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Explainer: What is the NEO and reasons for changing it

Friday's meeting of Federal, state and territory energy ministers resulted in an agreement to include emissions reduction goals in the National Electricity Objective (NEO).

This decision represents a significant step forward for Australia's clean energy transition.

The clean energy industry has been calling for this reform for more than 15 years and encourages ministers to move quickly to implement this critical directive.

What is the NEO?

Within the National Electricity Law, the NEO sets out some guiding principles for the National Electricity Market (NEM) rules. The NEO promotes "efficient investment in, and efficient operation and use of, electricity services for the long-term interests of consumers of electricity with respect to: 1. price, quality, safety, reliability, and security of supply of electricity; and 2. the reliability, safety and security of the national electricity system."

  • For the Australian Energy Market Commission to make a new rule, it must satisfy the NEO.
  • The NEO explicitly refers to "long-term" interests. When used by regulatory decision-makers, this means considering whether a policy change will drive beneficial outcomes over all time scales.

Why does it matter?

The inclusion of guidance around how to achieve emissions reduction goals through the NEO would make it easier to create policies that accelerate effective NEM decarbonisation at the lowest cost. It would also help deliver an orderly transition to clean, low-cost electricity and provide increased investment certainty.

Combined with a legislated emission reduction target, requiring consideration of environmental impacts through the NEO would increase clarity around the treatment of carbon and flow through into better decision-making across the board. It could be done in several different ways, each increasing the degree of discretion for decision-makers.

  • A requirement to minimise the cost of carbon. This might translate into regulatory decision-makers using an assumed dollar value for each tonne of CO2e to assess a particular decision to minimise these costs when undertaking quantitative cost-benefit analysis.
  • A requirement to consider an emissions reduction target. This might lead regulatory decision-makers to consider how their decisions are consistent with national carbon budgets as inferred from the legislated emissions reduction target.
  • Considerations of environmental benefit more generally. This might lead to decision-makers considering non-carbon impacts, such as land use, waterway pollution and biodiversity.

What's next?

Australia’s energy regulators – the Australian Energy Market Operator, Australian Energy Regulator, Australian Energy Market Commission and Energy Security Board – need to know what to do and be allowed to get on with the job of decarbonising our electricity. The best way of doing this is a statement of policy intent that sits above the NEO as a bridge between the 43 per cent emissions reduction target and delivering the decarbonisation of Australia's electricity system at the lowest cost.