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 National Electricity Market, as required pursuant to section 11 of the National Electricity Law, registration under the National Electricity Rules (unless a prescribed exemption is applicable).
Grid connection policies

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

Policy and framework

The policy underlying the National Electricity Market is contained in the National Electricity Objective as set out in section 7 of the National Electricity Law.

The National Electricity Objective is as follows:

The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to:

(a) price, quality, safety, reliability and security of supply of electricity; and

(a) the reliability, safety and security of the national electricity system.

 

The legislative framework for the National Electricity Market is contained in the following legislative schemes:

  • the National Electricity (South Australia) Act 1996;
  • the National Electricity Law;
  • the National Electricity Rules (the Rules); and
  • the legislation of the other participating jurisdictions that adopt each of the above, subject to certain derogations.

 

The Rules

The Rules have the force of law in each participating jurisdiction in the National Electricity Market.

The prescribed requirements and tests for the making of the Rules are set out in Part 7 of the National Electricity Law.

A person is entitled to submit a Rule change request to the Australian Energy Market Commission (AEMC).

Under the National Electricity Law, the AEMC may only make or change a Rule if it is satisfied that the Rule or change will, or is likely to, contribute to the achievement of the National Electricity Objective.

Retail energy regulation in the National Electricity Market

The National Energy Customer Framework (NECF) regulates the retail supply and distribution of electricity to customers.

The NECF has been adopted for the retail supply of electricity in South Australia, New South Wales, Tasmania, the Australian Capital Territory and Queensland. It does not apply in Western Australia or the Northern Territory. From 1 July 2019, the Northern Territory has adapted a modified form of Chapter 5A of the Rules. In Victoria, the NECF applies to Chapter 5A of the Rules. Otherwise, the Essential Services Commission has harmonised Victoria’s energy regulations to be substantially consistent with the NECF. On 1 July 2020, a number of changes to the Victorian Energy Retail Code became effective.

In accordance with clause 2.5.1 of the Rules, a person must not engage in the activities of owning, controlling or operating a transmission network unless that person is registered by the Australian Energy Market Operator (AEMO) as a transmission network service provider (TNSP).

In addition, a number of the state jurisdictions require TNSPs to be licensed (or hold an authorisation) pursuant to the state’s legislative regime for electricity regulation.

The relevant state authorisations typically include:

  • an environmental approval;
  • planning and construction approval; and
  • appropriate land rights, by way of easement, lease or licence granted by landowners over which the transmission network will pass.
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 encourages 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) introduced a national Renewable Energy Target 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. Sufficient projects have now been approved to meet and exceed the target of 33,000 GWh per annum (or 23.5 per cent of Australia’s electricity) to be generated by renewable energy facilities by 2020. The annual target will remain at 33,000GWh until the scheme ends in 2030.
  • 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 was the establishment of the A$2.55 billion Emissions Reduction Fund to be applied for investment in carbon abatement.
  • The Clean Energy Regulator will issue ‘Australian carbon credit units’ (ACCUs) for carbon emission reduction projects that 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 was amended to set targets for each year from 2016 to 2020. Owing to the impacts of the covid-19 pandemic, regulations setting our proposed targets for 2021 to 2025 have been released in draft, but not yet finalised. Accordingly, the effective 2021 target will remain the same as the 2020 target (equivalent to reducing 6.5 million tonnes of greenhouse gas). The Victorian government introduced a state-based renewable energy target of 25 per cent by 2020, 40 per cent by 2025 and 50 per cent by 2030.

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 (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 facilities’, being facilities that emit more than 100,000 tonnes of carbon dioxide equivalent (tCO2–e) per annum of direct (or ‘scope 1’) emissions, as defined in the NGER Act. The Safeguard Mechanism requires designated 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 to 2010 and 2013 to 2014).

Once a designated facility’s baseline has been established, the Safeguard Mechanism imposes a requirement on the person with operational control of the facility (as determined in accordance with the NGER Act) to ensure emissions from the facility remain 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 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 total scope 1 emissions for grid-connected generators for 2018–2019, which totalled approximately 164.2 ​million tCO2–e.

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 (the responsible emitter) 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 due to 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 responsible emitter fails to take one of the above actions. These include entering into an enforceable undertaking, issuing an infringement notice, or court proceedings to seek an injunction or civil penalties.

Storage

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

The Australian Energy Market Commission (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 barriers to the integration of storage in the National Electricity Market. 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. Several such improvements have been introduced recently.

On 23 August 2019, AEMO submitted a rule change request to the AEMC to amend the Rules to create a new category of ‘registered participant’ for participants with energy storage systems (eg, batteries and rooftop photovoltaic). This new category will be called a ‘bidirectional resource provider’ and will cover certain services provided from bidirectional units (ie, connections where electricity flows in both directions). The proposed bidirectional unit definition is technology neutral to allow for different storage technologies (eg, pumped hydro, batteries and flywheels).

The purpose of the proposed rule change is to clarify how energy storage systems fit within the framework of the Rules, which were designed originally around binary concepts of generation and load.

The next step in the rule change process is for the AEMC to publish a consultation paper for feedback.

On 1 December 2019, a rule change established a national register of distributed energy sources including small-scale battery storage with the aim of, among other things, promoting better investment decisions.

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, which will produce 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).

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?

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 2017, the Finkel Report 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.

In December 2019, a federal parliamentary inquiry published a report that recommended that the Australian government: consider the prospect of nuclear technology as part of its future energy mix; undertake a body of work to progress the understanding of nuclear technology in the Australian context; and subject to the results of a technology assessment and a commitment to obtain community consent before approving nuclear facilities, consider partially lifting the current moratorium on nuclear energy for new and emerging nuclear technologies. The Australian government has not yet formally responded to this report.

