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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020



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BILLS DIGEST NO. 41, 2020-21 20 JANUARY 2021

Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 Clare Murdoch Science, Technology, Environment and Resources Section Jonathan Mills Law and Bills Digest Section

Contents

List of abbreviations ........................................................ 3

The Bills Digest at a glance .............................................. 4

Purpose of the Bill ........................................................... 5

Background ..................................................................... 5

The Clean Energy Finance Corporation ....................... 6

What is the grid? ......................................................... 8

Grid transformation .................................................... 9

Electricity emissions ................................................ 10

Figure 1: share of electricity generation by technology, 1989-90 to 2018-19 ........................... 11

The case for grid investment ..................................... 11

Reliability and security ............................................ 11

Integrating renewables ........................................... 13

Grid technologies ...................................................... 14

Dispatchable generation and storage ..................... 14 Grid stabilisation technologies ................................ 15

Network investment ............................................... 16

The Underwriting New Generation Investments (UNGI) program ......................................................... 16

Related energy announcements and gas-led recovery ..................................................................... 18

Committee consideration .............................................. 19

Environment and Communications Legislation Committee ................................................................. 19

Senate Standing Committee for the Scrutiny of Bills ............................................................................ 20

Minister’s response ................................................. 20

Date introduced: 27 August 2020

House: House of Representatives

Portfolio: Industry, Science, Energy and Resources

Commencement: The day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at January 2021.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 2

Policy position of non-government parties/independents.................................................... 21

ALP ............................................................................. 21

The Greens ................................................................ 21

Zali Steggall ................................................................ 22

Centre Alliance/Senator Griff .................................... 22

Katter’s Australian Party ........................................... 22

Position of major interest groups................................... 22

Table 1: Key issues raised in major stakeholder submissions to the Environment and Communications Legislation Committee ................ 23 Financial implications .................................................... 26

Special appropriations .............................................. 26

Statement of Compatibility with Human Rights.............. 26

Parliamentary Joint Committee on Human Rights ... 27 Claim of incompatibility ............................................ 27

Key issues and provisions .............................................. 27

New definition of ‘investment’ ................................. 27

Investment instruments .......................................... 28

Rationale for new investment types ....................... 28

Key issue—investments without a return ............... 29 Key issue—additional Ministerial powers through regulations ................................................. 29

Expanded CEFC functions .......................................... 30

Stakeholder comments ........................................... 30

Establishing the Grid Reliability Fund ....................... 31

Key issue—additional Ministerial powers through the Investment Mandate .......................... 32

Key issue—UNGI program ....................................... 32

Changes to the scope of clean energy technology investments ............................................................... 33

Key issue—Definition of low emissions energy system...................................................................... 35

GRF technologies ..................................................... 35

Key issues—fossil fuel investments ........................ 36

Renewable energy technology requirement ............ 37 Stakeholder comments ........................................... 38

Important criteria to be set out in non-disallowable instruments .......................................... 39

Overlap between the criteria for general and Grid Reliability Fund investments ..................................... 39

Other provisions ........................................................... 40

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 3

List of abbreviations AEMO Australian Electricity Market Operator

ARENA Australian Renewable Energy Agency

CCS Carbon capture and storage

CEFC Clean Energy Finance Corporation

CEFC Act Clean Energy Finance Corporation Act 2012

CER Clean Energy Regulator

DER Distributed energy resources

DISER Department of Industry, Science, Energy and Resources

ESOO Electricity Statement of Opportunities

GRF Grid Reliability Fund

GW Gigawatt

ISP Integrated System Plan

MW Megawatt

MWh Megawatt hour/s

NEM National Electricity Market

NWIS North West Interconnected System

PV Photovoltaic

SWIS South West Interconnected System

UNGI Underwriting New Generation Investments

VRE Variable renewable energy

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 4

The Bills Digest at a glance The purpose of the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 (the Bill) is to amend the Clean Energy Finance Corporation Act 2012 (CEFC Act) to establish a $1 billion Grid Reliability Fund (GRF), and to allow the Clean Energy Finance Corporation (CEFC) to administer it by:

• enabling regulations to be made that allow the CEFC to make new types of investments, including loss-making investments

• expanding the functions of the CEFC

• establishing a new category of CEFC ‘GRF investment’ for:

- energy storage - electricity generation, transmission and distribution, and - grid stabilisation technologies • expanding the definition of low-emission technology under CEFC complying investment

technologies to also include the above categories of technology and

• excluding the GRF from the CEFC’s requirement to invest at least half of its funds in renewable energy projects.

While the Bill will allow for the CEFC to make investments in a broad range of technologies, much of the discussion around the Bill has focused on the potential for the changes to enable further CEFC investment in gas powered generation.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 5

Purpose of the Bill The purpose of the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 (the Bill) is to amend the Clean Energy Finance Corporation Act 2012 (CEFC Act) to establish a $1 billion Grid Reliability Fund (GRF), and to allow the Clean Energy Finance Corporation (CEFC) to administer it by:

• enabling regulations to be made that allow the CEFC to make new types of investments for the purposes of the GRF, including loss-making investments

• expanding the functions of the CEFC

• establishing a new category of CEFC investment—grid reliability fund investments—for energy storage, electricity generation, transmission and distribution, and grid stabilisation technologies

• expanding the definition of low-emission technology, as applicable to all CEFC investments, under CEFC complying investment technologies and

• excluding the GRF from the CEFC’s requirement to invest at least half of its funds in renewable energy projects.1

Background In recent years there have been a number of inquiries into energy and electricity in Australia.2 These inquiries were catalysed by: rising wholesale and retail prices; concerns around network reliability following the rapid uptake of variable renewable energy sources and closure of Hazelwood power station; and concerns around network security following the state-wide blackout in South Australia in September 2016.3

The Government’s ‘A Fair Deal on Energy’ policy, announced on 23 October 2018, aims to deliver reliable, secure and affordable energy, including by:

• maintaining and increasing supply of reliable electricity

• increasing domestic gas supplies and

• promoting efficient investment in energy infrastructure.4

On 30 October 2019, as part of this policy, the Government announced a new $1 billion GRF to be administered by the CEFC.5 The GRF would support ‘investment in new energy generation, storage and transmission infrastructure, including eligible projects shortlisted under the Underwriting New Generation Investments (UNGI) program.’6 (The UNGI is discussed further later in this Digest.)

1. Explanatory Memorandum, Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, p. 1. 2. See, for example: A Finkel, K Moses, C Munro, T Effeney and M O’Kane, Independent review into the future security of the National Electricity Market: blueprint for the future, Department of the Environment and Energy (DEE), Canberra, June 2017; House of Representatives Standing Committee on the Environment and Energy, Powering our future: inquiry into modernising

Australia’s electricity grid, House of Representatives, Canberra, December 2017; Australian Competition and Consumer Commission (ACCC), Restoring electricity affordability and Australia's competitive advantage, Retail electricity pricing inquiry 2017-18 final report, ACCC, Canberra, June 2018; ACCC, ‘Electricity market monitoring 2018-2025’, ACCC website; and ACCC, ‘Gas inquiry 2017-2025’, ACCC website. 3. R Garnaut, Superpower: Australia’s low-carbon opportunity, La Trobe University Press, Carlton, Victoria, 2019, pp. 62-64. 4. S Morrison (Prime Minister), J Frydenberg (Treasurer) and A Taylor (Minister for Energy), A fair deal on energy, joint media

release, 23 October 2018; Australian Government, A fair deal on energy, Australian Government policy document, 2019. 5. S Morrison (Prime Minister), M Cormann (Minister for Finance) and A Taylor (Minister for Energy and Emissions Reduction), $1 billion boost for power reliability, joint media release, 30 October 2019. 6. Ibid.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 6

The Clean Energy Finance Corporation The CEFC is a Commonwealth statutory authority established in 2012 under the CEFC Act.7 The object of the CEFC Act and the CEFC is to facilitate increased flows of finance into the clean energy sector.8 The CEFC’s current corporate plan further outlines:

Our purpose of increasing the flows of finance into the clean energy sector is directed at contributing to Australia’s efforts to reduce emissions. The scale of the emissions challenge suggests Australia requires significant new investment across the economy.9

The CEFC manages a $10 billion special account that co-finances and invests in clean energy technologies.10

The CEFC Board has statutory responsibility for decision-making and managing the CEFC’s investments.11 The CEFC Act requires investments by the CEFC to be complying investments— investments that are:

• in clean energy technologies, that is renewable energy, energy efficiency and low-emission technologies

• solely or mainly Australian-based and

• not in a prohibited technology, that is carbon capture and storage (CCS) technology, nuclear technology or nuclear power.12

