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Environment and Communications Legislation Committee
26/03/2018
Estimates
ENVIRONMENT AND ENERGY PORTFOLIO
Department of the Environment and Energy

Department of the Environment and Energy

Committee met at 11:01

CHAIR ( Senator Duniam ): I declare open this meeting of the Senate Environment and Communications Legislation Committee. The Senate has referred to the committee the particulars of certain proposed additional expenditure for the 2017-18 budget year for the portfolios of Environment and Energy and Communications and the Arts, and other related documents. The committee has fixed Friday, 11 May 2018 as the date for the return of answers to questions taken on notice for this particular hearing. Proceedings today will continue the committee's examination of the Department of the Environment and Energy and will follow the order as set out in the program. Under standing order 26, the committee must take all evidence in public session. This includes answers to questions on notice. Officers and senators are familiar with the rules of the Senate governing estimates hearings. If you need assistance, the secretariat has copies of the rules.

The Senate has also resolved that an officer of a department of the Commonwealth shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about how and when policies were adopted.

I particularly draw the attention of witnesses to an order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be raised. Witnesses are specifically reminded that a statement that information or a document is confidential or consists of advice to government is not a statement that meets the requirements of the 2009 order. Instead witnesses are required to provide some specific indication of the harm to the public interest that could result from the disclosure of the information or the document.

   The extract read as follows—

Public interest immunity claims

That the Senate—

(a) notes that ministers and officers have continued to refuse to provide information to Senate committees without properly raising claims of public interest immunity as required by past resolutions of the Senate;

(b) reaffirms the principles of past resolutions of the Senate by this order, to provide ministers and officers with guidance as to the proper process for raising public interest immunity claims and to consolidate those past resolutions of the Senate;

(c) orders that the following operate as an order of continuing effect:

(1) If:

   (a) a Senate committee, or a senator in the course of proceedings of a committee, requests information or a document from a Commonwealth department or agency; and

   (b) an officer of the department or agency to whom the request is directed believes that it may not be in the public interest to disclose the information or document to the committee, the officer shall state to the committee the ground on which the officer believes that it may not be in the public interest to disclose the information or document to the committee, and specify the harm to the public interest that could result from the disclosure of the information or document.

(2) If, after receiving the officer’s statement under paragraph (1), the committee or the senator requests the officer to refer the question of the disclosure of the information or document to a responsible minister, the officer shall refer that question to the minister.

(3) If a minister, on a reference by an officer under paragraph (2), concludes that it would not be in the public interest to disclose the information or document to the committee, the minister shall provide to the committee a statement of the ground for that conclusion, specifying the harm to the public interest that could result from the disclosure of the information or document.

(4) A minister, in a statement under paragraph (3), shall indicate whether the harm to the public interest that could result from the disclosure of the information or document to the committee could result only from the publication of the information or document by the committee, or could result, equally or in part, from the disclosure of the information or document to the committee as in camera evidence.

(5) If, after considering a statement by a minister provided under paragraph (3), the committee concludes that the statement does not sufficiently justify the withholding of the information or document from the committee, the committee shall report the matter to the Senate.

(6) A decision by a committee not to report a matter to the Senate under paragraph (5) does not prevent a senator from raising the matter in the Senate in accordance with other procedures of the Senate.

(7) A statement that information or a document is not published, or is confidential, or consists of advice to, or internal deliberations of, government, in the absence of specification of the harm to the public interest that could result from the disclosure of the information or document, is not a statement that meets the requirements of paragraph (1) or (4).

(8) If a minister concludes that a statement under paragraph (3) should more appropriately be made by the head of an agency, by reason of the independence of that agency from ministerial direction or control, the minister shall inform the committee of that conclusion and the reason for that conclusion, and shall refer the matter to the head of the agency, who shall then be required to provide a statement in accordance with paragraph (3).

(d) requires the Procedure Committee to review the operation of this order and report to the Senate by 20 August 2009.

( 13 May 2009 J.1941 )

(Extract, Senate Standing Orders)

I welcome the minister, Senator the Hon. Simon Birmingham, representing the Minister for the Environment and Energy. Minister, is there any opening statement from you?

Senator Birmingham: Good morning, Chair and everybody. No, thank you.

CHAIR: Excellent. Welcome back, Mr Pratt and officers. Should we proceed straight to questions?

Mr Pratt : I think we should.

CHAIR: Excellent. I'm pleased to hear it. We will go directly to program 4.1, Energy.

Senator KENEALLY: Thank you to Mr Pratt, the minister and your team for your attendance today. I'd like to ask about the Energy Security Board and its engagement in designing the National Energy Guarantee. Could you elaborate: what is the department's involvement in this process?

Mr Pratt : We're happy to take you through that. As you might imagine, we spend quite a lot of time working with the Energy Security Board—the board itself and also its constituent parts, the various energy bodies. We are heavily engaged with them at the moment, of course, in putting the Commonwealth's policy views around the National Energy Guarantee to them, and we've participated in their consultation processes in the lead-up to the COAG Energy Council ministers meeting in April.

Senator KENEALLY: In the process that you've just outlined, are you providing advice to the Energy Security Board on design details?

Mr Pratt : I'll let my colleagues run through the specific things. Certainly we're advising them about our position on some of those matters.

Mr Heferen : In relation to the Energy Security Board's work, there are at least two distinct components. There are many more, but, in relation to the guarantee, looking at the mechanism that can be utilised to ensure both the reliability of the system and the emissions intensity of the system is such that it meets the electricity generation's part of the overall Paris commitment.

In relation to the emissions intensity, I'll get Mr Chisholm or Mr White—I can't say 'James', because they're both James—to go through it in a little more detail. On the reliability side, it's essentially a matter for the ESB. But it would be important to note that given the ESB's make-up—the Chair, Dr Kerry Schott; the Deputy Chair, Clare Savage; and the heads of AEMO, AEMC and the AER—there are a lot of discussions that we have with those bodies as those bodies. For example, we have discussions with the AEMC about its work on the reliability frameworks review or with AEMO about its work on the integrated system plan. Those debates or those discussions or those insights all then feed into what they would do in their role with their ESB hat on, as opposed to their AEMO, AEMC or AER hat. The discussions we have just with the ESB as the ESB are one set of discussions, but there's also the other set where there are a number of issues that we discuss and work through and provide our perspective on, given that those will be areas in which those particular bodies would have the responsibility. But just in relation to the work on the emissions side in particular, I might pass to either Mr Chisholm or Mr White to give you some more detail.

