The federal government proposed a National Energy Guarantee as an alternative policy to the Clean Energy Target (CET) recommended by the Finkel Review. The Clean Energy Council was disappointed with this change of direction and made it clear that the CET was our preferred policy approach over the National Energy Guarantee. The following is an outline of what the Clean Energy Target would look like.

What is a Clean Energy Target (CET)?

A Clean Energy Target is a policy mechanism that would provide an incentive for new low emissions forms of energy generation to enter the market. It would operate as a technology neutral market mechanism encouraging the lowest cost eligible projects. 

How would a CET work?

A CET would set a target for a certain level of low emissions generation to be delivered each year. Eligible low emissions generators would be allowed to sell certificates. This obligation would likely be placed on electricity retailers, who would be required to purchase low emissions certificates from eligible projects. The value of certificates would be determined by the market, based on the cost of the least expensive projects. 

How much low emissions generation would a CET deliver?

One of the key decisions would be the target for how much low emission generation would be required each year. This target would need to provide long-term certainty for the market and confidence for investors to invest in new projects. It is at least expected that this target would need to be calibrated with Australia’s overall emissions reduction target of reducing emissions by 26-28% by 2030, to ensure the energy sector does its fair share of the abatement task.

How would a CET impact existing coal generation?

While a carbon tax or an Emissions Intensity Scheme places a direct cost on existing generators (based on their carbon emissions), a CET would incentivise new generation without directly imposing a cost on existing generation. However, encouraging new clean energy generation would have the impact of lowering wholesale energy prices (due to basic supply/demand dynamics and increased competition) and increasing competition with existing coal generation. 

Would a new CET replace the existing RET?

The existing RET peaks in 2020, and runs until 2030. It is expected that a new CET would commence by 2020 and continue well beyond 2030 to provide long-term investment confidence. A key design issue would be the way the CET and current RET interact between 2020 and 2030. This would require careful consideration to ensure previous investments made under the RET are not adversely impacted while the CET drives investment in new projects. 

What low emissions technologies would a CET support?

A key design decision would be the threshold for ‘low’ emissions technologies. That decision would determine which current and future technologies are likely to be eligible. While the Howard Government proposal in 2007 assumed a threshold of 0.2 tonnes/MWh of emissions to be eligible, the Finkel Review applied a threshold of 0.6 tonnes/MWh of emissions to its modelling.

It is expected that generators would be allocated a proportion of a certificate based on their actual emissions. For example, a gas generator would be allocated around half a certificate for each MWh of energy generated because it might produce emissions at around 0.3 tonnes/MWh. Alternatively, a wind generator would receive the full certificate value because it produces zero emissions. A CET would better promote lower emissions generation through this scaling effect.

How would a CET impact energy prices?

The lack of any long-term energy policy has added to increased power prices. Modelling commissioned by the AEMC suggests that wholesale power prices are currently between $27 and $40 per MWh higher than they might otherwise be.

A CET has both a cost and benefit on power prices. The cost of purchasing low emission certificates would ultimately be passed on to consumers by electricity retailers. However, this cost would be offset by lower wholesale power prices as a result of increased supply from renewable energy generators that get their fuel for free, a reduced risk premium due to policy certainty and more competition in the wholesale electricity market. On balance, these lower wholesale power prices would be expected to more than offset the additional cost of certificates, and therefore power bills would actually be lower under a CET policy than otherwise. 

This is consistent with the analysis undertaken by the Warburton review during the Abbott Government review of the Renewable Energy Target, which concluded that reducing the target would result in an overall increase in power prices.