28 June, 2018
Detailed plans for the design of Australia's planned National Energy Guarantee (NEG) have been published for consultation by the Energy Security Board (ESB) and the Coalition of Australian Governments (COAG).
The ESB's detailed design builds on the findings of an earlier public consultation process, focussing on how emission reductions would be assessed under the NEG while simultaneously ensuring the reliability requirements are satisfied. The COAG's paper sets out a broad framework for how the Australia's 2030 26% emissions reduction target will be set and seeks feedback on setting emissions targets and assessment.
The consultation on the COAG paper closes on 6 July 2018; one week ahead of the deadline for feedback on the ESB paper, 13 July 2018. The detailed design will then be finalised and presented to energy ministers from each of Australia's states and territories for their approval at a meeting of the COAG energy council on 10 August 2018.
If the final design is approved by the council, draft legislation should be finalised and introduced to the South Australian parliament by the end of the year.
"As the consultation process continues, the NEG continues to take shape and is slowly edging towards a sustainable and workable structure," said Perth-based energy expert George Varma of Pinsent Masons, the law firm behind Out-Law.com.
"While there has been progress in establishing the framework for the NEG, it is encouraging to see a broad range of stakeholders being consulted to make the NEG practical and achievable – although critics have suggested that the emissions reduction target could be more aggressive," he said.
Once in force, the NEG would require energy retailers, and some large energy users, to meet a reliability target of dispatchable energy from ready-to-use sources, while meeting an emissions target set at a level intended to enable Australia to meet its international climate change commitments. The policy is intended to be technology neutral, and will require retailers to source power from a variety of sources including coal, gas, wind, solar, hydro and battery storage.
The emissions reduction scheme proposed by the ESB involves the use of a central compliance registry, through which generator output and associated emissions would be allocated to a market customer's load. The idea is for the NEG to work in a way that is integrated with existing electricity market operations and reporting obligations, including those under the National Greenhouse and Energy Reporting Scheme (NGERS), without compromising on financial market liquidity.
Emissions reduction compliance would be assessed annually, with the suggestion that over- and under-achievement could be carried forward within prescribed parameters. Stakeholder opinion is divided as to the appropriate compliance period: either the financial year, to align with NGERS, corporate reporting and network pricing; or calendar year, to align with the Renewable Energy Target compliance and emissions-intensive trade exposed exemption processes. Enforcement tools including infringement notices, administrative and enforceable undertakings, civil proceedings and, ultimately, suspending or revoking authorisations are proposed.
The ESB has outlined eight high-level steps for assessing the reliability requirement, which will be set by the Australian Energy Market Operator (AEMO). AEMO will forecast the reliability requirement up to 10 years in advance and update it annually, taking into account the retirement of assets or changes in power demand. It will encourage the market to react to reliability gaps in the form of investment in new capacity, contract with liable entities for a share of system peak demand and act as a 'procurer of last resort' to address gaps that cannot be otherwise filled. It will also oversee compliance, and penalties where retailers do not meet their obligations.
"While further detail is needed to provide a comprehensive critical analysis of how the emissions reduction suggestions will operate in practice, the streamlined approach which is proposed to minimise onerous reporting obligations will be well received in the industry," said Varma. "Further, adopting a flexible approach to assessments is likely to be helpful during the evolution of this framework as the market evolves."
"The reliability assessment framework appears to be reasonable, although it is clear that the timeframes for forecasting and updating the requirements need further consideration and will no doubt change prior to finalisation of the NEG.
However, it is positive to see that the ESB has adopted a consistent theme of aiming to implement a streamlined reporting approach," he said.
The COAG paper proposes setting annual emissions targets for the first 10 years, with five-year extensions commencing from 2025 to take into account over or under achievement against the budget. Emissions forecasts and targets would then be adjusted annually, to take into account fluctuating electricity demands. COAG is seeking views regarding this timing, as yearly adjustments may make emissions targets less certain and could impact on investment in the sector.
The paper goes on to consider the potential relationship between the NEG and exemptions for emissions-intensive industries under the EITE programme; and the use of various external offsets as a flexible compliance option.
"It is likely that adjustments to the annual emissions targets and forecasts will be needed on a more frequent basis early on as the NEG framework develops," said George Varma. "Once enough data has been accumulated over time, clear trends will emerge which will allow more accurate targets to be set requiring fewer adjustments."
"The introduction of offsets into the NEG is likely to benefit larger generators in the market, but this will hopefully encourage further investment into lower emissions generation, leading to an overall decrease in power costs," he said.
For further information, please contact:
George Varma, Pinsent Masons
george.varma@pinsentmasons.com