Mr Chisholm : As Mr Heferen outlined, there are two ways in which we're engaging with the ESB. On the reliability component of the guarantee, we obviously are contributing to the policy development process that the ESB is engaging in. On the emissions component of the guarantee, the Commonwealth are responsible for not only the target that the emissions component is designed to address in the electricity sector but also how the compliance with that target is to be determined and assessed, the way contracts are going to be assessed, and also the treatment of other issues such as EITEs and offsets. We've contributed to the consultation paper that the ESB has developed, and we've also been involved in the consultations around that. Those are the two areas in which we're involved with the ESB.

Senator KENEALLY: Let me follow that up and ask: are you aware of the submissions that have been lodged to the Energy Security Board by industry and experts about the NEG design?

Mr Chisholm : Yes, Senator.

Senator KENEALLY: Has the department lodged a submission to the Energy Security Board?

Mr Chisholm : Not a submission in the sense that you're referring to, no.

Senator KENEALLY: The Energy Security Board will be providing advice to the COAG Energy Council—correct?

Mr Chisholm : That's correct, yes.

Senator KENEALLY: Will the department also provide advice to the COAG Energy Council on the design of the NEG?

Mr Heferen : The department will have no role in providing advice to the council. But, of course, as our minister is chair of the council, we'll have a key role in providing advice to our minister. As in any public policy process, the department of state will have a responsibility to ensure their minister is properly informed. We would expect here, given the amount of work the ESB is going through with all the relevant stakeholders and the close engagement and contact we have with the ESB, that it would be one of those ones where hopefully what the ESB comes up with in providing advice to council will be something that all members of what we call the Senior Committee Officials, the SCO—that's the group I chair, which is made up of my equivalents for each of the jurisdictions—will have the opportunity to have discussions with the ESB prior to the council meeting. I would anticipate any issues that need to be worked through and expanded and resolved would be done through that process. Going back to your precise question, the department has no role in providing advice to the council. We would just do it through our minister and, of course, the minister would then go to the council.

Senator KENEALLY: Can I sum up your answer in this way: the department's role is to be in conversation with the Energy Security Board through various mechanisms, but you haven't made a submission formally, and you don't provide advice directly to the COAG Energy Council; you provide advice through your minister.

Mr Heferen : That's correct.

Senator KENEALLY: In looking at the National Energy Guarantee, have you identified any major risks in the design?

Mr Chisholm : I can start with that question. We've been aware of the submissions that have been made to the ESB as part of the consultation process. Obviously, with any regulatory design process, the ESB is concerned to ensure that no unintended consequences materialise. There are areas that the ESB is focused on ensuring are addressed. We want to ensure that the reliability is addressed through the guarantee and that our emissions target is met while minimising the compliance burden that industry would have.

Senator KENEALLY: With respect, Mr Chisholm, that's a fairly general statement that could be made about any government process. Let me ask this: the department of energy's website highlights that the NEG will lead to energy generators making the right investment in the right place at the right time. Is the department in a position to assess what the right investment in the right place at the right time is?

Mr Chisholm : That will come down to the forecasts that the AEMO determines as part of the implementation of the guarantee. The AEMO will set forecasts, and a reliability requirement will flow from that. That will probably be a regional element—there'll be a regional element to that too. In advance of the implementation of the guarantee and the precise nature of the forecasts by the AEMO, we can't say with certainty where that will be triggered.

Senator Birmingham: If I could add: the point of the NEG is not to create an architecture that sets out with the government commencing by defining what the outcomes should be in terms of what investment occurs precisely in what energy generation options and where. It is for governments to agree on a framework that ensures the outcomes—the outcomes of reliability, emissions reduction, targets being met and, ultimately, all that occurring at the lowest cost—are achieved by the market responding to the requirements of the NEG. It's about making sure that it is a NEG that delivers those outcomes, not setting out from day 1 saying, 'This particular type of energy somewhere should be delivered in this time frame.' The intention here is that it will be generator-neutral in terms of the way that it applies.

Mr Heferen : There's one other pretty consistent theme that comes through in submissions, and that is the effect on competition. As we're all aware, the concentration of ownership and generation—particularly in New South Wales, Victoria and South Australia, and clearly in Queensland and Tasmania given the government ownership there—and also the concentration of ownership retail level is something that a lot of participants are pointing out. Given that the guarantee, or the NEG, is really about dealing with the twin challenges of reliability and emissions intensity, it's not actually a tool designed to get at ensuring appropriate levels of competition. But, clearly, in going through the process, a lot of regard has to be had to making sure that it at least doesn't exacerbate the concentration that's there. If there's a way of making the contract market more liquid—which would then of itself, hopefully, induce more competition—that's an important thing. The ASX, I think in its submission, made comments to that effect. Whether everything goes through the ASX or not—as the ASX would argue—in and of itself could be regarded as a bit of a competition issue. Putting that to one side, the general point about the need for liquid markets to enhance competitive outcomes is a point very well made and a point taken by the ESB. Some of the tests will be whether in fact that's the right mechanism to deliver that outcome—and that needs to be worked through in some of the discussion—or whether there needs to be other mechanisms dealing with competition, given that the NEG is about reliability and emissions intensity. Of course, the council and the minister are acutely aware of that and have commissioned the ACCC to come forward with the report—I think by the end of June—to deal with issues on the competition side.

Senator KENEALLY: Is it the department's understanding that these competition issues are going to be addressed before the design of the NEG is finalised?

Mr Heferen : It will be side by side.

Senator KENEALLY: Will the design of the NEG be developed in conversation or in a silo side by side with the competition issues?

Mr Heferen : They'll be complementary.

