NEG's ability to cut energy costs divides analysts

The NEG framework, released last month, provided a national policy and direction for the energy sector in response to the Finkel review. While it has been welcomed by the sector, which has faced ongoing uncertainty in the space, the ability of the new policy to achieve its aims are in doubt.

Advisory firm Energy Action argues the NEG's focus on extending the operational life of older coal-fired power station will increase capital costs and that will flow on to consumers through contracts.

"We're seeing the impact of higher prices," Energy Action chief executive Ivan Slavich told Fairfax Media.

"What we're seeing, following the release of the National Energy Guarantee, is actually an increase in prices."

Energy Action said the reliability obligations in the NEG could have an impact on spot prices as it may force soon-to-be-closed plants to remain operational where the costs associated with retaining these plants are passed onto retail consumers.

"The government has moved to shore up reliability by keeping high-inertia plants open," Mr Slavich said.

"Within the NEG is the obligation for baseload generation of coal to be put on life support for longer, and they'll pass the costs of keeping those old power stations open.

"There's significant capital costs in staying open, what's the total costs of keeping these coal power stations open compared to investing in renewables?"

As prices increase, Mr Slavich forecast a greater run towards renewables especially before the cutting of the renewable energy target in 2020.

"Renewables projects will just need to be smarter now that they won't be able to transfer their system security impact to the Australian Energy Market Operator," he said.

"If anything, as the Large Renewable Energy Scheme closes its books, there will be a rush towards renewable generation approval before the scheme closes in 2020."

Seeing things differently is KPMG chief economist Brendan Rynne who says early figures show a price reduction ahead.

"Our own analysis can see generally how the price reduction is made up," Mr Rynne told Fairfax Media.

"On the balance of expectations, it will drive down prices. The numbers [in terms of savings] the government is talking about are plausible."

KPMG's report stated that a combination of gas market reforms, an increased focus on demand management, and contracting for reserve capacity will actually put downward pressure on wholesale costs.

Additionally, the removal of the RET may also cut prices.

"Once the RET is gone then there won't be that impost," Mr Rynne said.

KPMG added that consumer actions are also helping to drive down price, as overall demand - excluding sharp peak periods - has tracked downwards consistently over the last few years.

"This electricity efficiency gain has been driven by the adoption of new technologies and by improved processes and behaviours," KPMG stated.

However, it highlighted that metal manufacturers and miners are unlikely to see the benefits of the NEG.

"In the long run, relatively capital-intensive sectors like non-ferrous metal manufacturing sub-sector and non-ferrous metal ore mining sub-sector are projected to continue to be significantly adversely impacted," KPMG's report said.

"This is simply because they do no get a significant offset in benefits from the reduction in real wages in the long run."

Another factor that may drive down energy costs is the Australian Energy Regulator's (AER) latest agreement with the major networks.

Currently, network costs account for approximately 48 per cent of the average bill.

Over the last three months, the AER has reduced the allowed rate of return - how much they are able to charge - for the major networks within the east coast's electricity network.

This marks a consistent reduction in the rates of return, which currently sit at six per cent of the average cost of capital.

"It is important that at this time of affordability concerns, consumers are confident that we are closely scrutinising these proposals to ensure that consumers are not paying any more than they should for safe and reliable services," AER chair Paula Conboy told Fairfax Media.

"This means we are always looking to sharpen the tools we use to analyse proposals, ensure that consumer voices are being heard by networks when developing the proposals they submit to us and in our processes of assessing those proposals."

The NEG's modelling, which will reveal in greater depth the extent of price reforms and implementation of reliability obligations, will be released later this month at a Council of Australian Governments (COAG) Energy Council meeting in Hobart, Tasmania.