The National Energy Guarantee (NEG) – release of detailed design
In a Nutshell
The Commonwealth Government and the Energy Security Board (ESB) have released detailed design proposals for the National Energy Guarantee (NEG) for public consultation until 6 July (emissions) and 13 July 2018 (NEG design) respectively. The consultation papers can be accessed here.
The detailed design proposals build on the design elements that were set out in the high-level design proposal released in April this year. They describe how the reliability requirement and the emissions reduction requirement will each be forecast, implemented and enforced. For some elements, the design is still under consideration and comments on the relative merits of potential design options are specifically sought.
This alert notes the key new features that are now proposed, as well as changes from the earlier high-level design.
The National Energy Guarantee
At a high level, the NEG will require electricity retailers and large customers purchasing direct from the market (together, market customers) to own or contract electricity that meets separate targets for reliability and emissions. These targets are intended to drive support for investment in electricity facilities that maintain the reliability of the power system while at the same time reducing emissions.
As market customers will be given the discretion to decide what energy mix they will apply in order to meet their targets, the NEG is intended to provide an incentive for the market to determine how best to achieve both targets at the lowest cost, thereby keeping electricity prices as affordable as possible.
For more on the key features of the high level design of the NEG, please see our May 2018 alert here.
Release of Detailed Design
The detailed design documents that have been released for public consultation build on the framework for the NEG that was described in the high level proposal.
They describe how the reliability requirement and the emissions reduction requirement will each be forecast, implemented and enforced.
Of particular interest is that it is no longer proposed that reporting and compliance with the NEG be managed at a corporate group level. Instead, each market customer is to manage its reporting and compliance individually.
The ESB’s detailed design document provides further detail regarding each of the design elements set out in the high level proposal released in April.
Few of the design elements have changed from what was originally proposed.
However, it is interesting to note that following submissions made in respect of the high-level design, the ESB is now reconsidering the proposed application of the reliability component to large customers. At this stage it is proposed to set a threshold of 5 MW peak demand at a single site before large customers are subject to the reliability requirement. Customers falling below the 5 MW threshold will be able to ‘opt-in’ if they wish.
A two-stage approach to compliance and imposition of penalties is also proposed for the reliability requirement. The first stage will involve allocating to non-compliant entities a predetermined proportionate cost per MW of non-compliance, based on what would be necessary to cover the Procurer of Last Resort costs to consumers. The second stage (intended for more significant or repeated failures to comply) will include enforceable undertakings and civil penalties. The civil penalty is proposed to be set at a maximum of $1 million for first offences and $10 million for repeat offences.
The ESB’s detailed design document sets out the proposed process for allocation of generation and associated emissions across market customers, accounting processes, and the design of the emissions registry.
It also provides further detail about various design elements, including the carrying forward of over-achievement, deferral, reporting, compliance and enforcement.
It proposes that a civil penalty with a new upper limit of $100 million will apply for non-compliance with the emissions reduction requirement in exceedance of the annual deferral limit (which is proposed to be 10% of the requirement).
It is also proposed that the first 50,000 MWh of any market customer’s load will be exempt from the emissions reduction requirement so that small market customers will be exempt for some or all of their load. The ESB is considering the need for an anti-avoidance regime so as to manage the risk of market customers splitting their load across multiple entities to gain the benefit of the exemption.
The Government’s detailed design as released for consultation is focused on the exemption of emissions-intensive-trade-exposed (EITE) activities from the emissions component of the NEG, and the potential for market customers to use offsets to meet their emissions reduction requirements.
The Government has confirmed its intention that all EITE activities that are exempt from the requirements of the RET will also be eligible for exemption from the emissions reduction requirements of the NEG.
It is proposing that the same calculation methodologies that are used by EITE entities to apply for RET exemptions be used for NEG exemptions, and is also proposing that a single application be used for both exemptions so as to minimise regulatory and administrative burden.
The Government has indicated that it is still considering whether and how offsets might be used as a flexible compliance option to meet NEG emissions reduction requirements.
The consultation paper describes a possible approach that would allow use of Australian Carbon Credit Units (ACCUs), subject to a cap on the number of offsets that could be used across the electricity sector.
The cap is intended to preserve any investment signal provided by the NEG, as it would give certainty as to the minimum level of emissions reduction the electricity sector would contribute through use of its own facilities. Given the objective of introducing the NEG, the cap would also be set to ensure that the majority of the activity undertaken to meet the emissions reduction requirements would occur within the electricity sector. The paper suggests that this could be in the order of 5 or 10 percent of the emissions reductions, with mechanisms for adjustments either annually or at the 5-yearly review of the target.
In addition, the Government is considering whether and how to apply an individual cap for offsets usage to each market customer, to provide certainty about the extent to which they can use offsets, and prevent the overall cap being exhausted by large surrenders by a few entities.
Technical Working Papers and a Regulation Impact Statement are expected to be published on 22 June 2018.
The Commonwealth Government is seeking submissions on the Commonwealth design elements of the NEG by 6 July.
The Energy Security Board is seeking submissions on the draft detailed design by 13 July. Details regarding the submission process are available on the COAG website.
The detailed design is intended to be finalised following the concurrent consultation periods and presented to the COAG Energy Council on 10 August 2018.
If the final design is approved by the COAG Energy Council, draft legislation to implement the NEG will be introduced to Parliament by the end of the year.
Finlaysons will continue to release further updates as new information comes to light.
This Alert is intended as an alert only. It does not purport to be comprehensive advice. Readers should seek professional advice before acting in relation to these matters.