Policy update October 2021 07 October 2021
The focus of many members based in NSW and Victoria has been keeping their businesses afloat during COVID restrictions. It has been an incredibly tough few months but there is now light at the end of the tunnel. Restrictions in both jurisdictions are being wound back, with restrictions in the construction sector in Victoria starting to ease on Tuesday 5 October 2021.
Policy work has continued around the country during the lockdowns, with major announcements in the last few weeks.
There has been a lot of discussion in the media about Australia’s climate change policies in the run up to international climate change negotiations that take place from 31 October to 12 November in Glasgow. These negotiations are known as the 26th Conference of Parties (COP) to the United Nations Framework Convention on Climate Change, often referred to as COP26.
Over the past year the pressure has ramped up on Australia to take more action on climate change. While the election of President Biden in the US has had a major impact, it is only one of many factors, with many of our trading partners in Asia and Europe adopting much stronger climate change targets.
Many of our major trading partners have committed to reach ‘net zero’ emissions by or before 2050, and several major developed economies (e.g. the US and European Union) aim to reduce their emissions by well over 40 per cent by 2030. In contrast, Australia doesn’t have a formal target to reach net zero by 2050, and aims to reduce emissions by just 26-28 per cent by 2030. In addition, our current policy settings are unlikely to even deliver our current 2030 emissions target. Electricity generation is decarbonising rapidly, but emissions from transport and gas extraction and use have been growing.
The global pressure for Australia to ramp up its ambition is being compounded by domestic pressure from several sources - voters, businesses, states and parts of the coalition government itself. It is, for want of a better phrase, a perfect storm.
How the Australian Government will respond to this pressure is still unclear – even within the Government itself many people clearly do not know where this will land. While some Liberal politicians and the NSW Government have publicly pushed the Prime Minister to make stronger commitments, there is strong resistance from many National politicians. In addition, Morrison’s previous attacks on Labor’s climate change proposals limit his policy options.
This is a very long way of saying – we won’t know what, if any, changes are going to be made to the Australian Government’s climate change policies until they’re announced. However, the longer-term direction is clear – pressure will continue for Australia to ramp up its actions, and Australian businesses must prepare to operate in a net zero economy, likely well before 2050.
Even if the Commonwealth Government doesn’t raise its ambition, businesses will be driven by state and territory targets and policies.
On 29 September 2021 the NSW Government announced that it was raising the state emissions reduction target from 35 per cent by 2030 to 50 per cent by 2050. Victoria, South Australia, the ACT and Queensland have also set 2030 targets, and the average goal of these five states is a 43 per cent reduction of emissions by 2030, comparable to the average targets of major developed economies (see chart below). Adam Morton from The Guardian notes that, even if Western Australia, Tasmania and the Northern Territory don’t reduce their emissions at all over the next decade, these targets mean that Australia’s emissions will fall by 34 per cent by 2030.
Figure 1: Australian states and territories 2030 target
Source: Investor Group on Climate Change
This means that Australia already has an aggregate national emissions reduction target that is much more ambitious than its formal national target, but lacks the national mechanisms to deliver this goal. Unless the Commonwealth Government introduces more effective national measures, states will simply ramp up their efforts on climate change.
In other words, the key issue for Australian businesses isn’t whether they should prepare for a low-emissions future – this is inevitable – but whether there will be a consistent national policy framework or a patchwork of policies across the country.
Regardless of how coordinated this effort is, a new report from the US shows how critical it is that energy efficiency is part of the mix to ensure that climate change policy is effective and cost-effective.
The first day of October was a milestone for the National Electricity Market (NEM), as it finally switched from 30-minute settlement to 5-minute settlement. Without going into the arcane details of this change, roughly what it means is that prices for energy will vary every 5-minutes, providing much more precise price-signals. The chart below, kindly provided by Dylan McConnell of the Climate and Energy College at the University of Melbourne, shows what happened to wholesale energy prices at midnight on 1 October.
This switch from Duplo to Lego signals the NEM significantly growing up as it moves to a clean energy system. In a practical sense, 5-minute settlement is a huge deal for the owners of demand response, batteries and peaking capacity, as they can be much more confident about the rewards that they’ll receive for dispatch.
The NEM will undergo another major change on 24 October 2021, when the Wholesale Demand Response Mechanism (WDRM) comes into operation. As I’ve discussed many times before, the WDRM will allow energy users to sell reductions of demand into the wholesale energy market, potentially delivering significant gains to flexible loads. The WDRM will come into operation with a single clunky baselining methodology based on CAISO 10-of-10, which works well for flat loads but isn’t particularly suited to weather-dependent loads. We’ll work with the Australian Energy Market Operator over the coming year to hopefully introduce more baselining methodologies.
