Regulating a New Energy Future for Australia Professor Samantha Hepburn Director Centre for Energy and Natural Resources Law Deakin Law School

Governance for a New Energy Landscape Energy law is not static Factors: *Dynamic nature of energy markets; technological developments; *Convergence of energy markets with other markets; *Rising tension between energy, environmental and climate change policy. Determine priorities Evaluate Market Conditions Global obligations Domestic concerns Use panoply of regulatory tools: * benchmarking to incentivise behavioural shifts; *codes to frame standards; *market mechanisms to drive and support transition; * rules to mandate and monitor

Existing Issues for Energy Regulation – Preliminary Finkel Report What role should the electricity sector play in meeting Australia’s emissions reduction targets? How do we ensure the NEM can take advantage of new technologies and business models? How do we ensure the NEM meets the needs of all consumers, including residential, large-scale industrial and vulnerable consumers? What are the barriers to investment in the electricity sector? What immediate actions can we take to reduce risks to grid security and reliability?

Existing Issues for Energy Regulation – Preliminary Finkel Report Is there a role for technologies at consumers’ premises in improving energy security and reliability? What role is there for new planning and technical frameworks to complement current market operations? How can markets help support additional system security services? How can we improve the supply of gas for electricity generation to contribute to reliability and security? How can we ensure that competitive retail markets are effective and consumers are paying no more than necessary for electricity?

Global Climate Policy The Paris Agreement aims to align international policy in an attempt to limit global carbon emissions and prevent global temperature from increasing above 2 degree Celsius. (UNFCCC Paris Agreement *95% of Australian coal must stay in the ground to stay within 2 degrees *An energy mix is crucial *Accelerate renewable energy production *Shift to less carbon intensive methods of energy production. Moving towards sustainable energy production that is coherent with our obligations under the Paris Agreement To meet international obligations Australia must now implement a coherent national framework that maintains ‘reliability, security and affordability of energy’.  (Commonwealth of Australia, ‘Review of Climate Change Policies’ (Discussion Paper, Department of the Environment and Energy, March 2017) 11.

does not consider the impact of the burning of fossil fuel emissions Domestic Climate Change Policy Direct Action Safeguard mechanism – any company that emits more than 100,000 tonnes of carbon a year will be limited by their capacity to emit further.  Baselines are lenient. Established at the companies uppermost level in the last five years  - but have the capacity to be increased.  The mechanism  does not consider the impact of the burning of fossil fuel emissions 70% of the purchased abatement is derived from vegetation sequestration. A significant portion of this sequestration is susceptible to return to the atmosphere. Ineffective in itself to mitigate emissions from carbon intensive energy production or to incentivise renewable energy production

Renewable Energy Policy – Renewable Portfolio Standards Renewable portfolio standards (aka renewable target/quota obligation) create markets by requiring electrical utilities to source a portion of the electricity they sell from renewable energy. Require electric utility companies to source a certain share of the electricity they sell to end-users from solar, wind, and other renewable sources of energy.. Utilities comply with these requirements through "renewable energy credits" (RECs). Eligible power plant operators receive one REC for every megawatt hour (MWh) of electricity generated from renewable resources. Independent power producers can sell their RECs to utilities to earn a premium on top of their income from power sales in the wholesale electricity market. In addition to buying RECs, utilities can also invest in their own renewable power generation facilities to earn RECs for the electricity they produce. Costs passed on to ratepayers. RPSs may be technology-neutral and award the same amount of RECs for all eligible renewable energy technologies but some are technology specific

Renewable Energy Policy – Feed in Tariff Feed in tariffs attract renewable power generators with above market rates for their output and guaranteed access to the electricity grid. RPS policies call on the market's invisible hand to determine trading prices for RECs FIT programs require regulators to set the rates for renewable electricity at a level that incentivizes investment without offering windfall profits. FIT policies allow utilities to pass the costs of premium payments for renewable energy on to their ratepayers. FITs tend to be technology-specific, offering different tariff rates for different strands of renewable energy technologies based on their respective technological maturity and generation costs FIT design can be size-sensitive in order to account for the different cost structures of large utility-scale and small distributed-generation facilities.