The CEFC Board operates and makes its investment decisions independently of government; however, the CEFC must also comply with an Investment Mandate,13 which is issued by the responsible Ministers14 to give guidance to the CEFC. The Investment Mandate includes direction on return, risk, financial instruments, priority investment areas and allocation of investments.15 The Investment Mandate must not be inconsistent with the CEFC Act and must not require the CEFC Board to make any particular investment.16

From its election in September 2013 to early 2016, the Coalition Government maintained a policy to abolish the CEFC.17 However, two abolition Bills were rejected by the Senate in 2013 and 2014, while a third abolition Bill lapsed in April 2016.18 The plan to abolish the CEFC was formally abandoned in March 2016.19 Since then, the Government has issued a number of new Investment

7. The CEFC is also a corporate Commonwealth entity under the Public Governance, Performance and Accountability Act 2013 (PGPA Act). 8. Clean Energy Finance Corporation Act 2012 (CEFC Act), section 3. 9. CEFC, Corporate plan 2020-21, CEFC, Melbourne, 2020, p. 7. 10. CEFC Act, sections 45-46, 58 and 60. 11. CEFC Act, section 14. 12. Ibid., subsection 59(2); sections 60-62. 13. Ibid., section 67. Note that the Investment Mandate is not a disallowable instrument: see paragraph 44(2)(b) of the

Legislation Act 2003 and section 9 of the Legislation (Exemptions and Other Matters) Regulation 2015. 14. Currently the Minister for Energy and Emissions Reduction and the Minister for Finance: see CEFC Act, section 64 and the definition of ‘responsible Ministers’ in section 4. Note that the Acts Interpretation (Substituted References - Section 19BA) Amendment Order 2015 (No.1), substituted the reference to the Treasurer in the definition of ‘responsible Minister’ in the

CEFC Act to the Minister for the Environment, and the Acts Interpretation Substituted Reference Order 2017 substitutes the reference to the Minister for the Environment to the Minister administering the CEFC Act. 15. Clean Energy Finance Corporation Investment Mandate Direction 2020, clauses 7, 8, 9, 10, 13 and 14. 16. CEFC Act, section 65. 17. T Abbott (Prime Minister), Swearing-in of the new Coalition Government, media release, 18 September 2013; G Hunt (Minister for the Environment), ABC RN Breakfast, interview with Fran Kelly, 21 March 2016. 18. See the Clean Energy Finance Corporation (Abolition) Bill 2013; the Clean Energy Finance Corporation (Abolition) Bill 2013 [No. 2]; and the Clean Energy Finance Corporation (Abolition) Bill 2014. 19. M Turnbull (Prime Minister) and G Hunt (Minister for the Environment), Joint press conference, Sydney, joint media release, 23 March 2016.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 7

Mandates to the CEFC and established five programs (listed below) to be funded out of the CEFC’s $10 billion allocation.

Investment Mandates in force between 2015 and 2018 directed the CEFC to focus on ‘emerging and innovative’ renewable energy technologies and energy efficiency technologies, such as large-scale solar, storage, offshore wind and energy efficiency in the built environment.20 During this time the Government also introduced a Bill to remove the prohibition on the CEFC investing in CCS technologies, which lapsed in April 2019.21

Since December 2018, the responsible Ministers have made three more Investment Mandates.22 The most recent Investment Mandate, made in May 2020, directs the CEFC to focus on technologies and financial products as part of the development of a market for firming intermittent sources of renewable energy generation, as well as supporting emerging and innovative clean energy technologies.23 The current Investment Mandate also encourages the

CEFC to prioritise investments that support reliability and security of electricity supply, and to take into consideration the potential effect on reliability and security of supply when evaluating renewable energy generation investment proposals.24

The Minister for Energy and Emissions Reduction and the Department of Industry, Science, Energy and Resources (DISER) have both indicated an intention to update the Investment Mandate once the Bill is passed.25

In addition, five Government programs are funded out of the CEFC’s $10 billion allocation:

• the $200 million Clean Energy Innovation Fund to invest in early-stage clean technology companies, announced in March 201626 and jointly managed by the Australian Renewable Energy Agency (ARENA)27

• the Sustainable Cities Investment Program, to make available up to $1 billion of investment finance over ten years to accelerate the development and deployment of clean energy projects in Australian cities, first established in 201628

• the Reef Funding Program to make available up to $1 billion of investment finance over ten years to finance clean energy programs in support of the Reef 2050 Long-Term Sustainability Plan, first established in 201629

20. Clean Energy Finance Corporation Investment Mandate Direction 2015 (No. 2), clause 13; Clean Energy Finance Corporation Investment Mandate Direction 2016, clause 13; Clean Energy Finance Corporation Investment Mandate Direction 2016 (No.2), clause 13.

21. See the Clean Energy Finance Corporation Amendment (Carbon Capture and Storage) Bill 2017. 22. Clean Energy Finance Corporation Investment Mandate Direction 2018; Clean Energy Finance Corporation Investment Mandate Direction 2019; Clean Energy Finance Corporation Investment Mandate Direction 2020. 23. Clean Energy Finance Corporation Investment Mandate Direction 2020, clause 13. 24. Ibid. 25. A Taylor, ‘Second reading speech: Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020’, House of

Representatives, Debates, 27 August 2020, p. 5749; Department of Industry, Science, Energy and Resources (DISER), Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, [Submission no. 22], 22 September 2020, p. 4. 26. The Clean Energy Innovation Fund was initially allocated $100 million annually for ten years. See: M Turnbull (Prime Minister) and G Hunt (Minister for the Environment), Turnbull Government taking strong new approach to clean and renewable energy innovation in Australia, joint media release, 23 March 2016; M Cormann, ‘In committee: Budget Savings (Omnibus) Bill 2016’, Senate, Debates, 15 September 2016, p. 1193. 27. CEFC, ‘Innovation Fund’, CEFC website, n.d. 28. Clean Energy Finance Corporation Investment Mandate Direction 2016 (No.2), subclause 14(2); CEFC, ‘Sustainable cities’, CEFC website, n.d. 29. Clean Energy Finance Corporation Investment Mandate Direction 2016 (No.2), subclause 14(3); CEFC, ‘Reef Funding Program’, CEFC website, n.d.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 8

• the $300 million Advancing Hydrogen Fund to support the growth of the Australian hydrogen industry, announced in November 2019 following the release of Australia’s National Hydrogen Strategy30 and

• the $100 million Australian Recycling Investment Fund to finance recycling projects that use clean energy technologies, with a particular focus on waste plastics, paper, glass and tyres, announced as an election commitment in May 2019 and established in December 2019.31

The CEFC Board also formulates written investment policies which outline its investment strategy, benchmarks and standards as well as the risk management approach for the CEFC and its investments.32

The CEFC is considered to have been ‘effective in directly and indirectly facilitating increased flows of finance into a range of clean energy projects across a number of sectors.’33 As at 30 June 2020, the CEFC has committed $8.2 billion in investments with a total investment value of $27.8 billion, meaning that every CEFC dollar invested had catalysed additional private investment at a rate of $2.30.34 In 2019-20, the CEFC reported a record $942 million in repaid or recouped CEFC finance, with total repayments over the CEFC’s lifetime amounting to $1.66 billion.35 The CEFC estimates the lifetime carbon abatement for CEFC investment commitments since 2012 to be 220 megatonnes of carbon dioxide equivalent greenhouse gas (Mt CO2-e). 36

The CEFC was established alongside ARENA, which provides grant funding to renewable energy technology projects. Currently, the two agencies have clearly delineated roles which ‘enable ARENA to develop new and emerging … technologies to the stage where the CEFC can provide investment support to accelerate further commercialisation and deployment.’37

What is the grid? The electricity network, or the grid, comprises the transmission and distribution infrastructure that transports electricity from generators to homes and businesses (see Box 1). Due to the country’s large size and concentrated population distribution, Australia does not have a national interconnected electricity grid. The main electricity grid is the National Electricity Market (NEM), which consists of 13 distribution networks fed by five state-based transmission networks in Queensland, New South Wales (NSW) including the Australian Capital Territory (ACT), Victoria, South Australia and Tasmania, linked by cross-border interconnectors.38 The NEM delivers around 80 per cent of all electricity consumed in Australia.39

30. Clean Energy Finance Corporation Investment Mandate Direction 2020, subclause 14(5); M Canavan (Minister for Resources and Northern Australia), M Cormann (Minister for Finance) and A Taylor (Minister for Energy and Emissions Reduction), Australia to be a world leader in hydrogen, joint media release, 23 November 2019; CEFC, ‘Hydrogen’, CEFC website, n.d.

