By

Isaac Crawford

Viashin Govender

Lisa Fukuda

Mustafa Kaka

Yolana Keogh

Ben Kroll

Patrick Loughrey

Haven Roche

Lucia Zuniga Mendoza

This article reflects parts of chapters 1 and 2 of a review carried out by the 2021 graduate cohort that examines how energy market bodies in other jurisdictions account for carbon in their regulatory and decision-making frameworks.

 

Introduction

In August 2021, the Australian Energy Market Commission’s (AEMC or Commission) 2021 graduate cohort began work on a review which examines how energy market bodies in other jurisdictions account for carbon in their regulatory and decision-making frameworks.

The review investigated eight jurisdictions and their relevant energy regulators. The jurisdictions were selected to provide a spectrum of examples based on their differing economies, climate change commitments, energy markets and regulatory frameworks. These are:

• Canada and the Canadian Energy Regulator
• Germany and the Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railway
• Ireland and the Commission for Regulation of Utilities
• New Zealand and the New Zealand Electricity Authority
• Singapore and the Energy Market Authority
• South Africa and the National Energy Regulator of South Africa
• United Kingdom and the Office of Gas and Electricity Markets
• United States and the Federal Energy Regulatory Commission.

The report provides information on the operation of the jurisdiction’s energy markets, governance structures, applicable legislation, guiding energy objectives, and draws comparisons with the Australian energy market. The report also outlines how the jurisdictions and regulators account for carbon in their decision-making and the instruments and processes used to establish and implement decarbonisation policies.

Comparison to other jurisdictions

The review identified a number of similarities and differences between Australia and the selected jurisdictions with regard to their energy objectives, market structures and the role of government in energy regulation. The report draws comparisons in these key areas and aims to provide insight into how diverging frameworks can influence the national and regulatory decision-maker approach, and response to, decarbonisation.

Energy objectives

There is a wide range of energy market objectives and an associated spectrum of obligations placed on the regulator. For some jurisdictions, their statutory objective requires explicit consideration of carbon and the environment.

The AEMC’s work is governed and guided by three objectives: the National Electricity Objective (NEO), National Gas Objective (NGO) and National Energy Retail Objective (NERO). The AEMC must have regard to these objectives in performing or exercising any function or power under the National Energy Laws, National Energy Rules and regulations. The AEMC may only make a Rule if it is satisfied that the Rule will or is likely to contribute to the achievement of the relevant objective.

Jurisdictions with similar energy objectives to the NEO that explicitly account for carbon:

• The United Kingdom’s Office of Gas and Electricity Markets (Ofgem) has a primary objective to ‘protect the interests of existing and future consumers.’ In 2010, the United Kingdom updated the Electricity Act 1989 and Gas Act 1986 to establish that the term ‘interests’ must be thought of holistically to include interests ‘in the reduction of electricity/gas supply emissions of targeted GHGs’.
• Singapore recently included a new provision to the Energy Market Authority’s (EMA’s) functions and duties under the Electricity Act 2001 that enables the EMA to consider decarbonisation in making regulatory decisions. The amendment expands its statutory objectives to include implementation of policies, strategies, measures and any other requirements on any matters for, or in connection with, the reduction of GHG emissions across the electricity supply chain.

Jurisdictions with similar energy objectives to the NEO that do not explicitly consider carbon but allow for broader environmental impacts to be taken into account:

• The German Federal Network Agency for Electricity, Gas, Telecommunications, Post and Railway (BNetzA) has an objective to ensure that the supply of electricity and gas is the most ‘environmentally friendly which is increasingly based on renewable energies’.
• A key duty of the Commission for Regulation of Utilities (CRU) in Ireland is to take account of the protection of the environment.
• The South African objective requires the National Energy Regulator of South Africa’s (NERSA) to ensure sustainable development and promote utilisation of diverse energy resources.

These legislated objectives provide the energy regulators with discretion in their decision making processes on whether, and how, they account for carbon.

Jurisdictions with similar energy objectives to the NEO that do not explicitly consider carbon or the environment:

• The statutory objective of the New Zealand Electricity Authority (Authority) is to ‘promote competition in, reliable supply by, and the efficient operation of, the electricity industry’ for consumer benefit. Despite the objective’s lack of an environmental limb, the Authority has outlined its long-term strategic intent to assist in transitioning New Zealand to a low emissions energy sector.

