Regulation of electricity utilities – power generation

Authorisation to construct and operate generation facilities

What authorisations are required to construct and operate generation facilities?

The authorisations required to construct and operate generation facilities include a combination of the following:

  • environmental, planning and works approvals under state (and potentially federal) environment protection and state planning legislation;
  • the grant of environment protection licences and approvals for the operation of the generation facility under state (and potentially federal) environment protection legislation;
  • the grant of a generation licence by the relevant state regulator under state electricity legislation; and
  • for the purposes of the NEM, as required pursuant to section 11 of the NEL, registration under the Rules (unless a prescribed exemption is applicable).
Grid connection policies

What are the policies with respect to connection of generation to the transmission grid?

The policies are summarised and discussed in questions 1 and 9.

Alternative energy sources

Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?

Federal and state government policy and legislation has encouraged power generation based on renewable energies. For example:

  • the federal government signed the Paris Agreement - this agreement was made within the framework of the United Nations Framework Convention on Climate Change. Australia has set an emissions reduction target of 26-28 per cent on 2005 levels by 2030;
  • The Renewable Energy (Electricity) Act 2000 (Cth) - this Act introduced a national Renewable Energy Target (RET) scheme requiring electricity retailers to source a proportion of their electricity from renewable energy facilities. Compliance is achieved by the retailer obtaining renewable energy certificates. The object is for 20 per cent of Australia’s electricity to be generated by renewable energy facilities by 2020;
  • the federal government also implemented the Carbon Farming Initiative Amendment Act 2014 (Cth) to provide the framework for its Direct Action Policy (DAP). The central feature of the DAP is the establishment of the A$2.55 billion Emissions Reduction Fund (ERF) to be applied for investment in carbon abatement; and
  • the Clean Energy Regulator will issue ‘Australian carbon credit units’ (ACCUs) for carbon emission reduction projects which are created and audited under approved methods. The Clean Energy Regulator may enter into contracts for the purchase of ACCUs following a ‘carbon abatement purchasing process’ to be conducted in accordance with the Carbon Credits (Carbon Farming Initiative) Rule 2015.

State legislation and ‘renewable energy action plans’ have been also introduced. For example:

  • Victoria introduced the Victorian Energy Efficiency Target Act 2007. The Victorian Energy Efficiency Target Scheme has now been amended to set targets for each year from 2016 to 2020. The Victorian government recently introduced a renewable energy target of 25 per cent by 2020 and 40 per cent by 2025; and
  • in September 2013 the New South Wales government released its ‘Renewable Energy Action Plan’. The object of this plan is aligned with the object of the RET scheme.
Climate change

What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?

The National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth) (the Safeguard Mechanism) was introduced by amendments to the National Greenhouse and Energy Reporting Act 2007 (Cth) (the NGER Act) made by Schedule 2 of the Carbon Farming Initiative Amendment Act 2014 and commenced on 1 July 2016.

The Safeguard Mechanism applies to ‘designated large facilities’, being facilities that emit more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) per annum of direct (or ‘scope 1’) emissions, as defined in the NGER Act . The Safeguard Mechanism requires designated large facilities to establish an emissions ‘baseline’ (calculated in accordance with prescribed criteria in the NGER Act, based on the highest level of emissions by the facility over the historical period between the years 2009-2010 and 2013-2014).

Once a designated large facility baseline has been established, the Safeguard Mechanism imposes a requirement on the person with operational control of the designated large facility (as determined in accordance with NGER Act) to ensure emissions from the designated large facility are under that baseline.

However, the electricity sector has been given special treatment under the Safeguard Mechanism, so that a ‘sectoral baseline’ has been set for electricity generation facilities that are connected to any of Australia’s major electricity networks. The sectoral baseline for the electricity sector is 198 million tonnes (or tCO2-e).

As part of the annual National Greenhouse and Energy Reporting data, the Clean Energy Regulator will publish the total scope 1 emissions for all grid-connected generators . The most recent data published by the Clean Energy Regulator is the aggregate scope 1 emissions for the electricity sector for 2015-2016, which totalled approximately 180,874,878 tCO2-e (Clean Energy Regulator: Electricity sector emissions and generation data 2015-16 (27 October 2017)).

Under the Safeguard Mechanism, the ‘sectoral baseline’ approach will apply unless the total of eligible direct emissions exceeds the baseline in any financial year. If the sectoral baseline is exceeded, baselines for individual facilities will apply in place of the sectoral baseline.

If a facility’s emissions exceed (or are expected to exceed) its baseline in any financial year, the person with operational control of the facility has a number of options available to manage the excess emissions, including:

  • applying for a calculated baseline or an emissions intensity baseline variation;
  • surrendering ACCUs to offset emissions and bring net emissions below the baseline;
  • applying for a multi-year monitoring period to allow additional time to reduce emissions; or
  • applying for an exemption where emissions are the result of exceptional circumstances such as a natural disaster or criminal activity.

