The proposed introduction of an emissions objective into the National Energy Objectives flagged by Energy Ministers at their meeting on August 12, 2022, would represent a significant shift in how long-term consumer interests are defined in the National Electricity Objective (NEO), National Gas Objective (NGO), and National Energy Retail Objective (NERL) (National Energy Objectives), writes David Northcott, senior manager at Rennie Partners.
The National Energy Objectives are high-level principles that sit within the national energy legislation for electricity, gas, and retail markets that came into effect in 2005, 2008 and 2012 respectively. This national legislation is adopted in a largely uniform manner by the National Electricity Market (NEM) jurisdictions (NSW, Queensland, Victoria, South Australia, and Tasmania) under the Australian Energy Market Agreement.
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The drafting energy objectives across markets is broadly similar—and is concerned with promoting, “efficient investment in, and efficient operation and use of, energy services for the long-term interests of consumers of energy with respect to price, quality, safety, reliability and security of supply of energy”.[1]
The objectives provide overarching guidance to relevant statutory authorities as to how they must perform their core functions across regulated gas and electricity markets in the NEM and limited gas networks in Western Australia. For example:
- The Australian Energy Regulator (AER) (and in some cases the Economic Regulation Authority (ERA) must exercise its economic regulatory functions (e.g. the making of revenue determinations for regulated electricity and gas networks) having regard to the NEO or NGO.
- The National Competition Council must have regard to the NGO in making coverage recommendations under the National Gas Law.
- The Australian Energy Market Commission must have regard to the Energy Objectives in making decisions related to rule change applications to ensure any changes contribute to the achievement of relevant National Energy objectives.
- The Energy Security Board (ESB) must only make recommendations for changes to the National Electricity Rules to Energy Ministers where it is satisfied they are consistent with the NEO.
- The Australian Energy Market Operator (AEMO) must have regard to the NEO in carrying out its functions under the national framework.
Past interpretation of National Energy Objectives
Past interpretation of the NEO and NGO has emphasised economic efficiency as the primary means to achieve a limited number of consumer interests specific to electricity and gas supply (price, quality, reliability, and security); however, disagreement has arisen between interested parties in relation to how these interests should be balanced and prioritised, and the optimal period over which benefits should be realised by market participants.
Later decisions of the Australian Competition Tribunal (Tribunal) in relation to AER (and ERA) determinations for regulated gas and electricity networks emphasise that different regulatory decisions may yield similarly ‘efficient’ outcomes while having different ‘long-term’ impacts on consumer interests. This underscores that interpretation and application of the National Energy Objectives often involves a trade-off between more immediate consumer benefits such as price reductions, and investment considerations that may benefit reliability and security of services and the system over the longer term.
Interpretative considerations for an “emissions objective”
It is not clear how jurisdictions plan to insert an emissions element into existing National Energy Objectives, but a reasonable approach would not upend the current priority given to efficiency, but instead might place emissions as another long-term consumer interest to be balanced with existing interests of price, quality, reliability, and security.
Notwithstanding the historical difficulty that decision makers have faced balancing existing consumer interests, an approach that saw emissions inserted next to other consumer interest would require statutory decision makers to find a way to compare existing interests and the new emissions interest. Statutory bodies would need to build a suitable methodology to undertake this balancing act, comprising of the following key elements:
- What is the source of the emissions element in the objective: existing consumer interests such as reliability and security are identified by reference to relevant reliability settings and technical requirements within the regulatory framework. The source of the emissions interest would likely be a nationally legislation emissions target, but it may also be necessary to identify expectations of the energy sector towards meeting the legislated target.
- What is the impact of the statutory decision on emissions: while existing interests are directly related to the market, and can be quantified (though not without disagreement) with some certainty, emissions impacts will, in many cases, be one step removed from a decision made by the relevant statutory body. Quantifying emissions impacts will therefore require careful consideration of the causative relationship between any decision and the emissions impacts.
- What is the priority of the emission objective relative to other consumer interests: current drafting of the National Energy Objectives provides no guidance on relative priority afforded to price, quality, reliability, and security elements. If a particular decision would mean an emissions benefit, but raise prices or reduce reliability, the statutory body would need to decide if such a decision would be in the long-term interests of consumers. For example, an emission benefit may provide grounds for the AER or the ERA to allow a regulated network an additional capital or operational expenditure allowance, while also leading to higher network tariffs. Decision makers would also need to make a call on whether an increase to the emissions reduction ambition should increase the priority afforded to the emissions interest relative to other elements.
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The other elephant in the room for Energy Ministers will be how any emissions objective will interact with the urgency of ensuring sufficient east coast gas supply. It would be disingenuous to suggest that these two reforms are inconsistent in the short term to medium term, as an emissions objective should support nuanced and longer-term decision making, however, there is clearly the risk that an emissions objective may directly, or indirectly, accelerate electrification of the system and a move the system away from gas in the medium term.
Jurisdictions have evidently come a long way from the sentiment expressed by the South Australian energy Minister at the time the NEO was introduced that, “Environmental and social objectives are better dealt with in other legislative instruments and policies which sit outside the National Electricity Law”.[2] An emission objective is certainly feasible as part of greater government transition ambition, but its framing needs to carefully considered in order to provide clear guidance to statutory bodies and the Australian energy markets that rely upon transparent decision making.
[1] The NEO is related to electricity services, and the NGO to natural gas services
[2] Second Reading Speech, National Electricity (South Australia) National Electricity Law (Miscellaneous Amendments) Amendment Bill 2007 (SA)