Finally, the Energy Security Board (ESB) presented their final advice to Australia’s energy ministers about changes to the post-2025 framework for the NEM. The report is over 300 pages long, and if you want the crib notes I’d focus on the recommendations on pages 19-21 of Paper A. Key recommendations include:
- A capacity mechanism. It’s not currently possible to evaluate the costs and benefits of this proposal, as there are insufficient details. Accordingly, national cabinet has agreed that the ESB should undertake further work to design this mechanism so that it can be evaluated;
- A proposed DER Implementation Plan that focusses on distributed generation, but will look at trying to develop reforms that will reward consumers for flexible demand;
- The immediate development of a NEM wide jurisdictional strategic reserve that allows individual jurisdictions to procure reserves beyond the national market reliability standard. While this could lead to different reserve standards in different states, it would at least lead to national consistency on the mechanism used to achieve this;
- Create a trigger to allow state ministers to trigger the Retailer Reliability Obligation (RRO) in their jurisdiction, as South Australia has done;
- Support for AEMC processes that are currently underway, including the development of a Unit Commitment for Security (UCS) mechanism for non real-time procurement of resources; and
- Development of a spot-market for inertia.
The recommendations in the report are very broad and so there will be a lot of time between now and them being fully designed and operational, but this is a landmark report.
Energy efficiency schemes
While enough Victorian Energy Efficiency Certificates (VEECs) have been generated to meet 100 per cent of the 2021 target and around 40 per cent of the 2022 target, the price of VEECs has been hovering around the $80 mark. There are a number of likely reasons for this, including COVID restrictions limiting generation, the reduced incentive for lighting and a change in the emissions factor of electricity.
The Victorian Government is working on a raft of changes to the scheme, some of which could partially reduce the tightness of the market. These include development or review of methodologies for:
- Commercial and Industrial Heat Pumps;
- Refrigerated Display Cabinets;
- Cold rooms;
- Water and Space heating;
- Smart thermostats; and
- Hot pipe lagging.
The latest information on the VEU can be found here.
In late September the NSW Government released a new position paper on the Energy Security Safeguard, which sets out a range of matters relating to the ESS and the new Demand Reduction Scheme (PDRS). The NSW Government also introduced the regulation to Parliament to create the PDRS, which will commence ‘in time for the 2022-23 summer’. While the Government has determined a number of features of the PDRS, including the targets, liability and nature of the certificates, we anticipate that they will consult on the details in the coming months.
In South Australia, activity under the Retailer Energy Productivity Scheme (REPS) has slowed down owing to the cap on carrying over activities between years. We look forward to working with the South Australian Government to address this issue.
National Construction Code
The EEC has been extremely busy working on the proposed update to the National Construction Code (NCC) for 2022, which would lift minimum requirements for new homes from 6 Star NatHERS to 7 Star NatHERS and require the building and its fixed appliances to meet an overall energy budget.
The Consultation Regulation Impact Statement (CRIS) for the NCC has now been released. Despite exceptionally conservative assumptions, the CRIS found that raising the standard for new homes would deliver net savings to home buyers from the first day that they move in, as the tiny increase in their mortgage repayments are dwarfed by reductions in their energy bills.
However, there are a number of significant methodological issues with the CRIS that underestimate the social benefits of raising building standards, and we’ll be working closely with the Australian Building Codes Board and a range of partners to try to address these issues.
State climate change policies
On 9 September the Western Australian Government announced a $750 million ‘Climate Action Fund’, that has a number of low-impact policies, with the main measure being $350 million for expansion of softwood plantation estate. In terms of energy management, there’s a paltry $13 million for a ‘household energy efficiency scheme,’ meaning that Western Australia will be paying much higher costs than other states for carbon abatement.
In contrast, on 30 September the ACT Government has again demonstrated its firm grasp of climate change policy, announcing a more modest but well-targeted set of measures to reduce emissions, including:
- $15.3 million to reduce carbon emissions from the ACT Government Callam Offices in Woden;
- $12.8 million over four years for the Emergency Service Agency’s Vehicle Replacement Program, which will include the addition of nine zero-emissions vehicles to the emergency services fleet;
- Allocating the first $5 million of the $50 million Vulnerable Household Energy Support Scheme, helping low-income homeowners and public housing tenants cut their energy bills with subsidies to switch from fossil fuel gas to efficient electric appliances; and
- $5 million over four years for the Community Clubs Building Energy Efficiency Fund, supporting clubs to reduce their costs and their reliance on pokies by making energy efficiency improvements with rebates of up to $75,000.
The ACT Government has also opened the $150 million Sustainable Household Scheme to all eligible households and individuals, which offer zero-interest loans of up to $15,000 to invest in energy efficient upgrades to their homes.
Deloitte finds efficiency retrofits deliver billions in benefits
The Australian Council of Social Service (ACOSS) is the peak council for community services in Australia and the lead national advocate for people affected by poverty, disadvantage and inequality. ACOSS engaged Deloitte to estimate the impacts of it’s proposed ‘National Low-income Energy Productivity Program (NLEPP), which includes:
- $1.51 billion to upgrade 319,853 public housing dwellings;
- $923 million to upgrade 117,865 community housing dwellings;
- $4.87 billion to audit and upgrade low-income owner-occupied homes; and
- $1.8 billion to audit and upgrade private rental properties for low-income people.
Deloitte found that these measures would deliver between $3.4 billion and $4.9 billion in Gross Domestic Product between 2021 and 2025, and create up to 22,000 full-time equivalent jobs over the life of the program.
This landmark report by ACOSS can be downloaded from their website.
Rob Murray-Leach is Head of Policy with the Energy Efficiency Council. Connect with Rob on LinkedIn.