Under the NGER Act, the Safeguard Mechanism provides a range of enforcement options for the Clean Energy Regulator where a person with operational control of a designated large facility (a ‘responsible emitter’) fails to take one of the above actions. These options include entering into an enforceable undertaking, issuing an infringement notice, or court proceedings to seek an injunction or civil penalties.

National Energy Guarantee

On 13 October 2017, the Energy Security Board (ESB) provided advice to the Federal Minster for Energy regarding retailer reliability, emissions guarantee and affordability, following AEMO’s report into dispatchable generation. The advice recommended the establishment of dual reliability and emissions guarantees, which would impose requirements on electricity retailers to meet their retail electricity load using a portfolio of resources that include a minimum amount of ‘flexible dispatchable capacity’, and at an emissions level that is consistent with Australia’s international emissions reduction commitments.

Under the ESB’s proposed model, each of the emissions and reliability guarantees would be imposed as conditions of registration by a retailer as a wholesale market customer in the NEM, under the Rules.

The reliability guarantee would require retailers to hold forward contracts with dispatchable resources that cover a predetermined percentage of their forecast peak load. The amount and type contracted would be based on the system-wide reliability standard as determined by the Reliability Panel at the AEMC.

The emissions guarantee would be established by the federal government setting an emissions target (consistent with Australia’s international emissions reduction commitments) that would then be adapted to impose a requirement on retailers to meet their customer loads from a mix of electricity generation sources that equated to a predetermined average emissions level. Retailers would be required to disclose how they have met their guarantee through either their contracts with existing generators or with generators to develop new capacity.

In February 2018, the ESB released a consultation paper seeking feedback from market participants on a series of high-level options for the eventual design of the emissions and reliability guarantees (referred to collectively as the National Energy Guarantee (NEG)).

The paper confirmed that the ultimate design of the NEG will require energy retailers to contract with, or directly invest in, generation, storage or demand response so that:

  • there is a minimum amount of dispatchable energy available to meet consumer and system needs (ie, reliability requirement); and
  • the average emissions level of the electricity they sell to customers supports Australia’s international emission reduction commitments, as set by the Commonwealth Government (ie, the emissions requirement).

The paper also confirmed the ESB’s preference for implementation of the NEG through existing governance arrangements in the NEM.

Following periods of consultation, in August 2018 the Council of Australian Governments (COAG) released an exposure draft of the proposed changes to the NEL that would implement the NEG. The draft laws were prepared by the ESB based on the Final Detailed Design of the NEG.

However, at the time of publication, neither COAG nor the federal government have decided to proceed with the NEG.

Storage

Does the regulatory framework support electricity storage including research and development of storage solutions?

The AEMC released a report in December 2015 that examined whether the existing regulatory frameworks are sufficiently flexible to integrate energy storage technologies. There were several issues with the regulatory framework that were identified as potentially acting as a barrier to the integration of storage in the NEM. However, it was also identified that batteries and storage technologies can be accommodated within the existing regulatory framework, although it has been acknowledged by the AEMC that improvements could be made to facilitate installation. For example, in many cases, a storage device can be treated as a generator having the same capacity and characteristics. Also, in relation to network regulation, storage can be classified as a contestable service.

On 28 November 2017, the AEMC made a final rule to change the settlement period for the electricity spot price from 30 minutes to five minutes.

The Rule, which will take effect from 2021, will mean all settlement periods are reduced to five minutes, producing a more granular and more accurate price signal for investment in fast-response technologies such as batteries (as well as new-generation gas peaking plants).

In order to ensure the rule change is effective, the operational dispatch and financial settlement periods will both be aligned to five minutes, which will reduce the time interval for financial settlement in the national electricity market from 30 minutes to five minutes.

Government policy

Does government policy encourage or discourage development of new nuclear power plants? How?

In its 2015 Energy White Paper, the Australian government has identified that there are legislative restrictions on the use of nuclear energy in Australia. In particular, it was stated that approval cannot be provided for the construction or operation of nuclear plants in Australia under either the Environment Protection and Biodiversity Conservation Act 1999 or the Australian Radiation Protection and Nuclear Safety Act 1998.

In the Energy White Paper, the Australian government has not committed to either supporting or not supporting the use of nuclear energy in Australia. It stated that it would consider the outcomes of the South Australian Royal Commission into its future involvement in the nuclear fuel cycle including the mining, enrichment, energy and storage phases for the peaceful use of nuclear energy. The Royal Commission delivered its report on 6 May 2016, recommending that the South Australian government pursue the removal, at the Federal level, of the current prohibition on nuclear power generation to allow this form of generation to contribute to a low-carbon electricity system if required.

In 2017, the Finkel Report (see below) observed that the establishment of nuclear power would require ‘broad community consultation and the development of a social and legal licence’. Owing to the ‘strong awareness of the potential hazards associated with nuclear power plant operation, including the potential for the release of radioactive materials’, the Finkel Report concluded that any development of nuclear power technologies would require significant time to overcome the social, legal, economic and technical barriers in Australia.