Australia’s Safeguard Reforms: New Amendments and the Path Forward for Emission Regulations

Interlocking metal gears with words such as 'RULES', 'REGULATIONS', 'COMPLIANCE', 'STANDARDS', and 'POLICIES'

On Friday the Department of Climate Change, Energy the Environment and Water released the amendment to the Safeguard rule which was largely expected, but still another blow to large emitters. This came into force as of the 7th October 2023 which was the day after it was registered.  

In the latest update to the regulation default emission intensity numbers have been updated and new production variables established. This will be another blow to those Safeguard entities who will now be set to international best practice standards for the default emission intensities.  

Further to the above and also on Friday, the Climate Active certification process had a paper released, following its roundtable and workshop earlier this year. In this consultation paper they are looking to strengthen the certification process which has slipped against industry standards since its inception in 2010.  

One key concept the reforms are looking to address is that currently there is no mandatory gross emission reductions (i.e. reduction of emissions prior to offsetting) required under the legislation.  

The proposals are looking to enforce that “meaningful direct emissions reductions” are undertaken and strategised before offsetting occurs. It would also look to ensure they are tracking their performance against meaningful targets to assist them in this. This requirement will form part of the audit and will be required for them to meet and maintain their Climate Active certification.  

Interestingly they are including all scopes (1, 2, and 3) within their boundary and emission reductions although the “boundary” for this will surely be amended to allow for those outside of their direct control, especially for those within the Scope 3 targets.  

The second part of the consultation paper is looking to tighten the availability of international credits as per the Chubb review paper in late 2022. The proposal will be met by the green lobby as a half measure I am sure as they are stating that vintage requirements on international certification is put in as 5-Years which is loose to say the least. But let’s see if that has any impact at all on price or requirements before we make that call.  

The other interesting proposal is that any ACCUs used as a voluntary requirement will count towards Australia’s national emissions reduction target under the Paris Agreement. It does make you wonder how we will meet these targets at all if this is a scramble for a few voluntary certificates.  

What will be a real key item to watch is if this could this be the first step towards vintage limits on all Carbon Credits, and if so, what will that do to an already tightening supply market. With Safeguard reforms coming in and baselines declining the market is anticipating strength and vintage limits may be the catalyst to the government $75/tonne cap.  

Consultations close on this paper on the 15th December with implementation of changes from 2024 expected.  

Could We Finally Have a Post-2030 Plan?

Wind turbines at sunset overlooking a coastal landscape

You would be forgiven for missing the nuances released in the multiple papers released by the Department of Climate Change, Energy, the Environment and Water in late September. Under the heading of ‘Australian Hydrogen News’ there was a glimmer of hope we may indeed have some post RET certainty on the horizon.

In what was the smallest of the 4 papers, was the Renewable Energy Guarantee of Origin (REGO) scheme paper, which is associated with tracking renewable electricity generation.

Following on from the December 2022 paper which set out a framework for the REGO scheme, this paper is seeking views on timing, implementation and design of the scheme which is looking like it will come into effect in January 2025.

But it goes further, it strongly insinuates, that the aim of this new legislation is to provide certainty that the scheme will allow for the creation of renewable energy certificates, as per the current LGC and STC legislation but with additions post 2030. Thus, the REGO scheme will enhance the Renewable Energy Targets (RET) post 2030 when it will supersede the current legislations, but co-exist for the 5 years prior, “noting there are benefits to moving towards a single, enduring certificate creation framework.” and further it confirms the CER will continue to be the body which will administer it.

This news will be welcomed by many as the concerns around a combined “carbon equivalent” scheme both brought back memories of the old carbon taxes as well as concerns for the demand of ACCUs under the safeguard reforms exacerbating that value of carbon. If you were to include the Scope 2 emissions into that demand mix the governments proposed ceiling of $75/certificate (escalating annually) would in no doubt be reached.

Now the REGO scheme will not be changing any requirements under the RET scheme before 2030. But it is likely to remain in place until at least 2050, as such the investment certainty the market has been looking for may soon be in place. The two will co-exist with the RET liability still being required to be met by the LGC / STC component of your liability, but any voluntary surrenders above that level could be met via the REGO scheme. This could be beneficial as the changes could allow many more of these REGO certificates to be produced and thus hold the price at a softer level than the under demand LGC market. With voluntary surrenders also able to be moved out of this LGC market the demand for these certificates could also be reduced, with the hope these additional certificated could bring the value back to pre-social licence demand levels.

