Chapter 18

Energy & Renewables

The electricity, gas and renewables sectors are currently undergoing significant changes as the industry transitions from a primarily coal-based generation mix to greater levels of ‘flexible’ renewable generation. High electricity and gas prices, network system security issues and emerging new technologies are major drivers in the transformation of the energy market. Amidst the boom in the development of wind and solar projects in recent years, the emergence of flexible storage technologies (i.e. batteries, and pumped hydro) is driving the shift away from coal and gas while assisting renewables to respond to the highly political issues of security, reliability and affordability of generation.

Australia continues to struggle to implement a policy mechanism to balance reducing carbon emissions, maintaining energy security and enabling energy affordability. As a result, the regulatory frameworks around the energy sector are currently unsettled and are likely to evolve.

18.1 Power and renewables

Electricity markets

Australia has a number of separate electricity systems. The largest of these in the National Electricity Market (NEM) which encompasses Queensland, New South Wales, Victoria, South Australia, Tasmania and the Australian Capital Territory followed by the Wholesale Electricity Market (WEM) which operates throughout the South West Interconnected System in Western Australia. Smaller systems include the North Western Interconnected System in the remote Pilbara region of Western Australia and the Northern Territory Electricity Market which operates in the Northern Territory of Australia.

National Electricity Market

The NEM is the largest electricity system in Australia comprising 40,000km of transmission lines, 9 million customers, and 50,000MW of generating capacity with A$11.4 billion worth of electricity traded each year. The NEM was established under the National Electricity Law (first passed in South Australia and then uniformly adopted in each jurisdiction) in 1998 and is primarily governed by the National Electricity Rules.

The NEM is operated and regulated by the following independent bodies:

  • Australian Energy Market Operator (AEMO) – market operator, market registrations;
  • Australian Energy Market Commission (AEMC) – responsible for rule changes; and
  • Australian Energy Regulator (AER) – enforcement, retail and network licensing / exemptions, network revenue determinations.

While many legal and regulatory aspects of the sector are governed by the National Electricity Law and the National Electricity Rules, certain key aspects can differ from State to State. These include planning and environmental approvals, transmission and distribution network licensing, retailer licensing (Victoria only) and generation licensing (other than NSW).

Participants in the NEM can be divided into three broad groups: generators, network service providers (i.e. transmission and distribution network operators) and market customers (i.e. electricity retailers). Most of the generators, network services providers and retailers in the NEM are now privately owned however some level of Government ownership remains in each category. Large energy retailers in the NEM typically also own significant generation capacity, known as ‘gentailers’, however network services providers typically only hold transmission or distribution assets and do not participate in electricity generation or sale.

The retail price for electricity sold to consumers connected to the NEM is now largely ‘unregulated’ however electricity transportation costs (i.e. the charges that must be paid to network services providers) continue to be regulated by the AER in accordance with the National Electricity Rules.

The NEM itself is a gross power pool, in which the wholesale electricity price is determined for each region of the NEM (Queensland, New South Wales, Australian Capital Territory, Victoria, Tasmania and South Australia) every trading interval (currently 30 minutes, but a move to 5 minute trading intervals will take effect from 2021), 24 hours a day. To set this price AEMO runs a reverse auction in the lead up to each trading interval. Generators make offers (bids) to generate certain quantities during the trading interval at various prices. The introduction of 5 minute trading intervals will create opportunities for increased ‘flexible’ generation to dispatch into the NEM.

AEMO dispatches generation in the trading interval starting with the cheapest offer and moving through the bids until sufficient supply has been dispatched to meet demand. The wholesale price for that trading interval will be the highest price that was bid by any generator that AEMO actually dispatched. The same wholesale price is received by all generators that were dispatched during the trading interval regardless of whether they bid a cheaper price. Currently the NEM wholesale price may range from -A$1,000/MWh to A$14,500/MWh in any trading interval. Consistent high market prices in recent years have resulted in increased pressure on governments to reform the NEM.

