ENERGY SECURITY BOARD NATIONAL ENERGY GUARANTEE FINAL DETAILED DESIGN 1 August 2018 Dr Kerry Schott INDEPENDENT CHAIR Energy Security Board
Clare Savage INDEPENDENT DEPUTY CHAIR Energy Security Board
Paula Conboy CHAIR Australian Energy Regulator
John Pierce CHAIRMAN Australian Energy Market Commission
Audrey Zibelman CEO & MANAGING DIRECTOR Australian Energy Market Operator Contents
Executive Summary 1 4 Reliability requirement 35 Step 1: Forecasting the reliability requirement 37 1 Introduction and next steps 4 Step 2: Updating the reliability Background to this paper 5 requirement 37 Process 5 Step 3: Triggering the reliability Structure of final detailed obligation 37 design paper 6 Step 4: Liable entities 38 Step 5: Qualifying contracts 39 2 Context 7 Step 6: Procurer of Last Resort 41 The status quo is not an option 9 Step 7: Compliance 41 Longer term price signals at the heart of the Guarantee 10 Step 8: Penalties 41 Reducing electricity prices and improving affordability 10 5 Governance 42 Managing reliability risks 15 Implementation through NEM Reducing emissions 17 governance arrangements 43 Safeguarding competition 19 Review of operation of aspects of the Guarantee mechanism 44 Relevant Commonwealth 3 Emissions reduction requirement 20 legislation 44 Electricity emissions intensity targets 21 6. Modelling 45 Entities covered by the emissions reduction requirement 21 Modelling framework 46 Applying the emissions reduction Assumptions and approach 47 requirement 22 Scenario 1 ‘No policy’ 49 Flexible compliance options 29 Scenario 2 ‘Guarantee’ 51 Reporting and compliance 31 Technology cost assumptions 54 Other considerations 34 Projected jurisdictional outcomes 54 Operation of the Guarantee under different circumstances 59 List of committed projects to 2020-21 59
A Abbreviations and defined terms 61 COAG Energy Council
Dear Ministers
I am pleased to enclose the Final Design of the National Energy Guarantee (the Guarantee) for your consideration.
The Guarantee integrates energy and emissions policy in a way that encourages new investment in both low emissions technologies and in dispatchable energy such that the electricity system achieves its share of emissions reduction targets and operates reliably. It is designed to deliver long-term policy confidence and stability to reduce investment risk and bring down electricity prices.
The Guarantee has five key drivers that will work together to lower retail prices: • policy stability unlocking new investment • policy stability reducing the risk (and therefore the cost) of new investments • increased contracting unlocking new investment • increased contracting in deeper and more liquid contract markets to reduce the level and volatility of spot prices, and • increased voluntary demand response.
The final design is the culmination of almost a year’s work and a collaborative effort by people and organisations from across the energy sector and the community. Stakeholders have been clear with the Energy Security Board (ESB) that the status quo is simply not acceptable and have demonstrated a commitment to work together to respond to the changes that are underway in the energy market.
Many stakeholders have stressed that at least some of the existing pipeline of new investment is predicated on the assumption that integrated energy and climate policy is now within reach. Any delay, or worse a failure to reach agreement, will simply prolong the current investment uncertainty and deny customers more affordable energy. The strength of the Guarantee mechanism reflects the open and constructive input we have received via written submissions, technical working groups, and public forums at each step of the process.
The ESB has designed the Guarantee mechanism to be fuel and technology neutral and provide a clear investment signal so that the cheapest, cleanest and most reliable generation (or demand response) gets built in the right place at the right time. There is no revenue collected from the Guarantee and there is no certificate trading scheme.
The design incorporates specific measures to safeguard competition, and to enhance liquidity and pricing transparency in retail and wholesale markets. Importantly, the Guarantee is a flexible mechanism that can accommodate different levels of emissions ambition over time, and work with state and territory emissions targets and renewable energy schemes to create greater confidence for the industry. The attached final design includes extensive, updated modelling led by the ESB, in partnership with the Australian Energy Market Commission, drawing on expert advice and capability from ACIL Allen consulting. The modelling by ACIL Allen (as with the modelling previously conducted for the ESB by Frontier Economics) uses an economic model of the wholesale electricity market and prices to forecast likely changes in the generation mix under different policy settings and the consequential impact on customer bills. This is in contrast to the Australian Energy Market Operator’s Integrated System Plan modelling which is a cost-based engineering assessment focused on long-term transmission planning and investment.
The most recent Guarantee modelling by ACIL Allen validates the conclusions of the modelling previously undertaken by Frontier Economics on the Guarantee. This analysis confirms that the mechanism can deliver much needed savings for households and businesses that have been impacted by rising energy prices and can ensure the electricity sector contributes its share towards Australia’s international emissions reduction commitments, all while ensuring we have sufficient dispatchable resources for reliable power. The average household bill is expected to be $550 lower each year through the 2020s than it is now, and $150 of those savings are because of the Guarantee.
Should the Energy Council choose to proceed, the Guarantee would be implemented through existing governance arrangements for the National Electricity Market.
The Energy Security Board looks forward to discussing this with you at the next Energy Council meeting on Friday 10 August 2018.
Yours sincerely
Kerry Schott AO Chair, Energy Security Board 1 August 2018 Executive Summary
The National Energy Guarantee (the Guarantee) is a • increased voluntary demand response. mechanism designed to integrate energy and emissions NEM average wholesale prices are, on average, policy in a way that encourages new investment in both low expected to be over 20 per cent lower over the 2020s under the Guarantee than without it. Lower emissions technologies and in dispatchable energy such that wholesale prices are expected to translate into the electricity system operates reliably. Providing long-term lower bills for all consumers. The average policy confidence is critical to lowering investment risk in NEM-connected household is estimated to save around $550 dollars a year (real $2018) on their the National Electricity Market (NEM) and bringing down retail bill over the 2020s relative to 2017-18. Of electricity prices. this, nearly $150 per year (real $2018) is forecast additional savings as a result of the Guarantee.
The Guarantee requires retailers to contract with The Guarantee is specifically designed so that generation, storage or demand response so that: it does not undermine, and may indeed boost, competition through measures that enhance • there are contracts in place to support a market liquidity and pricing transparency in minimum amount of dispatchable energy to retail and wholesale electricity markets. Under meet consumer and system needs (reliability the emissions reduction requirement, smaller requirement), and retailers are supported through the exemption • the average emissions level of the electricity of the first 50,000 MWh of load and with sold to consumers meets the electricity relatively greater flexibility to carry forward sector’s share of Australia’s international any over-achievement. Under the reliability emissions reduction commitments, as set requirement, when the reliability obligation is by the Australian Government (emissions triggered, a Market Liquidity Obligation will reduction requirement). require the largest participants to offer to buy and sell contracts with all participants. The emissions reduction and reliability The emissions requirements work together so that the market It is possible that higher emissions reduction reduction has a fair opportunity to deliver adequate targets may be set in the future by the Australian requirement is an reliability while lowering emissions. The Government. In this case, the Guarantee annual obligation Guarantee is fuel and technology neutral and mechanism and framework will automatically provides a clear investment signal, so the accommodate the new targets. Further, the on market cleanest, cheapest and most reliable generation design of the Guarantee does not limit the ability customers in the (or demand response) gets built in the right place of States and Territories to set and meet their NEM. at the right time. own emissions reduction or renewable energy targets. The Guarantee has five key drivers that will work together to lower retail prices: • policy stability unlocking new investment Emissions reduction requirement • policy stability reducing the risk (and therefore The emissions reduction requirement is an the cost) of new investments annual obligation on market customers in the NEM. Market customers must ensure the • increased contracting unlocking new average emissions intensity of their load is at investment or below the prescribed ‘electricity emissions • increased contracting in deeper and more intensity target’ for the compliance period. liquid contract markets to reduce the level and volatility of spot prices, and
1 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Executive Summary
Compliance with the emissions reduction allocate all generation and associated emissions, requirement is assessed annually by the a requirement against unreasonably withholding Australian Energy Regulator (AER), based allocations, and a general anti-avoidance on a financial year compliance period. The regime. These elements are not included in the first compliance year proposed is 2020-21. final design. The AER will actively monitor the An emissions registry, administered by the behaviour of registry participants and, if required, Australian Energy Market Operator (AEMO), will the ESB will reconsider the need for a general be established to facilitate efficient compliance. anti-avoidance regime and/or an unreasonable withholding provision. The registry allows market customers to be allocated a share of a generator’s output and its associated emissions, for which they have Reliability requirement obtained the rights. The registry automatically matches emissions to each market customer The reliability requirement is designed to based on the generation allocated against incentivise retailers and other market customers their load. Market customers that do not have (liable entities) to support the reliability of the generation allocated for some or all their load NEM through their contracting and investment in will be assigned the average emissions intensity resources. of all unallocated generation in the registry, to AEMO will forecast annually whether the cover their unallocated load. reliability standard is likely to be met (or not) 1 The AER will compare each market customer’s in each NEM region over a 10-year period. average emissions intensity against the electricity Where a reliability gap is identified, the market emissions intensity target to assess compliance. will have the opportunity to invest to close that To provide flexibility, market customers can carry gap. However, if a material gap persists or forward a limited amount of over-achievement for emerges three years from the period in question, use in the next compliance year. Similarly, limited then AEMO will apply to the AER to trigger the deferral is allowed. reliability obligation. Some elements of the final design have been If the reliability obligation is triggered, liable revised from the draft detailed design of 15 June entities may be required to demonstrate future 2018, based on stakeholder feedback through compliance by entering into sufficient qualifying the consultation process. These are: contracts for dispatchable capacity (including demand response) to cover their share of a one • The emissions reduction requirement in two-year system peak demand at the time of has been designed as a whole-of-market the gap. mechanism, in that every megawatt-hour (MWh) of generation that occurs in a compliance year One year from the forecast reliability gap, if will be recorded in the registry for allocation the AER confirms a material gap in resources against every MWh of market customer load in remains, AEMO will use its safety-net Procurer that compliance year. This includes pre-1997 of Last Resort to close the remaining gap. At renewable generation (such as Snowy Hydro this point, liable entities must disclose their The reliability and Hydro Tasmania). contract positions to the AER. If actual system requirement peak demand in the compliance year exceeds • The approach to over-allocations of generation that which would be expected to occur once is designed to has been revised. Market customers have an incentivise retailers in every two years, then the AER will assess incentive to reallocate generation in advance the compliance of liable entities. Those whose and other market of the reporting deadline. Over-allocation will customers (liable required share of load is not covered by not attract a civil penalty. qualifying contracts for the specified period entities) to support • The carry forward limit has increased, to up are non-compliant. the reliability of to 10 per cent of the first year’s electricity Some elements of the final design have been the NEM through emissions intensity target per MWh of load their contracting revised from the draft detailed design of 15 June plus a fixed amount of 60,000 tCO2-e. and investment in 2018, based on stakeholder feedback through the • In the first year, market customers can defer consultation process. These are: resources. their full compliance obligation, but any • Large customers will be provided the flexibility deferral must be made up in the following to ‘opt-in’ to manage their own reliability years. obligation, if they consider this is the most The Energy Security Board (ESB) reconsidered cost-effective and efficient approach. the need for a requirement that generators
1 The regions of the National Electricity Market include Queensland, New South Wales, Victoria, Tasmania and South Australia.
