National Energy Guarantee moves to the next stage

In brief

The COAG Energy Council has voted to progress the development of the National Energy Guarantee by approving the release of the draft National Electricity Law amendments. Partners Anna Collyer and Kate Axup and Managing Associate Karla Drinkwater discuss what has been approved, the details still to be clarified and the next steps towards implementation of the National Energy Guarantee.

The final design

The approval by the COAG Energy Council of the Energy Security Board's (ESB) Final Detailed Design marks a significant milestone in the development and implementation of the National Energy Guarantee (the Guarantee).

The ESB made a number of changes to the mechanics of the Guarantee in the Final Detailed Design. In particular:

• generators will no longer have an obligation to allocate all of their output in the emissions registry by the compliance reporting date.
• additional measures designed to encourage efficient allocation of generator output amongst liable entities have also been introduced. These include allowing liable entities a longer period to reallocate generator output following the end of the compliance year, having regard to factors such as the entity's final EITE loads and the expected emissions intensity of the unallocated generation (which will be reported throughout the year).
• the flexible compliance options for the Emissions Requirement have been refined, including by allowing liable entities to defer their full compliance obligation for the 2020-2021 compliance year, as well as 10% of their compliance obligation in future compliance years, with deferrals cumulative over two years.
• the proposed Emissions Requirement anti-avoidance regime and requirement that generators not unreasonably withhold allocations of their output for anti-competitive purposes have not been progressed, although the ESB has indicated that it will continue to consider whether there is a need for targeted anti-avoidance measures and that the need for these requirements may be reconsidered having regard to the AER's observations of market behaviour during the initial years of the Guarantee's operation.
• large customers¹ will not automatically be liable under the Reliability Requirement, but will be able to 'opt-in' and manage the reliability obligation associated with their load if they wish to do so.
• although supported by the ACCC in its Retail Electricity Pricing Inquiry, the ESB has indicated that the reporting of qualifying contracts and associated trades in approved trade repositories is not warranted for the Reliability Requirement at this stage.

Outstanding details

There are a few areas where further clarification regarding the proposed mechanics of the Guarantee is needed. It is expected that the majority of these will be clarified in the Rule change drafting.

Emissions Requirement

The mechanics of the Emissions Requirement are now largely settled, however it is not yet clear:

• when the initial review of the emissions target will occur (whether by 30 June 2024 or within the first three years of operation).
• whether generator consent or involvement will be required to enable: (1) an entity to transfer its right to claim generator output to a liable entity; or (2) a liable entity to reallocate to another liable entity a portion of generator output already allocated to the first entity and verified by the generator.
• what (if any) evidence a liable entity must provide in addition to the volume and generator details when claiming generator output in the emissions registry.
• how the output of an embedded generator that exceeds the 5MW capacity threshold but is under the 25,000 tCO_2-e emissions threshold will be accounted for in the emissions registry.
• how the additionality of GreenPower obligations will be implemented within the Guarantee mechanism.
• whether liable entities will need to wait until after the end of the compliance year to be notified of their actual EITE exempt amounts or whether they will be given access to this information earlier (and whether the EITE entity must provide, or consent to the CER providing, this information to the liable entity).
• how a 'corporate group' will be defined for the purposes of determining which liable entities are entitled to the 50,000 MWh 'small market customer' exemption.
• how the offsets cap of 5% of a liable entity's 'requirements under the emissions element' will be calculated and whether it may be possible for liable entities who would have met their emissions requirement obligation to purchase offsets up to their 5% allocation and then carry forward the resulting overachievement or reallocate the overachievement to others with a shortfall at an agreed price. The ESB has indicated that it will consider the mechanics of the use of offsets and further quantitative limits as part of the public consultation on the Rule changes.

While the Guarantee designed by the ESB will only apply to the National Electricity Market (NEM), earlier this year Western Australia requested that the ESB advise how Western Australia might be able to participate in the Emissions Requirement. Noting that its main priority is the implementation of the Guarantee within the NEM, the ESB indicated it would present its preliminary view on participation by Western Australia (and potentially the Northern Territory) at the COAG Energy Council meeting on 10 August. It is not clear what advice has been provided by the ESB in this regard.

Reliability Requirement

The mechanics of the Reliability Requirement are slightly less evolved than the Emissions Requirement. Details that have not yet been determined, a number of which will be the subject of further consultation by the ESB, include:

• the test for determining whether a reliability gap is 'material'. The ESB has indicated a preference for an objective test (framed as a threshold by which the Reliability Standard in the Rules is exceeded) that would not require discretion by AEMO.
• whether the 'T-3 trigger' is required or whether, as proposed by South Australia, there should be an ongoing reliability compliance obligation.
• if the 'T-3 trigger' is retained, the factors the AER may (or must) take into account in deciding whether to refrain from triggering the Reliability Requirement.
• how the 'firmness factor' to be applied to qualifying contracts is to be calculated. The ESB has indicated that factors to be taken into account will likely include the strike price and likelihood of cover during the period of the forecast gap.
• the qualifications required of an independent auditor with respect to the 'firmness factor'.
• the required content and format of a liable entity's net contracting position submission to the AER and who is considered an 'appropriately authorised officer', able to sign off on the submission.

The design of the market liquidity obligation will also be the subject of further consultation by the ESB, which is expected to clarify:

• how 'vertically integrated retailer' will be defined (including the threshold size) for the purposes of determining which entities have market liquidity obligations;
• how many entities per NEM region are expected to have market liquidity obligations;
• what are the standardised products and maximum bid/offer spread that must be made available;
• the trading platform on which these contracts must be made available;
• what additional safeguards may be required to give further assurance that liable entities will be able to meet their reliability obligations if the Reliability Requirement is triggered; and
• how the market liquidity obligation will interact with other market-making schemes (e.g. the ongoing South Australian market-making obligation recommended by the ACCC in its Retail Electricity Pricing Inquiry.

Next steps

There are a few key steps remaining before the Guarantee comes into force.

The core framework of the Guarantee will be set out in amendments to the National Electricity Law, which will be released for public consultation shortly. Following public consultation, the final legislation is expected to be submitted to the COAG Energy Council for approval in late September and, if approved, introduced to the South Australian Parliament by the end of the year.

The Commonwealth government has also indicated that it intends to introduce the supporting Commonwealth legislation into Parliament by the end of the year.

The National Electricity Rules will set out the detailed mechanics of the Guarantee. The proposed Rule change drafting will also be subject to public consultation, following which the initial Rule change will be presented to the COAG Energy Council at its April 2019 meeting. If approved, the Rule change will be made by the South Australian Energy Minister in mid-2019.

The Guarantee will commence operation once the legislative amendments and initial Rule change have been made, with the 2020-2021 financial year intended to be the first compliance year for the Emissions Requirement and the reliability Requirement Rule changes potentially commencing as early as the 2019-2020 financial year.