Renewable Energy Target The Renewable Energy (Electricity) Act 2000 (Cth) (‘the REEA’) prescribes a system that utilises tradable certificates for renewable energy generation.  If a participant falls short of their target they are required to purchase substitute certificates to ensure they meet the RET and avoid paying a  penalty. (s5) This helps providers to maximise supplies of renewable energy thus driving growth in the sector. The mandatory RET makes renewable energy more commercially viable whilst incentivising infrastructure investment and reducing emissions 

Australian Domestic Gas Safety Mechanism (ADSM) Pricing and supply in Eastern gas market a concern Domestic gas price rises LNG a global commodity and going offshore - $200 billion investment in LNG has transformed the framework. Restricting supply to the domestic market drives up prices Regulatory impediments to development of onshore unconventional gas – social, environmental factors to be considered. Permits not being developed Increased demand – gas being used as a transitional resource

Australian Domestic Safety Mechanism The Customs (Prohibited Exports) Amendment (Liquefied Natural Gas) Regulations 2017 - new Division 6 into the Customs (Prohibited Exports) Regulations 1958. Division 6 establishes a framework for restrictions on the export of LNG where the Resources Minister determines there is a reasonable prospect of a supply shortage in the domestic market. May require LNG exporters drawing gas in net terms from the domestic market to limit exports or find offsetting sources of new gas. Short term – 5 years.

Australian Domestic Gas Safety Mechanism Export controls can only be triggered where the Minister has reasonable grounds to believe there is sufficient supply of gas available for the Australian domestic gas market over a forthcoming calendar year. Minister will issue a permission to control exports (may have conditions) Volume of gas that LNG exporters will be allowed to export (as set out in permission) must take account of expected market needs. Once permissions are issued, it will not be possible for the Minister to vary permission conditions (including export volumes) without the agreement of the licence holder. Penalties for non-compliance, including revocation of export permissions,

Technology is driving changes in energy demand The Finkel Report – Preliminary Findings Technology is driving changes in energy demand New technologies are emerging more rapidly than previously envisaged. Variable renewable electricity generation, particularly wind and solar photovoltaic (PV), is increasing. The shift from coal- red generators to wind and solar PV generators has implications for security and reliability. These variable renewable electricity generators do not inherently provide usable inertia to support power system security. They are also much less able to contribute to other ancillary services required to maintain a secure and reliable supply of power.

The Finkel Report – Preliminary Findings Solutions are available to effectively integrate variable renewable electricity generators into the electricity grid: intelligent wind turbine controllers, batteries and synchronous condensers, open cycle gas- red generators – all are well-placed to complement variable renewable electricity generators This will contribute to system security. The NEM does not currently encourage the adoption of these solutions. Emerging markets for these ancillary ‘system security’ services are lagging. New and updated frameworks, technical standards and rules may be required.

The Finkel Report: Final Recommendations The adoption of a clean energy target (CET) to drive investment in low emissions generators across Australia; The introduction of a package of energy security obligations, including inertia requirements in each region or sub-region of the NEM, generator fast frequency response capabilities, and a wholesale update to connection standards;  A shift to a market-based mechanism for procuring fast frequency response services where there is a demonstrated benefit in doing so;  Implementing a generator reliability obligation to ensure the each region of the NEM retains adequate dispatchable capacity; and Providing the Australian Energy Market Operator (AEMO) with a "last resort" power to procure or enter into commercial arrangements to have gas-fired generators available to maintain reliable supply.

Clean Energy Target (CET) CET by 2020 To have a similar operation to the existing renewable energy target (RET).   CET is pragmatic policy. Not an emissions intensity scheme or an emissions trading scheme because of previous rejection of these options. CET will permit eligible generators to create certificates for each MWh of electricity produced in proportion to how far the emissions of the generator fall below an emissions intensity threshold; CET will require electricity retailers to acquire a number of those certificates each year to ensure that a proportion of their electricity is purchased from low emissions generators.  CET is fuel neutral. All generators would be eligible to participate provided their emissions intensity meets or is below the threshold.   Need a mechanism to prevent renewable generators from benefitting from both the RET and the CET.