2 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Executive Summary
• Retailers can adjust their contract position National Energy National Energy within the compliance year when they take Guarantee - Guarantee - on new commercial and industrial customer scheme mechanics emissions sites with historic peak load less than 30 MW. reduction target • Large vertically integrated retailers will be covered by a Market Liquidity Obligation COAG Energy Australian when the reliability obligation is triggered. Council - all Government Obligated entities will be determined based governments on a size threshold and required to perform a market making function for the duration of the gap period. Qualifying contracts will not be New legislation to set targets required to be recorded in a trade repository with associated trade reporting for the National National Greenhouse purposes of the Guarantee. Electricity Law and Energy Reporting Act • Liable entities found to be non-compliant with National Electricity Rules Australian their contracting obligations will be charged National Registry an amount that contributes to the costs of of Emissions AEMO exercising its Procurer of Last Resort Units Act function. This will be a proportionate cost contribution commensurate with the non- compliance, determined after the event and Mechanism to Emissions reduction capped at $100 million. deliver emissions target and trajectory reduction including extension requirement process and reliablity Governance requirement Surrender of offsets and EITE exemptions The Guarantee is to be implemented through two legislative routes. The first route is through the existing governance arrangements for the If the COAG Energy Council approves the NEM, agreed by all the Governments that are final design of the Guarantee at its 10 August party to the NEM in the Council of Australian 2018 meeting, there will be a period of public Governments (COAG). The majority of the consultation on the draft NEL legislation, which Guarantee mechanism is implemented through is anticipated to occur from around mid-August amendments to the National Electricity Law to around mid-September. It is expected that the (NEL) and the National Electricity Rules (Rules). draft NEL legislation will then be finalised for • The NEL will set out who is liable under the introduction to the South Australian Parliament emissions reduction and reliability obligations, by the end of 2018. the key aspects of those obligations, and The necessary Rules to implement the Guarantee the compliance and penalty framework. It will be made by the South Australian Energy will also include a new emissions objective Minister in mid-2019. to guide rule-making in relation to Rule changes relevant to the emissions reduction Limited aspects of the operation and requirement. implementation of the Guarantee will be reviewed • Detailed aspects of the mechanism (as set out after three years to ensure that it is working in the final detailed design document) will be smoothly. included in the Rules. After the initial package of changes to the The second route of legislation is via the Rules are made, the Australian Energy Market Australian Government. Australian Government Commission (AEMC) is the rule-maker legislation sets the intensity targets, provisions in response to rule change proposals and in for emissions-intensive trade-exposed (EITE) accordance with its current functions under exemptions, the surrender of offsets, and the NEL. emissions reporting and related information Using an established framework, with clear sharing and gathering powers. accountabilities and change processes, will give The responsibilities of the COAG Energy Council businesses and investors the confidence and and the Australian Government, as they relate certainty they need to invest in the long-term to the Guarantee, are set out as follows. and deliver cheaper, cleaner and more reliable electricity for Australian consumers.
3 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE 1 Introduction and next steps Introduction and next steps
1.1 Background to this paper 1.2 Process On 24 November 2017, the COAG Energy Council Designing the Guarantee has been an iterative requested the ESB provide further advice on the and inclusive process. Inception to final design Guarantee. has taken almost a year with input through multiple consultation processes. The ESB’s high-level design for the Guarantee was presented to the 20 April 2018 COAG Energy The detailed design outlined in this document Council meeting. It was agreed that the ESB builds on: would progress development of the detailed • the model the ESB initially proposed in its design of the Guarantee, for determination at the November 2017 advice COAG Energy Council’s 10 August 2018 meeting. • the draft design consultation paper published The Guarantee comprises changes to the NEM on 15 February 2018 and its legislative framework which seek to: • the high-level design published on 20 April • maintain the reliability of the system 2018, and • achieve the emissions reductions required • the draft detailed design released for public from the electricity sector to meet Australia’s consultation on 15 June 2018. overall international commitments, and The ESB has benefited greatly from the • meet the above objectives at the lowest overall engagement and feedback from a range of costs. stakeholders on the detailed design of the This paper sets out the details of how the Guarantee. Guarantee will be structured and work in • The ESB convened Technical Working practice. Groups to advise on certain detailed design The electricity emissions reduction target, elements. The Technical Working Groups were trajectory and its subsequent review is the comprised of a broad range of stakeholders responsibility of the Australian Government. with relevant expertise from more than The Australian Government is also responsible 30 organisations. for whether external offsets may be used, and • The draft detailed design was released whether EITE load is exempt. for public consultation on 15 June 2018. • A stakeholder forum was held in Melbourne on 2 July 2018. • More than 90 submissions on the consultation paper were received from a range of stakeholders, including a number of retailers, generators, and large energy users. The ESB thanks stakeholders for their participation in the consultation process.
5 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Next steps 1.3 Structure of final detailed The COAG Energy Council will be asked to agree to the final design of the Guarantee mechanism design paper at its 10 August 2018 meeting. Subsequently, This paper is structured as follows: jurisdictions will be asked to approve the release • Chapter 2 explains the context for and of an exposure draft of the Bill to amend the expected outcomes of the Guarantee. NEL. Following a four-week consultation period, the Bill will be finalised for introduction to the • Chapter 3 describes the ESB’s detailed design South Australian Parliament before the end of for the emissions reduction requirement. 2018. The amendments to the NEL deal with • Chapter 4 describes the ESB’s detailed design the mechanism of the Guarantee and the way in for the reliability requirement. which reliability and emissions are considered together to achieve the three objectives of • Chapter 5 outlines the governance approach affordability, reliability and emissions reduction. for the Guarantee. Draft rule changes will be presented to the COAG • Chapter 6 outlines the market modelling Energy Council at its April 2019 meeting, after undertaken to support the analysis in this a period of development and consultation. If paper. agreed, these Rules will be made by the South To make it easier to track how the Guarantee has Australian Energy Minister in 2019. developed, this paper is set out in a similar way The national emissions target and trajectory from to the earlier papers. 2020 to 2030, the review points for that target, the process for extending targets, and the treatment of offsets and emissions-intensive trade-exposed industries are matters in the jurisdiction of the Australian Government. These matters are all dealt with separately in Commonwealth legislation, which will be introduced into Parliament if COAG agrees to proceed with the Guarantee. Some State and Territory governments have, or are proposing, emissions reduction schemes and programs in their jurisdictions. These are matters for those governments and their legislation. If the Guarantee is implemented these schemes will coexist with it.