31. Clean Energy Finance Corporation Investment Mandate Direction 2020, subclause 14(4); S Morrison (Prime Minister), J Frydenberg (Treasurer) and M Price (Minister for the Environment), A cleaner environment for all Australians, joint media release, 3 May 2019; M Cormann (Minister for Finance), A Taylor (Minister for Energy and Emissions Reduction), S Ley (Minister for the Environment) and T Evans (Assistant Minister for Waste Reduction and Environmental Management), Backing Australia’s recycling industry, joint media release, 15 December 2019; CEFC, ‘Australian Recycling Investment Fund’, CEFC website, n.d.

32. CEFC Act, section 68. These policies must be consistent with the Investment Mandate (subsection 68(2)). The current investment policies are available on the CEFC website: CEFC, ‘Investment policies’, CEFC website, n.d. 33. Deloitte, Statutory review of the Clean Energy Finance Corporation, report prepared for DEE, Deloitte Touche Tohmatsu, Sydney, 10 October 2018, p. 15. 34. CEFC, Annual report 2019-20, CEFC, Melbourne, 2020, pp. 4, 13. 35. Ibid., p. 15. 36. Ibid., p. 17. Carbon dioxide equivalent is a unit that enables the comparison of different greenhouse gases (M Brander,

‘Greenhouse Gases, CO2, CO2e, and Carbon: what do all these terms mean?’, Ecometrica, August 2012). 37. CEFC, CEFC statement on ARENA funding, media release, 17 September 2020. 38. Australian Energy Regulator (AER), State of the energy market 2020, AER, Melbourne, 2020, p. 117. 39. DISER, ‘National Electricity Market’, DISER website, n.d.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 9

The Northern Territory has three separate grids—the Darwin-Katherine, Alice Springs and Tenant Creek electricity networks—and Western Australia has two main grids—the South West Interconnected System (SWIS) and the North West Interconnected System (NWIS).40 Throughout Australia, electricity may also be delivered to localised areas via small, non-interconnected systems, or microgrids.41

Box 1: Electricity supply chain42

Generators produce electricity from a range of sources, such as coal, gas, solar, wind and water. The generation sector is a competitive market. Generators sell electricity to large industrial energy users and local retailers via wholesale spot and contract markets.

Transmission networks comprise transformers, large towers, high-voltage lines and cables, and interconnectors that transport electricity large distances across and between states. Private and state government-owned Transmission Network Service Providers operate the transmission networks, which are regulated natural monopolies.43

Distribution networks comprise transformers, poles and wires, and substations that transport and deliver low-voltage electricity to homes, offices and factories for lighting, heating and to power appliances. Distribution Network Service Providers operate the distribution networks, which are also regulated natural monopolies.

Retailers, or electricity providers, purchase electricity from the wholesale market and network services from transmission and distribution network service providers, and then sell them as a package to residential, commercial and industrial customers. Retail is a competitive market.

Distributed energy resources (DER) are generally small-scale generation units embedded within the distribution network and behind the meter, such as rooftop solar photovoltaic (PV) units and home battery systems. DER enables consumers to generate and/or store electricity for use and to sell excess electricity back to retailers or offer demand response.

Microgrids enable local generation and storage, typically at a community scale, and are not connected to the main grid.

Grid transformation Most of Australia’s electricity infrastructure was built in the 20th century, designed to generate electricity in a few large power stations, and distribute it via high capacity transmission lines.44 But Australia’s electricity systems are now undergoing a major transformation, from centralised one-way systems dominated by fossil fuel generation at large power stations to dispersed, diverse two-way systems that incorporate utility-scale and behind-the-meter renewable energy sources.45

Australia’s energy system is considered by some to be undergoing the fastest transformation in the world,46 driven by factors such as community concern around climate change, federal and

40. AER, State of the energy market 2020, op. cit., p. 117; Government of Western Australia, ‘Electricity industry’, wa.gov.au website, page reviewed 17 July 2020. 41. AER, State of the energy market 2020, op. cit., p. 129. 42. Australian Energy Market Commission (AEMC), ‘Electricity supply chain’, AEMC website, n.d.; AER, State of the energy

market 2020, op. cit., p. 25. 43. AEMC, ‘Electricity market’, AEMC website, n.d. 44. K Thornton, ‘Reform required to unlock our electricity grid’, Ecogeneration, 115, December 2019, p. 12. 45. AER, State of the energy market 2020, op. cit., p. 29; Australian Energy Market Operator (AEMO), Power system requirements,

Reference paper, AEMO, Melbourne, July 2020, p. 4. 46. AEMO, 2020 Integrated System Plan for the National Electricity Market, AEMO, [Melbourne], July 2020, p. 10.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 10

state government policies, renewable technology improvements and cost reductions, an aging coal fired generation fleet, and high coal and gas fuel costs.47

Coal fired generation remains the dominant supply source in Australia’s electricity system; however, this is changing (see Figure 1). In the past decade, the contribution of coal fired generation to overall electricity generation has fallen from more than 71 per cent to just over 58 per cent, while the contribution of wind generation has tripled and the combined contribution of utility-scale and rooftop solar has gone from negligible to more than five per cent.48 Since 2014, more than 4 GW of coal fired generation left the market, while more than 7 GW of new renewable generation came online.49 Overall the contribution of fossil fuel sources to electricity generation in Australia has declined more than ten per cent, being replaced by renewable energy sources.50 This trend is expected to continue, with around two-thirds of coal fired generating capacity in the NEM announced for closure over the next 20 years, and much of the committed new generation capacity comprising large-scale renewable energy.51 Similarly, recent modelling of the SWIS predicts that, in any scenario, over 70 per cent of generation capacity will be met by renewables by 2040.52

Electricity emissions This transition is an important factor in greenhouse gas emissions reduction efforts to meet Australia’s Paris Agreement commitments (to reduce emissions by 26 to 28 per cent below 2005 levels by 2030).53 So far, the transition towards renewable energy generation in Australia has resulted in an 18.3 per cent reduction of emissions generated by the electricity sector since 2009,54 representing around 44 per cent of all emissions reductions over that period.55 However, electricity generation is still the highest emitting sector in Australia, accounting for 32.7 per cent of emissions recorded in Australia’s National Greenhouse Gas Inventory in the year to March 2020.56

The electricity sector now has a number of mature and demonstrated low- and zero-emissions technologies, including distributed rooftop solar PV, large-scale wind and solar renewables, large- and small-scale battery storage, and pumped hydro storage, with large-scale renewables now the least expensive form of generation capacity to construct and operate.57 The CEFC has played an important role in supporting the entrance of renewable energy sources into the grid, having financed 31 utility-scale solar projects and 12 wind farms since 2012, totalling more than 3 GW of energy.58 The maturity of zero emissions technologies in the grid, the fact that electricity is utilised for energy supply across the economy, and additional opportunities for electrification, mean that

47. AER, State of the energy market 2020, op. cit., pp. 29-36. 48. DISER, Australian energy statistics 2020: Table O, DISER, Canberra, 2 October 2020.

49. AER, State of the energy market 2020, op. cit., p. 36. Note that coal fired and gas powered generation capacity is not equivalent to renewable generation capacity because renewable generators have lower utilisation factors—around 2-3 MW of new renewable generation capacity is needed to replace 1 MW of retiring coal fired generation capacity (p. 36). See also: IGI Global, ‘What is capacity utilization factor’, IGI Global website. 50. DISER, Australian energy statistics 2020: Table O, op. cit. 51. AEMO, 2020 Integrated System Plan, op. cit., p. 12; AEMO, 2020 Electricity Statement of Opportunities, (2020 ESOO), AEMO,

[Melbourne], August 2020, p. 7. 52. Energy Transformation Taskforce, Whole of system plan 2020, Government of Western Australia, Perth, August 2020, p. 10. 53. Australian Government, Australia’s intended nationally determined contribution to a new climate change agreement, Paris

Agreement, United Nations Framework Convention on Climate Change, August 2015. 54. DISER, Quarterly update of Australia’s National Greenhouse Gas Inventory: March 2020, DISER, Canberra, August 2020, p. 12. 55. Ibid, pp. 12, 48. Calculated from a reduction in electricity sector emissions of 38.8 Mt CO2-e and a total national inventory reduction of 87.5 Mt CO2-e from the year to June 2009 (the peak year for electricity emissions). 56. DISER, Quarterly update, op. cit., p. 12. 57. C Butler, A Denis-Ryan, P Graham, R Kelly, L Reedman, I Stewart and T Yankos, Decarbonisation futures: solutions, actions and

benchmarks for a net zero emissions Australia, ClimateWorks Australia, Melbourne, March 2020, pp. 37-39; Energy Transformation Taskforce, Whole of system plan 2020, op. cit., p. 11. 58. CEFC, Annual report 2019-20, op. cit., p. 24.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 11

the electricity sector has the potential to continue to deliver more than a proportional share towards meeting emissions reduction targets.59 Ongoing decarbonisation of the electricity sector is also considered a precondition for the decarbonisation of other high emitting sectors, such as the transport, manufacturing and building sectors.60

Figure 1: share of electricity generation by technology, 1989-90 to 2018-19

Source: Department of Industry, Science, Energy and Resources (DISER), Australian energy statistics 2020: Table O, DISER, Canberra, 2 October 2020.