AEMO operates as a clearing house for settlement purposes by receiving from market customers (i.e. retailers) the wholesale price for all electricity consumed by their customers during the relevant trading interval and paying the wholesale price to all generators who generated electricity during the relevant trading interval.

Retailers generally charge their customers a fixed price for the electricity they consume. Retailers typically manage their exposure to the fluctuating wholesale electricity price by entering into hedges or other derivative contracts with other market participants or by purchasing electricity futures contracts.

WEM

The South West Interconnected System (SWIS) over which the WEM operates incorporates over 7,800 km of transmission lines, supplies about 18 terawatt hours of electricity each year has more than one million customers and 5,798MW of registered generation capacity, including 513 MW of non-scheduled generation. Unlike the NEM the WEM is a net market (i.e. bilateral contracts between participants still play a large role) which trades both capacity and electricity. AEMO has recently taken on the role of system operator in the WEM.

Renewables

When the NEM was established, the generation of electricity in the NEM was largely provided by coal and gas-fired generation. However, in the last decade this generation mix has been changing. One of the significant changes has been the halting of further development of coal-fired generation and the closure of some aging coal-fired plant. At the same time, a number of gas-fired generators have been 'mothballed' as the result of significant increases in wholesale gas prices following the development of major LNG facilities in Queensland.

At the same time there has been a growing penetration of renewable energy in the NEM, predominantly from onshore wind and utility-scale solar PV plant. This growth has been supported by a number of State and Federal regulatory arrangements. More recently, storage technologies are being deployed to meet network system security and stability requirements as well as provide flexible generation.

In response to high electricity prices, corporates, governments and universities have begun contracting directly with renewable energy generators to manage electricity costs, and purchase green products, known as corporate power purchase agreements (PPAs). Corporate PPAs are re-shaping electricity procurement for many organisations and can assist to support financing of renewable energy developments across the NEM. 

Climate change commitment

Australia is a signatory to the Paris Agreement under the United Nations Framework Convention on Climate Change. The Paris Agreement includes a commitment to limit the increase in global average temperature to below 2 degrees Celsius (above pre-industrial levels) and to pursue efforts to limit the increase in global average temperature to 1.5 degrees Celsius (above pre-industrial levels).

Australia has committed to reduce carbon emissions to 26-28% below 2005 levels by 2030, which builds on Australia’s 2020 Kyoto Protocol target of reducing emissions by 5% below 2000 levels.

Climate change policy

Various initiatives have been introduced by the Federal and State governments that aim to reduce Australia’s carbon emissions and promote greater renewable energy generation. The two key Federal Government policy initiatives are:

  • the Renewable Energy Target (RET); and
  • the Emissions Reduction Fund (Direct Action).

State governments have demonstrated increasing policy ambition to address rising electricity costs, secure energy supply and reduce emissions, while attracting investment. For example, Victoria legislated a separate, State-based, renewable energy target (VRET) and supported more than 900MW worth of renewable energy projects in the first round of the reverse auction.

RET Scheme

The key driver for investment in renewable generation in Australia has been the RET scheme which commenced in 2000 and is currently scheduled to operate until 2030.

Under the RET, renewable power generators may create Renewable Energy Certificates (RECs) with a REC being equivalent to around 1 MWh of electricity production from the renewable source. Electricity Retailers must purchase these RECs in a quantity that is equivalent to approximately 23.5% of the quantity of electricity they sell to consumers. Retailers are required to surrender RECs to the Clean Energy Regulator in respect of their electricity sales on a calendar year by calendar year basis. Failure to surrender sufficient RECs incurs a shortfall charge.

The RET Scheme is divided into the Large-scale Renewable Energy Target (LRET) and the Small-scale Renewable Energy Scheme (SRES). The two schemes create different categories of RECs with each category having a separate surrender target and pricing:

  • under the LRET Large-scale Generation Certificates (LGCs) are created progressively based on metered output from renewable installations with a capacity of at least 100kW such as utility scale wind or solar projects; and
  • under the SRES Small-scale Technology Certificates (STCs) are created from smaller renewable installations – typically residential or commercial rooftop installations. Unlike LGCs the STCs for a smaller project can be created ‘up-front’ upon installation based on anticipated generation and are often sold by the customer to the installer in exchange for a discount on the cost of the system.

