AEMC's recent determination expands scope for emission reduction initiatives in the energy sector

In a noteworthy development, the Australian Energy Market Commission (AEMC) has brought increased clarity to the application of the updated National Electricity Objective (NEO) and National Gas Objective (NGO) through amendments to the National Electricity Rules (NER), National Electricity Retail Rules (NERR) and National Gas Rules (NGR).

This regulatory enhancement, effective from 1 February 2024, now permits operators of energy networks and gas pipelines to propose expenditure aligned with emissions reduction targets, a capability absent in prior iterations of the rules.

Key changes effective from 1 February 2024

1. Incorporation of greenhouse gas emissions in NER

The NER now explicitly considers "changes in Australia’s greenhouse gas emissions" as a market benefit within the Integrated System Plan published by AEMO and the Regulatory Investment Tests for Transmission and Distribution.

2. Expenditure inclusion in proposals

Both the NER and NGR now allow network and pipeline operators to include in their revenue proposals and access arrangement proposals expenditures aimed at achieving emissions reduction targets.

3. Streamlined consultation process for AER

The NER, NGR, and NERR facilitate a streamlined consultation process for the Australian Energy Regulator (AER) to incorporate these rule changes and the September 2023 amendments to the NEO and NGO into its guidelines and instruments.

Under the previous regime, had the market participant requested that the AER factor into its decision-making process matters of emissions reduction, the AER would have been required to do so on a case-by-case basis. That approach attracted criticism from industry stakeholders given that it may have resulted in an inconsistent application of the NER, NGR and NERR. This misalignment with the amended NEO and NGO, which explicitly referenced jurisdiction-specific greenhouse gas emissions reduction targets, has now been rectified so that the AER may factor emissions reductions considerations on a uniform basis.

Emission Reduction Targets

Under the NEO and NGO, the AEMC is mandated to maintain an emissions targets statement, outlining:

• Targets set by each jurisdiction (2030, 2035-2045, and 2050) in terms of percentage emissions decreases.
• Targets to reduce emissions at the State, Territory and Commonwealth levels, expressed in terms of both supply-side and demand-side targets (eg. GWh of renewable capacity in the grid).

In conjunction with the updated national energy rules, the AEMC has released its revised emissions targets statement as of 1 February 2024.

Recommendations for operators

Operators of energy networks and pipelines intending to prepare revenue and access arrangement proposals or conduct Regulatory Investment Tests for Transmission and Distribution are strongly encouraged to take note of these rule changes and the newly published reduction targets.

To delve deeper into the emissions reduction component or understand how the evolving energy regulatory framework applies to your business, we encourage you to reach out to a member of our expert energy team.