The Emissions Requirement of the proposed National Energy Guarantee (NEG) will require entities registered as Market Customers in the National Electricity Market (NEM) to ensure that the average emissions intensity of the electricity they purchase meets the threshold required to achieve the emissions target set by the Commonwealth Government. For the most part, electricity retailers will be the liable entities for the purpose of the Emissions Requirement.
Since 2000, the Clean Energy Regulator has been administering the Renewable Energy Target (RET) under the Renewable Energy (Electricity) Act 2000 (Cth) (the RE Act).
The RET framework is a Commonwealth legislative scheme that sets a target for the amount of electricity to be supplied by renewable energy generators, and requires retailers of electricity to source a certain percentage of their energy needs from renewable sources. This in turn incentivises the generation of, and therefore investment in, renewable electricity.
The RE Act provides for the generation of 33,000 GWh of renewable electricity annually by 2020. After that point, the RET will remain at 33,000 GWh per year from 2021 to 2030, at which time the RET framework is scheduled to end. In other words, while the RET targets do not increase between 2020 and 2030, the scheme continues to operate until 2030. On 22 January 2018, the Clean Energy Regulator announced that, following a record year for sector investment in 2017, it considers sufficient projects have been announced to meet the 2020 target.
The Energy Security Board (ESB) has indicated that, following the introduction of the Emissions Requirement, the RET scheme will continue in effect until the end of 2030.
Further, the ESB has noted that electricity contracted for the purposes of the RET scheme would not be treated differently to new generation coming to market after the introduction of the Emissions Requirement. In other words, both could be counted towards an entity's compliance with the Emissions Requirement.
Accordingly, if the Emissions Requirement comes into force on 1 January 2020 as planned, there will be 10 years during which:
This would mean that Market Customers who are also liable entities under the RET are required to comply with both schemes until the RET expires in 2030.
Emissions reduction target
As with the RET scheme, the Commonwealth Government will be responsible for setting the emissions target under the NEG.
The consultation paper indicates the Commonwealth Government is currently considering setting the emissions target as a trajectory, which, at the outset, will be consistent with the RET target (26 per cent below 2005 levels by 2030) and help Australia meet its commitment under the Paris Agreement.
Beyond 2030, the Government has indicated that the trajectory would be reviewed every five years, with adjustments to the trajectory requiring at least five years' notice.
In proposing consistency between the emissions reduction targets, the Commonwealth Government appears to be signalling to the market that it is not seeking to reduce investment activity in the renewable energy sector.
Emissions Intensive Trade Exposed (EITE) industries
The Commonwealth Government has indicated that it considers the electricity used for EITE industries should be exempt from the Emissions Requirement and that the approach to determine the EITE activities eligible for exemptions under the Emissions Requirement will be consistent with those under the RET scheme.
That is, an EITE business would be eligible to apply for an exemption certificate for the electricity used in carrying out its eligible EITE activities. That exemption certificate would then be surrendered to the business' retailer or (where the business itself is registered as a Market Customer) applied to reduce its emissions intensity threshold.
It is not clear at this stage how a corporate PPA entered into by an EITE business would be treated from a compliance perspective. That is, whether the corporate PPA would:
effectively constitute an 'overachievement' that the EITE business could trade to Market Customers needing to reduce their emissions intensity; or
be allocated to the retailer for compliance purposes (meaning the retailer would experience a net benefit where it can use both the exemption certificate and corporate PPA to reduce its load emissions intensity).
Banking overachievement: By not restricting the years in which a Large-scale Generation Certificate (LGC) may be surrendered, the RET scheme permits unlimited banking of overachievement. The ESB has indicated that banking over-achievement would also be permitted under the Emissions Requirement, albeit there may be limits on the extent to which banking may occur.
The RET scheme permits liable entities to carry forward the liability to surrender up to 10 per cent of their LGC requirement in an assessment year. The ESB has indicated that Market Customers may also be able to defer compliance with a portion of their emissions requirement from one year to the next.
