On 15 June 2018, the Commonwealth released a consultation paper outlining the proposed design of the Commonwealth elements of the National Energy Guarantee (Guarantee). It was released alongside the Energy Security Board’s (ESB) Draft Detailed Design paper to provide a complete picture of the proposed design of the Guarantee.

The Commonwealth consultation paper addresses the mechanics of setting and changing the emissions reduction target, the proposed design of the emissions-intensive trade-exposed activity exemption and the potential use of offsets.

AGL’s view on the Guarantee

AGL welcomes the ESB’s proposed approach to integrate emissions reductions policy with energy policy through the draft design of the Guarantee. The Guarantee has the potential to establish a clear long-term policy framework to reduce Australia’s greenhouse gas emissions in the energy sector consistent with Australia’s long-term climate change commitments. Most importantly, by providing policy certainty, further investments can occur in generation infrastructure which will place downward pressure on electricity prices.

The piecemeal introduction of carbon reduction and renewables policies has produced unintended consequences for wholesale energy markets, as incentives for development and price signals have shifted over time. The lack of a long-term mechanism to address emissions reductions that has bipartisan political support has been a significant contributor to increased risks and costs for energy market participants and has had material impacts on the Australian energy sector overall.

With careful consideration to the detailed design and a focus on key policy principles, we believe the Guarantee can contribute to a more sustainable energy market for the long-term benefit of customers.

However, care needs to be taken not to attempt to resolve all of Australia’s energy market concerns through the proposed policy architecture. We note that the Guarantee is primarily a mechanism to provide certainty on investment during a period of transition to lower emissions generation sources, with an associated safeguard to ensure system reliability, and that its design should therefore focus on these two imperatives.

The Commonwealth design elements

AGL has given careful consideration to the proposed Commonwealth elements of the Guarantee, which we elaborate in our submission, a copy of which is available here.

In terms of setting the electricity emissions targets, AGL supports the Commonwealth’s commitment to the Paris Agreement and notes the proposal to set the emissions reduction targets in Commonwealth legislation as a table of annual emissions per megawatt hour (MWh) for the financial years ending 2021 to 2030. In order to ensure investor confidence in the long-term trajectory, we would also encourage the Commonwealth to legislate a ratchet obligation with respect to the electricity emissions targets.

In terms of forecasts and adjustments to the targets, we support the proposal to set a requirement for the level of emissions per MWh (tCO2-e/MWh) for retailers in the NEM each year, but also ensuring that actual emissions reduction targets correlate with changes to total electricity consumption.

Nevertheless, we consider that the Commonwealth’s proposal to require a five-year notice period to revise the electricity emissions targets may impose too rigid a framework on the scheme. In our view, a three-year notice period for ratcheting up the electricity emissions targets may be more appropriate.

We would also continue to encourage the Commonwealth to develop a long term, national carbon budget for Australia that extends to 2050 to support the development of an appropriately nuanced emissions trajectory for the electricity sector.

On the proposed exemption for Emissions-Intensive Trade-Exposed (EITE) activities, we consider that the costs of decarbonisation should be shared equitably across the Australian economy. We would urge the Commonwealth to carefully consider implementation of an EITE exemption. We note that the greater the level of exemptions, the higher the costs imposed on non-exempted businesses and households.

On the issue of offsets, we would urge the Commonwealth to take a cautious approach as their use may dilute the policy intent of the Guarantee and risk deferring the necessary structural adjustment of Australia’s energy sector. Should the Commonwealth take the view that offsets will have a role, it is imperative that public policy effectively manage the risks associated with their use by providing confidence to investors for allowable quality and quantity.