Considerations for an Emissions Amendment to the National Electricity Objective
Introduction
The National Electricity Objective (NEO), introduced into the National Electricity Law (NEL) in 2005 provides direction to the Australian Energy Regulator (AER), the Australian Energy Market Commission (AEMC), the Energy Security Board (ESB), and the Australian Energy Market Operator (AEMO) as to how they carry out core statutory functions.
At its meeting of 12 August, COAG Energy Ministers agreed, amongst other actions, to, “put an emissions objective into the National Energy Objectives”. This is in contrast to earlier views on the National Electricity Objective that environmental or social objectives should be left to other instruments outside those governing the National Electricity Market (NEM).
There are three separate energy objectives that apply to competitive national electricity, gas and retail markets established under the Australian Energy Market Agreement (AEMA): the NEO, the National Gas Objective (NGO), and the National Energy Retail Objective. While broadly similar in principle, this article will focus on the NEO.
Past interpretation of the NEO has emphasised economic efficiency as a means to achieve a limited number of consumer interests specific to provision of electricity (price, quality, reliability and security), though disagreement has previously arisen in relation to what interests should be prioritised, and the period over which benefits should be realised.
The inclusion of an emissions objective, presumably sitting alongside existing consumer interests in the NEO, would require a shift in how statutory entities exercise their respective functions under the NEL, as well as consideration of how an emissions benefit should be quantified to allow comparison against other priorities.
Careful policy consideration and drafting of amendments is needed to avoid creating uncertainty for market bodies and industry.
Meeting of Energy Ministers on 12 August 2022
The change in tone that accompanied the communique from the first Energy Ministers’ meeting in June of this year was cemented at the meeting held last Friday, 12 August. This meeting evidenced that jurisdictions have now formed considerable consensus that a unified policy approach is required to efficiently decarbonise the energy sector in Australia.
There are several issues worthy of discussion coming out of the meeting, including whether the agreement for a new ‘National Energy Transformation Partnership’ will replace or amend the current version of the Australian Energy Market Agreement. Perhaps the most interesting first step of this partnership arrangement is to ‘fast track an emissions objective in the National Energy Objectives’.
Such an amendment would represent the first substantial change since the existing NEO replaced its predecessor (the National Electricity Market Objective) in 2008.
The inclusion of an emissions objective is perhaps unsurprising given the Federal Government’s proposed Climate Change Bill, and the net-zero commitments and transitional steps several states have taken recently, however, the implications of such a change need to be carefully considered in order to create clarity, rather than confusion, for the market.
What work does the NEO do in the National Electricity Market?
The NEO provides overarching guidance to the AER, the AEMC, the ESB and AEMO in the NEL as to how they must perform core functions.
The AER must exercise its economic regulatory functions in such a manner as to be consistent with the NEO. Importantly this includes the making of regulatory determinations for regulated Network Service Providers (NSPs), as well as the making of the Rate of Return Instrument which determines the rate of return on capital and imputation credits for regulated NSPs. It also influences AER decision on guidance material in relevant instances.
The AEMC must have regard to the NEO In performing or exercising any function or power under NEL or National Electricity Rules (NER), and must only make amendments to the NER where it is satisfied that such changes will contribute to the achievement of the NEO.
The ESB must only make NER rule change recommendations to Energy Ministers where it is satisfied they are consistent with the NEO.
AEMO must have regard to the NEO in carrying out its functions under the national framework. In contrast to the AER and AEMC, AEMO is not bound to seek achievement of the NEO in carrying out large components of its functions, although as we will see below, it is sometimes directed to consider the NEO under the NER.
While the NEO does not inform these functions to the total exclusion of other legal requirements, it is intended to carry significant influence on the broad discretion of relevant entities in many instances. For example, the AER acknowledges its indirect influence in relation to matters of network planning such as the application of the regulatory investment test for transmission and distribution.
The NEO also has specific application in some provisions of the NER as a means to direct the discretion of AEMO (Registration, Participant Fees under Chapter 2; metering procedures under Chapter 7), the AER (approval of model standing offers under Chapter 5A; NSP incentive schemes under Chapter 6 and 6A, various transitional provisions), and the Reliability Panel’s determination of protected events (Chapter 8). But given the length of the NER (v 179 stands at 1700 pages) the NEO seldom occurs, highlighting its main function as a guiding objective rather than hard constraint.
What does the NEO mean?
Ostensibly the NEO contains considerations that (in order) relate to economic efficiency, and long term customer interests that consists of a number of sub-elements (price, quality, safety, reliability and security) at both the customer and system level.
