Emissions reduction now part of the national energy objectives

The national electricity, gas and energy retail objectives now include an emissions reduction component.

Last week, the national energy laws were amended to clarify that energy market bodies are to take account of jurisdictional greenhouse gas emission reduction targets alongside the existing considerations of price, quality, safety, reliability and security of energy and energy services. The changes herald a new era in energy market regulation – one designed to deliver "a decarbonised, modern and reliable energy system that contributes to the achievement of Australia's emissions targets." ^[1]

Background

To achieve net zero by 2050 and the various interim State and Federal emissions reduction targets, the Australian energy sector requires significant increases in renewable energy generation capacity and energy storage, and substantial network augmentations to transport energy from its source to load centres. In recent years, concerns mounted that the regulatory investment tests and planning frameworks did not adequately account for environmental benefits, potentially damping investment and impeding Australia's decarbonisation efforts.

The prevalence of coal and gas-fired generation means the electricity sector has a significant role to play in achieving emissions reduction targets. Reducing electricity sector emissions is also expected to support decarbonisation in other sectors, such as transportation and industrial processes.

To expedite Australia's decarbonisation efforts, the first step taken by energy ministers under the National Energy Transformation Partnership is to fast-track an emissions reduction component into the national energy market framework to ensure energy market regulators consider emissions reduction in their assessments. The bill to amend the national energy laws was first introduced into the South Australian Parliament in June 2023 following a public consultation process.

Emissions reduction as part of the national energy objectives

The emissions reduction component in the national energy objectives^[2] helpfully delineates what energy market bodies are to consider:

"the achievement of targets set by a participating jurisdiction—

(i) for reducing Australia's greenhouse gas emissions; or

(ii) that are likely to contribute to reducing Australia's greenhouse gas emissions."

To ensure clarity and consistency, the Australian Energy Market Commission (AEMC) is charged with preparing and maintaining a list of the jurisdictional targets. Its inaugural Emissions Targets Statement Under the National Energy Laws (Targets Statement) is available on the AEMC website.

The amended energy objectives apply in stages

Although the legislative amendments have commenced, market bodies other than the AEMC are not required to apply the amended objectives for two months (the start date being 21 November 2023). The amended objectives immediately apply to the AEMC because, as demonstrated by the publication of the Targets Statement, it is required to progress priority matters that are critical to supporting the amended objectives and the energy market transition.

The delayed commencement is not, however, absolute. Transitional provisions require the Australian Energy Regulator (AER) and the Economic Regulation Authority (ERA) in Western Australia to apply the amended objectives to specified revenue determinations^[3] and access arrangement reviews^[4] that are already underway. A market body (including the AER or the ERA) may decide to consider or apply the amended objective to other processes or matters that require the national energy objective to be considered or applied and are underway as at the start date.

Operationalising the amended energy objectives

Governments and market bodies have completed or continue to progress workstreams that are central to operationalising the amended objectives.

As noted above, the AEMC has already published the Targets Statement, which records by jurisdiction the emissions targets that market bodies are to consider, at a minimum, when applying the national energy objectives. In line with the drafting structure of the emissions component, the Statement classifies each target as either:

• an economy-wide target to reduce greenhouse gas emissions (such as net zero by 2050 and interim jurisdictional targets); or
• a target likely to contribute to reducing Australia's greenhouse gas emissions (including targets for renewable energy generation capacity, renewable gases, energy storage, electrification and demand response).

A target can only be added to or removed from the Targets Statement at the direction of the Ministerial Council on Energy or the Minister of the jurisdiction to which the target relates.

The AEMC has also updated its guide, How the National Energy Objectives Shape Our Decision-Making, to include an attachment explaining how the AEMC will apply the emissions component of the national energy objectives in its rule change and market review processes.

Other important work remains in progress:

• The AEMC is consulting on two rule change proposals from energy ministers that seek to harmonise key provisions of the national energy rules with the amended objectives. The proposed amendments pertain to three key areas:
  • network and pipeline expenditure proposals and assessment (rule change 1);
  • electricity network planning and investment frameworks (rule change 2); and
  • enabling a streamlined process for the AER to update its statutory guidelines, guidance documents and instruments to reflect the updated national energy objectives (rule change 2).
   

  The AEMC expects to publish its draft rule determinations in respect of both rule changes in late October 2023.

• The AER is finalising its guidance on how it intends to operationalise the amended objectives in the 2024-29 regulatory determinations, and the matters it is likely to have regard to in considering whether to apply the amended objectives to regulatory processes that are currently underway or commence before the start date. The final guideline is expected to be published before the end of September.
• The Commonwealth is leading a co-operative workstream in close consultation with market bodies, States and Territories to develop a value for emissions reduction, or a method for determining one. The value will be used in regulatory investment tests and investment planning frameworks, and by the AER in assessing expenditure proposals. It is expected to be available by November 2023.