Clean Energy Target and the RET RET runs until 2030. CET begin in 2020 Careful development to ensure interaction between RET and CET 2020-2030 – esp to make sure investments under the RET are not affected by the CET. CET facilitates lower emissions: Generators allocated a proportion of a certificate based on their actual emissions. EG A gas generator would be allocated around half a certificate for each MWh of energy generated because it might produce emissions at around 0.3 tonnes/MWh. Alternatively, a wind generator would receive the full certificate value because it produces zero emissions.

CET and Energy Prices Cost of low emission certificates passed on to consumers by electricity retailers. Offset by lower wholesale power prices bc – increased supply from renewable energy generators, reduction in risk as a consequence of policy certainty and more competition in the wholesale electricity market. Lower wholesale power will offset the additional cost of certificates. Affordability under the CET policy.  

Develop: New generators must have fast frequency response capability; Energy Security Develop: Transmission network service providers will need to provide and maintain fixed levels of inertia in each region or sub-region of the NEM, which could include a portion substituted by fast frequency response services; Develop: New generators must have fast frequency response capability; Review: The Australian Energy Market Commission (AEMC) must review and update existing connection standard and take account of: system strength, reactive power and voltage control capabilities, performance during and after contingency events, and active power control capabilities. Transparency: New generators must fully disclose software or physical parameters impacting security or reliability.  (SA Blackout concerns) 

Market – Fast Frequency Response Mechanisms The Report supports measures requiring new wind and large-scale solar generators to have “capability” to provide fast frequency response services: including "synthetic inertia", to compensate for decreases in physical inertia from traditional synchronous generators across the NEM.  AEMC's proposal to establish a market for fast frequency response services needs to be developed - require evidence that a market mechanism would procure sufficient services to avoid impacting power system security. 

Generator reliability obligation New renewable generators be regulated to ensure that adequate dispatchable capacity is retained in all regions of the NEM.  If dispatchable capacity falls below a predetermined minimum acceptable level, new renewable generators must bring forward ‘new’ dispatchable capacity in that region (cost issue for new renewable projects). Geographical location of new capacity – not on site. Renewable projects could join with one new large-scale battery or gas-fired generation project to satisfy new capacity. Battery Storage Issues : eg how to regulate the interaction between renewable generator and battery connection arrangements into the national grid; registration requirements under the National Electricity Rules;  

Last Resort Power for Gas-Fired Generators Recommendation that AEMO be granted a ‘last-resort power’ to procure and enter into commercial arrangements with existing gas-fired generators to make them available to maintain reliability in the NEM.  AEMO may only exercise this right if "certain conditions" are met (no clarity on what those conditions might be).  Rejection of reform proposal for NEM to become a competitive capacity market - too costly and a inefficient because departs substantially from existing framework. 

Why the CET is Important Energy Security must be based upon: reliability, availability, affordability and sustainability. CET promotes each of these elements  Investment Security: Constant policy Shifts impact upon investor confidence: The target must be calibrated with Australia’s overall emissions reduction target of reducing emissions by 26-28% by 2030, to ensure the energy sector does its fair share of the abatement task. CET provides an incentive for new generation – no direct cost on existing generation. Will lower wholesale energy prices (due to basic supply/demand dynamics and increased competition) with existing coal generation. 

Regulatory tools utilised to achieve different tasks – Conclusions Successful climate change mitigation requires a timely decarbonization of the electricity sector – the largest source of greenhouse gas emissions Accelerating renewables within this context is critical – as is supporting fossil fuel transition. Regulatory tools utilised to achieve different tasks – Incentivising and supporting market transition, Adapting to changing consumer behaviour Responding to technological innovation Decelerating fossil fuel energy production and incentivising decarbonization