6 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE 2 Context Context
Fifteen years of climate policy instability has impeded long-term “We are broadly supportive of the proposed investments in the NEM and this has compromised system security and National Energy Guarantee design as per the reliability. It has also impacted electricity prices and added to affordability draft detailed design consultation paper. We problems for consumers. As the Finkel Review noted, our energy system believe it appropriately addresses stakeholder has been vulnerable to escalating prices while being both less reliable and concerns, while also integrating energy and emissions policy in a way that encourages secure. Increased market intervention has been necessary to maintain new investment in clean and low emissions the security and reliability of the system and this has further distorted technologies and a dynamic energy market.” price signals to producers and consumers. In short, the uncertainty about – St Vincent de Paul and South Australian Council climate change policy has severely damaged the electricity industry and of Social Service (SACOSS)4 its household and business consumers. This cannot continue. “Origin supports the objectives of the NEG to bring together energy and climate change policy The Guarantee brings together climate and and provide a clear investment signal for low energy policy for the first time in Australia. It emissions and reliable generation sources at ensures we can meet the electricity sector’s least cost to Australian homes and businesses.” share of our international obligation to reduce – Origin5 emissions, while supporting the reliability of our “When we saw the draft design… we liked electricity system. Providing long-term policy what we saw and we decided to invest in more confidence will lower investment risk in the generation on top of the generation we had NEM and bring down electricity prices. at that time, so we bought three hydro power Submissions to the ESB’s consultation process stations and entered into a bunch of power were widely supportive of the objectives and purchase agreements to support new build and design of the Guarantee. that has now translated into lower prices for our customers… and we are in discussion with “The Business Council believes that the several parties about long-term contracts to Guarantee will put in place a durable mechanism support dispatchable power. … that appropriately balances our economic So the point there is that at least some of the The Guarantee growth, energy security, and environmental sustainability.” – The Business Council of benefit of the NEG is already built in to the forward brings together Australia2 price and consumers are already starting to see climate and energy some of the benefit on their bills. So what that “In our view, the importance of acting to rebuild policy for the first means is if the NEG is not approved – I don’t know the confidence of consumers in the sector and time in Australia. what’s going to happen, but I think it’s reasonably trust in the energy system cannot be overstated. likely wholesale prices will increase. If wholesale Consumers understand that there is a generation prices increase, we’ll see some reversals of the “supply” problem, with the ageing of the coal positive situation we’re in now where we see flat or fired power station fleet, and the need for a declining price for consumers in the most recent minimum amount of dispatchable energy to be price changes, and I think that just gets us into available to meet consumer and system needs, a spiral that I don’t think is healthy for anyone.” in the transition to a lower emissions economy.” – Ed McManus, CEO of Powershop Australia, – Energy Consumers Australia3 2 July 2018 stakeholder forum
2 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Business%20Council%20of%20Australia%20 Consultation%20Paper.pdf, p.7. 3 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Energy%20Consumers%20Australia%20 Consultation%20Paper.pdf, p.3. 4 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/St%20Vincent%20de%20Paul%20and%20South%20 Australian%20Council%20of%20Social%20Service%20%28SACOSS%29%20Consultation%20Paper.pdf, p.1. 5 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Origin%20Consultation%20Paper.pdf, p.1.
8 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE “EnergyAustralia considers that the main barrier These developments have encouraged to efficient investment in dispatchable capacity deployment of renewable generation in the NEM has been the policy uncertainty around emissions and these trends are expected to continue. reduction. If this is resolved through the The introduction of solar and wind into the Guarantee, or another policy, then it will help end NEM at this scale is a challenge that will require the paralyses of decision making that confronts adaptations to the existing framework. The long term investment and divestment decisions variable nature of wind and solar PV means it for assets worth hundreds of millions of dollars cannot be dispatched on demand. This requires which have lives of 15-20 years or more.” complementary capacity that is capable of rapidly – EnergyAustralia6 increasing or decreasing output in response to changes in system demand or output from wind 2.1 The status quo is not an option and solar PV. Until recently, almost all of the NEM’s generation Developments in behind the meter technologies was supplied by large thermal generators (coal including rooftop solar, battery storage and or gas), or from hydro. Other forms of generation, electric vehicle charging are changing the shape such as solar or wind power, were not economic of daily demand, resulting in sharper peaks without significant subsidies. This is no longer and shallower troughs in average time-of-day the case. Substantial cost reductions in wind demand. This means much sharper increases and solar generation have occurred. These cost in output from the grid will be required in the reductions have been technology driven and have afternoon as demand increases and output from improved with manufacturing scale. solar PV drops. Over the period to 2030, flexible generation resources that can rapidly ramp up to Customer preferences have also changed and the evening peak will be critical. encouraged increased deployment of wind and solar PV. Many large-scale solar and wind projects These changes underway in the NEM cannot be are underpinned by power purchase agreements reversed. They are now more market driven than from Australian businesses – reflecting the policy driven. The operating procedures and rules attractive electricity costs these agreements can governing the NEM must also adapt and do so in now offer and a preference from some businesses a coordinated way that supports the transition for low emissions electricity. Voluntary action while ensuring electricity is affordable. An schemes such as GreenPower and State based unstable and uncoordinated policy environment renewable schemes add to this demand. exacerbates these issues. Nationally, more than 17 per cent of households National electricity prices have more than have either solar PV or solar hot water or both, doubled over the past decade – growing with almost 1.9 million small-scale solar PV much more rapidly than general inflation and systems now installed.7 lowering the purchasing power of all Australian households, especially the most vulnerable Recent increases in export coal and gas prices have (Chart 1). While much of the price increase over added to the challenges for thermal generators the past 10 years has been caused by network making it more difficult for these technologies to or retail pricing, the more recent increases have compete. In the last two years thermal coal export been largely attributable to increased wholesale prices, for example, have increased from around prices. These price increases have also been 8 $73 per tonne to around $115 per tonne, and an impost on Australian businesses, potentially between 2015 and 2018 gas-fired generators’ fuel undermining their international competitiveness costs have risen from almost $5 per gigajoule to and weighing on economic growth. around $8 per gigajoule.9
Chart 1: Cumulative increase in the price of Australian consumer goods
120 Cumulative percentage 110 increase in nominal prices Electricity 100 90 80 70 60 50 Average of all 40 consumer 30 goods 20 10 0 Mar 08 Mar 10 Mar 12 Mar 14 Mar 16 Mar 18 Source: Australian Bureau of Statistics, Catalogue Number 6401.07
6 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/EnergyAustralia%20Consultation%20Paper.pdf, p.11. 7 Clean Energy Regulator Postcode data for small-scale installations and ABS 6523.0 - Household Income and Wealth, Australia, 2015-16. 8 Resources and Energy Quarterly – June 2018, Department of Industry, Innovation and Science. 9 ACCC Retail Electricity Pricing Inquiry—Final Report (2018), p.71.
9 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE The Australian Competition and Consumer Increased contracting in deeper and more liquid Commission’s (ACCC) recently released Retail contract markets is expected to reduce the level Electricity Pricing Inquiry—Final Report10 is a and volatility of spot prices. comprehensive study into the drivers of retail The Guarantee has been specifically designed electricity prices with a wide-ranging package to ensure it does not undermine but rather of recommendations to reduce prices. The enhances the liquidity, transparency and the ESB welcomes this report and looks forward level of competition in the retail and wholesale to working with the COAG Energy Council to electricity markets. consider how these recommendations are best responded to and implemented. A cornerstone of the ACCC’s recommendations to reduce 2.3 Reducing electricity prices wholesale electricity prices is the adoption and implementation of the Guarantee. and improving affordability In the advice presented to the COAG Energy Lowest cost outcomes for consumers will be Council in November 2017, the ESB included achieved by creating a stable policy environment initial estimates of the effects of the Guarantee which appropriately values an optimal mix of based on detailed market modelling. capacity and creates clear incentives for the private sector to deliver it. This section presents updated estimates of the effects of the Guarantee, reflecting the final policy design as well as developments in the 2.2 Longer term price signals at NEM over the past nine months. The updated the heart of the Guarantee modelling results are detailed further in Chapter 6. Spot market prices for electricity are for the very near-term, that is, the next 30 minutes. Current high wholesale electricity prices, as In contrast, the agreements struck between well as the Australian Government’s Renewable retailers and generators in the contract market Energy Target (RET) scheme, have incentivised have a much longer-time horizon, sometimes a large pipeline of renewable generation. Already spanning many years. committed projects and the first stages of the Victorian Renewable Energy Target (VRET) and The Guarantee addresses the market for Queensland Renewable Energy Target (QRET) wholesale electricity contracts. Derived from schemes means that around 7,800 MW of market expectations of future spot prices, these large-scale wind, solar and battery capacity contract markets focus on the longer term and is expected to be added to the NEM between deliver key signals for new investment. 2018-19 and 2020-21. The NEM is designed so that price signals provide But a failure, again, to agree and implement the necessary information for market participants an integrated energy and climate policy will to make investment or retirement decisions be disruptive and could result in a continued concerning their physical assets and their and potentially extended environment of policy efficient operation. These price signals are borne uncertainty. In this environment, it is reasonable out in wholesale spot market outcomes and to assume that only those projects currently financial contract markets, both of which provide financially committed would proceed to build.11 participants with strong incentives to deliver In an environment of continued policy uncertainty, electricity when it is needed. If participants fail it is also reasonable to assume that financing to manage their financial exposure to either low costs and the associated hurdle for new or high spot prices or make a poor investment investment will be higher than under the decision (for example, in a new generator that Lowest cost Guarantee. outcomes for is under utilised), they alone face the financial consumers will consequences, not consumers or taxpayers. Chart 2 outlines the expected build profile over the years to 2030 should the Guarantee not be achieved by The Guarantee builds on the existing pricing and proceed. Only new-build projects that have creating a stable risk management frameworks used in the NEM reached financial close or that will be funded to signal the need for investment in new sources policy environment under Stage 1 of the VRET or QRET are expected of generation. which appropriately to be constructed in the short-term. The values an optimal Market participants are expected to contract Australian Government’s Snowy 2.0 project is mix of capacity in a variety of ways to meet both the emissions anticipated to commence generation in and creates clear reduction and reliability requirements. Through 2023-24. Some black coal generation is expected incentives for their contracting, market customers will to withdraw in line with announced closures or the private sector support a range of different generation and key contracting and technical milestones. Rooftop to deliver it. demand-side technologies. This will result in solar PV is expected to continue to expand increased contracting levels, which in turn will through to 2030 in line with AEMO forecasts. create deeper and more liquid contract markets.
