The renewables debate shifts a gear: Finkel Review proposes Clean Energy Target

Earlier this month the review panel appointed by the COAG Energy Council and led by Chief Scientist Alan Finkel released its report on the national energy market (NEM). Blueprint for the Future: Independent Review into the Future Security of the National Electricity Market contains a wide range of recommendations to achieve the key outcomes of increased security, future reliability, rewarding consumers and lower emissions. In the first of our articles on the recommendations of the Finkel Report, we will focus on the Review Panel's recommendations that:

• a Clean Energy Target (CET) be introduced as the preferred policy option for reducing emissions from the NEM; and
• the existing Renewable Energy Target Scheme (RET Scheme) remain unchanged to the end of its design life in 2030, but not be extended beyond that date in its current form.

  Background to the Finkel Report

  The Finkel Report was commissioned by COAG in 2016 to address concerns about the security and reliability of the NEM in the context of a decade-long period of uncertainty around emissions reduction policies in Australia which is widely held to have:

• pushed up electricity prices by hindering investment in new infrastructure; and
• undermined the reliability of electricity supply as a result of new generation technologies being connected to a system that was not designed for them.

The NEM is the interconnected electricity market operating in Queensland, NSW, Victoria, the ACT, South Australia and Tasmania. It was developed at a time when electricity was almost entirely generated by coal, gas and hydro, rather than by intermittent generation sources such as wind and solar. Electricity generated in the NEM produces 35% of Australia's greenhouse gases.

Why a CET?

The Finkel Report found that both an Emissions Intensity Scheme (EIS) and a technology-neutral CET would achieve the desired reduction in emissions from the NEM, and favoured a CET in light of the fact that the Federal Government has previously ruled out implementing an EIS. Based on modelling undertaken by the Finkel Review, the CET produced better price outcomes than both the EIS and business as usual scenarios, and is capable of delivering Australia's emissions reductions target.

The CET model adopted for the purposes of the review was calibrated to an emissions reduction target of 28% on 2005 levels by 2030, with a linear trajectory to zero emissions by 2070. The design of any CET implemented by the Government may not conform to those parameters. The effectiveness and impact of any CET scheme will depend on the ambition of the Federal Government's emissions intensity threshold.

The proposed CET would aim to incentivise investment in new low-emissions electricity generators without imposing any penalties on existing coal-fired generators (to avoid prematurely displacing them from the NEM). However, the Finkel Report acknowledges that additional measures must be implemented to ensure security of the NEM in light of the fact that older generators are reaching the end of their life and generation from new renewable generators is variable, presenting challenges for the capacity of the NEM to respond to electricity demand on call.

At this early stage there appears to be tentative support for a CET from both sides of politics, as well as from industry participants, with the main debate being over the role of new coal fired generation. However, political consensus on Australia's emissions reductions target will be key to the effectiveness and longevity of the scheme. It is expected that the findings in the Finkel Report will in part inform the outcome of the Australian Government's review of Australia's climate change policies, which is due to conclude by the end of 2017.

CET in the context of Finkel's key recommendations

The Finkel Report encourages the Australian Government to deliver a strategic energy plan focusing on an orderly transition to an NEM with greater penetration of renewable energy, system planning and stronger governance. The plan would include:

• a credible and enduring emissions reduction mechanism (ie. a CET) supported by a long-term emissions reduction trajectory for the electricity sector;
• security measures such as the planned retirement of large generators, back-up power supplies and last resort powers for the regulator; and
• a newly formed Energy Security Board, comprised of an independent chair and vice-chair, as well as the heads of the three governing bodies, charged with implementing the review's recommendations and monitoring the market transition to renewable energy.

What would a CET look like?

The proposed CET would operate similarly to the existing RET Scheme and have the following features:

• all fuel types, including coal with carbon capture and storage or gas, would be eligible for the scheme provided they meet or are below the specified emissions intensity threshold;
• eligible generators would receive certificates for the electricity they produce in proportion to how far their emissions intensity is below the specified threshold; and
• electricity retailers would be obliged to purchase those certificates to demonstrate that a certain proportion of their electricity comes from low emissions generators.

If the CET model proposed in the Finkel Report is adopted, new eligible generators will receive certificates for all electricity generated, while existing eligible generators will only receive certificates for any electricity that they produce above their historic output. The RET Scheme would also be retired in 2020, and so provisions to prevent renewable generators from benefiting from both the RET Scheme and the CET would need to be considered.

What else needs to change?

The volume of renewable energy in the NEM will continue to increase (regardless of whether a CET is introduced), in part because it is now cheaper to build wind and solar generators than it is to build fossil fuel generators. Finance is not readily available for new coal/gas generation.

The Finkel Report recognises that the NEM needs to change to address this to ensure stability and energy security. The CET only goes part of the way as it will still encourage low emissions generation which at this time is still predominantly renewable. Energy storage is identified as an important tool to provide stability and energy security but this might involve broader NEM reform as different parts of the energy generation, transmission and distribution network have different capabilities to deliver storage opportunities.

Our next article will explore the recommendations of the Finkel Report in relation to energy storage.

What the Clean Energy Target means for you

Apart from checking the Change in Law clauses of your agreements to see whether you will bear (or be able to pass through) the costs of any expenses incurred by generators, retailers and other affected parties in complying with the CET, the key CET lessons are likely to be:

• For investors: Bipartisan support for the CET should re-engage investment confidence in investment in the NEM, and in particular for clean energy sources such as wind, solar and biomass (as well as energy storage opportunities).
• For generators: Fossil fuel power stations will have a continued role to play in the NEM under the CET, however, where power stations plan to retire, the CET will require a structured and planned retreat. The notice provisions of the CET will in turn facilitate the strategic entry for new low emissions entrants. Existing low-emissions generators will need to consider the implications of the possible abolition of the RET Scheme in 2030. Developers of new low-emissions generators should carefully consider the timing of the construction of any new plant given the proposed CET is likely to operate on the basis that existing eligible generators may only receive certificates for any electricity that they produce above their historic output.
• For retailers: Under a CET, retailers will need to source a certain amount of electricity from clean energy and will be liable for purchasing certificates to prove it.