The case for grid investment The energy transition has created challenges in delivering critical power system needs of maintaining reliability and security, while enabling consumer affordability and meeting emissions outcomes.61

Reliability and security A reliable power system has the generation, demand response and transmission network capacity to supply enough electricity to meet customer demand to a high probability.62 A secure power system operates within technical limits and can withstand faults and disturbances, such as the loss of a transmission line or the unexpected disconnection of a large generator.63 A power system that breaches operating limits may pose a risk to the safety of individuals, damage equipment and lead to blackouts.64

59. Climate Change Authority (CCA), Prospering in a low-emissions world: an updated climate policy toolkit for Australia, CCA, Canberra, March 2020, p. 79. 60. Butler et al., Decarbonisation futures, op. cit., pp. 10-12. 61. AEMO, 2020 Integrated System Plan, op. cit., p. 10. 62. AEMC, ‘Reliability’, AEMC website, n.d. 63. AEMC, ‘Security’, AEMC website, n.d. 64. AER, State of the energy market 2020, op. cit., p. 45.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 12

Maintaining both reliability and security requires the power system to be in balance by continuously matching supply with demand, and constantly managing technical parameters such as voltage and frequency.65 As energy is not generally stored in the grid, this is done in real-time. In the NEM, the Australian Energy Market Operator (AEMO) maintains this balance via a five-minute generation dispatch cycle, as well as through markets and agreements for ancillary services, which can be directed to rapidly increase or decrease output to maintain system security.66 Operating the system in this way requires dispatchability and predictability.67

Historically, demand followed a predictable pattern, and electricity supply has been provided by dispatchable, synchronous generators, such as large coal fired, gas powered and hydro-electric generators. Dispatchable generators can be directed to operate on demand, with fast-response options able to respond to, or ‘firm’, sudden changes in demand or supply. Synchronous generators have large turbines that rotate in synchronism with grid frequency. This provides grid stability services such as inertia and system strength, 68 which increase resilience to disturbances and help maintain a stable and secure power system.69

The energy transition means that supply and demand conditions are projected to become more volatile, which presents challenges to maintaining system reliability and security.70 For example:

• the reliance of wind and solar generation on weather patterns can result in sudden changes in output and demand, requiring fast-response dispatchable generation to fill supply gaps when light levels or wind speeds are low71

• recent and expected closures of Australia’s ageing fossil fuel plant fleet, as well as existing plants becoming more prone to outages due to plant breakdown, deteriorating performance, and maintenance and repair work, has raised concerns of potential generation shortfalls72

• an increased proportion of wind and solar generation, which connects to the grid via non-synchronous inverters, has created concerns around the possibility of increased system disturbances due to inertia shortfalls and weak system strength73 and

• the popularity of rooftop solar PV and other DER is resulting in major changes to demand patterns and, in some cases, presents capacity and security concerns for the distribution grid.74

Further challenges to reliability and security are presented by the ‘increasing frequency, extremity and scale of climate-induced weather events and other emerging threats’ that affect generation and transmission infrastructure.75

65. AEMO, Power system requirements, op. cit., p. 4. See also: AEMO, ‘Managing frequency in the power system’, AEMO Energy Live blog, 6 February 2018; AEMO, ‘Energy explained: voltage’, AEMO Energy Live blog, 17 June 2020. 66. AEMO, The National Electricity Market, fact sheet, AEMO, [Melbourne], 28 July 2020; AEMO, ‘Ancillary services’, AEMO website, n.d. 67. AEMO, Power system requirements, op. cit., p. 5. AEMO defines dispatchability as the ‘extent to which the output of an

energy resource or portfolio of resources can be relied on to “follow a target” and adhere to a dispatch schedule at some time in the future’ (p. 35). 68. High inertia makes it easier to manage frequency disturbances and high system strength makes it easier to keep voltage stable. See: AEMO, System strength: system strength in the NEM explained, AEMO, [Melbourne], March 2020; AEMO, ‘Energy

explained: frequency control’, AEMO Energy Live blog, 1 July 2020. 69. AER, State of the energy market 2020, op. cit., p. 48; GHD Advisory, Managing system strength during the transition to renewables, report prepared for ARENA, GHD, Brisbane, 2020. See, also: AEMO, ‘Energy explained: system strength’, AEMO

Energy Live blog, 15 July 2020; AEMO ‘Frequency control’, op. cit. 70. AEMO, 2020 ESOO, op. cit., p. 7; AER, State of the energy market 2020, op. cit., pp. 37, 47. 71. AER, State of the energy market 2020, op. cit., p. 37. 72. Ibid., p. 43. 73. Finkel et al., Independent review into the future security of the National Electricity Market, op. cit., p. 49. 74. AER, State of the energy market 2020, op. cit., p. 57; AEMO, ‘Energy explained: minimum operational demand’, AEMO Energy

Live blog, 25 August 2020. 75. AEMO, 2020 ESOO, op. cit., p. 4.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 13

The increasing volatility of supply and demand conditions has resulted in an increased need for flexible management of the grid to maintain system reliability and security. Since 2017, AEMO has increasingly had to intervene in the NEM to manage reliability and security events. These interventions have included, for example, deploying contracted standby strategic reserves, issuing directions to dispatchable generators to increase output, constraining renewable generation or transmission lines, or, as a last resort, shutting down parts of the network (load shedding).76 However, based on current and committed generation and transmission investment alone, the NEM is not expected to experience reliability risks until 2029-30 (when the Vales Point coal fired power station is scheduled for closure).77

Integrating renewables Current grid infrastructure is considered a major impediment to further investment in grid-scale renewables. The optimal location requirements of grid-scale wind and solar generation, as well as their rapid uptake and distributed nature, have resulted in integration issues as a result of weak proximate transmission network capacity.78 The NEM transmission grid also has a weak level of interconnections, reducing the ability of the grid to provide reliability and security services between regions, and meaning disruption of an interconnector can quickly lead to the isolation of a region.79

The Clean Energy Regulator (CER) considers ‘the ability of Australia's electricity grid to transmit renewable electricity from production to areas of demand is currently the major limiting factor to further growth’ in renewable generation investment.80 The Clean Energy Council’s regular survey of investment confidence within the clean energy industry has identified grid connection, network access and transmission concerns as consistently the top challenge cited by businesses since July 2019.81

Improved transmission and distribution network capacity will be critical in supporting increased variable renewable energy (VRE) sources, by reducing transmission losses and congestion costs, and allowing more reliable and improved levels of transfer of electricity between regions.82 This would mean that power from geographically diverse renewable energy resources could be transferred from regions where the weather is favourable to regions where it is not, at a given time, thus reducing, or smoothing, the overall variability of renewable electricity supply.83 Network investment must be balanced with costs, as over-investment in some regions in Australia has resulted in significant increases in electricity prices.84 However, AEMO notes:

If … VRE is coordinated with strategic investments in the transmission network, the greater resource diversity and competition will reduce the costs of supply. This in turn should result in downward pressure on electricity bills, assuming effective wholesale and retail markets. 85

76. AER, State of the energy market 2020, op. cit., pp. 44, 50-51. 77. AEMO, 2020 ESOO, op. cit., pp. 8, 57-58. Note that this is an inherently conservative assessment as it only includes current committed and approved investments, announced closures and expected demand (pp. 56-57). 78. AER, State of the energy market 2020, op. cit., pp. 11, 36; Thornton, ‘Reform required to unlock our electricity grid’, op. cit., p.

12.

79. International Energy Agency (IEA), Energy policies of IEA countries: Australia 2018 review, OECD/IEA, 2018, p. 16; AEMO, Power system requirements, op. cit., p. 16. 80. Clean Energy Regulator (CER), Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, [Submission no. 43], 2 October 2020,

p. 2.