The changes being proposed will allow all electricity generation to be eligible to produce a REGO. This would include below baseline generation. It is noted whilst the REGO may be produced under this certain accounting methodologies, such as GreenPower would not use any of these certificates and schemes such as RE100 are likely to make changes which include further exclusion provisions for older generation power stations.

Another interesting inclusion into the REGO scheme is the further information around the inclusion of STC’s. With the increase in aggregated VPPs and orchestrated DERs the likelihood is post 2030, when most STC deeming periods expire, there is an opportunity to include these smaller schemes within the larger REGO scheme which could in turn create further issues. The reason being is a REGO will have a time stamp and the likelihood of us moving to a hourly matching requirement, is becoming much stronger in some industries. As such the consideration that the REGO is produced when 1MW is reached will not ultimately “match” the offtake it is matching which may cause issues for some stakeholders. However, it has to be assumed that if that is such a strong consideration for your internal stakeholders, they will not be matching their offtake from an aggregated small site portfolio?

One throw away comment in the paper but directly linked to this is “once the REGO scheme is in place with locational and temporal attributes, this could be used as the basis for further refinements to the NGERs market-based methodology.” Could we see post 2030 a requirement for NGERs reporting to move to hourly matching and if so at what cost to businesses? This is absolutely one to watch for in future papers.

Another interesting area being discussed is around offshore generation or export of generation which may be outside of Australia’s territorial waters. Whilst the paper defers a decision on this to the future paper “Electricity and Energy Sector Plan” they cannot defer for long as Sun Cables development shows the scenario will be emerging possibly before the legislation.

The one area they did elaborate on in slightly more detail is the position around how storage will have eligibility within the scheme. We are all acutely aware that no renewable grid can exist without significant increases in storage capability but with this comes significant opportunity for the owners of these facilities to participate in schemes such as this. The Department have on a high level proposed that the certificates produced will be “proportional to the certificates surrendered relative to the charging debit”. A fair definition, but as with all things the devil is in the detail, and we will be watching for the subordinate legislation which will outline this more comprehensively.

Overall, the paper offers little additional substance to what we knew in December, it offers slight clarifications but with the anticipated enactment of the legislation in 2024, and commencement on the 1st January 2025 businesses need to be aware of the changes being discussed and that they are not only applicable to the Hydrogen Industry, regardless of where the Department have decided to place them in consultation.

AER’s State of the Energy Market in 2023

The AER released their annual ‘State of the Energy Market’ report last Thursday for 2023 for Australia’s electricity and gas markets. This included some relatively good news as the energy system in 2023 has “experienced fewer shocks and better outcomes than in 2022”. The 2023 wholesale electricity market prices have declined from the record prices in 2022, largely due to the government interventions in the coal and gas markets. Despite the decline, prices remain high by historical standards.

A media release by the AER accompanying the report stated, “Increases in wholesale energy prices were evident in retail prices, with estimated electricity bills rising between 9% and 20% in all NEM jurisdictions in 2022-23, impacting households already experiencing broader cost-of-living pressures. “

The report highlighted the pressures for investment in renewables to permit the retirement of coal generation. The report also commented on Liddell’s retirement in April 2023 going smoothly due to the new renewable generation and recent favourable market conditions.

The transition to new energy infrastructure faces several challenges:

  • The vast scale and required coordination of investments.
  • Rising costs in the infrastructure sector.
  • The need for community engagement in infrastructure planning and development.

The report highlighted the government involvement and support in investments including joint initiatives between Australia Government and state and territory governments.

The dynamic between electricity and gas markets is increasingly interconnected. As regions shift from gas demand to electricity demand (like replacing gas heating with electric air conditioning), it’s anticipated that pressure on gas markets will decrease, while electricity demand will surge. Factors like electric vehicle adoption will further influence electricity demand and the necessity for new infrastructure.

Furthermore, planning will now also factor in emissions reduction to serve the long-term interests of energy consumers, integrating it with other goals such as price, reliability, and supply security.

An interesting comment was made in the report executive summary highlighting concerns in the industry surrounding issues of competition in the market and market power outlined below.