10 Available at https://www.accc.gov.au/regulated-infrastructure/energy/electricity-supply-prices-inquiry/final-report. 11 This estimate is consistent with the ESB’s market intelligence and supported by stakeholder submissions to the policy development process, see for example the Powershop and EnergyAustralia comments published at the begining of this chapter.
10 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Chart 2: Change in NEM generation capacity by fuel type without the Guarantee
5 GW, year on year change 4 Battery 3 Utility solar 2 Wind Snowy 2.0 Rooftop solar 1 0 Liquid fuel -1 Gas Black QLD black coal Black coal Coal -2 (Liddell) -3 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
The continued connection of additional renewable generation projects to the NEM in coming years is projected to see prices fall from today’s elevated levels (Chart 3). The modelled short-term wholesale price reductions are comparable to those currently implied by futures contracts.
Chart 3: NEM wholesale prices without the Guarantee
100 real 2018 $ / MWh 90 Current futures 80 pricing 70 60 50 40 NEM wholesale prices 30 without the Guarantee 20 NEM wholesale prices (historical) (modelled) 10 0 99-00 02-03 05-06 08-09 11-12 14-15 17-18 20-21 23-24 26-27 29-30
Sources: ACIL Allen Consulting, ASX Energy futures, ABS Catalogue 6401.0, AEMO, Energy Security Board
While the closure (as announced) of the Liddell The Guarantee will lower prices in five key ways: The Guarantee coal-fired power plant in NSW in 2022-23 puts • policy stability unlocking new investment will provide some upwards pressure on prices, in NSW in stakeholders with particular, the addition of around 2,000 MW of • policy stability reducing the risk (and therefore policy confidence capacity with the completion of the Australian the cost) of new investments by comprehensively Government’s Snowy 2.0 pumped hydro project • increased contracting unlocking new integrating energy in 2023-24 is expected to extend this period of investment lower prices. However, prices are expected to and climate policy • contract markets becoming deeper and more rise again over the decade as the supply-demand to guide an orderly liquid and reducing the level and volatility of balance tightens and real gas prices are assumed transition for the spot prices, and to rise. Little further investment is required electricity sector. before 2030 under this scenario which assumes • increased voluntary demand response. no unexpected closures of major thermal The Guarantee will provide stakeholders with plant. There is a further slight increase in the policy confidence by comprehensively integrating price trajectory in 2029-30 associated with the energy and climate policy to guide an orderly modelled withdrawal of some black coal capacity transition for the electricity sector. This will assist in Queensland. in bringing forward additional new investment and reduce the cost of capital of those new investments.
11 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Through their contracting, retailers will support in contracted time-periods. In this way, higher a range of different generation and demand-side levels of long-term contract cover also slightly technologies to meet the emissions reduction mitigate the risk of short-notice generator and reliability requirements of the Guarantee at closure. the lowest possible cost. The incentives and structures created by the Increased long-term contracting is expected Guarantee are also expected to accelerate the to further lower prices under the Guarantee development of the demand-side response as all market customers (mostly retailers) market. This will give the NEM additional, will be required to have a reliable level of firm potentially-lower cost, ways to respond to peaks contracts in place at key times. This will lead in demand. to more competitive bidding in the spot market In aggregate these aspects of the Guarantee as generators reduce their bids to increase are expected to place significant additional their chances of being dispatched to cover downwards pressure on prices. NEM-average their contracted capacity.12 Generators with wholesale prices are, on average, expected to be high levels of long-term contracts in place face over 20 per cent lower over the 2020s under the strong financial incentives to be able to generate Guarantee than without it (Chart 4).
Chart 4: NEM wholesale prices under the Guarantee
90 real 2018 $/MWh 80 70 Without the Guarantee 60 50 40 30 With the Guarantee 20 10 0 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
Lower wholesale prices are expected to lower over the 2020s relative to 2017-18 with network bills for all consumers. The average NEM-connected costs held constant in real terms. Of this, nearly household is estimated to save around $550 $150 per year (real $2018) of projected savings is dollars a year (real $2018) on their retail bill directly attributable to the Guarantee (Chart 5).
Chart 5: Forecast average retail bill savings relative to 2017-18 for NEM-connected households under the Guarantee
700 real 2018 $ / annum Additional savings expected Savings expected 600 under the Guarantee even with no 500 policy
400
300
200
100
0 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
12 A generator typically offers contracted capacity at marginal cost (save for below marginal cost bids in respect of a minimum level of generation required to safely continue operation) and offers remaining capacity to maximise net revenues.
12 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE The price savings from the Guarantee are hydro project in 2023-24 is projected to put expected to be broad-based, with all NEM further downward pressure on prices, broadly jurisdictions expected to benefit from lower offsetting the price effects of Liddell retiring electricity prices as a result of the Guarantee. and extending a period of lower prices. Some These savings are not directly comparable with Queensland black coal generation is projected the estimated bill savings in the ACCC’s recent to withdraw in line with key contracting and Retail Electricity Pricing Inquiry—Final Report – technical milestones around 2029-30 which the estimated savings differ in scope and the time causes a further slight increase in the modelled periods compared. wholesale price trajectory in Queensland at this time. The modelling suggests that under Wholesale prices are projected to fall in all NEM this scenario, it will not be profitable for some jurisdictions relative to 2017-18. Additional Queensland black coal capacity to undergo committed supply and moderation in coal prices necessary refurbishments in 2029-30, a time are projected to put downwards pressure on which coincides with the expiration of a major prices even without the Guarantee (Chart 6). power purchase agreement. However, the The closure (as announced) of the Liddell modelling does not consider the potential for coal-fired power plant in NSW in 2022-23 puts particular commercial arrangements to be some upward pressure on prices particularly extended or assess the additional value that in NSW. However, the replacement capacity the flexibility of this type of plant might attract. announced by the ownership of Liddell together As with any modelling, particularly over such with the addition of around 2,000 MW of capacity long time horizons, this should not be read as a The price savings with the completion of the Snowy 2.0 pumped from the Guarantee prediction of future events. are expected to be broad-based, Chart 6: Wholesale regional reference prices without the Guarantee with all NEM real 2018 $ / MWh jurisdictions 140 expected to 120 South Australia benefit from lower New South Wales electricity prices Victoria 100 as a result of the Tasmania Guarantee. Queensland 80
60
40
20
0 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28 28-29 29-30
Source: ACIL Allen consulting
13 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Wholesale prices are forecast to be lower in all NEM jurisdictions under the Guarantee than in its absence (Chart 7).
Chart 7: Projected jurisdictional wholesale price outcomes
New South Wales Queensland
100 Real 2018 $ / MWh 100 Real 2018 $ / MWh
80 80
No policy No policy 60 60
40 40 Guarantee Guarantee 20 20
0 0
South Australia Tasmania
100 Real 2018 $ / MWh 100 Real 2018 $ / MWh
80 80 No policy
60 60 No policy
Guarantee 40 40
Guarantee 20 20
0 0
Victoria NEM
100 Real 2018 $ / MWh 100 Real 2018 $ / MWh
80 80
No policy 60 No policy 60
40 40 Guarantee Guarantee 20 20
0 0
Source: ACIL Allen consulting
14 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE 2.4 Managing reliability risks The reliability requirement is designed to A portfolio of ensure that a portfolio of dispatchable power resources is The reduction in dispatchable coal-fired is available when required as the system required so generation and the greater penetration of transitions. Increased contracting will also that when wind variable renewable technologies such as reduce the likelihood of unexpected closures. solar and wind generation present risks to and solar are For generators, greater levels of contracting will the reliability of our electricity supply. not available, have the effect of increasing their commitment to future generation – as a failure to generate alternative sources Historically, most of the installed generation capacity has been dispatchable (that is, able to at times they are contracted would leave them of power can be exposed to significant financial risk. Transferring dispatched. generate as required) provided by coal, gas and hydro-electric plants. Provided these generating such liabilities is costly, and so being in a largely units have sufficient fuel (that is, coal, gas, contracted position would increase a generator’s stored water) and their operational positions incentive to keep the plant well-maintained allow it – and assuming no unexpected outages and to quickly take action to respond to any or transmission constraints – they can be called unplanned outages. The reliability requirement is upon by AEMO to increase or decrease their expected to work in combination with the three- output at any time in a predictable manner, given year notice of closure rule recommended by the enough notice. Finkel Review to ensure market decisions are made in a more orderly fashion.13 However, as Australia’s ageing generators retire they are being replaced by cheaper variable The Guarantee also incentivises a more renewable alternatives or increased output from developed demand response market, financially gas-fired power stations. rewarding action by consumers, which will aid reliability and capture value for consumers who The proportion of available dispatchable choose to participate. generation capacity in the NEM is therefore declining. While some new wind and solar Neither the risk nor the effects of unanticipated investments in Australia are seeking to make outages or closures should be underestimated, themselves dispatchable by co-locating with a especially as the share of dispatchable battery or storage such as pumped hydro, this generation in the NEM decreases. Without is not true for the majority of these resources. the Guarantee, the market will have a less Therefore, a portfolio of resources is required coordinated response to unanticipated events, so that when wind and solar are not available, and such disruptions could increase prices and alternative sources of power can be dispatched. threaten reliability as has been seen over the past few years.