81. Clean Energy Council (CEC), ‘Clean energy outlook confidence index’, CEC website, 7 July 2020. 82. AER, State of the energy market 2020, op. cit., p. 54. 83. AEMO, Power system requirements, op. cit., p. 16. 84. ACCC, Restoring electricity affordability and Australia’s competitive advantage, op. cit., p. ix. 85. AEMO, 2020 Integrated System Plan, op. cit., p. 60.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 14

Grid technologies AEMO’s Integrated System Plan (ISP) provides a roadmap for NEM future generation and grid infrastructure investments. The most recent ISP modelling, published in June 2020, suggests that the optimal grid is one dominated by renewable energy sources and supported by a diverse range of complementary technologies:

… the least-cost and least-regret transition of the NEM is from a system dominated by centralised coal-fired generation to a highly diverse portfolio of behind-the-meter and grid-scale renewable energy resources. These must be supported by dispatchable firming resources and enhanced grid and service capabilities, to ensure the power system remains physically secure.86

Dispatchable generation and storage AEMO’s Electricity Statement of Opportunities (ESOO) identifies an additional 1,480 MW of firm capacity will be needed to enter the NEM in the next decade to meet the existing reliability standard.87 The ISP predicts that, over the next 20 years, 6-19 GW of new dispatchable resources will be required to firm a grid increasingly dominated by intermittent renewable energy resources.88 Fast-response dispatchable technologies considered in the ISP include utility-scale pumped hydroelectricity (pumped hydro) and battery storage, demand response and small-scale distributed batteries, and gas powered generation.

Grid-scale electricity storage technologies such as batteries and pumped hydro are expected to comprise a significant proportion of new investment in dispatchable resources.89 Battery storage is becoming increasingly economically viable as technology costs reduce, with at least five batteries now operating in the NEM.90 Pumped hydro is the most mature form of electricity storage in Australia, with schemes in NSW and Queensland in operation since the 1970s.91 The Australian Government has committed support to new pumped hydro storage, including the Snowy 2.0 project and the Tasmanian ‘Battery of the Nation’ proposal.’92 The Government’s recent First Low Emissions Technology Statement identifies grid-scale storage as ‘a critical element of Australia’s future electricity system.’93 Storage has the potential to deliver significant emissions reductions by enabling a greater penetration of renewable energy in the grid, and offsetting higher emitting dispatchable generation sources.94

Demand-side participation, where customers reduce or shift electricity use from high demand and price periods, is also predicted to play an increasing role in the grid in coming years.95 Technologies include automated home energy management systems and appliances with smart grid technologies, home battery systems, virtual power plants (where DER from numerous homes are aggregated and operated as a single system), and electric vehicles (which, in the future, are

86. AEMO, Our 20-year plan for the National Electricity Market: an overview of AEMO’s 2020 Integrated System Plan (ISP), AEMO, Melbourne, [24 August 2020], p. 4. See also: AEMO, 2020 Integrated System Plan, op. cit., p. 11. 87. AEMO, 2020 ESOO, op. cit., pp. 9, 59. The existing reliability standard specifies that expected unserved energy (USE) should not exceed 0.002% of total energy consumption in any region in any financial year (p. 3). 88. AEMO, 2020 Integrated System Plan, op. cit., pp. 12, 50. 89. Ibid., p. 50. 90. AER, State of the energy market 2020, op. cit., p. 80. This includes the Hornsdale Power Reserve, Dalrymple ESCRI-SA Battery

Energy Storage System and Lake Bonney Battery in South Australia, and the Ballarat Energy Storage System and Gannawarra Energy Storage System in Victoria. 91. DISER, ‘Pumped hydro’, DISER website, n.d.; Butler et al., Decarbonisation futures, op. cit., p. 38. 92. DISER, ‘Pumped hydro’, op. cit. 93. DISER, Technology investment roadmap: first low emissions technology statement 2020, DISER, Canberra, 2020, p. 19. 94. Ibid., p. 40. 95. AEMO, 2020 Integrated System Plan, op. cit., p. 57.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 15

expected to provide ‘vehicle-to-grid’ storage, providing electricity back to the grid at periods of high demand).96

Hydrogen technologies, although at an emerging stage, may also have future potential for electricity storage and dispatchable generation.97 Hydrogen has also been proposed as a potential alternative to diesel generators in microgrids, and as a blended fuel with gas, which could lower the emissions profile and extend the economic life of gas powered generators98 (although the emissions intensity of hydrogen is affected by production method).99 The First Low Emissions

Technology Statement considers hydrogen to present a competitive option for firming electricity at $2 per kilogram.100

Gas powered generators typically provide ‘flexible’ or ‘peaking’ power, ramping up quickly to cover supply shortfalls during high demand periods, or to provide longer-term firming overnight or during long periods of low wind.101 The AEMO ISP considers that existing gas powered generators will play a critical role in complementing VRE and storage, particularly once significant amounts of coal fired generation capacity is retired.102 However, the ISP considers new gas powered

generation to present an economically viable dispatchable resource option only if gas prices are low and battery costs remain high.103 Efficient gas powered generation has typically been considered to be less than half as emission intensive as coal fired generation.104 However, this is controversial, with recent studies suggesting this could be a significant underestimation.105 The Australian Government has shown considerable support for gas powered generation (see sections below).106

Grid stabilisation technologies The dispatchable technologies listed above also provide various services to help maintain grid stability and security. For example, gas powered generators and pumped hydro plants are synchronous and thus inherently provide inertia and system strength.107 Grid-scale battery storage can provide rapid, accurate ancillary services to help stabilise technical issues in the grid, such as frequency control services.108 The ability of large-scale battery storage to provide virtual inertia, which emulates services provided by synchronous generators, through new inverter technology is

96. AER, State of the energy market 2020, op. cit., p. 81. 97. S Bruce, M Temminghoff, J Hayward, E Schmidt, C Munnings, D Palfreyman and P Hartley, National Hydrogen Roadmap: pathways to an economically sustainable hydrogen industry in Australia, CSIRO, Australia, 2018, pp. 35-36; COAG Energy Council Hydrogen Working Group, Australia’s National Hydrogen Strategy, Department of Industry, Innovation and Science,

[Canberra], 2019, p. 34. 98. Bruce et al., National Hydrogen Roadmap, op. cit., pp. 38, 46. 99. Hydrogen can be produced by electrolysis (where electricity is used to split water) or through coal gasification or steam

methane reforming (where hydrogen and carbon dioxide are produced by reacting fossil fuels with steam) (COAG Energy Council Hydrogen Working Group, Australia’s National Hydrogen Strategy, op. cit., p. xiv). 100. DISER, First low emissions technology statement 2020, op. cit., p. 18. 101. AEMO, 2020 Integrated System Plan, op. cit., p. 53. 102. Ibid. 103. Ibid., pp. 55-56. 104. Finkel et al., Independent review into the future security of the National Electricity Market, op. cit., p. 109. 105. B Hmiel et al., ‘Preindustrial 14CH4 indicates greater anthropogenic fossil CH4 emissions’, Nature, 578, 2020, pp. 409-412. See

also: J Watts, ‘Oil and gas firms “have had far worse climate impact than thought”’, The Guardian (Australia), 20 February 2020. 106. See, for example: A Taylor, ‘Answer to Question without notice: Energy’, [Questioner: T O’Brien], House of Representatives, Debates, 31 August 2020. 107. AER, State of the energy market 2020, op. cit., p. 76; GHD Advisory, Managing system strength during the transition to

renewables, op. cit., p. iv. 108. AER, State of the energy market 2020, op. cit., p. 38.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 16

currently being developed, with two demonstration projects recently completed in South Australia.109

Additional technologies are also being deployed to help stabilise the grid and maintain system security. For example, synchronous condensers (large rotating electric machines that closely resemble synchronous generators) are a mature technology that presents a solution to bolster grid stability as large synchronous generators leave the market.110 In South Australia, the installation of four synchronous condensers is currently underway.111 The capability of wind and solar farms to provide stability services is also evolving, with improvements in inverter based generation technology allowing rapid response to changes in supply and demand, and making a limited contribution to system strength.112

Network investment The ISP outlines an optimal development pathway for the NEM transmission network, which includes nine near-term critical projects and nine longer-term projects to augment the transmission grid.113 Projects include upgrades of existing infrastructure, as well as new interconnectors, cables and network augmentations to support the development of renewable energy zones (REZs), which are ‘high-resource areas … where clusters of large-scale renewable energy projects can capture economies of scale as well as geographic and technological diversity in renewable resources.’114 The ISP considers:

As long as augmentation costs are kept to an efficient level, strategically placed interconnectors and REZs, coupled with energy storage, will be the most cost-effective way to add capacity and balance variable resources across the whole NEM. 115

The Government has committed funding to a number of ISP transmission projects, including the HumeLink transmission upgrade in NSW, the Queensland-NSW Interconnector (QNI) project, the Project EnergyConnect interconnector between South Australia and NSW, the Victoria-NSW Interconnector (VNI) West project, and the Marinus Link transmission cables between Victoria and Tasmania.116

The Underwriting New Generation Investments (UNGI) program On 23 October 2018, the Government announced plans to introduce the UNGI program to underwrite investment117 in new power generators.118 The program aims to support new

109. Neoen, ‘Learn: virtual inertia’, Hornsdale Power Reserve website, n.d.; S Sproul, S Cherevatskiy and H Klingenberg, ‘Grid forming energy storage: provides virtual inertia, interconnects renewables and unlocks revenue’, Hitachi ABB Power Grids webinar presentation, 6 July 2020.