Senator KENEALLY: Is there a risk here though that, if we haven't addressed the competition issues first, we get to a process where we work out that it's going to be very difficult to both deliver the NEG as laid out by government as well as address these competition issues?

Mr Heferen : I don't think so. In fact, I'd be very confident that the answer to that is no in this important respect: the April meeting of the council will be the one where the ESB will come forward and provide a high-level design for the council to give endorsement on for further work to be done. The intention is that the August meeting of the council is where they would be in a position—if the council agrees—to say, 'Yes, we're going to go ahead with this, and let's make sure the more detailed design is put in place.' The ACCC's report is due at the end of June. The key thing about the high-level design goes to this question of the dual guarantee of reliability of emissions. Clearly, the ACCC's report will have some important perspectives on competition in the system. To the extent that people are happy, going down in the high-level design would make the contract market more liquid. A lot of the competition issues, in part, would be dealt with—or at least would not be exacerbated. That is April, then end-June, then August. The more concrete design has the clear capacity to ensure that whatever's decided in August—if it is to be decided—is done in full knowledge of the important changes to the framework, if any are needed, to ensure appropriate competition both at wholesale and at retail level.

Senator KENEALLY: What do you see are the risks to competition that need to be managed?

Mr Heferen : The market concentration.

Senator KENEALLY: Many stakeholders, including the ACCC, have claimed that the NEG—depending on what design we end up with—could empower the big electricity companies, stifle competition in the sector and lead to higher prices. That's a risk, yes?

Mr Heferen : If competition were stifled, it would be a very small step to say that that would lead to high prices. Whether the NEG itself would stifle competition, there's nothing in the design of the NEG itself—certainly at this stage, in any discussion—that would lead one to that conclusion. To be fair, the ACCC in its submission is making sure that that point is made and understood. Any further concentration of ownership probably would not have good competitive effects. I don't think there's anything like that in the proposal that the ESB has put forward. All along the way, when this was being worked up last year and into this year, the issue of competition has always been well understood. The importance of making sure that the guarantee doesn't do anything to exacerbate it and, if possible, can do things to ensure more liquid, more transparent and therefore a more competitive market have been uppermost in people's minds.

Senator KENEALLY: Chair, how much time do I have?

CHAIR: How much more do you require, noting that Senator Bartlett and Senator Patrick would also like to ask questions?

Senator KENEALLY: I am mindful of my Senate colleagues. Let me have a few more moments.

CHAIR: Yes, sure. Then we'll go to Senator Bartlett and then Senator Patrick.

Senator KENEALLY: How long do we intend to spend on this section?

CHAIR: It was largely down to requests by you. We have Program 2.1 as well. I think Senator Bartlett has a bracket of about nine or 10 questions for 2.1, which could take some time.

Senator KENEALLY: I will move quickly then. If I can stay on this matter of competition for a moment, Mr Heferen, some stakeholders in response to market concentrations have suggested that the obligations under the NEG should sit with generators and not with retailers. Would this mitigate market concentration risks?

Mr Heferen : I don't think so. I must confess, I've not read the submission that you refer to there in sufficient detail. I wouldn't think that putting obligation on either the retailer or the generator would necessarily have an effect on competition.

Senator KENEALLY: Surely the gentailers in places like New South Wales have a significant advantage under the NEG as it's currently designed.

Mr Heferen : That would depend a lot on whether the gentailer would have sufficient balance in their generation to ensure that their retail arm—if all they were doing was contracting with their generation arm, the retail arm would have both the right emissions intensity and the right level of reliability. Putting aside Snowy Hydro—and you would, given that Red Energy and Lumo Energy's retail arm is backed by Snowy, so hydro fits both—if you look at the large gentailers, the majority of their generation would be from fossil fuel, which would obviously struggle to meet emissions intensity requirement. There'll be a need for them to contract out to get the level of low emissions generation that's needed. There's a confusion of the issue. While we have the gentailers, we also have the concentration of ownership at the wholesale level. The gentailing function is not necessarily the problem of ownership. The ACCC themselves have long argued—and argued at the time—that the then New South Wales government's sale of Macquarie Generation to AGL Energy was something that should have been stopped. The ACCC tried to stop it. They took that forward but ultimately weren't successful. The issue about how much is linked to the retail is contestable—as opposed to the question of concentration of generation itself. I think people would now look back and say, 'Yes, the ACCC were probably correct in their assertion at the time.'

Senator KENEALLY: Let me put it to you this way then: others—primarily retailers—have suggested the establishment of secondary markets would alleviate market concentration risks. The retailers could go to an open and transparent market to meet emissions obligations rather than to the large gentailers. Would that potentially mitigate these concentration risks?

Mr Heferen : To the extent those concentration risks are there, that might do it. As you've noted there, that's giving us issues that have been raised in consultation. The ESB will be considering those very carefully in the design of the contract mechanism. As I mentioned before, that it's more open and more transparent should add to liquidity and therefore add to good competition outcomes, which is along the lines of what the ASX have argued in their submission. That's obviously something that the ESB will be looking at very carefully.

Senator KENEALLY: So the ESB will be looking at the possibility of having a secondary market to allow retailers to essentially trade their emission obligations.

Mr Heferen : I probably shouldn't go to the mechanism by which the ESB would want that outcome to occur. That's still really a question for the ESB. Whether it's a secondary market or whether it's something else I don't think we're in a position to really go that far. It's a question of the outcome that's required. I think people are focused on the outcome of making sure that market concentration isn't exacerbated. That outcome is very clear. The precise mechanism to get to the outcome—I think the ESB still needs to work through its process.

Senator KENEALLY: So this is still an option potentially on the table? Government policy hasn't ruled this out?

Mr Heferen : Certainly. There is no government policy—or in any state or territory, for that matter, as far as I'm aware. Obviously to go ahead the council needs to agree, so each jurisdiction will have to have its views. I've never heard anything in any discussion on this that would push against the idea of having more open and liquid markets. But I make the point that the mechanism by which that's to be delivered is still a matter for the ESB to consider and advise on.

Senator KENEALLY: Mr Chair, I'm happy to allow my fellow senators some time.

