INSIGHT

National Energy Guarantee - development of Emissions Requirement

By Anna Collyer
Climate Change Energy Environment & Planning Renewables Power

In brief

Following the recent release of the National Energy Guarantee High Level Design Document, Partner Anna Collyer and Senior Associate Karla Drinkwater report on the proposed Emissions Requirement of the National Energy Guarantee, which seeks to lower emissions in keeping with international commitments. This article considers developments in the Emissions Requirement's design since the initial Consultation Paper was released in February 2018, and is part of a series in which Allens examines aspects of the proposed National Energy Guarantee.

Background

If approved by the COAG Energy Council in August 2018, the Emissions Requirement component of the National Energy Guarantee (the Guarantee) is expected to be implemented in 2020, and will require entities registered as market customers in the National Electricity Market (NEM) to ensure that the average emissions intensity of their electricity load meets the threshold required to achieve the emissions target set by the Federal Government.

The emissions target is proposed to be set as a trajectory (comprising an initial 10-year target, with five-yearly reviews thereafter) and would be updated at predetermined intervals, as well as in response to demand forecast changes, with changes occurring with a minimum of five years' notice.

Design element updates

Reporting The High Level Design Document reveals the ESB has moved away from a physical contract-based scheme, and now proposes that the data reported under the National Greenhouse Energy Reporting Scheme (NGERS) (including generation and its associated emissions) be incorporated into the Emissions Requirement compliance registry, which will enable liable entities to claim, and generators to verify, generation (and its associated emissions) for compliance purposes.

Self-reporting by retailers and generators in this way, with the Australian Energy Regulator (the AER) holding audit rights to verify compliance, could be a useful compromise in terms of the regulatory burden on liable entities when compared with the register of contracts proposed in the Consultation Paper. Whether this approach does, in fact, have a lighter touch than a physical contract-based approach will depend on the detailed design of the registry and reallocation process, and how contract data on a 'generation settled basis' can be reported for both firm and non-firm contracts.

Controlling corporation approach In response to concerns raised by stakeholders about the effect that the Guarantee may have on competition in the National Electricity Market, the ESB proposes to adopt the NGERS concept of controlling corporation-based approach to reporting and compliance. The design paper indicates that emissions associated with generation owned by a vertically integrated retailer will automatically be allocated to that retailer for compliance purposes, and that the retailer may then reallocate emissions by further contracting.

While this approach may contribute to measures seeking to limit the impact of market concentration in the NEM, further clarification of how this approach is intended to work in practice may be required. Eg:

  • if the generation arm of a gentailer has contracted with a party outside the corporate group, that third-party retailer presumably is able to 'claim' that generation, meaning it would not be attributed to the gentailer's retail arm;
  • the automatic attribution of gentailer generation to its retail arm could be beneficial for the retail arm if the generation is predominantly renewable, meaning any unhedged load within the retail arm would get the benefit of lower emissions generation, while the deemed emissions intensity of the pool of unallocated energy may be higher as a result of that low emissions generation being automatically allocated to the retail arm;
  • if there is a surplus of generation in a gentailer's generation arm (once the retail arm's load and other third-party claims have been deducted), it is not clear whether the surplus would be considered unallocated energy or whether it would remain allocated to the retail arm;
  • if a gentailer generation surplus can be reclassified as unallocated energy, there is presumably an incentive for the gentailer to nominate generation with a higher emissions intensity and keep the lower emissions generation allocated to its retail arm;
  • if a gentailer generation surplus cannot be reclassified as unallocated energy (and remains with the retail arm), there would be a mismatch between the unallocated load volume and the unallocated energy, meaning the deemed emissions intensity of the unallocated loads may not be an accurate representation of the actual generation.

'Matching' loads with generation There is still fairly limited detail about how the ESB sees this working in practice, particularly regarding both firm and non-firm contracts. Presumably, the register will need to enable reporting to be done on a 'generation settled basis', to avoid an overly simplistic assumption that generation contemplated by a contract equals actual generation. While this is the case for non-firm contracts that simply follow the generation actually produced, firm contracts have no connection between the MWh to be settled and the MWh produced by the generator.

