At the December 2015 COAG Energy Council meeting, Energy Ministers tasked officials with preparing advice to allow the Energy Council to better understand the potential impacts of climate change policies on the National Electricity Market (NEM). The Australian Energy Market Commission (AEMC), along with the Australian Energy Market Operator (AEMO), was asked to assist officials with this work.

At the August 2016 Energy Council meeting, Energy Ministers agreed to expand the scope of the advice to include consideration of the economic and operational impacts of existing jurisdictional renewable energy target schemes, to the extent that the details of those schemes had been finalised.

As part of the advice, the report on the integration of energy and emissions reduction policy develops the following emissions reduction mechanisms. Each of the policy mechanisms have been designed so that they are expected to achieve a target of 28 per cent emissions reduction on 2005 levels by 2030. 

• Market-based: The establishment of a declining Emissions Intensity Target for the electricity sector, where generators with an emissions intensity above the target would need to buy credits and those with an emissions intensity below the target create and sell credits.
• Technology subsidy: Extension of the existing Large-scale Renewable Energy Target (LRET). Based on 2015 forecasts of demand, the current LRET would need to increase from 33,000 GWh in 2020 to 86,000 GWh in 2030 to meet the 28 per cent emissions reduction target.
• Government regulation: Based on current forecasts of demand, a regulatory policy mechanism is implemented by government to close the number of fossil-fuelled generators required to meet the emissions reduction target.

The report analyses the characteristics and impacts on the energy market of these three emissions reduction policy mechanisms.

AEMO has undertaken an analysis of the potential impacts of each of the three emissions reduction mechanisms on key elements of power system security, such as frequency control. AEMO’s work is included as an appendix to the AEMC report.

The report finds that Emissions Intensity target (EIT) has the lowest impact on prices relative to the business-as-usual scenario and relative to the Extended LRET and Regulated Closure.  The EIT also achieves emissions reduction at the lowest cost of the three policy mechanisms.

In contrast, the regulated closure policy results in the highest costs to consumers while the Extended LRET has the highest cost of abatement for the economy overall.