CHAIR: That's very gracious of you. We'll go to you, Senator Bartlett, and then Senator Patrick and we'll try to finish off 4.1.

Senator BARTLETT: I have a couple of questions on this area. There have been a fair few failures of the existing coal and gas power plants over the summer, with various ones tripping and removing power from the market. How is that type of unreliability of the existing power plants going to be incorporated into requirements under the NEG?

Mr Chisholm : Sorry; would you mind repeating the question?

Senator BARTLETT: Over the last few months, there have been a fair few existing power stations that have failed at various times—over 50 examples, according to one report I've read. How is that unreliability of the existing power plants going to be incorporated into the Energy Guarantee scheme?

Mr Chisholm : Depending on how the design is finalised, the obligation that is allocated to existing generators could take a number of different forms. Then, at the end of a compliance period, there'll be a process of assessing or ensuring that retailers have got the right sort of generation that meets the reliability and dispatchability obligations that AEMO has determined would need to be there for the reliability gap. The paper that the ESB has released has a number of compliance options in there for assessing that. Whether it's done ex ante or ex post, the triggering of a reliability obligation is something that's still being looked at. But we would want to ensure that, when generators are subject to some of those features, the system is able to adapt to that.

Senator BARTLETT: The modelling with the Energy Guarantee incorporates the state targets into the federal target at the moment, doesn't it?

Mr White : The ESB's modelling that they carried out and reported on last November—in establishing the assumptions under that, they took into account at that point the generation that had been committed to under the state targets.

Senator BARTLETT: Does that mean that, in the way this has been designed at a national level, you're basically just riding on the back of what the states are already doing? Is there anything extra on top of that that you're doing to promote additional action?

Mr White : The modelling outcomes from the Energy Security Board show that there would be additional investment incentivised by the guarantee, over and above what was established under the state targets.

Senator BARTLETT: As part of this, does that mean you're encouraging the states to improve their level of activity, their performance, in this area?

Mr White : The government's been fairly clear that it expects the electricity sector to provide a share of emissions outcomes pro rata to the national targets that Australia inscribes in its nationally determined contribution under the Paris Agreement. In that respect, there's nothing in the guarantee that specifically incentivises the states to do more or less.

In the consultation paper that was released in February, chapter 4, which relates to the Commonwealth's emissions-related design elements, talks about geographic neutrality and discusses having a single emissions target in relation to the guarantee. State targets may draw more investment in low-emissions technology into those jurisdictions, but there'd be a single emissions target under the guarantee and also a single regional reliability target under the guarantee. Jurisdictions that drew in more low-emissions generation to the extent that that was variable renewable energy would, if that raised any kind of reliability issue, find that there would be a heightened possibility that the reliability obligations under the guarantee would come into play in that jurisdiction.

Senator BARTLETT: You mentioned that the consultation paper talked about some reforms to the safeguard mechanism, as I understand it. Is that indicative of the direction the government's looking to take the safeguard mechanism?

Ms Wilson : The safeguard mechanism consultation paper is separate to the consultation paper that the Energy Security Board released for the National Energy Guarantee. I'm happy to answer that under outcome 2.1, but it is a separate paper and a separate process.

Senator PATRICK: Obviously one of the elements of the NEG is to bring down prices. That's one of the elements that my constituents talk to me about all the time. The government has not set a price target in respect of its design of the NEG. Is that correct?

Mr Heferen : That's correct.

Senator PATRICK: Is it setting a target of some sort? As you design something to achieve an outcome, you need to understand what that outcome is or what your expectations might be, because that's clearly going to affect the design of the framework. So I'm just wondering whether it is only through supply targets that you're trying to achieve lower prices.

Mr Heferen : The government has many initiatives to deal with issues relating to price. Some are through the council and some are just the federal government going alone. The modelling that Mr White referred to earlier that the Energy Security Board did with a guarantee, estimated that there would be price reductions as a result of the guarantee, largely driven by the argument that having stable policy in place the disincentive for investment would be removed. There's a lot of discussion now about how it's hard to get people to invest, aside from, say, the renewable energy target, which provides an income stream. So, by putting in place a system whereby there's less disincentive, or more incentive to invest, the modelling suggested that there would be price effects on that. That's largely on the supply side. There are a range of other issues on the supply side that the government has in train. There are a lot of reforms in the gas area. The price of gas has come off a bit from the peak of last year. Some of those are dealing with supply. Some of those are about better operating markets within the country and how the gas is transported.

There are also issues on the demand side that the government is grappling with that will affect price. The Commonwealth government proposed to abolish the limited merits review for the capacity for networks to get a second bite of the cherry, so to speak. Whilst that didn't bring prices down from the past, it will hopefully limit further price increases in the future.

Senator PATRICK: I guess what I am getting to—and I will put it in a simple car analogy—is that, if you're designing a car for a particular top speed, all of the sorts of factors that you talk about, such as engine size, the tyre rating and all that sort of stuff, hinges around having set a target, a requirement, in the engineering design. So my question is really fundamental: does the government have, in its own mind, a target? You might say to me that that's a confidential number and that you don't want to undermine your process, but it would seem to me flawed if you haven't set a top speed when you are trying to design a car.

Mr Heferen : Just to take the analogy a bit further: in the overall performance of the car, a lot depends on how much you flog it, how hard you push the brake and how hard you push the accelerator. In relation to the price itself—

Senator PATRICK: But some customers are very interested in the top speed, and many, many customers are very interested in the price. It's a selling point here.

Senator Birmingham: And—to torture the analogy—of course, in the design of the car, consideration will be given to fuel efficiency, which could be considered alongside emissions reduction targets. Consideration would be given to safety matters, which could be considered analogous to reliability considerations. All of those factors feed into then wanting to produce your car at the most affordable rate for the market. Indeed, in the case of the NEG, the ambition here is—and the advice from the Energy Security Board is that this is the most efficient mechanism to deal with measures such as reliability and the dispatchability of energy, as well as meeting emissions reduction targets in the energy sector—to achieve the lowest cost. What is that lowest cost? The Energy Security Board has commissioned modelling in that space that identifies the type of cost reductions that would be expected to be achieved. The government would hope to see those achieved, and, of course—consistent with the other policy reforms that we've instigated, in terms of changes to the transmission markets, around review rights there, our intervention in the gas markets and so on—we'd hope that they would compound to see further price reductions.