By way of example, there could conceivably be instances where the generation produced by a generator is different from that settled under its contract with a retailer. Eg during an outage, a generator (X) may elect to subcontract or back-to-back its obligation to generate under a contract with retailer Y. In this scenario, although 100 MW may have been settled under the contract between X and Y, 10 MW of that generation may have been produced by another generator (Z). In this circumstance, while retailer Y may claim 100 MW for compliance purposes in the registry, generator X could only verify 90 MW and would need to reallocate the other 10 MW claimed to generator Z.

If generator Z's facility is more emissions intensive than generator X's, this could have implications for retailer Y's compliance obligations, particularly if retailer Y only finds out about Z's involvement late in a compliance year.

Calculation of load A liable entity's load, for compliance purposes, will be calculated by reference to its wholesale purchases from the Australian Energy Market Operator, plus embedded generation and behind-the-meter consumption (eg rooftop solar and storage on households and businesses).

While the growth in recent years of behind-the-meter generation and advances in technologies facilitating the accessibility of these resources by the wider market (think virtual power plants and network support) mean these resources will likely have a more significant role to play in the future, behind-the-meter consumption is not currently measured and is not clear how the ESB envisages such consumption will be calculated for the purposes of the Emissions Requirement.

Visibility regarding actual emissions Although it is not yet clear whether calendar or financial years will be adopted for Emissions Requirement compliance purposes, the ESB has suggested that compliance reporting be due after the NGERS data has been reported and finalised. Allowing liable entities a period after the NGERS data has been finalised to do a final true-up for compliance purposes is a useful suggestion.

To ensure they are capable of meeting the required threshold, it may also be necessary for liable entities to be able to forecast accurately the emissions intensity of their load during the compliance year. In this regard, the ESB has proposed that actual AEMO generation data and NGERS data for the previous year be made available in the compliance registry during the compliance period. Again, this is a helpful suggestion; however, it is not yet clear whether this will be sufficient to enable liable entities to calculate the likely emissions intensity of their unallocated load, or whether there will be sufficient time available after the NGERS data is finalised.

Flexible compliance options The ESB and Federal Government have also clarified that, while compliance with voluntary 'green' schemes (eg GreenPower) cannot be counted for emissions requirement purposes, the Guarantee will not preclude the operation of state schemes, which will operate alongside the Emissions Requirement. Accordingly, liable entities will be able to claim  towards their compliance obligations generation for which a state-scheme subsidy was provided.

Over and underperformance The ESB has confirmed that carry-forward of over achievement and deferral of non-compliance will be permitted, with the limits to be applied and the mechanism to require over achievement to be offered to the market to be the subject of further consultation.

Federal design elements While it appears EITE customer loads will be exempt from the Emissions Requirement, the exemption mechanism (including whether retailers can assign the most emissions intensive generation to EITE customer loads) will be the subject of further consultation by the Federal Government. The use of offsets will also be the subject of further consultation.

Impact on RET The ESB has recommended that RET Scheme continue unchanged, without closure to new entrants once the current target is met.

How can stakeholders prepare for the Emission Requirement?

Consider existing contracting practices While the ESB has indicated that the reporting and compliance obligations for the Emissions Requirement will promote flexibility in contracting (and that physical backing of contracts will not be required), there will need to be agreement, in some form, between liable entities and generators as to the generation the liable entity is able to claim from that generator. Market customers and generators could consider what their contract book currently looks like, and the extent to which existing contracts could be relied upon to claim generation for compliance purposes or whether a separate arrangement may be required to clarify the position.

It may also be helpful to consider whether existing contracts or contracts under negotiation may require additional reporting obligations on the parties, to facilitate Emissions Requirement compliance reporting.

Consider reporting and compliance strategies Market customers and generators should consider how reporting and compliance obligations will be managed in practice within their organisations and wider corporate groups, and whether their internal capability is appropriately resourced.

Due diligence Consider, as part of any strategic review or new investment decision, the potential impact of the Emissions Requirement on existing asset portfolios or, in the case of new investment decisions, target assets. The impact of the Reliability Requirement will also be relevant for investment decisions, as, while generation associated with state schemes may be claimed for the purposes of the Emissions Requirement, jurisdictions with high renewable targets may be at greater risk of triggering the Reliability Requirement.

Engage in consultation The Federal Government and ESB have set an ambitious timetable for the development of the Guarantee, with further rounds of consultation on key aspects of the detailed design to occur before a final design is provided to the COAG Energy Council in August 2018.