Australia: Blueprint for future energy security and transition to cleaner energy mix

WHO SHOULD READ THIS

• All energy market participants including generators, retailers, financiers and service providers.

Background

The Panel which conducted the independent review into the future security of the National Electricity Market (NEM) has released its final report, Blueprint for the Future (the Blueprint), also dubbed the Finkel Review, for the Panel's chair, Australian Chief Scientist, Dr Alan Finkel AO.

The Blueprint proposes regulatory changes in order to achieve the objective of a "secure, reliable and affordable electricity system". The Blueprint also ventures into climate change policy by proposing a technology-neutral Clean Energy Target (CET) designed to reduce emissions from the electricity sector by 28% below 2005 levels by 2030, with a long-term aim of zero emissions in the second half of the century.

The Finkel Review was commissioned at an extraordinary meeting of the Council of Australian Governments (COAG) Energy Council in October 2016, following the state-wide blackout in South Australia in the previous month. A preliminary report was subsequently delivered to COAG Leaders in December 2016 and COAG was briefed by Dr Finkel on the final report at its meeting on 9 June 2017.

The timing of release of the Blueprint capped off a week of major energy announcements with the unveiling by the Queensland Government of the next phase of its renewable energy strategy several days earlier. (Please click here for more details of this release.)

The only public comment made by the Turnbull government on the release of the Blueprint was that it would now carefully consider its recommendations. Just prior to release of the Blueprint, 16 industry peak bodies, environmental NGOs and the social welfare peak body, the Australian Council of Social Service, said that the Finkel Review deserves full and fair consideration and advised governments against rash decisions and knee-jerk reactions.

The Minerals Council of Australia said it would take an open-minded and constructive approach over the coming months to consultations with Federal and State governments on the findings of the Blueprint. Similar sentiments were expressed by the oil and gas peak body, the Australian Petroleum Production and Exploration Association. The Clean Energy Council, representing the renewables sector, welcomed the proposal for a CET, saying it could deliver much needed investor confidence, but noting there were a range of detailed design considerations that would need thorough investigation and consultation.

As with any review of this nature, it will not satisfy everyone's wish list but stakeholders are broadly positive or neutral on the Blueprint. While no further formal consultation process has been announced, anyone with a stake in the future of the Australian electricity market should consider their position and work with their respective industry bodies as the outcomes move to implementation.

Key recommendations

The Blueprint aims to minimise adversely disruptive change by:

• leveraging off existing mechanisms and process infrastructure
• facilitating an orderly exit of dated plant from the system
• focusing on forecasting and reporting by generators to maintain stability
• encouraging market-based reliability solutions with an emphasis on gas as the ultimate solution for baseload, and
• establishing new efficiencies in the procurement and development of renewables.

Orderly transition

A key tenet of the Blueprint is the need for an orderly transition to a reliable and low emissions future.

The echoes of regulatory disarray over the past decade can be heard in the Blueprint's call for a clear, credible and enduring emissions reduction mechanism. The Blueprint recognises both of the most-backed horses in this debate – a CET and an Emissions Intensity Scheme, and most notably recommends the adoption of a CET to encourage new low emissions generation into the market in a technology neutral fashion. Under this mechanism, new low emissions generators such as wind, gas or the combination of coal with carbon capture and storage (but apparently not high efficiency conventional coal) will receive incentives to enter the market.

Other key recommendations around the need for an orderly transition are:

• The Australian, State and Territory governments to agree to a national emissions reduction trajectory.
• As part of the Australian Government's 2017 Review of Climate Change Policies, consideration should be given to a post-2030 emissions reduction goal. The Panel encourages the Australian Government to develop a national 2050 emissions reduction strategy by 2020, consistent with commitments under the Paris Agreement.
• Australia's existing Renewable Energy Target (RET) to continue until its scheduled 2020 end date but should not be extended.
• All existing large electricity generators to be required to provide a binding three years' notice of closure. This will give time for communities and industry to adjust, a signal issue in recent blackouts and spikes in prices in regions of the NEM. This recommendation is in lieu of introducing some form of capacity or market-based mechanism in order to direct investment towards maintaining reliability (as seen in a number of other comparable jurisdictions).
• Require transmission network service providers to provide and maintain a sufficient level of inertia for each region or sub-region, including a portion that could be substituted by fast frequency response services.
• Instead of a market-based mechanism for procuring fast frequency response, stipulate by regulation that new generators (including renewables) have fast frequency response capability. In time a market-based mechanism could, however, be justified.
• By end-2017, the Australian Energy Market Operator (AEMO) should require generators to provide information on their fuel resource adequacy and fuel supply contracts, to enable it to better assess fuel availability. By mid-2018 AEMO should be given a last resort power to procure or enter into commercial arrangements to have gas-fired generators available to maintain reliability of electricity supply in emergency situations.