Senator PATRICK: Sure. And I get your analogy—

Senator Birmingham: Well, it's your analogy!

Senator PATRICK: but you do actually state a requirement for fuel efficiency of the car. You are stating a whole range of requirements about what you want from a reliability perspective and from a security perspective. The emissions target is very clear. So all of these are requirements that you would normally lay down in an engineering sense, and all of the other factors then come into play about how you balance off those requirements. But if you don't set a target requirement, what it means is that that particular element may well get overwhelmed by, perhaps, some of the other requirements—like a hard requirement for the Paris targets. That's what I'm exploring—

Senator Birmingham: And I think that's an important part of why the Energy Security Board's modelling was undertaken: to ensure that there's transparency there about what the expected impact on affordability will be—what the expected price reduction would be. That then, as a public figure that's out there, essentially becomes something against which the whole process, I'm sure, will be held to account.

Senator PATRICK: When you started this process with the NEG, you did indicate some price change, and I understand—and this is not a criticism—that, in some sense, that was a guess, because you didn't understand all of the different elements of the puzzle. At the end of this process, at the end of the design of the NEG, as you present the changing legislation to the parliament, will you have much more detailed targets in relation to price that say, 'If you do this and you pass the legislation, we can expect these sorts of price outcomes'?

Mr Pratt : Senator, with respect, I'd like to park the analogy—poor pun intended! I think the analogy only works in a system which envisages the government actually regulating the price of electricity. That is not in contemplation. My understanding, clearly, is that the government is very, very focused on reducing electricity prices as much as possible, but through market based mechanisms which don't involve a regulation. The figures you are referring to relate to modelling which was undertaken by the Energy Security Board late last year which envisaged that power prices when the National Energy Guarantee was in place would be $400 per year on average lower than the average bill for 2017. So those were modelled—

Senator PATRICK: That was from 2022, I think—or was it 2020?

Mr Pratt : I'll just find the figure.

Senator PATRICK: At the end of this process, as you've designed this, I presume you'll run a model that will inform the parliament and the public what your anticipated prices are.

Mr Heferen : Just to be clear, it's question of prices being lower than they'd otherwise be, because the absolute price itself, at the retail level, will always be a function of what it is at the wholesale level. The key thing at the wholesale level is the price of the fuel. So the price of coal and the price of gas are typically the two that really drive it. So, as the minister and secretary have said, the whole idea is to try and have something that responds to provide better investment signals, more certainty combined with reliability and meeting our emissions reduction obligations. As the minister said, we'll probably be held to account at some level to say, 'The estimate is that it will be X dollars or X hundred dollars lower than what the price would otherwise be.' That, I'm sure, we'll be able to get more concrete. The question of what the absolute price would be going forward is a function of, in large part, the fuel cost.

Senator PATRICK: Okay, thank you. That's helpful. In my reading of the consultation paper, it talks about AEMO predicting the demand. I presume that's on both gas and electricity, because gas does, in some sense, have an impact on electricity prices and, indeed, availability, as we discovered in South Australia. In terms of confidence in AEMO, it's been expressed to me in the past, particularly in relation to gas—I don't know what the values are or what the verdict is with respect to electricity—that AEMO has consistently got that wrong. I'm not trying to verbal you. I'm going to ask the question: is it possible—and you can perhaps take this on notice—to provide the committee with some data that shows what its past estimates were and what the actuals were to see whether or not that's going to be a problem element of the NEG?

Mr Heferen : I will just clarify that, when AEMO does its demand forecast, that's not a price. That's a requirement—

Senator PATRICK: I understand that. I've shifted topics, sorry.

Mr Heferen : Planners are always accused of being overly conservative. It's probably a good thing they are. But we will take that on notice to look at AEMO's previous demand forecasts and how that reconciles with actuals.

Senator PATRICK: It might come out that they're really, really good. That's the point of the question—to be able to baseline some thought on it using proper information.

Mr Heferen : I'm sure they're better than any available alternative.

Senator PATRICK: Okay.

Mr Pratt : Just to be fair to AEMO, I think we should put on the record that they have been very successful across this recent summer in managing these issues.

Senator PATRICK: Sure. Of course, there was a lot of focus on them in that period after events in Victoria, South Australia and New South Wales. At the end of this process, we'll need to make some changes to legislation. I ask this question in the context that we've had an EIS proposed, we've had a CET proposed and now we have the NEG proposed. For whatever reason—and I don't want to go there—there have been political risks associated with each of those. Are you factoring that into this effort so that we don't get to the second part of next year and end up finding ourselves in another situation caused by factors in this building where all your effort to do some good work is gone? Are you trying to manage that risk in some particular way?

Senator Birmingham: Senator Patrick, Mr Pratt may wish to add something after I've commented. I note that, over many years, there have been many different proposals and ideas in relation to energy policy from many quarters. Of those that you cited before, the National Energy Guarantee is the only one that has been the policy of this government to pursue. It is the policy of this government. Of course, we have to, by its very design, work through the implementation steps in a constructive way with the states and territories through the COAG Energy Council. That's the process that's underway. We welcome, as you well know, the fact that we think there'll be a more cooperative approach around that COAG Energy Council now than there was a couple of weeks ago. But, clearly, it will still require testing and rigour and, of course, ultimately, potential consideration by the parliament. I doubt that anybody takes anything through the parliamentary process for granted.

Senator PATRICK: Yes. I'm not trying to suggest that this thing should be sabotaged in any way, shape or form. We do need to get the investment confidence back in the market. I wonder whether there's dialogue taking place with each of the states as part of this process to make sure that, when you get to the end of it, you don't end up proposing something that won't get across the line.

Mr Pratt : Certainly we're consulting heavily with the states and territories.

Senator PATRICK: That's the mechanism for doing that?