13 The Finkel Review recommended that generators in the NEM be required to give at least three years’ notice to the market prior to closure to support an orderly transition. The COAG Energy Council endorsed this recommendation on 14 July 2017 and the rule change request is currently being considered by the AEMC: https://www.aemc.gov.au/rule-changes/generator-three-year-notice-closure.
15 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Case study: The closure of the Northern Power station in South Australia The Northern Power Station (Northern) was a 540 MW coal fired generator located near Port Augusta in South Australia that had historically provided up to 40 per cent of the region’s electricity. In October 2015, Alinta announced it would be closing Northern in just five months’ time, bringing forward the closure date by two years, due to an increasingly challenging operating environment and failure to secure support to remain open. At the time of its retirement, Northern was over 30 years old, though not yet at the end of its operational life. However, the mine that supplied the power station was running out of quality coal and the mine would have required significant capital-intensive augmentation to continue operation. Over the previous four and half years, Alinta had reportedly invested $200 million to extend the operating life of the generator. The key reasons for the difficult trading conditions faced by Northern included reduced electricity demand (partly driven by the uptake of rooftop solar PV) and increased competition from zero marginal cost variable renewable energy generation in South Australia. Prior to the closure, Alinta was reportedly seeking to secure customers (particularly commercial and industrial users) via long-term energy off-take agreements for the coming years to ensure Northern’s continued operation. The prices sought for these contracts, while likely higher than what commercial and industrial users were expecting to pay if they had otherwise remained exposed to the wholesale spot price, look very good value in hindsight. The closure of Northern in May 2016 resulted in a substantial reduction in supply in energy and ancillary service markets, and in contract market liquidity in South Australia. Contributing factors to these increased wholesale prices included a greater reliance on gas generators at a time when gas prices were increasing on the east coast, interconnector constraints, as well as limited availability of existing gas-fired generators due to mothballing. Had Northern successfully secured customers via long-term contracts, it is likely that it would have continued to operate through 2016 and 2017. Following the closure of Northern, the majority of new generation capacity constructed in South Australia has been variable renewable energy. As variable renewable energy traditionally does not offer firm contract products, this has not improved contract liquidity in the region.
Counterfactual scenario Drawing on AEMO’s observation in its Integrated System Plan that a key element of a least cost approach to support an orderly transition of the energy system sees coal generators maintained until the end of their technical lives, a counterfactual scenario was modelled where Northern continues operating beyond May 2016 to assess the potential wholesale price outcomes. The Guarantee is intended to increase long-term contracting and help lessen the likelihood of unexpected sudden and early exits, where reliability is identified to be at risk. Increased contracting will incentivise generators to defend their sold contract positions or face significant financial liabilities. The reliability obligation will reinforce the value of firm contracts in times and regions when supply of these contracts is at risk of becoming scarce. The modelled price outcomes over the period May 2016 to December 2017 suggest that wholesale prices would have been materially lower than those observed over the period. This is particularly evident in the winter of 2016, where a series of high price events significantly drove up average wholesale spot prices, and in the first half of 2017 where the supply-demand balance was very tight. The average wholesale price in the counterfactual scenario is around $79/MWh compared with the actual price observed of $102/MWh (representing a 23 per cent reduction) (Chart 8).
16 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE The Guarantee can Chart 8: South Australian wholesale prices in 2016 and 2017 also accommodate different levels $250 of ambition over Nominal $/MWh time, and work with State and Territory $200 schemes to create greater confidence $150 for the industry. Actual
$100
$50 Counterfactual
$0 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17
Source: ACIL Allen Consulting, AEMO actuals
These higher wholesale prices flowed through the residential retail bills over the 2016 and 2017 period. A conservative estimate of the impact on typical South Australian residential retail bills of the higher wholesale spot prices would be in the order of $200 to $250 for 2016-17. In this counterfactual scenario, the continued operation of Northern displaces gas-fired generation in South Australia, and also reduces the reliance on imported energy from Victoria.
2.5 Reducing emissions expected that cumulative emissions over the decade will not reduce enough for the NEM to The Australian Government has proposed to set meet its share of the national target (Chart 9). an emissions reduction target for the electricity sector consistent with achieving a 26 per cent The emissions reduction requirement is designed reduction on 2005 levels by 2030. to ensure that the NEM evolves in a manner that is consistent with the undertakings given The currently committed pipeline of new by Australia under the Paris Agreement. The renewable generation is expected to make a Guarantee can also accommodate different levels substantial contribution to lowering emissions in of ambition over time, and work with State and the NEM and the amount of additional abatement Territory schemes to create greater confidence required. Annual NEM emissions are expected for the industry.
to fall by over 15 MtCO2-e between 2017-18 and 2020-21 reflecting the significant volume of The Guarantee is expected to deliver the renewable energy committed to connect to the emissions reduction target for the NEM, with an additional 38 MtCO -e abatement over 2020-21 NEM over this period. By 2020-21, emissions in 2 the NEM are expected to be around 24 per cent to 2029-30 relative to a scenario without the below 2005 levels. Guarantee. The flexibility allowed by the carrying forward of over-achievement and deferral But without a specific policy commitment to between years will assist in lowering overall achieve emissions reductions in the NEM, it is abatement costs.14
14 The modelling imposed a cumulative target for 2020-21 to 2029-2030 of around 1,320 MtCO2-e, consistent with the NEM achieving a 26 per cent reduction on its historical 2005 emissions.
17 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Chart 9: NEM emissions under the Guarantee The Guarantee has therefore Mt CO2-e 155 MtCO2e been specifically designed to not 150 undermine, and 145 may indeed boost, Without the 140 competition through Guarantee Carbon budget measures that 135 enhance market liquidity and pricing 130 With the transparency in 125 retail and wholesale Guarantee electricity markets. 120 115 17-18 19-20 21-22 23-24 25-26 27-28 29-30 Source: ACIL Allen consulting
Operation of the Guarantee under higher Interaction of the Guarantee with state targets emissions reduction targets A number of State and Territory governments It is possible that higher emissions reduction have, or have proposed, renewable energy targets targets (that is, a larger percentage reduction for their region. Projects developed under a in emissions) may be set in the future by the state-based scheme would also be eligible to Australian Government. This would require a transfer their allocations to a market customer change to Australian Government legislation. for the purposes of complying with the emissions However, the Guarantee framework will reduction requirement. These projects would automatically accommodate new targets. In therefore contribute to achieving the NEM-wide particular, no changes to the NEL are expected emissions intensity target set by the Australian to be required based on the proposed drafting. Government. Higher targets create greater demand for However, there is nothing within the design of lower emissions intensity allocations under the Guarantee which limits the ability of states to the emissions reduction requirement, providing set and meet their own emissions reduction or investment signals for existing and new low renewable energy targets. emissions intensity generators, but will not In regions with both the Guarantee and a change the fundamental operation of the state target operating, some of the beyond Guarantee. The strong disincentives against business-as-usual investment would be driven by non-compliance, including a penalty of up to both policies supplementing each other. One of $100 million, allow the design to accommodate the two policies will bind to deliver more additional more stringent targets and ensure that investment and emissions reductions than the market participants respond effectively to the other. investment signals provided by the Guarantee. The Guarantee does not require any region to Depending on the magnitude and timing of any deliver a specified level of emissions reductions changes to targets, consideration could be given or renewable investments to achieve the to adjusting some parameters of the emissions NEM-wide emissions reduction target. Instead, reduction requirement, such as the limit on the Guarantee creates the incentives for investors carrying forward over-achievement or deferring to find the most efficient locations to invest under-achievement. However, these are across the NEM to deliver a given emissions parameters that can be changed in the Rules; reduction target. This is reinforced by the the NEL itself would not need any changes. reliability requirement that, regardless of the In the absence of a policy such as the Guarantee change in generation mix, preserves reliability that takes into account both emissions and in each region. Emissions reduction or renewable reliability, higher targets could mean an increase energy goals within a jurisdiction will contribute in the share of variable renewable generation to achieving the NEM-wide emissions reduction to a point where reliability becomes an issue. target, but there is no mechanism to increase the However, under the Guarantee, the reliability target for other jurisdictions in light of individual requirement ensures that firm capacity (including state and territory goals. demand response) is contracted by liable entities. This will incentivise investment in dispatchable resources so that higher targets do not impact on reliability.
18 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE 2.6 Safeguarding competition The Guarantee will safeguard competition in five key ways: In 2017, the Finkel Review highlighted • The emissions registry will support contract concerns about wholesale market competition market liquidity by not requiring bespoke, and increased retail and wholesale market physically linked financial contracts. concentration, and the implications for price and service outcomes.15 As noted above, the • Limits will be applied on carrying forward ACCC has also considered issues of market over-achievement in the emissions registry concentration as part of its Retail Electricity to prevent hoarding but with greater flexibility Pricing Inquiry—Final Report and made a for smaller retailers. number of key recommendations. • The emissions registry will automatically Stakeholders have been clear in their correct over-allocations of generation, to engagement with the ESB that competition prevent hoarding and to make sure that all cannot be undermined through the design of the retailers will be able to comply. Guarantee. The Guarantee has therefore been • 50,000 MWh exemption from registry specifically designed to not undermine, and may compliance to support smaller retailers. indeed boost, competition through measures • Market Liquidity Obligation (when the that enhance market liquidity and pricing reliability obligation is triggered) to ensure transparency in retail and wholesale electricity largest participants must offer to buy and markets. sell contracts with all participants. This will be supported by a voluntary book-build conducted by AEMO.
