National Energy Regulator Aligns with National Energy Objectives

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Need to know

The AEMC has released its final electricity and retail rules, aligning the National Energy Rules (NER) with the updated National Energy Objectives (NEO).

Effective from February 1st, 2024, the finalised rules enhance transparency and clarity in applying updated energy objectives to decision-making processes. They emphasise the importance of considering emissions reduction alongside key factors like price, quality and reliability. Additionally, this alignment streamlines consultation processes for the Australian Energy Regulator (AER), facilitating timely updates to guidelines and instruments in response to evolving energy objectives.

The Energy Rules

Essentially, the Energy Rules determine how companies can operate and participate in the energy generation and retail sectors and outline the rights and responsibilities that govern the economic regulation of electricity transmission and distribution networks. In response to two rule change requests from Energy Senior Officials on behalf of the Ministerial Council on Energy, they’ve now been amended to incorporate emissions reduction into the national energy objectives.

The publishing of the final rules provides clarity on how emissions reduction is expected to be factored into decision-making processes established under the national energy rules and the revenue determination and access arrangement decision processes for network service providers.

These changes will support Australia’s emissions reduction targets within scope of the national energy framework. Importantly, this means emissions reduction is now a relevant consideration in market bodies’ decision-making, as well as certain activities of market participants regulated under the national energy rules.

 

Advantages of including emission reductions

As mentioned before, the final rules made by the AEMC under the national energy laws are designed to promote efficient investment in, and efficient operation and use of, energy services for the long-term interests of consumers with respect to price, quality, safety, reliability, and security of supply. These final rules aim to:

  1. support Australia's emissions reduction goals through integrated energy policy decision-making
  2. increase market efficiency via clear emissions guidelines
  3. align urgent reforms with ongoing operations, adhering to new energy goals
  4. enhance regulatory practices with transparent and consistent emissions objectives application
  5. improve transparency and clarity in how the updated energy objectives apply to decision-making processes established under NERs

 

Final rule inclusions: the details

The final rules incorporate emissions reduction within the energy regulatory framework by adding ‘changes to Australia’s greenhouse gas emissions’ as a class of market benefit for the Integrated System Plan (ISP) and Regulatory Investment Test for Transmission and Distribution (RIT-T and RIT-D) processes. The rules also change the definition of ‘net economic benefit’ in the NER to improve clarity on its operation.

Under the final rule, AEMO is not obliged to classify emissions reduction as a market benefit in the 2024 ISP unless it receives Value of Emissions Reduction (VER) guidance by 29 February 2024. This provision, requested by AEMO, allows flexibility to include emissions reduction after this date, but it's not mandatory. If VER guidance is issued by the deadline, AEMO must include emissions reduction in the ISP.

Regardless, AEMO will continue to consider emissions reduction in line with the updated NEO and government policies. This approach ensures that, even without VER guidance, the 2024 ISP will align with emissions reduction goals.

 

Benefits to the AER and wider industry

As with many updates to rules and regulations delivered in Australia’s economic and government system, the main benefits are in the consistent application and guidance achieved. Ultimately, NERs are also designed to promote efficient investment in, and efficient operation and use of, energy services for the long-term interests of consumers with respect to price, quality, safety, reliability, and security of supply.

From a market participant perspective, this means improved incentivisation and clarity on how to:

  • improve the efficiency for their emissions reduction activities over a planning/investment timeframe
  • assess the marginal benefit of emissions reduction and the marginal costs of emissions increases - against other costs and benefits of proposed projects
  • factor emissions reduction into their decision-making improves the transparency for processes such as the RIT, ISP, and expenditure proposals.

The alignment of the energy rules therefore provides the AER with streamlined consultation processes to assist in their ongoing updates of guidelines and instruments due to any changes to the energy objectives. Specifically, the AER can now:

  • ensure the economic benefits of reducing emissions are appropriately considered during cost-benefit analyses conducted by market bodies and regulated entities
  • conduct a single, consolidated consultation using the distribution consultation procedures for minor updates needed in the National Energy Rules (NER), and national energy retail rules (NERR) guidelines due to changes in the energy objectives
  • carry out a consolidated consultation process for five network planning guidelines and instruments using the standard rules consultation procedures, with two rounds of consultation, in time for the 2026 ISP
  • consult using the consultation processes, either individually or in groups for NER guideline updates that are not minor, other than the network planning instruments noted above
  • adequately consider the benefits of emissions reduction and costs of emissions increases, which accrue to a broad range of parties beyond the electricity sector, when an assessment of net economic benefits is undertaken as required by the NER

According to the AEMC, without these changes, market participants and the AER would be required to factor emissions reduction into decision-making on a case by case basis. Such an approach may result in an unpredictable regulatory framework and would increase administrative burden for market participants and market bodies.

 

Next steps    

If you are interested in familiarising yourself with the National Energy Rules and the amendments, there are a range of further readings. These include:

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