Australia: What is next for the National Energy Guarantee (NEG)?

What's happened at the Federal level?

Speaking at a press conference yesterday, Prime Minister Malcolm Turnbull has announced that the introduction of the much anticipated Commonwealth Bill containing the emissions reduction target for the National Energy Guarantee (NEG) has been put on hold.

As originally proposed, key elements of the NEG which were to be within the remit of Commonwealth legislation included:

  1. what the emissions reduction target will be and how/when it will be reviewed;
  2. exemptions for emissions-intensive trade-exposed (EITE) activities; and
  3. the use of Australian Carbon Credits Units (ACCUs) to offset liable entities' emissions reduction obligations.

While the future of the NEG now appears uncertain, Prime Minister Turnbull appears to have ruled out the possibility of putting the emissions reduction target in regulations, rather than Commonwealth legislation as was originally proposed.

Crucially, the ambition level for the emissions guarantee remains a contested feature of the NEG between all factions of politics. The Commonwealth Government was targeting a 26% reduction on 2005 levels by 2030, with a review in 2024. However, at the Clean Energy Summit in Sydney earlier this month, Shadow Minister for Climate Change and Energy, the Hon Mark Butler MP, reaffirmed that the Labor Party will strongly oppose the Coalition's target and push for a 45% reduction on 2005 levels by 2030.

The Prime Minister's decision to hold back the draft Commonwealth NEG legislation indefinitely, follows the full Coalition party room's adoption of the NEG as its official energy policy just last week.

What's happened at the State/Territory level?

On 10 August 2018, the State, Territory and Federal Energy Ministers which make up the COAG Energy Council (Energy Council) met to consider the final design of the NEG and its implementation through the State-based National Electricity Law (NEL).

The Energy Council agreed to progress the design of the NEG and draft legislation to amend the NEL was released for consultation the following day: National Electricity (South Australia) (National Energy Guarantee) Amendment Bill 2018 (NEL Bill).

The NEL applies in each State and Territory comprising the national electricity market (NEM). Accordingly, in order for the amendments to the NEL to go through, all of the NEM jurisdictions would need to support the NEG. However, without any certainty around the Commonwealth Government's position in relation to key issues such as the emissions reduction target, it remains unclear whether the State and Territory Energy Ministers will sign off on the NEL Bill.

The NEL Bill, as publicly released, sets out:

  1. who will be liable under the reliability and emissions reduction requirements; and
  2. how those mechanisms will work, including the compliance and penalty framework.

The NEL Bill also flags where additional provisions relating to the implementation of the NEG will be set out in the National Electricity Rules (NER), which sit under the NEL.

The most significant design features of the proposed emissions reduction and reliability requirements in the NEL Bill are identified in the table below.

Key features of the NEL Bill

Emissions reduction requirement

Commences at same time as Commonwealth legislation.

How it works Design features in the NEL Maximum penalties

Liable entities will be required to ensure that the emissions intensity of their liable load is not more than the electricity emissions intensity target set by the Commonwealth Government for each financial year.

Retailers and market customers will be liable entities.

  • Emissions register – all NEM generation and associated emissions will be allocated to liable entities in an emissions register maintained by AEMO. The register will reflect the contractual arrangements between generators and liable entities.
  • Emissions intensity – a liable entity's emissions intensity will reflect its preliminary emissions intensity (based on its allocated emissions in the emission register), adjusted for whether the liable customer has carried-forward overachievement or deferred under-achievement from a previous compliance year and any available offsets (see "Offsets" below).
  • Offsets – A liable entity can elect to reduce its emissions intensity by purchasing offsets (ie. ACCUs) as permitted by Commonwealth legislation and in accordance with the NER. The NER may also require or permit liable entities to adjust their emission intensity by:
    • carrying-forward all or some of their emissions overachievement from the previous compliance period; or
    • deferring all or some of their emissions under-achievement to the next compliance period.
  • Liable load – a liable entity's "liable load" will be calculated based on the quantity of electricity purchased from the NEM, plus any behind the meter generation. Any EITE exempt load and GreenPower load will not count towards an entity's liable load.
  • $100 million for a body corporate
  • $1 million for a natural person

Reliability requirement

Commences on assent of the NEL Bill.

How it works Design features in the NEL Maximum penalties

Liable entities will be required to ensure that their net contract position for trading intervals in NEM regions for which a reliability gap is forecast will cover their share of the forecast one-in-two year peak demand.

Retailers and market customers in NEM regions where a T-3 reliability instrument applies will be liable entities.

  • T-3 reliability trigger - If AEMO has identified a material reliability gap in its forecast 3 years out, the AER will be required to determine whether to exercise the T-3 reliability trigger. The materiality threshold will be set out in the NER; however, the AER will have discretion as to whether or not to trigger the obligation. If it does so, a T-3 reliability instrument will apply for the relevant trading period/s.
  • T-1 reliability trigger - If a T-3 reliability instrument applies and AEMO has identified the material reliability gap persists 1 year out, the AER will be required to determine whether to exercise the T-1 reliability trigger. If it does so, a T-1 reliability instrument will apply and all liable entities will be required to demonstrate to the AER that their net contract position is compliant with the reliability requirement.
  • Exceptional circumstances - In order to address concerns raised at the 10 August 2018 Energy Council meeting that a reliability gap could emerge at any time, the draft NEL Bill also includes a power for the NER to identify when the AER can exercise the T-1 reliability trigger in circumstances where the T-3 reliability trigger has not previously been exercised.
  • Opting-in - Non-liable entities will be able to opt-in to the reliability requirement providing they purchase their electricity through a retailer and are above a threshold of annual consumption of electricity to be prescribed in the NER.
  • $1 million for a first breach
  • $10 million for subsequent breaches

What's next for the NEG?

At the State/Territory level, the Energy Security Board (ESB) is currently seeking feedback on the draft NEL Bill and submissions will remain open until 12 September 2018.

In addition, the ESB has released a policy paper setting out additional options for activating the reliability requirement under the NEL (Reliability Options Paper), including whether:

  • there should be an additional trigger at T-5 to give liable entities more time to respond to a forecast gap; and
  • the T-3 trigger should be removed so that liable entities are responsible for monitoring AEMO's forecasts and managing their contract positions accordingly.

Submissions on the Reliability Options Paper will remain open until 5 September 2018.

Following the consultation periods on the draft NEL Bill and the Reliability Options Paper, the final proposed legislation to amend the NEL is to be the subject of a further Energy Council meeting in September or October this year. All things going to plan, the Energy Council is expected to seek to implement the NEL Bill before the end of 2018.

The draft rule changes proposed for the NER are to be presented to the Energy Council at its April 2019 meeting. If agreed, the NER rule changes will to be implemented later in 2019.

At this stage, until the Commonwealth Government seeks to advance the NEG legislation at the Commonwealth level, it remains unclear how the State-level processes that have already commenced will play out. However, it remains likely that consultation on the NEL Bill and the Reliability Options Paper will be allowed to progress.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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