AER Draft Guidance including emission reductions in energy objectives

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The Australian Energy Regulator (AER) has released draft guidance on how it proposes to implement the amended National Electricity Objective (NEO) and National Gas Objective (NGO) to include consideration of emission reductions. The amendments to the NEO, NGO and National Energy Retail Objective are expected to be passed by the South Australian parliament in September 2023.

The AER “supports clarity around the changes to the national energy objectives to refer to government emission reduction targets and their application to AER decisions,” the guidance states. “As the independent regulator, the national energy objectives guide our work to promote the long-term interests of consumers with respect to achieving emission reduction targets, alongside our existing considerations including price, quality, safety and reliability of energy supply.”

The guidance covers two main areas:

  1. The matters the AER is likely to consider in deciding whether to apply the amended objectives to processes already underway when the amendments commence, likely in November 2023. The AER states it will consider “the materiality, for the possible outcomes of the AER’s decision making process, of applying or not applying the amended energy objectives.” It will also consider “the information, capabilities and tools available or accessible to us, at this interim stage and within required or appropriate decision-making timeframes, to assess these matters.”
  2. How the AER proposes to operationalise the amended NEO for electricity distribution network service providers in their 2024-29 revenue determinations. The AER states its “existing tools and assessment techniques are sufficiently flexible to accommodate the additional emissions reduction objective in the national electricity objective.” It expects network service providers to provide evidence of “the nature, depth and breadth of consumer engagement on the proposal, and demonstrate the impact of consumer preferences.” The AER also notes that “if guidance is provided on a value, or method of working out a value of emissions reduction, then…we will work with the network businesses on how it will be utilised in our final determinations for the 2024–29 regulatory control period.”

A key way the amended NEO may impact the AER’s decision making is through cost-benefit analyses submitted by network businesses to support their expenditure forecasts. The AER states: “As part of any cost benefit analysis, network service providers will need to estimate the change in the quantity of emissions that their proposed expenditure will create, and then apply a value to those emission reductions (in accordance with any guidance by government)…With the inclusion of emission reductions into the national electricity objective, it may be reasonable to include a monetarised value of emissions in calculating net benefits within the cost benefit analysis framework.”

The amendments to the energy objectives to include consideration of emission reductions represent a significant change to the AER’s regulatory approach. The AER’s draft guidance aims to provide clarity to stakeholders on how it proposes to implement these changes in its decision making. Interested parties have until 18 August 2023 to make submissions to the AER on the draft guidance.

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