Jurisdictions that do not have an energy objective similar to the NEO:

• The Canada Energy Regulator (CER) is not required to perform its functions and duties according to a statutory objective equivalent to the National Energy Objectives. The decisions made by CER are influenced by laws passed by the Canadian federal government, and the provincial and territorial governments.
• The United States Federal Energy Regulatory Commission (FERC) is also not obliged to adhere to an energy objective when making regulatory decisions. Instead, it is guided by legislation passed by the United States Federal Congress (Congress) and legal precedents arising from court judgements. However, the National Environmental Policy Act 1969 directs all agencies of the government, including FERC, to consider the impacts of its actions on the environment.

Market structure

Different market structures can impact on how regulatory decision-maker responsibilities are distributed in the energy sector.

Jurisdictions where responsibility over regulatory decision-making is shared between numerous parties:

• In Canada, each province and territory is governed by multiple bodies depending on the location. For example, the Ontario Energy Board (OEB) is the independent energy regulator that regulates Ontario’s energy sector as required under provincial legislation.
• Similarly, in the United States many areas of energy regulation are outside of FERC’s remit and are dealt with by various State Public Utility Commissions. These include regulation of retail electricity and natural gas sales to consumers, and regulation of local distribution pipelines of natural gas.

Jurisdictions with similar market structure to Australia:

• New Zealand’s Authority is an independent government body responsible for overseeing and regulating the New Zealand electricity market. The Authority develops and sets the market rules for New Zealand’s energy market, which is akin to AEMC’s functions in the NEM. However, unlike the AEMC, the Authority also enforces and administers the market rules which also makes it similar to the AER. New Zealand’s system operator is Transpower, a state-owned enterprise responsible for the real-time operation of New Zealand’s electricity system and wholesale market. Thus, Transpower has similar responsibilities to AEMO. One crucial difference is that Transpower is also responsible for planning, building and maintaining New Zealand’s national grid infrastructure.
• In the United Kingdom responsibility for the energy market shared between three bodies. The Department of Business, Energy and Industrial Strategy (BEIS) is responsible for setting energy policy and their role is very similar to the AEMC. However, the AEMC is an independent statutory body rather than a government department. Ofgem’s primary responsibility is the implementation of government policy and regulating the electricity and gas markets to ensure they work in the interests of consumers. Its role is similar to the AER. National Grid is the market operator and performs a similar role to AEMO. Both organisations manage the day-to-day operation of the power system including monitoring of performance and security, and overseeing settlements. A distinguishing feature of National Grid is that the company owns the electricity transmission network in England and Wales, and has established a legally separate business called the Electricity System Operator to operate the network and balance supply and demand. In contrast, the electricity transmission assets in each Australian state and territory are owned and maintained by multiple different businesses.

Government role in regulation

Governance arrangements vary across jurisdictions in relation to the degree of autonomy that state governments have to derogate from national governments’ energy policies and set their own approach to decarbonisation.

Jurisdictions with similar separation of powers to Australia:

• At the federal level both Canada and Australia are able to establish broad national climate change, environmental and energy policies, and related laws and regulations. Both jurisdictions at the state level have a degree of autonomy and can set and implement their own arrangements that may differ from the federal government. For example, under the carbon tax system Canadian provinces and territories can select the methodology they prefer to account for carbon instead of adopting the federal backstop system.
• South Africa also has a three tiered system of government like Australia. The national, provincial and local levels of government all have legislative and executive authority as set out in the Constitution and their powers may be distinctive or interrelated. The national government is the primary driver of decarbonisation policies in the energy sector and is the main rule maker. It also owns the market operator, Eskom Holdings SOC Limited (Eskom), which holds the majority of South Africa’s generation and transmission assets. In contrast, Australia’s energy market bodies and transmission and generation businesses operate independently of the federal government.

Jurisdictions affected by current and former membership to the European Union (EU):

• Germany and Ireland state governments and county legislatures have limited power in the energy sector and apply a national approach to decarbonisation across their regions. These jurisdictions are uniquely distinct from Australia because they are members of the EU and as such their national policy objectives and decisions are influenced by EU energy and climate change directives and targets.
• The United Kingdom was also a member of the EU Internal Energy Market until 31 December 2020 (Brexit) and now manages its power system independently of the EU. Since the cessation, there have been negotiations to establish a new energy agreement with discussions focusing on interconnection and the outcomes for Northern Ireland. The negotiations are expected to be completed by 30 June 2026, when the interim agreement expires. Brexit does not affect the United Kingdom’s climate change commitments as these were established at a national level under the Climate Change Act 2008.

Access the full review.