Does 2030 NEM Re-design point to decarb ambition?

What is the government trying to achieve?

I’m getting more interested in the 2030 Market redesign and what it could mean for decarbonisation policy.

What is the government trying to achieve?

This Federal government started by saying that spending a bunch of money would let the market reach 82% renewables. Then it said that we weren’t on track for 82% renewables (by 2030), so the introduced the Capacity Investment Scheme to underwrite the revenues of projects required to get us there.

So problem solved? What re-design is needed?

Wildly speculating is fun, so here’s a few things I think the government might be considering.

1. Abandon Unserved Energy as a concept, at least for generation capacity planning. No blackouts are tolerable when those blackouts can be blamed (rightly or wrongly) on government policy. Force the industry to somehow build something for those 1 in 10 year low renewables / high demand events. One way of looking at it, is if you accidentally build “too much” clean firm capacity, then that just means they can legislate closure of the last coal and gas plants earlier than anticipated!

2. Find an exit strategy for Capacity Investment Scheme liabilities. The government will end up paying out under CIS revenue floors. Presumably the public service doesn’t see it as sound policy to just keep paying the electricity industry from consolidated revenue forever. They could try to shift the CIS liability onto retailers and therefore consumers, or they could try to raise prices in the market so that the CIS revenue floors don’t get hit. One way to do that might be to transfer CIS liabilities onto carbon-emitting generators.

3. Which brings me to carbon pricing! The Safeguard Mechanism applied to industrial emitters is pretty strong really, so the Labor government has established some credibility on legislating meaningful carbon constraints, and they haven’t really received much pushback in the press from industry or version 2 of Tony Abbott. A carbon price could be introduced by lowering the electricity sector Safeguard benchmark, which would establish ACCUs as the electricity sector carbon price. Even just legislating closure of a few coal generators could raise prices and avoid large CIS liabilities for the government.

4. Ahead markets. In a way this is a lot more boring than the points above. But it seems like something AEMO really wants that they didn’t get in the 2025 review. So I wouldn’t be surprised if there’s another push to think about it. It’s not a terrible idea if done right as there will be coordination issues with multiple gentailers playing poker with each other over battery storage levels and gas or coal unit commitments. Those coordination issues could be reduced by the right ahead market design.

These ideas seem ambitious and wildly more hopeful for meaningful climate policy than what has seemed possible over the last ten years of policy debate. But if we start by asking what the government wants to achieve with this review that isn’t being achieved by the CIS + transmission investment, then the only options left seem to be more ambitious climate action.