assess the short-run and long-run impacts associated with a 10 percent increase in the cost of generating electricity. In the short run, Australia’s GDP is estimated to be 0.24 percent below its baseline level, a cost to the economy of around $4.2 billion per annum, with the export sector being the hardest hit. Total employment falls by 0.21 percent, or nearly 26,000 jobs. In the long run, the economy is smaller than it otherwise would have been by around 0.17 percent, which is consistent with a reduction in household disposable income of around $150 per annum (in $2017). This decline in household disposable income reduces consumption activity in the economy by 0.29 percent, which is a larger decline than that experienced in the short run.
  4. Relatively capital intensive sectors like Basic Non Ferrous Metal Manufacturing sub-sector and the Non Ferrous Metal Ore Mining sub-sector are projected to continue to be significantly adversely impacted in the long run - because they will not get a significant offsetting benefit from the reduction in real wages. The relatively large reduction in household consumption in the long run is the key driver behind the entry of sub-sectors like Gambling, Water Supply, Sewerage and Drainage Services, Gas Supply, and Telecommunication Services into the bottom 20 performers.

In summary, the sensitivity of the Australian economy to rising electricity prices highlights the importance of establishing a stable, effective policy for achieving the objectives of affordability, reliability and sustainability. The longer the existing uncertainty remains, the slower will be the investment response to these challenges, resulting in the continuation of unnecessary volatility in electricity prices into the foreseeable future.

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