15 Independent Review into the Future Security of the National Electricity Market: Blueprint for the Future, Commonwealth of Australia 2017, p.138.
19 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE 3 Emissions reduction requirement Emissions reduction requirement
The emissions reduction requirement is an annual obligation on market intensity targets’). The NEL will refer to these customers in the NEM to ensure the average emissions intensity of their electricity emissions intensity targets for the load is at or below the prescribed electricity emissions intensity target purpose of the emissions reduction requirement. for that compliance period. The compliance period for the emissions reduction requirement will be on a financial year basis. 3.2 Entities covered by the emissions reduction An emissions registry will allow market customers to be allocated a share of a requirement generator’s output and its associated emissions, Entities subject to the emissions reduction for which they have obtained the rights. The requirement will be each entity registered by registry automatically matches emissions to AEMO as a market customer under the Rules each market customer based on the generation (mostly retailers, but also other parties that allocated against their load. Unallocated load is purchase electricity directly from the NEM). assigned the average emissions intensity of all unallocated generation in the registry. Each market customer will manage its own reporting and compliance. To allow one company The AER will compare each market customer’s within a corporate group to manage reporting average emissions intensity against the electricity and compliance for multiple market customers, emissions intensity target to assess compliance. there will be an ability for a market customer’s This chapter sets out details of the emissions obligation to be transferred to another related reduction requirement, including: market customer, if agreed by both parties. • coverage of market customers and their load The market customer’s performance against • the approach to allocating generation and the electricity emissions intensity target is associated emissions, matching generation determined as the average emissions associated and load, and registry operations with its generator allocations from the registry, per MWh of its load. • flexible compliance options and the rules governing their use, and A market customer’s load for the purpose of the emissions reduction requirement includes • the framework for the AER to monitor and adjustments to account for the following enforce compliance. circumstances. • Small market customer exemption: To 3.1 Electricity emissions support retail market competition, the first intensity targets 50,000 MWh of a market customer’s load is exempt from the emissions reduction The Australian Government has consulted on its requirement. The exemption will apply to proposed design of the Commonwealth elements one market customer per corporate group. of the emissions reduction requirement, including The level of the exemption has been set its approach to setting the electricity emissions such that small market customers will be intensity targets, implementing the exemption for exempt for some or all of their load. As a EITE activities, and the use of external offsets. market customer’s load increases above The Australian Government will legislate the 50,000 MWh, its exempt proportion decreases. trajectory of annual emissions targets for This measure will help smaller market the electricity sector, expressed as average customers meet the emissions reduction emissions per MWh (‘electricity emissions requirement, while not affecting overall coverage. So that the electricity emissions
21 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE intensity targets are still met, the exempt load arrangement held with a counterparty outside will be spread over other market customer the registry, provided both the market customer load. and the generator verify the agreement in the • EITE exemption: The Australian Government registry. Market customers can agree to enter intends to exempt EITE load from the into contracts to allocate generation in the emissions reduction requirement. So that the registry with the same generators that they electricity emissions intensity targets are still enter into hedging contracts with, but there is met, the exempt load will be spread over other no requirement for these parties to be the same. non-exempt market customer load. This will ensure that the Guarantee works in a way that is integrated with existing electricity • GreenPower: Some businesses and market operations without compromising household consumers undertake voluntary financial market liquidity. action to reduce emissions associated with their electricity use. A prominent example The emissions reduction requirement has been is the GreenPower program. GreenPower designed as a whole-of-market mechanism, in will be treated as additional to the emissions that every MWh of generation that occurs in a reduction requirement. compliance year will be recorded in the registry for allocation against every MWh of market The necessary adjustments are described customer load in that compliance year. This will in section 3.3.2. Depending on a market include the exports from rooftop solar PV and customer’s particular circumstances, it may other embedded generation as purchased by not have any load covered by the emissions market customers. reduction requirement in a given compliance year as a consequence of one or more of these Inclusion of pre-1997 renewable generation adjustments. The draft detailed design consultation paper noted the view of some stakeholders that Submissions in response to the draft detailed pre-1997 renewable generation that is not design consultation paper reflected mixed views included in the RET – for example, the majority regarding the small market customer exemption. of Australia’s hydro generation – should Stakeholders that supported the small market not benefit from the emissions reduction customer exemption noted the potential benefit requirement. This could mean excluding this to competition. For example, the Australian generation and its associated emissions from Industry Group commented that the exemption the emissions reduction requirement altogether, “may be helpful to support competition, and or alternatively, automatically distributing it it does not seem to present significant risks between market customers. of harm”.16 Stakeholders that did not support the exemption mostly raised concerns about In its submission to the consultation process, the additional complexity it would create. For ENGIE in Australia & New Zealand acknowledged example, Snowy Hydro argued the exemption the additional complexity that may entail from “will add complexity to the majority of players excluding pre-1997 renewable generation, but in the market and drive strategic incentives on raised concerns that “its inclusion may result Market Participants depending on their customer in inappropriate wealth transfers or place load size”.17 On balance, the ESB considers that large renewables portfolios in a significantly the potential for the small market customer advantageous position”.18 EnergyAustralia exemption to improve competitive outcomes and similarly expressed a position that “pre-1997 reduce the compliance burden for small retailers renewable generation should be baselined out outweighs any complexity of its implementation. of the Guarantee as they were for the Renewable The emissions Energy Target, to avoid significant windfall gains”.19 reduction 3.3 Applying the emissions requirement is reduction requirement However, a number of submissions to the designed to ensure consultation process supported the inclusion there is sufficient The emissions reduction requirement is designed of the pre-1997 renewable generation in the flexibility for to ensure there is sufficient flexibility for market emissions reduction requirement. The Australian market customers customers to meet their compliance obligation at Industry Group suggested that under the lowest possible cost. emissions reduction requirement “every source to meet their of generation has an underlying value or disvalue An emissions registry is used to allocate compliance for achieving the target. Attempting to excise this generator output and its associated emissions to obligation at lowest value as a ‘windfall gain’ risks overcomplicating a market customer’s load for each compliance possible cost. the scheme and discouraging efficient decisions period. This can be based on any contractual about the use or extension of old assets.”20
16 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Australian%20Industry%20Group%20 Consultation%20Paper.PDF, p.3. 17 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Snowy%20Hydro%20Consultation%20Paper.pdf , p.3. 18 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/ENGIE%20in%20Australia%20%26%20New%20 Zealand%20Consultation%20Paper.pdf, p.2. 19 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/EnergyAustralia%20Consultation%20Paper.pdf, p.7. 20 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Australian%20Industry%20Group%20 Consultation%20Paper.PDF, p.4.
22 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE BlueScope Steel noted that the inclusion of the To record the allocation of generation in the pre-1997 renewable generation “provides for a registry, it must be requested by one party, and broader range of compliance options for liable approved by the counterparty.25 The parties entities. It also simplifies compliance and target can record allocations at any time during the setting under the Guarantee.”21 Delta Electricity’s compliance period. They will also have nearly six view was that excluding pre-1997 renewable months after the end of the compliance period generation “could also exacerbate competition to continue to adjust their portfolios by recording concerns for smaller market participants by reallocations, until the compliance deadline of denying them access to the widest range of mid-December. sources of low emissions generation.”22 The pool of unallocated generation and emissions The large hydro generators were opposed to in the registry will have an associated ‘residual’ excluding pre-1997 renewable generation: emissions intensity. The residual emissions intensity will be a floating value, which varies “Any proposal to exclude pre-1997 generation over the compliance period as allocations are would violate competition and technology recorded. Market customers that do not have neutrality principles, would be detrimental to generation allocated for some, or all, of their load retail competition, and would not incentivise by the end of the compliance and reporting period hydro generation to provide energy services will be assigned the residual emissions intensity such as system strength and inertia as the NEM for that load. transitions to a renewable and intermittent The Guarantee generation mix.” – Snowy Hydro23 Allocations will be expected to be entered in a timely manner to allow AEMO to provide regular has been designed “Excluding a subset of generation from the updates of the contents of the unallocated pool as a technology- emissions obligation is unwarranted and will and its emissions intensity. neutral mechanism distort the investment and reinvestment signals that applies to the Guarantee provides. Existing hydropower Incentives for allocating generation the whole market delivers flexible, dispatchable renewable energy The draft detailed design proposed an so that it can into the NEM. National energy policy must administrative requirement that generators achieve emissions support the retention and modernisation of these allocate all generation and associated emissions important assets.” – Hydro Tasmania24 by the reporting and compliance date. reductions at least-cost. The ESB considers that while it is appropriate Through the consultation process, several to exclude pre-existing generation under a stakeholders provided feedback that a scheme like the RET that targets additional requirement of this nature is not necessary for renewable energy, it is not appropriate to exclude the emissions reduction requirement to operate this generation from the emissions reduction effectively, and should be removed. requirement of the Guarantee. The Guarantee “Delta does not believe that the administrative has been designed as a technology-neutral obligation on generators to allocate all their mechanism that applies to the whole market generation in the registry is necessary for the so that it can achieve emissions reductions at operation of the emissions obligation.” – Delta least-cost. This is intentionally different from the Electricity26 RET which only requires one form of emissions reduction – namely, from new renewable energy Alinta expressed a concern that the proposed sources. Excluding pre-existing generation from requirement “creates a potential risk on the emissions reduction requirement may create generators, whereby if they are unable to assign distortions in the behaviour of generators that their allocation to a liable entity they will be could harm the Guarantee’s efficient operation. penalised”,27 while the Minerals Council of Australia contended it would “increase costs 3.3.1 Allocation rules and reduce incentives for investment in existing At the start of the compliance period, all dispatchable generation”28 and the Australian generation and associated emissions will be Aluminium Council similarly expressed a concern unallocated. that it “may undermine the business model of dispatchable (thermal) generation and that generation is needed to undertake any transition effectively.”29
21 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/BlueScope%20Consultation%20Paper.pdf, p.3. 22 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Delta%20Electricity%20Consultation%20Paper.pdf, p.2. 23 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Snowy%20Hydro%20Consultation%20Paper.pdf, p.1. 24 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Hydro%20Tasmania%20Consultation%20Paper.pdf, p.1. 25 It is not intended that output could be directly allocated between generators. 26 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Delta%20Electricity%20Consultation%20Paper.pdf, p.2. 27 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Alinta%20Energy%20Consultation%20Paper.pdf, p.6. 28 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Minerals%20Council%20of%20 Australia%2Consultation%20Paper.pdf, p.5. 29 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Australian%20Aluminium%20Council%20 Consultation%20Paper.pdf, p.3.
