Reforming the National Energy Market: Should the National Electricity Objective Be Amended or Can Albertan Energy Law Provide Guidance?

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Reforming the National Energy Market: Should the National Electricity Objective Be Amended or Can Albertan Energy Law Provide Guidance?

In November 2016, Prime Minister Malcolm Turnbull ratified the Paris Agreement on climate change, which formalised Australia’s target to reduce greenhouse gas emissions by 26-28 per cent below 2005 levels by 2030.1 However, recent modelling suggests that the Federal Government’s suite of ‘direct action’ climate change policy, including the Emissions Reduction Fund 2 and the Renewable Energy Target (‘RET’),3 will be insufficient to meet this target.4 Therefore, significant policy reform will be required for Australia to meet its international obligations. The focus of such reform must be centred on electricity generation, which constitutes Australia’s largest source of emissions.5 Regardless of how climate change policy is reformed, its success will be dependent on how well it integrates with the National Energy Market (‘NEM’).6 The integration of climate and energy policy is vital not only to ensure that Australia’s international obligations are met, but to maintain electricity security and affordability as climate policy changes the mix of electricity generation sources.7 As a result, there have been many calls for the NEM to be reformed.8 There are various aspects of the NEM that may prevent the integration of climate and energy policy.9 However, this essay will focus on whether the National Electricity Objective (‘NEO’) constitutes a barrier to the integration of climate and energy policy and whether it should be amended.

How is the NEM governed?

The National Electricity Law (‘NEL’)10 establishes the national legal framework for electricity in Australia.11 There are various bodies that operate within the NEM. First, the Council of Australian Governments (‘COAG’) Energy Council is the main policy maker in the NEM.12 Second, the Australian Energy Market Commission (‘AEMC’) is the statutory authority responsible for making the National Electricity Rules (‘NER’)13 and market development.14 Third, the Australian Energy Market Operator (‘AEMO’) is a corporate entity responsible for the operation of the NEM, improving power system security15 and preparing the National Transmission Network Development Plan (‘NTNDP’).16 Fourth, the Australian Energy Regulator (‘AER’) is responsible for monitoring compliance with the NEL and NER.17

The objective of the NEL, the NEO, is: ‘… to promote efficient investment in, and efficient operation … of, electricity services for the … long term interests of consumers of electricity with respect to price, quality, safety, reliability and security of … electricity …’18 The AEMC,19 AEMO 20 and AER 21 must perform their functions in accordance with the NEO.

Does the NEO prevent the integration of climate and energy policy?

There is an evident lack of an environmental objective relating to emissions reduction or increasing renewable energy in the NEO.22 The above governance framework suggests that the NEM bodies are significantly influenced by the NEO. It has thus been argued that the absence of an environmental objective within the NEO prevents climate policy from filtering down into the NEM and being effected by its bodies.23 This argument will be tested by considering the nature of policy development, rule-making and transmission planning within the NEM.

Policy development

Despite the absence of an environmental objective in the NEO, the COAG Energy Council (‘the Council’) has recently demonstrated a strong commitment to reforming the NEL to facilitate the execution of climate policy. One of the objectives of the Council’s reform agenda was to improve ‘the alignment of carbon and energy policy settings’.24 To fulfil this the Council is, for example, developing frameworks for the deployment of solar battery storage products and investigating how the AEMO’s transmission planning can better reflect climate policy.25 In addition, the Council is striving to improve national energy productivity, one of the benefits of which includes emissions reduction.26 It stated that the co-ordination of energy and climate policy would ensure that emissions reduction occurs at least cost to consumers.27 Moreover, the Council initiated an independent review into the current state of energy security and governance within the NEM and the integration of federal climate and energy policy.28

This demonstrates that policy development within the NEM is very much informed by the NEO. Energy reform that had the effect of reducing emissions or promoting renewable energy was only discussed if it advanced the long-term interests of consumers. This suggests that policy development is limited by the NEO, which Kallies argues may hinder energy reform supporting renewable energy.29  Nonetheless, the integration of climate and energy policy remains a priority of the Council even if it will endeavour to do so, consistently with the NEO, at least cost to consumers.