Mr Pratt : Well, the mechanism is, in fact, through the Energy Security Board's processes, which we contribute to. But, of course, we deal extensively with our colleagues in the states and territories in the lead-up to the Energy Council meeting, for example.

Senator Birmingham: Notwithstanding a degree of posturing by the opposition, I'd note that they don't appear to have a clearly defined policy on this, which does leave open the possibility that, if we can succeed through the COAG Energy Council processes with continued support from both Labor and coalition governments, then hopefully we might be able to enjoy some bipartisanship here too.

Senator PATRICK: Sometimes that can be managed through making sure people are well-informed up to the point where the legislation finally drops into the parliament. I'm not trying to be unhelpful—

Senator Birmingham: The fact is that it needs to work through the COAG Energy Council process. Perhaps unlike policy proposals of previous governments such as the carbon tax, which were sort of dropped on the parliament and the nation, this is going through, clearly, a very exhaustive process outside of this place that will then feed into what happens here. As I said, hopefully that does help to underpin bipartisanship.

Senator PATRICK: Thank you, Minister. I have a final question. Obviously one of the things that we're trying to create with the NEG is a positive investment environment. Can you indicate whether part of the strategy will involve incentives to suppliers and other participants in the supply market? Is that being considered as a possibility? Particularly in that regard, will you be looking at—and this is to do with the fact that we've got some monopoly situations—providing incentive to some of the smaller players?

Senator Birmingham: I'm not quite sure—

Senator PATRICK: Is it reliant on incentives at the end? Are you factoring that into the design? If you are, is it an intention to look at giving incentive to smaller players?

Senator Birmingham: I think the best point of reference is the fact that the Energy Security Board has gone through a public consultation process and received a range of submissions through that. It is for them to present their views to the COAG Energy Council rather than for government to pre-empt what their views might be.

Senator PATRICK: Is it a constraint that they're not permitted to look at that as a mechanism to, perhaps, get a better outcome?

Mr Heferen : There are certainly no constraints. To the extent that people have put forward their submissions, and they're working through it, as the minister said, they would be, no doubt, having regard to the entirety of options for the council to consider.

Senator PATRICK: Thank you, Chair.

Senator KENEALLY: Can I come back to the reliability aspect of the National Energy Guarantee. In the department's view, is coal-fired power able to be used as dispatchable power under the NEG?

Mr Chisholm : Yes.

Senator KENEALLY: Let me ask then about reliability with coal-fired power. We've had some 51 unplanned shutdowns of coal and gas units over the 2017-18 summer. I won't take time listing all of them. This also coincides with the December heatwave, reported by the Bureau of Meteorology. Are ageing coal units especially vulnerable during heatwaves?

Mr Chisholm : All forms of generation are vulnerable to different things. Variable renewable energy, such as wind and solar, is also vulnerable to weather conditions. Generators also—including coal-fired generators—are vulnerable to weather conditions, particularly at times of peak demand.

Senator KENEALLY: How many unplanned renewable energy shutdowns over 2017-18 is the department aware of?

Mr Chisholm : I'll take that on notice.

Senator KENEALLY: Would it be less than 51?

Mr Chisholm : I think the point—

Senator KENEALLY: We're aware of 51 unplanned shutdowns of coal and gas units in the NEM. You don't have any numbers for unplanned renewable energy shutdowns over the 2017-18 summer?

Mr Chisholm : The point with respect to solar and wind is that it shuts down when the sun doesn't shine and the wind doesn't blow.

Senator KENEALLY: Let me ask about that. If it is the case, as you argue, has there been a role for the South Australian large battery in ensuring system reliability, with these unplanned shutdowns of coal and gas?

Mr Chisholm : The battery has provided some system security support to the market since it began its operations late last year, and storage will continue to play a very important role in stabilising the grid, as we get more and more variable renewable energy in the system. Hence the government's support for Snowy 2.0, and other battery projects, through vehicles such as ARENA's support for the rollout of battery projects, and co-location of batteries with forms of renewable generation. It's been working closely with AEMO on that front, too. So it's all part of the mix, going forward.

Senator KENEALLY: You say that renewable energy can have shutdowns if the wind isn't blowing and the sun isn't shining, but AEMO can plan for cloudy and non-windy days. They can see that coming. A coal unit blowing up and shutting down, as it did on 18 December 2017, when Eraring Power Station, the largest coal-fired power station in the country, tripped, and that was the fourth that week, all without warning.

Senator Birmingham: You might want to add to this—in the ESB's design of the NEG, and looking at the reliability obligations and obligations around the dispatchability of energy, those obligations are intended to fall upon retailers to make decisions in their contracting decisions. Those retailers will need to be mindful—and it's up to the ESB to set the rules—of reliability of the power that they have contracted for, and reliability can take many forms. I'm sure that in the work that's been done there would be consideration of, shall we say, unforeseen circumstances and how they might be considered through the reliability obligations. But then, in circumstances that might be more foreseeable—and that may include plants that have low-reliability records—all of those factors, I'm sure, are being weighed as the ESB considers its advice to the COAG Energy Council.

Senator KENEALLY: That answer seems to suggest that retailers may well make a judgement about the reliability of coal, based on the types of figures I have just described here. They may choose, in fact, not to purchase coal because—

Senator Birmingham: Senator, retailers may make a judgement about the reliability of one power generator versus another power generator regardless of the way in which that power is generated.

Senator KENEALLY: Minister, I understand that—

Mr Heferen : Just in relation to what AEMO plans for, it does plan for those unplanned outages. They operate their system, realising there are a bunch of credible contingencies but also non-credible contingencies. Even though it says non-credible, it doesn't actually mean non-credible; it just means the probability is much lower. They do have to operate on the basis that lines can go out, generators can trip and security elements can go wrong. Part of the very difficult job of the market operator is to be aware that, at any point in time, something might go wrong in any of the systems and, given the interconnection, it will then have spill-over effects to others. When people talk about how unplanned outages are going to cause all these problems—I take your point about 51, I wasn't aware there were 51. With that number of unplanned outages, as the secretary noted, the market operator got the system through the summer without the problems we had the summer before. Those unplanned outages, in a sense, are planned for in that they predict that something probably will go wrong. They don't know what it is. They don't know where it will be, but there needs to be sufficient backup and plans in place to ensure that lights, air conditioners and so forth stay on.