This view of the NEO is reflected in the both the extrinsic materials to the early versions of the National Electricity Law that introduced the NEO, and more recent guidance produced by the AEMC.*
The Second Reading Speech of the then South Australian Minister for Mineral Resources and Development (Minister) for the 2005 National Electricity (South Australia) (New National Electricity Law) Amendment Bill that introduced a similar predecessor to the NEO noted the National Electricity Market Objective, was economic in nature:
“The market objective is an economic concept and should be interpreted as such…If the National Electricity Market is efficient in an economic sense the long-term economic interests of consumers in respect of price, quality, reliability, safety and security of electricity services will be maximised.”
The Second Reading Speech given for the 2007 amending legislation that introduced the NEO as it exists today further reinforced this interpretation, with the Minster noting:
“The purpose of the National Electricity Law is to establish a framework to ensure the efficient operation of the national electricity market, efficient investment in, and the effective regulation of electricity networks….This (National Market) should be guided by an objective of efficiency that is in the long term interests of consumers.”
These materials support the proposition that economic efficiency is primary to the objective, and drives desired outcomes for consumers.
Further NEO interpretation through legal decisions
Prior to its abolition in 2017**, the limited merits review regime in the NEL provided a pathway for affected or interested persons to apply to the Australian Competition Tribunal (Tribunal) for review of some decisions of the AER, including those in respect of revenue or pricing determinations for NSPs. This provided an opportunity for both consumer groups and NSPs to challenge the decisions of the AER on grounds that an alternative to the decision of AER would better achieve the NEO.
The decisions arising from this review framework, and associated review processes under similar gas regulation, provide an insight into the interpretation of the NEO not dealt with in extrinsic material. This includes the concept of ‘efficiency’, and how secondary concepts contained in the definition of the NEO (price, quality, safety, reliability and security) which are to delivered by efficiency should be balanced and/or prioritised.
Efficiency: Several decisions confirm that the network regulatory regime under the NEL (and National Gas Law) achieves efficiency via the attempt to replicate the rewards and disciplines normally provided by a competitive market (see East Australian Pipeline (2007)).
In addition, following further amendments to the NEL in 2013 (Statutes Amendment (National Electricity and Gas Laws—Limited Merits Review) Act 2013) the Tribunal confirmed that different regulatory decisions could yield similarly ‘efficient’ outcomes but that these outcomes would, in turn, have different ‘long term’ impacts on consumer interests of price, quality, safety, reliability and security.
Consumer interests: Given that decisions with equally efficient outcomes can have different impacts on consumer interests, parties were able to take differing views on the appropriate balancing of these interests. Examples include consumer groups arguing that priority should be given to immediate price-based outcomes as a means to promote the interests of consumers. On the other hand, NSPs were able to argue the merits of safety and reliability of supply as a higher priority given the ‘long term’ requirement in the NEO (see Applications by Public Interest Advocacy Centre Ltd, Ausgrid, Endeavour Energy and Essential Energy (2015)).
Broadly, what this series of past decisions presents is that a reasonable interpretation of the NEO can be based on, unsurprisingly, a trade-off between more immediate consumer benefits (i.e. price) and longer-term network investment considerations that may benefit reliability and security.
Implications of an “emissions objective”
The most obvious implications of the inclusion of an emission objective in the NEO would be the potential impact on relevant functions of the AER, AEMC, AEMO, and the ESB.
A change in emphasis in the NEO may have direct impacts such as providing grounds for the AER to allow an NSP additional capital or operational allowance, or for the AEMC to make a rule change, on the basis such decision would facilitate an emissions reduction. This type of impact would also extend to the rules the ESB considered appropriate to bring to Energy Ministers.
Indirect impacts may also be substantial. For example, the AER has referenced the NEO in its Integrated System Plan guidance to AEMO on the selection of the Optimal Development Path. The NEO may also influence how AEMO weights the discretionary decisions it must make in its capacity as National Transmission Planner for the Integrated System Plan.
Obvious questions from a policy and/or drafting perspective that must be asked are:
What priority should an emissions objective (which is prima facie external to the electricity market) be given next to economic efficiency, and other sub-elements (price, quality, safety, reliability, security)?
How does an emissions objective relate to the long-term interests of consumers?
How should an emissions benefit be quantified in order to allow appropriate comparison to other competing factors?
Jurisdictions have evidently come a long way from the sentiment that prevailed under earlier governments that, ‘Environmental and social objectives are better dealt with in other legislative instruments and policies which sit outside the National Electricity Law’ (Second Reading Speech, National Electricity (South Australia) National Electricity Law (Miscellaneous Amendments) Amendment Bill 2007 (SA)). This does not mean an emission objective is not feasible as part of a revamped NEO but, given the historical interpretation of its constituent elements, introducing an emissions element into the NEO needs to carefully considered.
For more information, contact David Northcott at dnorthcott@renniepartners.com.au
* AEMC, Applying the Energy Market Objectives, 8 July 2019
** See the Competition and Consumer Amendment (Abolition of Limited Merits Review) Act 2017
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