Rule-making

The AEMC can only make a rule if it is satisfied that the rule will likely contribute to the achievement of the NEO.30 The AEMC may make a rule at the request of any person yet retains the discretion to make a ‘more preferable rule’ if such a rule would better contribute to the achievement of the NEO.31 This statutory duty is a significant barrier to the integration of climate and energy policy.32 This is typified by the AEMC’s rejection of the former Council’s rule change application in relation to Scale Efficient Network Extensions (‘SENEs’). A SENE refers to an extension to a transmission network which can facilitate the future connection of more than two generating systems.33 The rule change would have allowed large-scale renewable energy generators to share network augmentation and connection costs,34 thereby promoting investment in renewable energy by shifting the cost burden from generators to consumers.35 However, the AEMC significantly scaled back the proposal, failing to implement the cost-sharing framework.36 Key to this outcome was the AEMC’s conclusion that the final rule would better contribute to the achievement of the NEO,37 as it ensured that risk efficiently remained with investors and promoted competition in funding.38 This demonstrates that the NEO can prevent rule changes that deliver important emissions reduction benefits.39

The AEMC has delivered important rule changes that promote demand-side participation, the ability of consumers to make decisions regarding their energy consumption.40 These are crucial in mitigating the impacts of climate policy on consumers, like increased electricity prices.41 For example, the AEMC made a rule change enabling consumers to more easily access metering services and thus reduce electricity bills.42 However, these rule changes have only occurred because they have delivered strong economic benefits. It is unlikely that rule changes that substantially promote renewable energy can be made, as these may not necessarily maximise the long-term interests of consumers which is at odds with the AEMC’s statutory duty to make rules that achieve the NEO.

Transmission planning

Transmission planning is vital for integrating more renewable energy into the NEM as most renewable energy generation in Australia will be intermittent in nature.43 The AEMO, through its annual NTNDP, informs investment decisions regarding new transmission infrastructure by modelling opportunities for future development.44 By incorporating current and predicted emissions reduction policy into its modelling,45 the AEMO in its 2016 NTNDP made interconnector augmentation recommendations that would grant states better access to energy resources across the NEM as coal plants retire.46 This suggests that the AEMO is responsive to government policy, despite being required to exercise its functions in conformity with the NEO.47

However, the regulatory investment test for transmission (‘RIT-T’), the primary mechanism that regulates transmission development, is a significant barrier to the expansion of renewable energy.48 Network businesses must complete the RIT-T in order to identify the development option that maximises the net economic benefit to electricity suppliers and consumers.49 Yet ultimately the final decision to develop remains with the network business,50 and investment cannot be compelled in areas identified by the AEMO as necessary to facilitate the expansion of renewable energy generation.51 Furthermore, the Clean Energy Finance Corporation argued that the benefits that the RIT-T considers are too narrow and fail to incorporate a range of benefits, like how interconnector augmentation developments deliver better access to renewable energy resources.52 Although the Council acknowledged that the AER’s RIT-T Application Guidelines could be amended to account for a broader range of benefits, including those relating to climate goals,53 it is unlikely that such a change could occur with the current NEO. This is because the AEMC and AER would likely reject a change to the RIT-T rules and Guidelines respectively because the incorporation of non-market benefits would generate economic inefficiency by preventing electricity being supplied at least cost to consumers.

Is amending the NEO the answer?

