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The Finkel Report: a breakdown of the proposed clean energy target

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This article was written by Lachlan Fahey and Louis Chiam.

Why all the fuss? What the Finkel Review's Clean Energy Target means for the energy sector

Of the Finkel Review's 50 recommendations to improve Australia's power system reliability, only 1 has not yet been accepted by the Australian Government. The proposed Clean Energy Target (CET), which is designed to provide policy and investment certainty on emissions policy, has been caught up in the seemingly inevitable politics of climate change and carbon policy, with critics labelling it a "magic pudding".

So what's all the fuss about? In this alert, the KWM energy team explains the key features of the CET and how it might operate in the Australian energy market.

Australia – a new emissions policy

The Finkel Review into the Future Security of the National Electricity Market (released on 9 June 2017) recommends that Australia develop a whole-of-economy emissions reduction strategy which includes establishing a CET (Recommendations 3.1 and 3.2).

The Report notes that a mechanism is required to guide investment in a way that is compatible with Australia's international emissions reduction commitments, as existing policies (discussed below) aren't consistent with Australia's 2030 emissions reduction goals. It also emphasises the need for a long term solution which will have a dual purpose of creating policy stability and increasing investment to ensure new capacity is brought online.

Why a Clean Energy Target?

The Review compared a number of possible policies – business-as-usual (BAU), a Clean Energy Target (CET), an Emissions Intensity Scheme (EIS) and a lifetime limit on coal-fired generators (and a combination of these). The policies were assessed against 4 criteria:

  • cost for consumers
  • degree of flexibility and adaptability for the future
  • implications for security and reliability
  • ability to reduce emissions in line with national commitments

The Report concluded that a CET is the least expensive option for consumers, followed closely by an EIS, with BAU being the worst outcome. However, in contrast with an EIS, the Report notes that the CET would be easier to implement, as it could utilise the existing well-understood RET framework.

How would the Clean Energy Target work in practice?

Under a CET, all new generators with carbon emissions below a specified intensity threshold would receive certificates for their generation output, in proportion to their emissions "delta" (ie. the gap between the emissions intensity threshold and the level of carbon emissions produced by the generator). New eligible generators would receive certificates for all electricity generated, while existing eligible generators could receive certificates for any electricity they produce above their historic output. As with the current RET, electricity retailers would be required to purchase CET certificates to show that the requisite proportion of their electricity came from low emissions generators.

The CET achieves a quantitative target for emissions reduction (based on the quantity of low emissions generation) by setting a trajectory for the number of certificates to be surrendered each year.

Emissions Reductions

The CET was modelled on an emissions reduction target of 28% on 2005 levels by 2030, and zero emissions by 2070. The Report therefore recommends that the CET continue indefinitely, in line with commitments to reduce emissions well into the second half of the century. The RET on the other hand is only projected to deliver an approximate 5% reduction in electricity sector emissions on 2005 levels by 2030.

Chief Scientist Dr. Alan Finkel has commented that he will soon release the modelling used in relation to the CET.

Who would be eligible?

Critically, and unlike the RET, the CET is technology neutral – meaning all fuel types, including coal with carbon capture storage or gas, would be eligible for the scheme provided they meet the emissions intensity threshold. This element is designed to ensure the CET achieves its aim of reducing emissions at the lowest possible cost. Therefore, if a CET is adopted by the Federal Government, a key point of contention will be the level at which the emissions intensity threshold is set. The Report does not recommend a specific emissions intensity threshold, but it is understood the modelling assumed an intensity of 0.6 tonnes of CO2-e per MWh of electricity.

The Report recommends that renewable generators should not benefit from both the existing RET and the proposed CET. It remains to be seen whether the proposed CET and RET would run in parallel. The large-scale RET scheme is scheduled to reach its peak in 2020, and will therefore not create any further incentive for investment in renewable energy generation from that point. For further information on the existing RET scheme, please see below.

The modelling assumed participants would be eligible for CET certificates for 15 years.

Will it work?

It is important to remember that the CET is just one of 50 recommendations put forward by the Finkel Review. In addition to creating a stable investment environment in the electricity industry, work also needs to be done on upgrading the 20th century-designed grid so that it meets the needs of the 21st century. The Finkel Review recommended a range of measures aimed at 'grid optimisation'. For example, improving grid security by boosting the delivery of essential services such as physical inertia, better integrating variable renewable generators into the grid through improved use of data and access to forecasting information, and implementing incentives for consumers so that demand can be better managed (ie. avoiding critical points of peak demand). In order to capture the benefits of such improvements and new technology, the Finkel Review notes that the certificate-based CET should be flexible enough to avoid over-incentivising new capacity.

While the CET has garnered a degree of political backing, it has attracted its share of criticism, with senior conservatives accusing the Report of using "creative" modelling to promote the CET and labelling the CET a "magic pudding" and a "tax on coal".

The Federal Government has, together with the State and Territory Governments, endorsed 49 out of the 50 Finkel Review recommendations at July's COAG Energy Council meeting in Brisbane. However, whether the Federal Government will adopt the final, and arguably most controversial recommendation, the CET, remains to be seen. Even if a CET is announced, there is still likely to be further debate as to the level at which the emissions intensity threshold should be set (ie. which technologies will be eligible). With the large-scale RET reaching its maximum in 2020, and no further emissions reduction strategy currently announced, what we do know is that there is little certainty for the electricity sector on how Australia will meet its international commitments under the Paris Climate Accord by 2030 and beyond.

Existing emissions reduction mechanisms

There are currently two RET schemes, which are administered by the Clean Energy Regulator – the Large-scale Renewable Energy Target (LRET) and the Small-scale Renewable Energy Target (SRET).

The LRET encourages investment in renewable power stations in order to achieve 33,000 gigawatt hours of additional renewable electricity generation by 2020. The LRET does this by mandating electricity retailers to buy a certain amount of "large-scale generation certificates" based on the volume of electricity they buy each year. Retailers must then surrender the required number of certificates to the Clean Energy Regulator. Eligible generators receive large-scale generation certificates from the Clean Energy Regulator in proportion to the amount of eligible renewable energy they produce. Generators can then sell or trade these certificates to electricity retailers.

The SRET operates in a similar way to support small-scale installations like household solar panels and solar hot water systems by creating financial incentives for individuals and small business to install eligible small-scale renewable energy systems.

In addition to the LRET and SRET, there is also a "safeguard mechanism" as part of the government's Emissions Reduction Fund. The safeguard mechanism requires certain large businesses which have direct emissions of more than 100,000 tonnes of carbon dioxide equivalence per year to keep emissions within baseline levels, to ensure that emissions reductions purchased by the government are not offset by significant increases in emissions above BAU levels.

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