110. AER, State of the energy market 2020, op. cit., p. 48; ‘Synchronous condensers finding a new purpose’, Modern Power Systems website, 23 May 2019. 111. ElectraNet, ‘Strengthening South Australia’s power system’, ElectraNet website. 112. AER, State of the energy market 2020, op. cit., p. 48. 113. AEMO, 2020 Integrated System Plan, op. cit., pp. 14-16. 114. AEMO, 2020 ISP Appendix 4: energy outlook, AEMO, [Melbourne], July 2020, p. 10. See also: Climate Council, ‘What is a

renewable energy zone?’, Climate Council website, 23 November 2020. 115. AEMO, 2020 Integrated System Plan, op. cit., p. 13. 116. S Morrison (Prime Minister) and G Berejiklian (Premier of New South Wales), NSW energy deal to reduce power prices and

emissions, joint media release, 31 January 2020; S Morrison (Prime Minister) and A Taylor (Minister for Energy and Emissions Reduction), Ensuring affordable, reliable and secure electricity supply, joint media release, 15 September 2020; A Taylor (Minister for Energy and Emissions Reduction) and L D’Ambrosio (Victorian Minister for Energy, Environment and Climate Change), Delivering cheap and reliable energy in Victoria, joint media release, 22 November 2020. 117. ‘“Underwriting” is when a degree of financial risk associated with a project is taken on by the government, rather than the

project’s proponent’: L Schuijers, ‘The government's UNGI scheme: what it is and why Zali Steggall wants it investigated’, The Conversation, 29 April 2020. 118. Morrison, Frydenberg and Taylor, A fair deal on energy, op. cit.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 17

dispatchable energy generation projects for the NEM to lower prices and increase reliability.119 According to the Government, the UNGI was developed in response to recommendation four of the ACCC Retail Electricity Pricing Inquiry.120 The inquiry found that an entrenched lack of competition in NEM generation markets was a primary driver of high electricity prices in Australia, and recommended, among other things, that the Government enter into low fixed-price energy offtake agreements for new generation projects that met qualifying criteria.121

The Government undertook an 18 day period of consultation on the program, including the release of a consultation paper which outlined a number of possible mechanisms for attracting investment.122 The Government received 66 submissions for projects during a six week Registrations of Interest period, and in March 2019 announced that 12 projects had been shortlisted. This consisted of six pumped hydro projects, five gas projects and one coal upgrade project.123

Initial support terms to underwrite two of the shortlisted gas projects were announced in December 2019.124 Funding for the coal upgrade project was also slated in the 2020-21 Budget, although the exact funding amount was not for publication.125 According to the Department of Industry, Science, Energy and Resources (DISER), the other shortlisted projects are still under consideration for UNGI support.126 DISER also notes:

The government will continue to engage with proponents of projects that have not made the shortlist, but may meet the program’s objectives and eligibility criteria. This will support the development of a pipeline of mature projects that the government can work with over the life of the program. 127

On 23 April 2020, independent MP Zali Steggall referred the UNGI program to the Auditor-General, based on concerns around the program’s legislative basis, lack of assessment guidelines or criteria, and lack of clear process in the program’s development and implementation.128 Following this, the Australian National Audit Office (ANAO) included the UNGI program as a potential topic in the 2020-21 Annual Audit Work Program.129

119. DISER, ‘Underwriting New Generation Investments program’, DISER website, n.d. 120. S Morrison (Prime Minister), M McCormack (Deputy Prime Minister), A Taylor (Minister for Energy) and M Canavan (Minister for Resources and Northern Australia), Delivering affordable and reliable power, joint media release, 26 March 2019. 121. ACCC, Restoring electricity affordability and Australia’s competitive advantage, op. cit., pp. vii, 100. The ACCC suggested the

following qualifying criteria for project proposals: have at least three customers who have committed to acquire energy from the project for at least the first five years of operation; not involve any existing retail or wholesale market participant with a significant market share; be of sufficient capacity to serve the needs of a number of large customers; and be capable of providing a firm product (p. 100). 122. DEE, Underwriting new generation investments, Public consultation paper, DEE, Canberra, October 2018, pp. 5-7; see also

DEE, Underwriting new energy investments, fact sheet, DEE, Canberra, October 2018. 123. Morrison et al., Delivering affordable and reliable power, op. cit.; A Taylor (Minister for Energy), Call for registrations of interest for the Underwriting New Generation Investments program, media release, 13 December 2018; DISER, Underwriting

New Generation Investments program shortlist, fact sheet, [DISER], [Canberra], [1 March 2019]. 124. A Taylor (Minister for Energy and Emissions Reduction), Initial support terms for two new generation projects agreed, media release, 23 December 2019. 125. Australian Government, Portfolio budget statements 2020-21: budget related paper no. 1.9: Industry, Science, Energy and

Resources Portfolio, p. 70; E Fowler, ‘Vales Point gets upgrade’, The Australian Financial Review, 7 October 2020, p. 9. 126. DISER, ‘Underwriting New Generation Investments program’, op. cit. 127. Ibid. 128. Australian National Audit Office (ANAO), ‘Request for audit: Underwriting New Generation Investment (UNGI) program’,

ANAO website. These concerns were first raised by the Australia Institute. See: T Swann and R Merzian, Problems with UNGI, The Australia Institute, [Canberra], March 2020. 129. ANAO, ‘Performance audit (potential): Underwriting New Generation Investment’, ANAO website.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 18

Since the announcement of the GRF, and intentions for it to fund UNGI projects, DISER states:

The government will only refer UNGI projects to the Grid Reliability Fund that reflect the CEFC’s legislative mandate. The CEFC will not invest in coal projects.

Further announcements on shortlisted UNGI projects will be made as the government reaches agreements with individual project proponents.

In the longer term, the intention is for the CEFC to be the lead UNGI delivery agency - with the exception of coal projects. When the legislation allows, UNGI projects will be referred to the CEFC. The government will manage this transition to ensure no impact on program delivery.130

Related energy announcements and gas-led recovery In the weeks following the introduction of the Bill, the Government made a number of energy announcements, which provide further context for the Bill. These announcements included:

• plans for a gas-led economic recovery from the recession caused by the COVID-19 pandemic, including a commitment to identify priority gas pipelines and critical infrastructure, and to develop an Australian Gas Hub in Queensland131

• a target for the private sector to deliver 1,000 MW of new dispatchable energy to the NEM by the 2023-24 summer (coinciding with the expected closure of the coal-fired Liddell power station), with a promise that, if final investment decisions are not made by April 2021, the Government will progress plans for Commonwealth-owned company Snowy Hydro Ltd to build a gas-fired generator132

• a commitment to work with state governments to accelerate three priority transmission projects identified in the AEMO Integrated System Plan: the Marinus Link, and the Project EnergyConnect and VNI West interconnectors133

• a $1.9 billion package in low emissions technologies, primarily delivered to ARENA as baseline funding, but also including $50 million towards a Carbon Capture Use and Storage Development Fund, $70.2 million to set up a hydrogen export hub, and $67 million to install microgrids in regional and remote communities134

• $28.5 million to fund energy infrastructure in Western Australia, including investment in a 100 MW/200 MWh battery for the SWIS and extension of Western Australia’s microgrids program135 and

• a commitment to introduce NEM market reforms, to be developed by the National Cabinet Energy Reform Committee, to ‘take account of the increasingly distributed nature of generation and better recognise the critical stabilising role played by dispatchable generation’.136

Additionally, in the 2020-21 Budget, the Government committed to fund or underwrite a number of transmission, storage and generation projects as part of the JobMaker Plan, including to:

• provide loan funding to progress the Marinus Link project

130. DISER, ‘Underwriting New Generation Investments program’, op. cit. 131. S Morrison (Prime Minister), A Taylor (Minister for Energy and Emissions Reduction) and K Pitt (Minister for Resources), Gas-fired recovery, joint media release, 15 September 2020. 132. Morrison and Taylor, Ensuring affordable, reliable and secure electricity supply, op. cit. 133. Ibid. 134. S Morrison (Prime Minister) and A Taylor (Minister for Energy and Emissions Reduction), Investment in new energy

technologies, joint media release, 17 September 2020. 135. M Cormann (Minister for Finance) and A Taylor (Minister for Energy and Emissions Reduction), Delivering cheap and reliable energy in Western Australia, joint media release, 2 October 2020. 136. S Morrison (Prime Minister), National energy address, Tomago, NSW, media release, 15 September 2020.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 19

• provide funding for the CopperString 2.0 transmission project to connect the North West Minerals Province in Queensland to the NEM

• provide funding for the SWIS Big Battery project in Western Australia

• underwrite early works associated with the Project EnergyConnect and VNI West transmission projects and

• underwrite upgrades to the Vales Point coal fired power station—a project shortlisted for the UNGI program.137

The Government also released the First Low Emissions Technology Statement, which identified five priority technologies for Government investment: clean hydrogen; electricity from storage; low carbon steel and aluminium; CCS; and soil carbon.138 In support of this statement, the Government has flagged that, among other things, it will:

• require the CEFC, as well as ARENA and the CER, to focus on accelerating the five priority technologies and

• introduce legislative reforms to ensure the CEFC, as well as ARENA, is able to invest in the priority technologies.139

These intentions align somewhat with recommendations of the Report of the Expert Panel Examining Additional Sources of Low Cost Abatement (King Review). In September 2019, the Expert Panel, chaired by former President of the Business Council of Australia and Managing Director of Origin Energy, Mr Grant King, was appointed to provide advice to the Government on how best to incentivise low cost emissions reduction opportunities across the economy.140 The King Review recommended that the CEFC (as well as ARENA) be provided ‘with an expanded, technology-neutral remit so they can support key technologies across all sectors’.141

As outlined earlier in this Digest, the CEFC Act currently prohibits the CEFC from investing in CCS technology. The Bill does not change that prohibition. As such, enabling the CEFC to invest in CCS would require the introduction of further amendments to the CEFC Act. The Department indicated in October 2020 that it was in the early stages of preparing this additional legislation.142

Committee consideration

Environment and Communications Legislation Committee The Bill was referred to the Senate Environment and Communications Legislation Committee (the Committee) for inquiry and report. The Committee received 45 unique submissions, as well as approximately 700 form letters and more than 4,500 short statements. A public hearing was also held in Canberra (see ‘Position of major interest groups’ section).143

137. Australian Government, Budget measures: budget paper no. 2: 2020-21, p. 117. 138. DISER, First low emissions technology statement 2020, op. cit., p. 17. 139. A Taylor (Minister for Energy and Emissions Reduction), Technology-led plan to lower emissions, lower costs and support jobs, media release, 22 September 2020; Morrison and Taylor, Investment in new energy technologies, op. cit.

140. G King, S Smith, D Parker and A Macintosh, Report of the Expert Panel examining additional sources of low cost abatement, report prepared for DISER, 14 February 2020, p. 14. 141. Ibid., pp. 12, 91, recommendation 10.2. 142. Senate Environment and Communications Legislation Committee, Proof committee Hansard, 20 October 2020, p. 71. 143. Senate Environment and Communications Legislation Committee, Clean Energy Finance Corporation Amendment (Grid

Reliability Fund) Bill 2020, Senate, Canberra, November 2020, p. 1.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 20

The Committee’s majority report recommended the Bill be passed.144 The Australian Labor Party (ALP) and the Australian Greens (Greens) both provided dissenting reports that recommended amendments to the Bill (see ‘Policy position of non-government parties/independents’ section).145

Further details of the inquiry can be found at the inquiry homepage.

Senate Standing Committee for the Scrutiny of Bills The Scrutiny of Bills Committee (Scrutiny Committee) considered the Bill in its report dated 2 September 2020.146 The Scrutiny Committee raised concerns and requested further advice from the Minister in relation to the use of non-disallowable delegated legislation for significant matters. The Scrutiny Committee noted particular concern ‘that details of the investment criteria for the Fund are being left to non-disallowable delegated legislation and will therefore not be subject to effective parliamentary oversight.’147 The Scrutiny Committee questioned whether the Bill could be amended to set out the criteria that a GRF investment must meet in the primary legislation, or provide that Investment Mandates made by the Minister are subject to the disallowance process.148

Minister’s response In response to the Scrutiny Committee, the Minister stated:

• the non-disallowable Investment Mandate has been a feature of the CEFC Act since its introduction and its use for the proposed GRF replicates the existing role of the Investment Mandate in relation to the CEFC’s original fund

• the legislative concept of grid reliability investment is bounded by the definition of clean energy technologies contained in the Act and the Investment Mandate cannot be used to expand that statutory limitation

• it is long-standing practice that Ministerial directions to government bodies are non-disallowable

• Investment Mandate directions provided under a wide range of similar Commonwealth legislation are also non-disallowable

• the evolving nature of challenges to grid reliability and security necessitate the Investment Mandate to ensure that issues can be considered and updated as necessary, without requiring amendment of the Act

• the Investment Mandate cannot override the operational independence of the CEFC, nor require the CEFC to make, or not make, a particular investment and

• the Investment Mandate is an essential tool for the Government to give direction to the CEFC in the performance of its legislative functions.149

The Scrutiny Committee noted and responded to the Minister’s comments in its report dated 7 October 2020.150 The Scrutiny Committee left to the Senate as a whole further consideration of

144. Ibid., p. 33. 145. Australian Labor Party (ALP) Senators, Dissenting report, Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, The Senate, Canberra, November 2020, pp. 35-38; Australian Greens (the Greens), Dissenting report, Senate Environment and Communications

Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, The Senate, Canberra, November 2020, pp. 39-42. 146. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, 2020, 2 September 2020, pp. 5-6. 147. Ibid., p. 5. 148. Ibid., p. 6. 149. A Taylor, Minister’s Response to the Senate Standing Committee for the Scrutiny of Bills on the Clean Energy Finance

Corporation Amendment (Grid Reliability Fund) Bill 2020, [17 September 2020]. 150. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 13, 2020, 7 October 2020, pp. 20-23.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 21

the appropriateness of leaving criteria for which investments can be funded from the GRF to be determined in non-disallowable delegated legislation. This issue is addressed further in the ‘Key issues and provisions’ section of this Digest.

Policy position of non-government parties/independents

ALP On 1 September 2020, the ALP indicated that it ‘supports the expansion of the CEFC to help deliver a modern electricity grid, but not for gas generation investments’.151 The ALP foreshadowed proposed amendments to the Bill to ensure the CEFC retains the requirement to invest in projects that provide a return, and said it would block attempts to establish additional Ministerial powers.152 Shadow Minister for Climate Change and Energy Mark Butler said that, if these amendments are unsuccessful, the ALP will vote against the Bill.153

This position is reiterated in the ALP Senators’ dissenting report to the Committee inquiry into the Bill.154 The dissenting report proposed the Bill be amended to remove the power to define new investment types through regulation and retain the current definition of low-emissions technology in the CEFC Act:

While Labor supports those parts of the bill that are purely focused on increasing energy security and reliability through network and storage investment, two features of the current bill are sufficiently problematic to warrant amendment in Labor’s view. Put most broadly, as well as encouraging more transmission and security investment, this bill dilutes both the CEFC’s focus on emissions reduction and its financial independence. These two characteristics—a clear commercial investment focus with a clear commitment to financial independence, and a focus on genuine emissions reduction—are the defining characteristics of the CEFC and as both are severely undermined by this bill, Labor Senators cannot support the bill in its current form.155

The Greens The Greens do not support the Bill in its current form, describing ‘subsiding [sic] gas through the green energy bank [as] like pouring money from the health budget into asbestos.’156 Greens Leader Adam Bandt has reportedly described the Bill as a ‘Trojan horse for coal and gas’ and stated ‘[r]edefining gas as a “low-emissions technology” would let gas corporations access $billions in public funding intended for renewables.’157

The Greens dissenting report raised concerns as to the Bill’s impact on the CEFC’s independence:

Supporting this bill as currently drafted will weaken the independence of the CEFC with the Energy and Emissions Reduction Minister able to insert himself in the middle of investment decisions. Furthermore, the creation of a legislated definition of ‘low-emissions technology’ will allow the Minister to overrule the current CEFC Board’s control over what it considers to be eligible investments in non-renewable technologies. 158