23 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE On the other hand, the Australian Industry over-allocated generation and associated Group considered the proposed requirement as emissions to the residual unallocated generation being “reasonable to help ensure that market pool. customers have full opportunity to acquire the • The generation returned to the residual 30 generation volumes they require to comply” unallocated generation pool will be the lowest and ERM Power raised a concern that the emissions intensity generation allocated to absence of such a requirement “would allow the market customer, up to the volume vertically-integrated gentailers to push the of over-allocation. For example, a market costs of high-emissions generation onto their customer that is over-allocated by 1,000 MWh 31 competitors”. would have its lowest emissions intensity The ESB has decided not to proceed with 1,000 MWh of generation returned to the the requirement that generators allocate all residual unallocated generation pool. generation and associated emissions. On • The market customer’s compliance against balance, it is considered the final design contains the emissions reduction requirement would sufficient incentives for efficient allocations from then be assessed based on its remaining generators to market customers, including by generation (which would equal its load) and providing visibility over the volume of unallocated associated emissions. generation and its average emissions intensity. • This approach will reduce the average The draft detailed design also proposed a emissions intensity of the residual unallocated legal requirement that market customers and generation pool, to the benefit of market generators do not unreasonably withhold any customers that did not or could not allocate allocations for anti-competitive purposes. The generation against their entire load. ESB has also decided not to proceed with that requirement, as explained in section 3.5.3. These design elements are intentionally made, to incentivise over-allocated market customers Over-allocation to reallocate their over-allocation to other Over-allocation describes a circumstance where (under-allocated) market customers, thereby the total volume of generation allocated to a alleviating any competition concerns that might market customer exceeds its load in the registry. arise from some market customers choosing This is distinct from over-achievement where the to remain over-allocated to increase other generation may match the market customer’s market customers’ costs of complying with the load but the emissions intensity is less than the Guarantee (including any penalties levied on electricity emissions intensity target. non-compliance). Since total generation must equal total load The draft detailed design proposed an approach in the registry for each compliance period, the to over-allocation whereby the market customer consequence of a market customer being would have been assigned a deemed emissions over-allocated for the compliance period would intensity for the over-allocated amount and be that another market customer will not have would also have faced a civil penalty. Through the sufficient generation (either allocated or from consultation process, some stakeholders raised the residual unallocated generation pool) to cover concerns that the proposed approach was too its load. severe, given the possibility that over-allocation could occur unintentionally. The ESB has taken There is a risk that market customers may this feedback on board in revising the approach unintentionally be over-allocated due to to over-allocation, and has removed the proposed over-estimating their load. While market civil penalty for over-allocation. The revised customers will be able to reasonably estimate approach is still expected to incentivise market their load during a compliance year, they will not customers to reallocate generation in advance 32 know their final load until after mid-November. of the reporting deadline to avoid being Once their final load is known, market customers over-allocated, and provide proportionate will have one month to adjust their allocations treatment to circumstances of unintentional in the registry. A market customer that is over-allocation. over-allocated will have the opportunity to reallocate its excess allocation to another market 3.3.2 Accounting for generation and load customer. However, if the market customer does Total generation in the registry will be calculated not reallocate, the market customer will remain as NEM pool generation from AEMO, plus over-allocated at the compliance deadline. exports from embedded generation33 (including In the event that a market customer has an exports from rooftop solar PV). Since emissions over-allocation of generation against its load reductions achieved by embedded generation after the compliance deadline of mid-December, contribute to the overall emissions reduction the registry will automatically return the target, such generation ought to be recognised in
30 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Australian%20Industry%20Group%20 Consultation%20Paper.PDF, p.3. 31 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/ERM%20Power%20Consultation%20Paper.pdf, p.2. 32 As set out in section 3.3.3, mid-November is the deadline for recording embedded generation and solar PV data in the registry (which is used to determine a market customer’s final load) 33 This is generation that is not explicitly part of the NEM (i.e. is non-market) and is either embedded within a local retailer’s host region or embedded behind the meter at a site.
24 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE the registry and therefore embedded generator National Greenhouse and Energy Reporting exports are added to pool generation in the Act 2007. registry. • Embedded generators below these thresholds Total load in the registry will be calculated as will not be individually recorded but will be NEM pool purchases from AEMO, plus load equal included in the market customer’s registry to the exports from embedded generation. It will account in aggregate and will be assumed for also incorporate adjustments for exempt loads simplicity to have a zero emissions intensity. and account for voluntary GreenPower load. The market customer will be able to reallocate Pool generation and pool purchases the generation and associated emissions from Pool generation and pool purchases refer to its embedded generators to other market generation and load that is settled by AEMO customers, if it chooses. This will be provided for through the wholesale market in the NEM. in the Rules in relation to the registry. For the purpose of the emissions reduction Where a market customer is wholly exempt from requirement, all pool generation and pool the emissions reduction requirement as a result purchases will be defined ‘at the node’: of their exempt load, they will not be required to • Pool generation is measured at the include their embedded generation or solar PV transmission node identifier, with generator exports in the registry. imports netted against exports, and then With the continued growth of embedded adjusted by the marginal loss factor. generation and distributed energy resources • Pool purchases are measured by applying such as rooftop solar PV and behind the meter transmission and distribution loss factors to batteries, it is likely that AEMO’s future power the metered volumes. system planning and operations will require more This approach ensures that the pool generation data about the output from these resources. and pool purchases will require minimal scaling When this information becomes available to to match (estimated to be within around 1 per AEMO with greater timeliness and accuracy then cent), improving the accuracy of the registry. it may be possible to integrate distributed energy resources more seamlessly into the registry. For grid-connected batteries and pumped hydro However, the timing of any such change will facilities that are registered in the NEM as both a also need to consider how the Commonwealth market generator and a market customer, their is setting electricity emissions intensity targets, exports will be netted against their imports, such to ensure that targets and compliance are that only their net pool purchases are included in calculated on a like-for-like basis. The treatment their load. of embedded generation in the registry can be further developed through rule-making Embedded generation processes. Exports to the grid from embedded generation (including rooftop solar PV) are entered into the Exempt load registry by the market customer that purchases The calculation of market customer load will the output. So that total generation matches total include adjustments for exempt loads, being EITE load in the registry, the registry will automatically load, and the first 50,000 MWh of any market add the same volume to the market customer’s customer’s load (the small market customer load. exemption), as was discussed in section 3.2. • The amount of embedded generation entered The adjustments will only apply to a market into the registry will be grossed up to the node customer’s pool purchases. The ESB considers by applying transmission and distribution loss that the alternative approach of scaling the factors. market customer’s final load (including • Embedded generators will be explicitly embedded generation and solar PV) would create identified and included in the registry if they too much uncertainty, as the scaling factor would exceed both a capacity threshold of 5 MW not be finalised until after all market customers 34 had recorded their embedded generation and and have annual emissions of 25,000 tCO2-e or more. These embedded generators will solar PV loads in the registry.35 No information is generally already be reporting under the available throughout the year to enable updated National Greenhouse and Energy Reporting estimates. (NGER) scheme. Embedded generators over To give effect to the exemptions, each market 5 MW but with emissions below 25,000 tCO -e 2 customer’s pool purchases will be reduced by who are not already reporting under NGER the 50,000 MWh threshold and by any EITE load it will also need to have an emissions intensity supplies in a compliance year. Across all market determined for the purposes of the Guarantee. customers, each MWh of non-EITE load above the The Commonwealth will make provision for 50,000 MWh threshold will then be scaled-up by the Clean Energy Regulator to determine this a factor such that total load equals the total pool through a legislative instrument under the generation.36
34 To avoid capturing back-up plant that rarely runs. 35 As set out in section 3.3.3, the deadline for recording embedded generation and solar PV data in the registry is mid-November. 36 This methodology also implicitly incorporates the scaling-up of pool purchases to match pool generation.
