Making progress with emissions reduction: NEM design and state emissions policies

Coordinating NEM design with economy wide emissions reduction.

The two basic questions to begin with are: first, what is the emissions policy that NEM design should take into account and coordinate with? And second, is this happening?

The way that emissions reduction policy of this kind is being tackled globally is remarkably similar in most jurisdictions and countries.

The common high level policy has eight parts to it:

1. Recognise that emissions are an externality and as economics suggests such externalities are best tackled by everyone together…every country sets a target and reports on progress to reach its interim targets regularly and to each other. This transparency and ongoing monitoring and discussion is what the regular COP meetings are all about.
2. The next step is a target and a plan about how to get there. The target for Australia is net zero greenhouse gas emissions by 2050 as you all know. This means our emitted GHGs must become as low as possible and any gases emitted must be fully offset by carbon capture or storage. The internationally agreed baseline for measurement is 2005, and in that year Australia emitted about 620Mt CO2e. We are currently at around 500Mt CO2e and hence need to eliminate or offset this amount by 2050. The incoming government has set a target for 2030 of 43% reduction meaning that by then we need to offset or eliminate around 258 MT CO2e. Most States and many companies have targets that are more ambitious at around 50% by 2030 but eliminating between 250-350 MT CO2e by 2030 would set us up in a position to make the 2050 target.
3. Then decarbonise energy supply and do so as quickly as feasible.
   The extent of this challenge varies across jurisdictions. It is more challenging where renewable energy resources (like wind and solar) are not plentiful or available and where zero emissions fuel is not available or cost effective.
   
   The ability to decarbonise relatively quickly depends on the ability to provide further low emissions generation and transmission quickly; and the availability of long and short duration storage and firming capacity to back up the renewables. A capacity mechanism of some kind is essential for long duration storage and firming capacity. On the demand side the extent to which demand response is possible and the speed at which industries (including heavy industry) are electrifying and changing their production methods to be ‘green’ are both important.
4. Focus emissions reduction efforts in those sectors that are the most emissions-intensive. In Australia (for Scope 1 emissions) this means concentrating on emissions reduction in electricity, transport, agriculture, fugitive emissions, industrial processes and waste.
5. Set targets for each sector and have clear policies about how to get there. It is important that each sector is aware of the effort it needs to make toward the national target. A 43% reduction in emissions in Australia by 2030 does NOT mean that electricity needs to get to a 43% emissions reduction. Decarbonised electricity assists other sectors in their emissions reduction, and for the electricity sector, a target of 43% in 2030 is much easier than it is in other sectors. So electricity’s target will be greater than 43% to assist other sectors, (like transport and heavy industry) where emissions reduction is more challenging.
6. Begin by using the technology that is available and set interim targets before 2050 to drive actions that will allow the 2050 target to be met. Available technology certainly allows interim targets to be reached and the lower the emissions now the easier and faster a net zero emissions state can be met.
7. Consider the most cost effective ways to reduce emissions but be aware that changes in technology can change these estimates significantly. Simple abatement cost curves (that rank the cost of emissions abatement per gigatonne of CO2e) are not very useful because of the important interaction between sectors. Because energy is such a large input throughout the economy the impact of decarbonising electricity is profound as just noted.
8. For hard-to-abate sectors and industries encourage R&D to address the issue. Hydrogen is a possible replacement for gas to complete the electricity transition and to meet the emissions reduction target in some hard-to-abate sectors like heavy transport (aircraft and shipping).

So to fully coordinate NEM design with emissions reduction, encourage renewables, ensure storage and firm capacity is available, and as fast as possible – the electricity NEM design at present caters for coal fired generation retirement: it does not factor in the increased demand for electricity that will come from increased electrification more generally as more industries decarbonise. Just developing green hydrogen, for example, is a large expansion in electricity demand through the energy required in the electrolysis process.

Matching different energy policies in the States to NEM wide design reforms.

I was asked to comment on the different energy policies in the States. The first issue is why the States have different energy policies to the NEM and second, whether these differences are of concern?

1. Perspective. It is not surprising that the States have some differences in their electricity policies compared to the NEM wide policy and indeed always have done. Each of the States has different characteristics as a region, and in part to reflect this have agreed that each of them can derogate from rules when they have reason to do so. Tasmania’s strength in hydro power is not shared by others; and some States have much better wind and solar resources than others for example.
2. That said, in recent years the States have departed from NEM design more than previously. This has been driven by particular government anxieties around meeting their own emissions targets and through ensuring that they have reliable supply. Thus we note different State ambitions around renewable energy supply and different measures taken to support both small scale and large scale renewables: different feed in tariffs for residential solar, and contracts for difference on large scale renewables in some regions for example. We also note measures to keep some aged coal fired generators operating beyond their commercially feasible retirement dates and recent support for some gas fired upgrades and expansion.
3. The reason for these State initiated measures was a need to act on policy that the NEM could not accommodate at all or could not do in a way that was judged to be in a sufficiently timely manner.
   
   First, NEM policy was not able to manage emissions targets due to a lack of agreement between the Commonwealth and other Ministers. The only two recommendations in the Finkel Report that were not accepted by all Ministers were those related to emissions. Most policies in this area, including the NEG, simply could not be adopted across the NEM because of the impossibility of Ministerial agreement.
   
   The other reason for independent State actions was related to the perceived need for action in a more timely manner than the NEM policy could deliver. South Australia, New South Wales and Victoria were at different times extremely worried about reliability, particularly as their renewable energy programs expanded. This has led to different measures in each State with NSW implementing the most comprehensive program with its Roadmap. In every case, none of these measures has been introduced with the intention of damaging the NEM and steps have been taken to ensure that the market bodies are across all details and indeed asked to assist with implementation and ongoing changes.
4. Future agreement around emissions policy nationally now seems far more likely, and over time this should allow NEM wide policies to be introduced. The capacity mechanism that is much needed to ensure firm back up for renewables should no longer be seen as a ploy to prolong coal fired generators and can be directly designed to not do so.
   Similarly, the ongoing build of transmission in the Integrated System Plan should become easier to coordinate across the NEM rather than viewed independently by each State. As aged coal fired generators are less reliable, and as weather patterns vary across regions, the need for the Integrated System Plan transmission is clear.

So, the lesson for me is that state-based policy will not destroy the NEM, and similar emission targets across all governments in the NEM will make policy in this area possible for the NEM. Similarly, the measures taken by the states can be incorporated within the NEM but policy in the NEM must become more agile to be able to meet the real anxieties of the regions as they arise and recognize the differences in resources and demand that exist between the states.