Energy Brief: Objectifying Emission Reductions
September 02, 2022
On 12 August 2022, Energy Ministers from Australian states and territories that make up the country’s National Energy Market (NEM) and the Commonwealth Government agreed to fast-track the addition of an emission reduction objective in the National Energy Objectives (Objectives). While the devil is in the detail, this headline-making news could be significant. It could signal the end of the separation of climate change policy from energy market policy and be a critical first step in recognising the important role the energy industry will need to play for Australia to reach its emission reduction objectives.
This brief provides a short history of the Objectives and a view of how the addition of an emission reduction objective may change policy settings in the market.
What are the objectives and why are they important?
There are three Objectives embedded in the National Energy Laws:
The National Electricity Objective (NEO) set out in the National Electricity Law (NEL) is:
“to promote efficient investment in, and efficient operation and use of, electricity services for the long-term interests of consumers of electricity with respect to:
- price, quality, safety and reliability and security of supply of electricity
- the reliability, safety and security of the national electricity system.”
The National Gas Objective (NGO) set out in the National Gas Law (NGL) is:
“to promote efficient investment in, and efficient operation and use of, natural gas services for the long-term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.”
The National Energy Retail Objective (NERO) set out in the National Energy Retail Law (NERL) is:
“to promote efficient investment in, and efficient operation and use of, energy services for the long term interests of consumers of energy with respect to price, quality, safety, reliability and security of supply of energy.”
The Objectives are used by:
- Energy Ministers who must ensure that any statements of policy principles are consistent with the objectives
- the Australian Energy Market Commission (AEMC) who must consider how any rule made or review recommendation would promote the achievement of the Objectives (the AEMC has released a paper that sets out how it applies the Objectives in the course of its functions)
- the Australian Energy Regulator (AER) and Australian Energy Market Operator (AEMO) in the performance of their functions and powers.
Why is there no mention of emission reduction in the Objectives?
Debate on whether the Objectives should include a specific environmental/climate change/sustainability/emission reduction objective is not new. There has been on and off discourse about whether the Objectives should be amended for at least 10 years.
The key reason there is no emission reduction in the Objectives is the underlying philosophy that energy market and environmental policy should be treated separately. That is, energy market policy should be designed to deliver reliable, safe and secure services at the lowest possible price in the long-term interests of consumers. Policies to reduce emissions were considered best managed outside energy market policy settings so as to not distort efficient outcomes in the market.
One of the best examples of the practical implications of this separation is the Renewable Energy Target (RET). The RET was set as an investment target in renewable energy generation outside energy market settings by the Commonwealth Government. It was a successful policy in the context of its objective – investment in new renewable energy generation. However, achieving this objective had consequences for energy markets that could have been controlled but were not because of this separation of responsibilities (including, at the time, the separation of government responsibilities between Ministers and departments at the Commonwealth level).
What does an emission reduction objective mean now?
This is dependent on the drafting of the amendment, which is not yet released.
However, if an emission reduction objective acts like existing objectives (price, reliability, safety and security), in FTI Consulting’s view, it becomes another trade-off that Energy Ministers and market bodies must consider in making decisions on policy settings. That is, when policymakers consider different options, amended Objectives will push them to weigh up emission reduction along with price, reliability, safety, and security and choose the option that best serves all those objectives. This isn’t substantially different from what policymakers need to do currently, as price and reliability can, and often do, conflict.
From a practical sense, it could make “technology neutrality” harder to achieve in policy settings, as an emission reduction objective could implicitly assign different value to electrons produced from fossil fuel generators relative to those produced from renewable energy generation. This could have implications for a number of the initiatives that the Energy Ministers and energy market bodies are working through, including firming and transmission access reform. However, given that the sectors around the energy industry (electricity, stationary energy, transport and fugitive emissions) make up approximately 80% of Australia’s emissions, this can only be seen as a helpful move to speed up Australia’s pathway to net zero by 2050.
© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.