Matters for due diligence
As with the RET scheme, an entity's Emissions Requirement performance record will require investigation during due diligence concerning liable entities, both in terms of the:
past overachievement available for banking;
past non-compliance deferred for future year(s); and
asset portfolio and its forecast performance against the entity's future emissions requirements.
While both the RET scheme and Emissions Requirement are geographically neutral with respect to the location of the generation within the area of the scheme's operation, the RET scheme applies across Australia, whereas the NEG will be applied only within the NEM, meaning Western Australia and the Northern Territory are excluded from its operation.
This means that Market Customers must satisfy their Emissions Requirement by owning or holding contracts with respect to electricity generated in a NEM jurisdiction. Accordingly, a Market Customer that owns a generator in Western Australia, or who holds contracts for which the generation source is located in Western Australia, could not count that generation towards their Emissions Requirement.
While generation must be within the NEM, if the use of emissions offsets is permitted (see discussion below in this regard), these may be able to be sourced from outside the NEM, provided they meet certain eligibility requirements (eg Australian Carbon Credit Units).
While the RET scheme has always been scheduled to end in 2030, no expiry date has been proposed for the NEG.
Measure of compliance
While the RET scheme requires the creation and surrender of LGCs, an intangible tradeable asset created for the purpose of the RET scheme, the Emissions Requirement will not involve the creation or transfer of permits or certificates.
Rather, the Emissions Requirement will involve Market Customers calculating the average emissions intensity of their load and ensuring this level remains below their mandated threshold.
The ESB is considering how the emissions intensity of a Market Customer's load should be calculated, particularly given that many of the contracts which apply to NEM generation do not currently specify the generation source or emissions per MWh of the electricity the subject of the contract. This is one of the key aspects of the design on which the ESB is seeking stakeholder input.
Market Customers may also be able to purchase emissions offsets as a way of reducing the emissions intensity of their load in certain circumstances, something that is not permitted under the RET scheme.
Under the RET scheme, an entity is liable to surrender LGCs if it is the first person to acquire electricity delivered on a grid that has a capacity of 100 MW or more.
The consultation paper indicates that the obligation to comply with the emissions and reliability limbs of the NEG will be placed on Market Customers, meaning that in addition to electricity retailers, large customers registered in the NEM (such as smelters) and the owners/operators of energy storage facilities (which are required to register as both generators and customer in the NEM) will be subject to the new requirements.
While the Clean Energy Regulator governs the RET scheme, the Emissions Requirement would be governed by the Australian Energy Regulator.
Penalty for non-compliance
Liable entities failing to surrender at least 90 per cent of their LGC requirement in an assessment year are required to pay the 'renewable energy shortfall charge’.
In enforcing compliance with the Emissions Requirement, the ESB has indicated that the AER may use its discretion in making use of its existing compliance tools (such as infringement notices, administrative and enforceable undertakings and revocation of retailer authorisations).
The ESB has also indicated that other enforcement tools may be considered, such as the ability to impose increased prudential requirements or restrictions on accepting new customers while an entity is non-compliant.
While the reporting system maintained by the Clean Energy Regulator contains useful functionality (eg the automated data exchange with AEMO's market data), a new registry will be required to measure compliance with the Emissions Requirement, which will need to draw on information provided by the Clean Energy Regulator, AEMO, registered Generators and registered Market Customers.
Treatment of state-based and voluntary schemes
The Commonwealth Government has indicated that where a generator has received a subsidy under a State scheme (eg through a power purchase agreement with a State government counterparty), an entity contracting with that generator for electricity produced would be able to count that generation when calculating the entity's emissions intensity for the purposes of the Emissions Requirement. Presumably this would only be to the extent that all output of the facility has not already been contracted to the government entity.
With respect to voluntary schemes, the ESB has suggested that the Emissions Requirement may be designed so that participation in existing voluntary schemes such as the GreenPower Program would be in addition to the Emissions Requirement. That is, generation purchased to enable an entity to participate in a voluntary scheme could not be counted towards compliance with the Emissions Requirement.
Both the ESB and the Commonwealth Government are, however, seeking stakeholder views on the interaction of the Emissions Requirement with State-based and voluntary schemes.
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