Senator KENEALLY: It is widely accepted by experts in the industry that ageing coal plants are increasingly susceptible to unplanned shutdowns, especially in heatwave conditions. So this is exactly the question we would expect—a reliability obligation under the NEG to be activated. So my question is fairly simple to the department: should ageing coal plants be counted on to deliver reliable dispatchable power at these times under the National Energy Guarantee?

Mr Heferen : The point the minister made before was that the role and the guarantee is to set up the mechanism by which retailers will go about their business of contracting with generators to ensure that obligations will be met. So, who they choose to contract with will be a matter for them. If they choose to ensure their reliability is met solely by contracting with a power plant that doesn't have a good record—whether it's shutting down or whether it actually can't get a contract for gas, as the case sometimes is—that would seem to be pretty reckless behaviour from that retailer. So the purpose of the mechanism is to put the obligation on the retailer to sort out who they should be contracting with and their mix of generation to ensure they meet their dual obligations of reliability and the right level of emissions. And so, we'll see, as it works through—assuming it's put in place—as to what particular generation mix the retailers will have. They'll have to take into account cost, reliability and their overall emissions obligations.

Senator Birmingham: A retailer will essentially put together a portfolio to demonstrate they're meeting their reliability targets. My understanding is that AEMO currently factors in renewables reliability at about an average of 10 per cent for their nameplate capacity at peak demand times. That would vary, I'm sure, from one different renewable generator to another, depending where their operations are and the reliability that can even be placed upon those operations. Whether it's renewables or other generation sources, each would come with its own reliability profile, presumably, to be weighed and assessed by the retailer. However, clearly, there is a higher level of reliability, historically, from a number of those coal-fired power plants you refer to than from some other renewable plants but the proportionality of that would all have to be weighed.

Senator KENEALLY: With respect, Minister, whether their contract counts towards their reliability obligation is a question of the scheme design. The eligibility of coal to provide reliable power under the NEG is one of scheme design. It is a legitimate question that you're refusing to answer as to whether ageing coal plants should be counted on to deliver reliable dispatchable power under the NEG.

Senator Birmingham: Senator, I think you are now attempting to paint a picture that would imply—and we're dealing in hypotheticals here too—that many of the coal plants you're referring to were less reliable over the summer than dispatchability of certain renewables. I am pretty confident that that would not have been the case, Senator Keneally—

Senator KENEALLY: The department can't even tell me if there were any unplanned renewable energy shutdowns over the 2017-18 summer, but we know that there were 51 unplanned shutdowns of coal and gas.

Senator BIRMINGHAM: There would have been many more than 51 instances across the country where renewable generation plants would not have been contributing to the generation mix at that point in time, whereupon retailers would have been reliant upon production from non-renewable sources. I think you can play a game of trying to isolate one component of reliability. There are multiple components of reliability to be assessed, and that is, of course, all part of a responsible design of the NEG.

CHAIR: I'm just cognisant of time. Are you done with 4.1?

Senator KENEALLY: Yes, since questions aren't getting answered.

[12:00]

CHAIR: We'll now move to Program 2.1: Reducing Australia's greenhouse gas emissions. Senator Bartlett.

Senator BARTLETT: Thank you. I'll go with the question I asked before; you've had plenty of notice on that. I was asking about the consultation paper about the safeguard mechanism. Is that mechanism indicative of the direction the government is looking to take?

Ms Wilson : I'm not quite sure what you mean by 'indicative', but I'll just note that the government released a consultation paper on the safeguard mechanism on 21 February.

Senator BARTLETT: I can clarify the question a bit more. Did that include some suggestions of reforms?

Ms Wilson : Yes. The government, through the 2017 review of its climate change policies, committed to make the safeguard mechanism fairer and simpler, and that is why the department, on behalf of the government, released a consultation paper looking at making the safeguard mechanism fairer and simpler.

Senator BARTLETT: So that's broadly the direction you're looking at going in, subject to feedback?

Ms Wilson : Yes.

Senator BARTLETT: Thank you. I just want to get this clear: can the department confirm that Australia's emissions are increasing at the moment?

Mr Archer : There are a range of trends impacting on our emissions inventory at present. The most recent quarterly inventory showed, I believe, a decline in our emissions.

Senator BARTLETT: Our overall emissions?

Mr Archer : Total emissions for the quarter, yes.

Senator BARTLETT: Is it correct that the emissions from land clearing in Queensland have shown up in the federal greenhouse accounts?

Mr Archer : Certainly, we account for emissions from the land sector right across Australia; that includes Queensland. Our figures will be reflecting trends in the land sector in Queensland. There is a bit more of a lag between when we observe land clearing and when they show up in the accounts relative to some of the other estimates that we produce. But, yes, there are certainly trends in Queensland which are impacting on our emissions inventory.

Senator BARTLETT: And are those emissions from land clearing included in your projections?

Mr Archer : Yes. When we prepare projections of our emissions, we basically mirror the greenhouse gas accounts, so we project them forward. Again, that does include the land sector.

Senator BARTLETT: Basically, in that projection, you're assuming that would continue at around the current rate?

Mr Archer : I might defer to my colleague Mr Sturgiss on that question.

Mr Sturgiss : The details for the land sector projections are contained in the department's projections for the National Greenhouse Gas Inventory release late last year. In our time profile for land-clearing emissions, we do project a slight tailing off of emissions from the current levels.

Senator BARTLETT: Just a slight one? You said 'slight', didn't you—a slight tailing off?

Mr Sturgiss : A tailing off of emissions, so a slight reduction of emissions over time.

Senator BARTLETT: The Paris Agreement includes a ratchet mechanism to consider increasing our ambition every five years, as I understand it.

Mr Sturgiss : That's correct.

Senator BARTLETT: And there's what I believe is called a facilitative dialogue, starting this year, and formal stocktakes in later years. What's the department doing to prepare for this?