System planning

• Regular assessments to be undertaken to inform security and reliability obligations for each region.
• The introduction of an integrated grid plan to inform investment decisions and ensure security is preserved in each region as the generation mix evolves.
• Significant investment decisions on the interconnection between states or between regions within states to be made from a system-wide perspective. The system operator will develop a list of potential priority projects to enable efficient development of renewable energy zones.

Stronger governance

• A new Energy Security Board to drive the implementation of the Blueprint on behalf of the COAG Energy Council.
• The Energy Security Board to deliver an annual Health of the National Electricity Market report to COAG Energy Council.
• The existing market bodies – the Australian Energy Market Commission, the Australian Energy Regulator and AEMO – to be resourced, strengthened and made more effective through coordination provided by the Energy Security Board.

What this means for industry

The Panel found that both a CET and an Emissions Intensity Scheme (EI Scheme) were credible emissions reduction mechanisms because they minimise costs for consumers, are flexible and adaptable, and satisfy security and reliability criteria. Under an EI Scheme, generators with emissions below a set emissions intensity baseline would receive credits, while generators with an emissions intensity above the baseline would be required to purchase and surrender credits.

A CET calibrated to an emissions reduction target of 28 per cent on 2005 levels by 2030 with a linear trajectory to zero emissions by 2070 was modelled for the Blueprint. Under both a CET and EI Scheme, the renewable generation mix in 2030 was 42 per cent of dispatched generation.

Both mechanisms were shown to deliver better price outcomes than a business as usual case. With the additional context that a CET can be implemented within an already well understood and functioning RET framework, and has better price outcomes, the Panel recommended a CET be adopted.

While coal with carbon capture and storage is seen as being viable under a CET, the Minerals Council of Australia has expressed concern that the CET as described in the Blueprint does not encompass High Efficiency Low Emissions (HELE) coal generation. The Blueprint does not however embrace an option of placing a lifetime limit on coal plants.

Appendix B in the Blueprint points out that ultra-supercritical black coal plants have an estimated operating emissions of 700kg CO2-e/ MWh as against 370 for combine cycle gas.

Indeed, the gas sector would take heart from the Blueprint. It makes the point that gas plays an essential role in providing secure and reliable electricity for Australians and, in a message to governments stalling new gas supply, the Blueprint says that "governments should also work with communities to encourage safe exploration and production, based on best available evidence, performance data and appropriate financial rights for landholders".

A theme that comes through the Blueprint is a wariness about relying on secondary market mechanisms enshrined through the NEM. While the CET could be viewed as a version of a market mechanism, the Blueprint eschews market based approaches to ensuring fast frequency response capability.

The Blueprint also prefers operational regulation (three years notice of closure) to a British or Irish style capacity market mechanism. Therefore, the NEM continues to be an energy only market depending more upon its natural performance to issue the appropriate price signals for new investment rather than the approach of institutionalising within the NEM itself signals for investment on a continuing basis via mechanisms such as a capacity market.

For new renewables projects, under the Blueprint they would potentially have to include a battery or pumped hydro storage component to meet the recommended requirement to have fast frequency response capability. Many renewables project proponents are already building storage into their projects or at least in the later stages of their projects but it may make more sense for the provision of storage capability to be capable of being separated from energy generation.

Where to from here

The Blueprint has already been criticised as having a strong eye to political considerations but, to the extent that it can win a strong degree of political bipartisanship, it will have done an enormous service to the nation and the debate can continue on a scientific and economic basis rather than a political one. It has been chided by the Minerals Council for not including HELE coal technology as being 'clean energy', a theme that may be picked up by some members of the Coalition. On the other hand, it has been criticised for not modelling more aggressive emissions reduction targets, daring to mention coal with carbon capture and storage as potentially clean energy and persevering with an energy only market.

The likely battleground will inevitably be around coal, whereas the Blueprint is good news for gas (subject to the lifting of artificial supply constraints) and of course for renewables where a CET and renewable energy zones will be welcomed by most.

With a review of national climate change policies to be concluded later in 2017, it is likely that the Turnbull government may decide to act on some of the shorter-term energy security recommendations and the CET in the context of the climate change policy. In terms of the ultimate content of change, experience would suggest that the reaction from the finance community will be critical in terms of what can actually be achieved.