25 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE The scaling factor will be calculated three customers who will receive the 50,000 MWh months after the end of the compliance year,37 exemption in the forthcoming compliance year. based on the ratio of total pool generation to The maximum scaling factor will be set using total non-EITE pool purchases above the 50,000 AEMO’s best estimate with a small buffer for MWh threshold, in that year. To provide market error, as the cap should not bind frequently. customers with greater certainty, the scaling Throughout the compliance year AEMO will factor will be capped at a maximum based on publish the year-to-date scaling factor – based AEMO’s assessment of the relationship between on a conservative (high) estimate of EITE load as pool generation and pool purchases, the expected measured at the National Metering Identifier38 level of EITE load and the number of market – so that market customers have an indication of how the scaling factor is tracking.
Example of calculating scaling factor and applying to market customer load Hypothetically: • The total pool purchase load in a compliance year is 190 TWh. Of this, the exempt load is 30 TWh, which is the sum of: – The first 50,000 MWh of each market customer’s load, totalling 2.5 TWh. – A total EITE load of 27.5 TWh. • The total pool generation in the compliance year is 200 TWh. The scaling factor for the compliance year is capped by AEMO at a maximum of 1.3. The final scaling factor is 1.25, calculated as 200 TWh ÷ [190 TWh - 30 TWh] For a particular market customer with pool purchases of 12 TWh and 1.95 TWh of EITE load: • Its exempt load = 2 TWh (including its 50,000 MWh exemption plus the 1.95 TWh EITE load) • Its scaled-up load = 12.5 TWh, calculated as [12 TWh - 2 TWh] x 1.25 • The market customer will have 12.5 TWh of load that will need to have generation matched against it in the registry so that the average emissions level is at, or below, the electricity emissions intensity target (even though the market customer’s actual pool purchases were 12 TWh and it had 2 TWh of exempt load).
GreenPower load This will be achieved by deducting a market Some businesses and household consumers customer’s GreenPower load and associated undertake voluntary action to reduce emissions renewable generation occurring in the associated with their electricity use. A prominent compliance year from both its total load and example is the GreenPower program. allocated generation. This will mean GreenPower generation does not contribute to a market Stakeholders were broadly supportive of ensuring customer’s emissions intensity for its the additionality of voluntary action through the non-GreenPower load. Market customers will GreenPower scheme. For example, Origin noted need to have allocated generation from sources that “it is important that the additionality of that are consistent with its GreenPower product voluntary offerings is maintained so that retailers The registry commitment, such as 100 per cent new wind. can continue to offer new products as the market provides the Similar to the approach for pool purchases, evolves.”39 necessary the GreenPower load will be adjusted by infrastructure to In a submission on the draft detailed design transmission and distribution loss factors. facilitate efficient consultation paper, the National GreenPower® compliance with the Accreditation Program expressed its support 3.3.3 Registry operations The registry provides the necessary emissions reduction for the proposed treatment of GreenPower and infrastructure to facilitate efficient compliance requirement. noted their intention to work with the ESB and contribute to the framework of the emissions with the emissions reduction requirement. reduction requirement.40 It allows market customers to be allocated a share of a generator’s output and associated The calculation of a market customer’s emissions, and to present this for the purposes emissions intensity will include an adjustment of compliance in respect of their load. for GreenPower to allow consumers to make an additional contribution to emissions reduction beyond that required by the target.
37 I.e. once the pool generation and pool purchases are taken as final at end-September. 38 This estimate is conservative because it will not account for any deductions of non-EITE load consumed at that National Metering Identifier. 39 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Origin%20Consultation%20Paper.pdf, p.3. 40 http://coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/GreenPower%20Consultation%20Paper.pdf, p.1.
26 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE The registry will be administered by AEMO, The information in the registry that will be which already holds most of the data relevant publicly available will include: for the registry’s operation – in particular, pool • the emissions intensity of each generator to be generation and wholesale pool purchases. It also used in the compliance year – published prior has some existing data exchange protocols in to the compliance year commencing place with the Clean Energy Regulator. As the registry administrator, AEMO’s responsibilities • the total volume of output (MWh) that has been will include developing detailed procedures for allocated and each generator’s unallocated interacting with the registry and managing IT generation – updated regularly requirements. The AER will have access to the • the residual emissions intensity – updated registry to facilitate its role in monitoring and regularly, and enforcing compliance. • the outcomes of each compliance year, Market customers and generators will have including overall scheme outcomes and the accounts in the registry to manage their emissions intensity of each market customer allocations. Account holders will only be able to as set out in section 3.5.1. view information relevant to their own account The information in the registry that will not be and allocations. published is individual allocations of generation Through the consultation process, stakeholders and associated emissions and individual raised two separate issues in relation to market customer loads. The ESB considers third party access to the registry: access to publishing this information would reveal sensitive information, and access to registry accounts. information that would influence commercial negotiations. For example, it could increase Access to information the compliance costs of a market customer if Stakeholders put forward a range of views on the the market knew the amount of low emissions amount and type of information that should be generation to which it needed to obtain the rights. made available. Further consideration of the information to be “Alinta supports the majority of the ESB’s published and the timing of publication will take proposed design elements, including registry place in developing the Rules. transactions remaining confidential, and suggests that allocation positions within the Third party access to registry accounts registry should also be treated as so.” – Alinta41 A number of stakeholders provided feedback that third parties or intermediaries should be able to “To help ensure transparency in the market, we hold an account in the registry.44 ACCIONA noted believe that all information in the registry must that “with the use of suitable access permissions, be widely accessible: Making this information third party participation in the Registry and the confidential will be a barrier to the potential type of information accessible, would be easily entry into our market of new energy retailers, managed.”45 However, the ESB considers the which is contrary to the Guarantee’s objectives.” inclusion of third parties would create a risk that – Telstra42 they may have generator output allocated to them “While the registry should disclose sufficient at the reporting deadline, but are not subject to information to enable market customers to meet compliance requirements. This would mean that their obligation, it must also protect commercially there would be insufficient generation left in the sensitive information.” – AGL43 registry to be allocated to market customers for compliance. To the extent that third parties The publication of information from the registry held large allocations of emissions-intensive needs to consider the need for transparency to generation, targets would not be achieved in deliver the most efficient outcomes and the need practice. Restricting access to the registry is the to ensure that commercially sensitive information simplest way to mitigate this risk. As a result, is not exposed. third parties will not have access to the registry. A significant amount of information on the NEM is already available publicly. For example, AEMO Information recorded in the registry provides detailed data on dispatch by generating Each generator’s emissions intensity for a given unit, as well as demand and wholesale spot compliance year will be recorded in the registry prices. The AER publishes information on retail before the start of the compliance year. market shares in its annual State of the Energy Emissions data used to calculate the emissions Market report. intensity will primarily be sourced from NGER, for the financial year two years prior to the compliance year. This data is published by the Clean Energy Regulator by 28 February before the start of the compliance year.
41 http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Alinta%20Energy%20Consultation%20Paper.pdf, p.2. 42 http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Telstra%20Consultation%20Paper.pdf, p.3. 43 http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/AGL%20Consultation%20Paper.pdf, p.7. 44 AGL, BlueScope Steel, Clean Energy Council, Hydro Tasmania. 45 http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/ACCIONA%20Energy%20Consultation%20Paper.pdf, p.2.
27 ENERGY SECURITY BOARD • NATIONAL ENERGY GUARANTEE Using data from the NGER scheme helps align Greenhouse and Energy Reporting Act 2007. The emissions accounted for in the Guarantee with reporting or estimation of the emissions intensity the electricity sector emissions that Australia of generators will also take account of when the reports in the National Greenhouse Gas NGER facility boundary includes emissions from Inventory. This can ensure that the emissions major activities other than electricity production. reductions achieved under the Guarantee align For example, where a NGER facility includes with the target for the sector set by the Australian a cogeneration plant, the emissions intensity Government. The National Greenhouse for that generator would exclude emissions and Energy Reporting (Measurement) associated with the production of process heat. Determination 2008 provides methods, criteria Generation data used to calculate the emissions and measurement standards for calculating intensity will usually be for the financial year two emissions under the NGER scheme. It is updated years prior to the compliance year, to match the periodically to reflect improvements in emissions emissions data. For market generators it will be estimation methods. By drawing on the data measured at the transmission node identifier reported under the NGER scheme, the emissions (with generator imports netted against exports), under the Guarantee will reflect those methods and adjusted by the marginal loss factor that is for measuring emissions from electricity current for the compliance year. For embedded production. generators it will be measured as the exports A generator will be able to apply to the Clean to the grid, adjusted by transmission and Energy Regulator to receive an estimated distribution loss factors. Using data from the emissions intensity that accounts for specific From the start of the compliance period, pool NGER scheme helps circumstances. These circumstances will include generation and pool purchases data will be align emissions where the generator is new and does not have provided into the registry. This data is settled by accounted for in the relevant historical emissions data and where the AEMO in weekly batches, and each week’s data historical data is not reflective of a capital project Guarantee with the first becomes available four weeks in arrears. that has a significant impact on the emissions electricity sector The pool purchases data are subject to 20 and intensity. The process for making such estimates emissions that 30 week revisions, but will be taken as final for and application requirements will be set out Australia reports the purpose of compliance as at end-September in a legislative instrument under the National in the National following the compliance year. Greenhouse Gas Inventory. Figure 1: Example of information recorded in the registry46
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