What is evident from the foregoing is that the NEO forms a significant barrier to the integration of climate and energy policy. Although the Council has pushed for reform that would promote the expansion of renewable energy, these rule change proposals have been blocked by the AEMC because they do not maximise economic efficiency as defined by the NEO. As a result, it seems that little change could be made to the rules regulating transmission investment. Crossley concluded that the NEO prevents the government, through the Council, from giving expression to environmental policy.54 Wright thus argued that the NEO should be amended to include an ‘environmental sustainability’ objective, which could be defined to include promoting emissions reduction and increasing renewable energy.55

However, what is missing from the literature is a discussion of how such an amendment would impact on the functioning of the NEM. The purpose of the NEL was to ensure the efficient operation of the NEM, as measured according to the long-term interests of consumers.56 The AEMC stated that the advantage of the NEM’s governance structure is that it consists of independent market bodies with clearly delineated, limited responsibilities, whilst the government, responsible for ‘high-level policy and broader social value judgments’, remains external to the market.57 This allows the market bodies to focus on maintaining economic efficiency within the NEM to ultimately promote the long-term interests of consumers.58 The government on the other hand, as the elected polity, is in the best position to manage multiple and potentially conflicting objectives because it is experienced in making value judgments.59 The AEMC argued that the NEM bodies are not suited to making these judgments because they are specialised in conducting objective assessments based on economic considerations.60

Wright disagrees with this line of reasoning because he argues that the NEM bodies already balance conflicting objectives through their decision-making.61 For example, trade-offs between maintaining low electricity prices and ensuring reliable electricity supply may be required.62 However, what this argument fails to recognise is that electricity prices and reliability both directly affect the long-term interests of consumers. Environmental sustainability, although indirectly affecting consumers, cannot be said to be a part of the class of objectives that affect the long-term interests of consumers in the direct economic sense. The implication of this is that if an environmental sustainability objective was incorporated into the NEO it is likely that, given the significant difference between the nature of environmental sustainability and the other objectives, the NEM bodies would be required to resolve ‘major policy trade-offs’.63 This is not ideal because the NEM bodies are unelected and are not experienced in making these judgments. Hence, there is much force to the argument that introducing an environmental objective would divert the focus of energy governance from a ‘simple, clear and shared objective’.64

Yet the question remains: can climate policy be better effected without significantly changing the way in which the NEM is governed? Although it will be necessary to tailor a solution to Australia’s unique energy market, international examples may provide guidance.65 Although Alberta is a province in Canada, its electricity market is very similar to Australia’s national market. It is governed by four agencies, including the Alberta Electric System Operator (‘AESO’), which have similar roles to the NEM bodies.66 In addition, similar to the NEO the purposes of the Electric Utilities Act, the Albertan equivalent of the NEL, make no reference to any environmental objectives and are focused on maintaining economic efficiency.67 In 2016, the Albertan Government launched the Renewable Energy Program to facilitate the province reaching its renewable energy target.68 The Program is run by the AESO and will facilitate investment in renewable energy via a competitive bidding process.69 The Renewable Electricity Act was passed to implement this program,70 and states that the environment minister may direct the AESO to develop a proposal for a program to promote large-scale renewable energy generation 71 which ultimately must be approved by the minister.72 Further, the Act gives the minister the power to establish renewable electricity program objectives that promote environmental goals 73 that the AESO must follow in developing a renewable energy program.74

Although the effectiveness of this arrangement has not yet been assessed, the recent reform to the Albertan electricity market demonstrates that there may be other ways to better integrate climate change policy with energy law. Adopting a similar approach in Australia, the government could pass an act permitting the Council to direct the AEMC to develop mechanisms to promote renewable energy generation and develop environmental goals that the AEMC must follow in developing these mechanisms. Just as the Electric Utilities Act was amended,75 the NEL would need to be amended to specify that the AEMC’s statutory duty to have regard to the NEO does not apply when carrying out its duties under the new act. This arrangement would deliver many benefits. First, initiatives made by the AEMC to complement broad climate policy like the RET would be directed by the government,76 meaning that the NEO would no longer prevent energy reform that delivers important climate goals but does not necessarily further the NEO’s narrow conception of economic efficiency. This framework would allow the government to introduce a cost-sharing scheme for transmission development, and grant renewable energy generators guaranteed and/or priority access to the grid which has, for example, been adopted by EU law.77 Second, the government would benefit from the AEMC’s expertise in energy reform. Finally, as the NEO would remain unchanged, the general governance of the NEM would remain focused on promoting economic efficiency.

