Announcement date
10/05/2024
Link to announcement
Problem being addressed
Coal generators, which currently account for over half the National Energy Market's (NEM) generation output, are ageing, and several have announced early retirement dates. Most market participants consider the Australian Energy Market Operator's (AEMO) Step Change scenario to be the most likely, which estimates 14GW of coal-fired generation may retire by 2030, and all coal-fired generation will cease generating by 2043. The current pace of investment appears insufficient to deliver a smooth transformation, or to achieve the 82 per cent renewable penetration that would facilitate achieving a 43 per cent reduction in emissions by 2030.
Proposal
In 2021, Energy Ministers tasked the ESB to provide recommendations on the design of a capacity market for the NEM. However, energy ministers judged based on stakeholder feedback that such a capacity mechanism would not be sufficiently timely or targeted to address the rapid transformation of Australia’s electricity system. On 12 August 2022, Energy Ministers tasked government Senior Officials to propose further options for a new framework that delivers adequate capacity, ensures orderly transition; and incentivises new investment in firm renewable energy to ensure the system can meet peak demand at all times. On 8 December 2022, Ministers then endorsed in principle a new Commonwealth Capacity Investment Scheme (CIS), which provides a national framework to drive new clean dispatchable capacity (CDC) and support reliability in Australia’s rapidly changing energy market.
Three options to incentivise increased investment in Variable Renewable Energy (VRE) and two options to incentivise increased investment in Clean Dispatchable Capacity (CDC) were prioritised for further assessment.
- Option 1: No Government Action - A business-as-usual approach assumes current Commonwealth, state and territory policies and initiatives will be sufficient to incentivise the market to deliver sufficient storage capacity and generation in a timely manner to replace exiting generation and capacity. Under this approach there would be no disruption to current market-based incentives for private investment in new storage and generation.
- Option 2: Expanding the Large-scale Renewable Energy Target (LRET) - would involve certificates being issued based on discharge of capacity available to the grid.
- Option 3: Strategic Reserve - would involve payments to move and preserve existing capacity out-of-market that may have otherwise fully exited.
- Option 4: Capacity Investment Scheme (CIS) - would involve competitive tender bids for renewable energy generation and storage projects that can fill expected reliability gaps.
Assessed Impact Analysis outcome
Adequate
Assessment comments
The Office of Impact Analysis’ (OIA) assessment is that the quality of the analysis in the IA is adequate. The IA would have achieved a ‘good’ rating if there was the inclusion of additional detail on the rationale for government intervention, based on a clear description of the government’s role in the energy sector, improved coherence of the analytical framework being applied in the analysis, and more detailed evaluation planning, including key evaluation questions, responsibilities for data collection, data management and program governance.
Consistent with the Australian Government Guide to Policy Impact Analysis, the OIA agreed to redactions proposed by the Department of Climate Change, Energy, the Environment and Water (DCCEEW) of particular elements the IA. These redactions were agreed on the basis that they were <commercial in confidence> and their publication could compromise the integrity of the CIS tenders and diminish the competitive tension, thus affecting the achievement of value-for-money outcomes for the Commonwealth. The final costs of the scheme hinge on future electricity prices and their subsequent impact on project revenues. Disclosing the model outputs could enable participants to manipulate bids or strategies, undercutting other CIS participants, thereby distorting the competitive landscape.
Regulatory burden
DCCEEW estimates a cumulative annual regulatory cost over the lifetime of the Capacity Mechanism of $5.8 million. The regulatory burden estimate value calculates the number of hours it would take an assumed number of stakeholders (in this case businesses) participating in the CIS to engage with each step of the tender. It is assumed that two tenders will be conducted each year for three years.
Addendum (Publication date – 2024)
Since the certification of the Second Pass Impact Analysis, updated data has been released which was provided to decision makers following certification. Updated data is reflected in the supplementary Background paper (referred to as the addendum).
Furthermore, certain sections of the Impact Assessment document were required to be redacted due to their commercial-in-confidence nature. These redactions have affected the readability and may affect readers’ comprehension of the document. The addendum offers an evaluation of the chosen policy option's implications and benefits, as well as alternative options considered in order to address readability issues in the Impact Analysis. In July 2024 the Addendum documents were updated to reflect minor typographical or formatting edits.