“Our concerns are around the reduced liquidity of exchange-traded hedging products, the declining number of clearing service providers for electricity derivatives, and the levels of concentration of ownership of flexible generation capacity, particularly in NSW and Victoria. The AER’s anticipated new powers in relation to contract market monitoring will allow us to better monitor participant behaviour and gain sharper insights on issues of competition and market power.”

Powering Up: How Australia Is Revolutionising Its Electricity Grid

The launch of the Very Fast FCAS markets on 9 October 2023, 1300 (market time) will add two new FCAS markets, “very fast” Raise Contingency FCAS, and “very fast” Lower Contingency FCAS. These markets will enable frequency control by providing full active power response within 2 seconds, as opposed to the existing 6 seconds with the “fast” services. With the ability to respond to changes in power supply and demand within a second, these markets will provide a much-needed boost to the resilience of the National Electricity Market (NEM). As we move towards a future increasingly powered by renewable energy sources, the importance of maintaining a stable and secure power supply becomes even greater.

However, not everyone is convinced that the introduction of Very Fast FCAS markets is a positive development. Some critics argue that the increased competition created by these markets could drive down prices, potentially leading to lower revenues for generators and less investment in new capacity. There are also fears that the faster response times required by Very Fast FCAS markets may introduce technical challenges and increase the risk of errors or failures in the system. Furthermore, some stakeholders worry that the introduction of Very Fast FCAS markets represents a case of “scope creep,” where changes to the Market Ancillary Services System (MASS) exceed the original intent of the review and encroach on other areas of the NEM.

Despite these concerns, many see the benefits of Very Fast FCAS markets outweighing the drawbacks. By preparing for these changes now, businesses can take advantage of the opportunities presented by a more responsive and agile power grid.

In addition, the Department of Climate Change, Energy, the Environment, and Water is currently seeking feedback on its proposed Renewable Electricity Guarantee of Origin (REGO) scheme, which was originally proposed in Q4 2022, and aims to provide a stable framework for investors in the renewable energy sector.

The REGO scheme builds upon the existing Large-scale Generation Certificate (LGC) model but includes several key improvements. Firstly, it allows for greater transparency in reporting Scope 2 electricity emissions, making it easier for companies to demonstrate their commitment to sustainability. Secondly, it provides a long-term vision for the integration of offshore energy generation, improved electricity storage solutions, and distributed energy resources. Finally, it enables policymakers to adapt to changing market conditions and implement new policies as needed.

Another important development in the NEM is the Australian Energy Market Commission’s (AEMC) draft report on the Retailer Reliability Obligation (RRO). The RRO was introduced in 2019 to address concerns about the reliability of the power grid as the NEM transitions away from traditional fossil fuel-based generation towards cleaner, more intermittent sources of energy. Under the RRO, retailers must hold sufficient supplies of reliable generation and demand management resources, such as battery storage, pumped hydro storage, and demand response mechanisms, to meet customer demand during periods of peak usage.

While the RRO has been successful in encouraging retailers to invest in reliable resources, certain issues remain that need to be addressed. For instance, the current triggers for the RRO can create perverse incentives for retailers to over-invest in expensive peaking generators rather than cheaper, more efficient alternatives. Additionally, there are concerns that the RRO does not adequately account for the variability of renewable energy sources, leading to unnecessary expenditure on backup generation.

To address these problems, the AEMC’s draft report proposes several changes to the RRO. One suggestion is to replace the existing T-1 trigger, which is based solely on forecast demand, with a hybrid trigger that takes into consideration both forecast demand and actual supply. This change should help prevent situations where retailers are incentivised to overspend on backup generation due to overly conservative demand forecasts. Other recommended adjustments include allowing retailers to use non-generation sources of supply, such as demand response, to meet their obligations, and introducing an explicit mechanism for determining the reliability standard. Feedback on the draft is due by 2 November 2023, with the final report expected to be released in February 2024.

Overall, the launch of the Very Fast FCAS markets, the development of the REGO scheme, and the proposed modifications to the RRO form part of a broader effort to create a more reliable, resilient, and sustainable power grid for all Australians. While there may be disagreement around the specifics of each proposal, few dispute the urgent need for reform if we are to achieve our climate goals while keeping the lights on and the economy humming.