Regulation of electricity utilities – transmission

Authorisations to construct and operate transmission networks

What authorisations are required to construct and operate transmission networks?

In accordance with clause 2.5.1 of the National Electricity Rules (the Rules), a person must not engage in the activities of owning, controlling or operating a transmission network unless that person is registered by the Australian Energy Market Operator (AEMO) as a transmission network service provider (TNSP).

In addition, a number of the state jurisdictions require TNSPs to be licensed (or hold an authorisation) pursuant to the state’s legislative regime for electricity regulation.

The relevant state authorisations typically include:

  • an environmental approval;
  • planning and construction approval; and
  • appropriate land rights, by way of easement, lease or licence granted by landowners over which the transmission network will pass.
Eligibility to obtain transmission services

Who is eligible to obtain transmission services and what requirements must be met to obtain access?

Clause 5.3 of the Rules specifies the process by which a registered participant or proposed registered participant may make a request to establish or modify a connection to a transmission network.

An offer to connect must be fair and reasonable and must be consistent with the safe and reliable operation of the power system in accordance with the Rules.

The TNSP and the connection applicant must negotiate in good faith to reach a connection agreement. In the event of a dispute, Part K of Chapter 6A of the Rules provides for commercial arbitration of that dispute. Technical performance standards apply to generators seeking to connect to the National Electricity Market. TNSPs are required to make decisions according to these standards.

Access

There is no ability for a generator in the National Electricity Market to secure ‘firm’ access rights to the transmission network. Accordingly, generators that are connected to the transmission network face congestion risk. The Australian Energy Market Commission (AEMC) previously developed a proposed optional firm access (OFA) model, pursuant to which generators would be entitled to pay TNSPs for the right to secure ‘firm’ access and be charged by TNSPs in accordance with the costs of providing that access to firm capacity.

The AEMC’s final report to the Standing Council of Energy and Resources concluded that the implementation of OFA would not contribute to the achievement of the National Electricity Objective, although circumstances may arise in the future where there is a need for significant additional investment where the location and type of investment is uncertain, in which benefits may be derived from an OFA.

On 26 March 2020, the AEMC published an update paper outlining proposed long-term reforms to transmission access arrangements.

Government transmission policy

Are there any government measures to encourage or otherwise require the expansion of the transmission grid?

There are no specific government (eg, tax) incentives offered for expansion or augmentation of transmission networks.

In accordance with the Rules, the Australian Energy Regulator (AER) will only approve forecast capital expenditure where the AER is satisfied that the forecast reasonably reflects, among other things, the efficient costs of meeting demand and maintaining the quality and reliability of services.

Other incentives for TNSPs in the National Electricity Market include an efficiency benefit sharing scheme (EBSS) for operational expenditure, under which the AER determines the manner in which benefits of efficiency gains are shared between network businesses and network users. In accordance with the Rules, the AER has the power to apply an EBSS to capital expenditure for both transmission and distribution network businesses.

In July 2018, significant amendments to Chapter 5 of the Rules took effect, which introduced changes to transmission connection arrangements that were broadly intended to increase transparency and contestability for connection services.

Rates and terms for transmission services

Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?

The AER must make transmission determinations for TNSPs in accordance with Chapter 6A of the Rules for prescribed transmission services and negotiated transmission services.

A TNSP is required to prepare a negotiating framework that sets out the procedure to be followed for the purposes of negotiations to agree upon the terms and conditions of access.

In addition, the TNSP must submit to the AER a revenue proposal and a proposed pricing methodology relating to the transmission services provided by means of the transmission system owned, controlled or operated by that TNSP. This process involves forecasting the revenue requirements needed to cover efficient costs and provide a commercial return on capital investment.

The AER makes a final decision in respect of the transmission determination. Upon the AER making that final decision, the transmission determination will apply for a prescribed regulatory control period, being a period of not less than five years.

Section 7A of the National Electricity Law specifies the Revenue and Pricing Principles, which provide that a regulated network service provider should be provided with a reasonable opportunity to recover at least the efficient costs the operator incurs in providing direct control network services and complying with a regulatory obligation or requirement or making a regulatory payment.

The costs that a TNSP can recover are determined using the ‘building block’ approach. This approach is used to ensure that the expenditure of each transmission network service provider is amortised appropriately over time.

The maximum allowable revenue calculated using the building block methodology is converted into network prices using demand forecasts. In the case of TNSPs, the network pricing is set according to a ‘revenue cap’ methodology and the AER sets the ‘maximum allowed revenue’ for each year of the regulatory control period.

Entities responsible for grid reliability

Which entities are responsible for the reliability of the transmission grid and what are their powers and responsibilities?

AEMO is primarily responsible for assuring reliability of the transmission grid in the National Electricity Market. The statutory functions of AEMO involve, primarily:

  • the operation and administration of the wholesale exchange in the National Electricity Market; and
  • maintaining and improving power system security, planning for the development of the transmission grid and providing ‘shared transmission services’ by means of each participating jurisdiction’s transmission system.

 

The reliability of the transmission network is determined in accordance with the standards specified in the National Electricity Law and the Rules. In particular, clause 4.3 of the Rules specifies the scope of AEMO’s responsibilities for ensuring power system security, including in relation to the transmission network.

In July 2018, AEMO produced an Integrated System Plan (ISP), which is a cost-based engineering optimisation plan that forecasts the overall transmission system requirements for the National Electricity Market over the next 20 years.

The ISP was produced in response to a recommendation from the Finkel Report and is intended to assist in planning for the National Electricity Market in light of the fundamental changes in the sources and dynamics of the Australian electricity sector.

Law stated date

Correct on

Give the date on which the information above is accurate.

24 September 2020.