Conclusion

The NEO plays a significant role in influencing the decision-making of market bodies within the NEM. The Council, despite the restrictive nature of the NEO, has conducted various reviews into the integration of climate and energy policy and has made rule change proposals that would facilitate the expansion of renewable energy. However, these proposals have been changed by the AEMC in order to give better effect to the NEO. Further, the current regulatory framework for transmission developments needs to be reformed to better facilitate renewable energy investment. Yet this is unlikely to occur given the AEMC and AER’s statutory duties to act conformably with the NEO. It is clear that reform to the governance structure of the NEM is required to better integrate climate and energy policy to ultimately ensure that Australia meets its international obligations under the Paris Agreement and that the associated impacts on energy security and prices are minimised. However, there are many issues associated with amending the NEM that need to be investigated further. A potential alternative could involve adopting a governance structure similar to that implemented in Alberta. This would allow the government to implement energy reform that gives effect to the environmental outcomes intended for by climate policy, without compromising the market bodies’ focused role in maintaining economic efficiency within the NEM.

1 Prime Minister of Australia, ‘Ratification of the Paris Agreement on Climate Change and the Doha Amendment to the Kyoto Protocol’ (Media Release, 10 November 2016) <https://www.pm.gov.au/media/2016-11-10/ratification-paris-agreement-climate-change-and-doha-amendment-kyoto-protocol>.

2 Department of the Environment and Energy, Emissions Reduction Fund  <http://www.environment.gov.au/climate-change/emissions-reduction-fund>.

3 Department of the Environment and Energy, The Renewable Energy Target (RET) Scheme <http://www.environment.gov.au/climate-change/renewable-energy-target-scheme>.

4 RepuTex, ‘Framing Australia’s 2030 Energy & Climate Policy Mix’ (September 2016) 2.

5 Department of the Environment and Energy, ‘Quarterly Update of Australia’s National Greenhouse Gas Inventory: June 2016’ (December 2016) 9.

6 Anne Kallies, ‘A Barrier for Australia’s Climate Commitments? Law, the Electricity Market and Transitioning the Stationary Electricity Sector’ (2016) 39 University of New South Wales Law Journal 1547, 1549-50.

7 Alan Finkel et al., ‘Independent Review into the Future Security of the National Electricity Market’ (Preliminary Report, December 2016) 23.

8 Katharine Murphy, ‘Open Letter Urges Malcolm Turnbull to Deliver Energy Market Reforms’, The Guardian (online), 5 April 2017 <https://www.theguardian.com/australia-news/2017/apr/05/open-letter-urges-malcolm-turnbull-to-deliver-energy-market-reforms>.

9 Kallies, above n 6.

10 Contained in the NEL which is a schedule to National Electricity (South Australia) Act 1996 (SA), which has been adopted through implementing legislation in Victoria, Queensland, NSW, SA and the ACT.

11 Anne Kallies, ‘The Impact of Electricity Market Design on Access to the Grid and Transmission Planning for Renewable Energy in Australia: Can Overseas Examples Provide Guidance?’ (2011) 2 Renewable Energy Law and Policy Review 147, 148.

12 Ibid 149.

13 AEMC, National Electricity Rules, Version 90, 6 April 2017.

14 NEL s 29(1).

15 NEL s 49(1).

16 NEL s 49(2).

17 NEL s 15.

18 NEL s 7.

19 NEL s 32.

20 NEL s 49(3).

21 NEL s 16(1)(a).

22 Glen Wright, ‘Reforming the National Electricity Objective’ (Discussion Paper, March 2013) 3.

23 Kallies, above n 6, 1577.

24 COAG Energy Council, ‘Reform Agenda Implementation Plan – Progress Report’ (23 July 2015) 3.

25 Ibid.

26 COAG Energy Council, ‘National Energy Productivity Plan 2015-2030: Boosting Competitiveness, Managing Costs and Reducing Emissions’ (Annual Report, 2016) 7.