Ms Munro : I head up our international climate change branch in the department. You're right. Under the Paris Agreement, it's fundamental in terms of understanding how countries are tracking towards the goals of the Paris Agreement. In 2023, there'll be a global stocktake, and then that will be the setting process for the next round of nationally determined contributions. Australia's currently part of the process in terms of looking at the further guidance—or, as we call it, the Paris Agreement rule book—as part of the negotiations, which hopefully will culminate at the conference of the parties in Poland this year.

Senator BARTLETT: As part of that, has the department looked at opportunities for increasing our ambition?

Ms Munro : Not as part of that, because this refers back to the work that was underway through 2017 as part of the climate change review. No other countries, as far as I'm aware, are actually looking at the extent of increasing their ambition at this time. Again, the Paris Agreement doesn't actually come into operation until 2020, and the review-and-refine process is very well defined as part of the Paris Agreement.

Senator BARTLETT: You mentioned in your earlier answer Australia's emissions declining, and I understand they have reduced to 22.6 tonnes per year per capita—per capita relating to population growth, of course. To what level per capita do emissions need to fall to meet our Paris targets—and, as part of that, I presume you factor in projections about our overall population?

Ms Wilson : We'll have to take that question on notice.

Senator BARTLETT: Okay, thank you. I might put the rest of my questions on notice, given that we've only got five minutes left.

Senator KENEALLY: Thank you to this section of the department for being here today. Are you aware of the recently released modelling report from RepuTex on the interaction between the NEG and state renewable energy targets, released on 18 March 2018?

Mr Archer : No, I'm not personally aware of that report.

Senator KENEALLY: It was reported in Fairfax media on 19 March 2018, just by way of reference. RepuTex have modelled the impact of the NEG on renewable energy investment, calibrated to meet the government's 26 per cent emission reduction target, once all state renewable energy targets are taken into account. It concludes that the state renewable energy targets, by themselves, will deliver the government's target and lead to 41 per cent renewables by 2030.

Mr Archer : I think we heard Mr White, in the previous session, note that modelling that had been undertaken of the guarantee indicated that it would drive investment in renewables beyond what state targets would. So I would refer to that previous response.

Senator KENEALLY: You're referring to an argument put by Mr White in the previous session that the NEG is actually going to take investment in renewables beyond the current state renewable energy targets?

Mr Archer : That's my recollection of what Mr White said.

Mr Pratt : And that is the view that was expressed earlier in the session, and that is our view.

Senator KENEALLY: That's interesting. So, first of all, this RepuTex report, which says that we're going to meet the emissions reduction target without a NEG, says that we're going to meet it with just the state renewable energy targets alone. Has the department looked at that type of question? You say that you're not familiar with the report. Have you done any type of modelling on that? Is the NEG getting us to our emissions reduction targets? Or is it something on top of it; is it taking us further beyond?

Ms Wilson : The modelling that was undertaken and that everyone's referred to was undertaken by the Energy Security Board. When it comes to looking at our emissions projections, the impact or possible impact of the National Energy Guarantee is not yet included in our emissions projections going forward. We tend to include policies in emissions projections only once they're finalised. And as consultation is still being undertaken by the Energy Security Board on the National Energy Guarantee we have not done an estimate of the emissions reductions from the National Energy Guarantee in our emissions projections.

Senator KENEALLY: Right. Have you done an estimate based on the state renewable energy targets?

Ms Wilson : No. I need to be clear. Some of the state renewable energy targets, if they're in legislation, are included in our emissions projections, yes.

Senator KENEALLY: So, can you give an example of where a state had stated a renewable energy target but it had not yet been legislated?

Ms Wilson : When it comes to the emissions projections that the department undertakes, we look at the fact that Victoria has legislated its renewable energy target but some of the states and territories haven't yet legislated certain targets. So, it's only when a target is actually legislated that we include it in our emissions projections.

Senator KENEALLY: Going back to my original question, and just so we're clear, the RepuTex report concluded that state renewable energy targets by themselves will deliver the government's target and lead to 41 per cent renewable energy by 2030. Do you agree, or disagree, with that conclusion?

Ms Wilson : We haven't undertaken modelling. As I've said, when it comes to looking at the emissions predictions, I'm not aware of the assumptions or the modelling that RepuTex undertook, so I'd have to go and have a look at some of the assumptions that they put in place to get to that sort of conclusion.

Senator KENEALLY: Surely you should have had some kind of look at this in designing the NEG to know what you needed to do in addition to state renewable energy targets. But you're saying that you looked only at the ones that were legislated, and perhaps that's where the difference lies?

Senator Birmingham: No, Ms Wilson was speaking about the published projections of emissions that the department undertakes. The Energy Security Board of course has undertaken modelling in relation to the design of the NEG and is working through those design processes. Some state renewable energy targets are seemingly little more than a stated target and with no particular policy that underpins how or whether such a target would ever be met. Others have some legislative underpinning. Obviously consideration of all of those and the way that they may or may not be reflected in the ESB's modelling is something that would be a matter for the ESB in terms of the modelling that they've undertaken to date. I would also note that the ESB's prior advice has certainly been that in terms of the operation of the national energy market there would be clear benefits to the consistent approach that the NEG proposes rather than some of the more ad hoc approaches that individual state approaches over the years have resulted in.

Senator KENEALLY: Chair, given the time and given the fact that the department isn't aware of the specifics of the RepuTex report, I'm happy to place the rest of my questions on notice.

Mr Archer : I might just note that our energy colleagues, who I think have probably now left, may be more familiar with the RepuTex report than we are, given that it was talking about the National Energy Guarantee and renewable energy targets. It's not necessarily the case that the department is completely unaware of that report.

Senator KENEALLY: Understood. Thank you. I will nonetheless put my questions on notice and ask Mr Pratt to assign the appropriate people to answer them. Thank you.

CHAIR: That concludes the committee's examination of the Environment and Energy portfolio. Senators are reminded that questions on notice need to be in by Tuesday 3 April. Thank you all for your attendance today.

Committee adjourned at 12 : 14