The surrender target for LGCs will peak in 2020 at a level equivalent to 33,000 GWh of renewable energy output. From 2020 until the end of 2030 the target will remain at that level. The market value of LGCs is expected to drop sharply in the years following 2020 and the RET scheme is scheduled  to expire at the end of 2030.

Emissions Reduction Fund and Safeguard Mechanism

The Federal Government introduced a Direct Action Plan in 2014. The Government committed A$2.55 billion to an Emissions Reduction Fund, under which the Government pays for emissions abatement through an auction process to help achieve Australia’s 2020 emissions reduction target of 5% below 2000 levels by 2020.

Individuals and businesses taking part in the scheme earn Australian carbon credit units for each tonne of carbon dioxide equivalent stored or avoided by the project. The Australian carbon credit units can be sold to generate income either to the Government through a carbon abatement contract or on the secondary market.

As at December 2018, A$2.3 billion had been spent to abate 193 mtC02-e.

In 2015, as part of the Direct Action Plan, a Safeguard Mechanism was established to ensure the emissions reductions purchased by the Government are not offset by significant increases in emissions above business-as-usual levels elsewhere in the economy. The legislative framework of the safeguard mechanism is set out in the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) through the amendments to the Carbon Farming Initiative Amendment Act 2014 (Cth).

The Safeguard Mechanism applies to around 140 large businesses that have facilities with direct emissions of more than 100,000 tC02-e per year, which covers around half of Australia’s emissions.

Greenhouse and energy reporting

The NGER Act was passed in September 2007. The NGER Act provides for mandatory reporting of significant energy consumption and production, and greenhouse gas emissions which exceed certain threshold amounts. Penalties for non-compliance with the NGER Act include fines of up to A$260,000 and personal liability for CEOs. Responsibility for reporting is assigned to the company at the top of a corporation hierarchy (the 'controlling corporation'). The NGER Act only applies to energy consumed or produced in, or greenhouse gases emitted from, Australian territory. Since 1 April 2012, the scheme is administered by the Clean Energy Regulator.

VRET

The VRET is a Victorian Government initiative to promote investment in the renewable energy sector within Victoria. Under the VRET, Victoria is committed to renewable energy generation targets of 25% by 2020 and 40% by 2025. The targets have been supported by a reverse auction scheme whereby project developers competed to be the lowest cost provider of renewable energy resulting in the award of a number of ‘support agreements’ to large-scale renewable generators in 2018. 

Energy policy review

Finkel Review

In 2017 the Council of Australian Governments (CoAG) commissioned an independent review into the future security of the NEM. The review was led by Australia’s Chief Scientist, Dr. Alan Finkel AO, and was designed to provide a national reform blueprint for ensuring the security, reliability, affordability and sustainability (lower emissions) of the NEM. The report has since come to be known as the 'Finkel Review' (the Review)

The outcomes of the Review are underpinned by three pillars - orderly transition, better system planning and stronger governance, and comprise the following key recommendations:

  • requiring all large generators to provide three years’ notice of closure;
  • a system-wide grid plan detailing network investment decisions;
  • regional security and reliability assessments;
  • system planning to assist with the transition to an innovative, low emissions electricity system;
  • a new Energy Security Board to assist in implementing the findings of the Review and provide system-wide oversight;
  • strengthened energy market bodies; and
  • possible structural changes to the form of the NEM, including consideration of an ex ante market.

CoAG endorsed 49 of the Review’s 50 recommendations. A Clean Energy Target mechanism (which would essentially have replaced the RET) was not endorsed and at the time of writing there remains a level of uncertainty around the future of climate and energy policy at the national level. 

Last updated: 01/03/2019

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