27 Ibid 5.

28 COAG Energy Council, ‘Blueprint for Energy Security in the National Electricity Market’ (7 October 2016).

29 Kallies, above n 6, 1577.

30 NEL s 88(1).

31 NEL s 91A.

32 Penelope Crossley, ‘Review of the Institutional Governance Arrangements of the National Electricity Market’ (Report for the Public Interest Advocacy Centre, May 2015) 37.

33 NER r 5.19.1

34 Wright, above n 22, 7.

35 Glen Wright, ‘Facilitating Efficient Augmentation of Transmission Networks to Connect Renewable Energy Generation: The Australian Experience’ (2012) 44 Energy Policy 79, 86.

36 Ibid.

37 AEMC, National Electricity Amendment (Scale Efficient Network Extensions) Rule 2011, 30 June 2011, i-ii.

38 Wright, above n 35, 86.

39 Ibid 89.

40 AEMC, ‘Review of Demand-Side Participation in the National Electricity Market’ (Final Report, 27 November 2009) vi.

41 AEMC, ‘Power of Choice Review – Giving Consumers Options in the Way They Use Electricity’ (Final Report, 30 November 2012) 1, 7.

42 AEMC, National Electricity Amendment (Expanding Competition in Metering and Related Services) Rule 2015, 28 November 2015, iii-iv.

43 Lee Godden and Anne Kallies, ‘Electricity Network Development: New Challenges in Australia’ in Martha Roggenkamp et al. (eds), Energy Networks and the Law: Innovative Solutions in Changing Markets (Oxford University Press, 2012) 305.

44 Ibid 306.

45 AEMO, ‘National Transmission Network Development Plan’ (December 2016) 18.

46 Ibid 28-32.

47 NEL s 49(3).

48 Godden and Kallies, above n 43, 306.

49 NER 5.16.1(b).

50 Kallies, above n 11, 155.

51 Godden and Kallies, above n 43, 306.

52 Clean Energy Finance Corporation, ‘CEFC Response to the RIT-T Review Consultation Paper’ (20 October 2016) 4.

53 COAG Energy Council, ‘Review of the Regulatory Investment Test for Transmission’ (6 February 2017) 46.

54 Crossley, above n 32, 37.

55 Wright, above n 22, 11.

56 South Australia, Parliamentary Debates, Legislative Council, 16 October 2007, 886 (Paul Holloway).

57 AEMC, ‘Applying the Energy Objectives’ (1 December 2016) 3.

58 Ibid.

59 Ibid 10.

60 Ibid.

61 Wright, above n 22, 13.

62 Ibid.

63 Michael Vertigan, George Yarrow and Euan Morton, ‘Review of Governance Arrangements for Australian Energy Markets’ (Final Report, October 2015) 24.

64 Ibid.

65 Kallies, above n 11, 156.

66 AESO, Guide to Understanding Alberta’s Electricity Market <https://www.aeso.ca/aeso/training/guide-to-understanding-albertas-electricity-market/>.

67 Electric Utilities Act, SA 2003, c E-5.1, s 5.

68 Alberta Government, Renewable Electricity Program <https://www.alberta.ca/renewable-electricity-program.aspx>.

69 Ibid.

70 Renewable Electricity Act, SA 2016, c R-16.5.

71 Ibid s 3(1).

72 Ibid s 5(1).

73 Ibid s 3(2)(a).

74 Ibid s 4(d).

75 Electric Utilities Act, SA 2003, c E-5.1, ss 16(2), 20(1)(k.1).

76 Kallies, above n 11, 155.

77 Directive 2009/28/EC of 23 April 2009 on the Promotion of the Use of Energy from Renewable Sources and Amending and Subsequently Repealing Directives 2001/77/EC and 2003/30/EC [2009] OJ L 140/19, art 16.

Georgia Pick

© Kingfisher Law 2017

 

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