151. M Butler (Shadow Minister for Climate Change and Energy), CEFC is for renewables investment not new gas, media release, 1 September 2020. 152. Ibid. 153. Ibid. 154. ALP Senators, Dissenting report, op. cit., pp. 37, 38. 155. Ibid., p. 35. 156. Australian Greens, ‘Gas is not the answer’, Australian Greens website, n.d. 157. K Murphy and A Morton, ‘Greens warn Clean Energy Finance Corporation overhaul a “Trojan horse for coal and gas”’, The

Guardian (Australia), 8 May 2020; A Bandt (@AdamBandt), ‘Bought by gas, the Liberals are trying to legislate away a scientific truth. This is Orwellian. …’, tweet, 27 August 2020. https://twitter.com/AdamBandt/status/1298834436495044609 158. The Greens, Dissenting report, op. cit., p. 39.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 22

The Greens recommended:

• UNGI projects be funded through separate legislation, rather than the CEFC Act

• changes to the definition of low emissions technology be removed from the Bill

• the current definition of investment in the CEFC Act be retained

• additional amendments be made to make the Investment Mandate disallowable by parliament

• the proposed amendment to exclude GRF investment earnings from being able to be transferred to ARENA at the request of the CEFC be removed from the Bill and

• additional amendments be made to include ‘fossil gas’ and ‘coal’ as prohibited technologies.159

Zali Steggall Independent MP Zali Steggall has criticised the Bill in numerous social media posts,160 and has stated that, if the Bill is enacted, ‘it will pollute Australia's clean bank by allowing it to invest in gas and loss-making projects.’161 As noted above, Ms Steggall has referred the UNGI program to the Auditor-General, over concerns as to a lack of transparency and accountability around the program.162

Centre Alliance/Senator Griff Centre Alliance Senator Stirling Griff reportedly supported referral of the Bill to inquiry, noting:

At first glance I don’t see any significant issues with it, but the [Environment and Communications Legislation Committee] inquiry is important to understand the full range of effects. [The] CEFC is one of the most effective government agencies. Centre Alliance absolutely prefers investments are made by an independent agency at arm’s length from government ... 163

Katter’s Australian Party Katter’s Australian Party MP Bob Katter has not formally stated a position on the Bill, although, in April 2020, he called on the Government to expand the investment remit of the CEFC, to include ‘all types of infrastructure and industry’.164

Position of major interest groups A number of interest groups made submissions to the Committee’s inquiry, including conservation and community services organisations, investment and industry groups, and academics, as well as former Chief Executive Officer (CEO) of the CEFC Oliver Yates. Many supported additional funding for the CEFC or the overall policy objective of the GRF, but raised concerns over various aspects of the Bill.165 The Bill was generally viewed in the context of the Government’s wider energy

159. Ibid., pp. 40-42. 160. See, for example: C Reucassel (@craigreucassel), ‘Surely this can’t pass?? Currently CEFC can’t invest in loss making or fossil fuel projects. …’, tweet, 28 August 2020, retweeted by Z Steggall (@zalisteggall), https://twitter.com/craigreucassel/status/1299121670536359936; Z Steggall (@zalitseggall), ‘Great summary of how bad

today’s announcement from the PM is …’, Facebook update, 14 September 2020. https://www.facebook.com/Zali4Warringah/posts/great-summary-of-how-bad-todays-announcement-from-the-pm-is-for-energy-policy-ce/1214744645569227/. 161. Z Steggall, ‘Speech: Marine environment’, House of Representatives, Debates, (proof), 19 October 2020, p. 207. 162. A Morton, ‘Zali Steggall calls for investigation of Coalition plan to underwrite gas, hydro and coal power’, The Guardian (Australia), 27 April 2020. 163. Guardian live blog, The Guardian (Australia), 2 September 2020. 164. B Katter (Federal Member for Kennedy), Unlock the Clean Energy Finance Corporation and build Australia out of this coronavirus recession, media release, 7 April 2020. 165. See, for example: Submissions to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020: Australian Conservation Foundation (ACF), 350.org,

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 23

announcements, particularly its plans for a gas-led economic recovery. Many submissions understood the Bill’s intention to be to allow and, ultimately direct, the CEFC to invest in gas powered generation and fossil fuel projects.166 Most submissions opposed this intention, with the exception of the Australian Pipelines and Gas Association (APGA), Australian Petroleum Production and Exploration Association (APPEA), and the Australian Industry Group (Ai Group).167

Another key concern raised by a number of submissions was that the Bill would impact on the CEFC’s independence, by providing additional powers to the Minister to direct CEFC investments.168 This was disputed by the Ai Group, which considered:

… that independence would be preserved—that the CEFC would have greater scope to choose individual investments that might not in fact have a return, but the minister would remain unable to direct it to make particular investments. 169

An overview of additional key concerns raised in stakeholder submissions is outlined in Table 1 below. Further detail is included in the ‘Key issues and provisions’ section of this Digest.

Table 1: Key issues raised in major stakeholder submissions to the Environment and Communications Legislation Committee

Issue Stakeholder/s

Opposed/Expressed concern

Supported/Not concerned

Exempting the GRF from the CEFC requirement to invest at least half its funds in renewable energy.

Australian Conservation Foundation (ACF), 350.org, Greenpeace Australia, Solar Citizens, Uniting Church in Australia, Synod of Victoria and Tasmania and World Wildlife Fund (WWF) Australia Australian Council of Social Service (ACOSS)

Australian Pipelines and Gas Association (APGA) Ai Group

Greenpeace Australia, Solar Citizens, Uniting Church in Australia, Synod of Victoria and Tasmania and World Wildlife Fund (WWF) Australia, [Submission no. 5], 22 September 2020; E Thurbon, S-Y Kim, J Mathews and H Tan, [Submission no. 6], 22 September 2020; The Australia Institute, [Submission no. 23], September 2020; Climate Council of Australia (Climate Council), [Submission no. 27], 25 September 2020; Investor Group on Climate Change (IGCC), [Submission no. 28], September 2020; D Gocher (Director, Climate and Environment, Australasian Centre for Corporate Responsibility), Evidence to

the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, (proof), 13 October 2020, p. 29. 166. See, for example: ACF et al, Submission, op. cit., pp. 4-6; O Yates, Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund)

Bill 2020, [Submission no. 7], n.d., [pp. 2, 4]; Australian Council of Social Service (ACOSS), Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, [Submission no. 21], 25 September 2020, p. 2; Climate Council, Submission, op. cit., p. 3; Gocher, Evidence, op. cit., pp. 29, 32. 167. Australian Pipelines and Gas Association (APGA), Submission to the Senate Environment and Communications Legislation

Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, [Submission no. 14], 23 September 2020; Australian Petroleum Production and Exploration Association (APPEA), Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment

(Grid Reliability Fund) Bill 2020, [Submission no. 20], 25 September 2020; The Australian Industry Group (Ai Group), Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, [Submission no. 19], 24 September 2020, p. 5. 168. ACF et al, Submission, op. cit., p. 6; Yates, Submission, op. cit., [p. 5]; ACOSS, Submission, op. cit., p. 2; The Australia Institute, Submission, op. cit., p. 6. 169. T Reed (Manager, Climate, Energy and Environment Policy, Ai Group), Evidence to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, (proof), 13 October 2020, p. 19.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 24

Issue Stakeholder/s

Opposed/Expressed concern

Supported/Not concerned

The Australia Institute

Changing the definition of low-emissions technology. Concerns included: • that it is intended to

require the CEFC to invest in fossil fuel projects and • that the expanded definition is unnecessary as the CEFC can already invest in grid technologies. Stakeholders that supported this change commended a technology-neutral approach.

ACF, 350.org, Greenpeace Australia, Solar Citizens, Uniting Church in Australia, Synod of Victoria and Tasmania and WWF Australia Associate Professor Elizabeth Thurbon, Dr Sung-Young Kim, Emeritus Professor John Mathews and Associate Professor Hao Tan Mr Oliver Yates ACOSS The Australia Institute Climate Council of Australia (Climate Council) Australasian Centre for Corporate Responsibility (ACCR)

APGA Australian Petroleum Production and Exploration Association (APPEA)

The new term low emissions energy system (as added to the definition

of low-emissions technology) is not defined by the Bill. Concerns included: • that this introduces

excessive ambiguity and opacity • that the term low emissions energy system

could be determined by the non-disallowable Investment Mandate rather than the CEFC Board.

ACF, 350.org, Greenpeace Australia, Solar Citizens, Uniting Church in Australia, Synod of Victoria and Tasmania and WWF Australia Ai Group The Australia Institute Climate Council Investor Group on Climate Change (IGCC)

Expanding the definition of investment to include new types of investment as per new regulations— particularly that this could include loss-making investments. Concerns, included: • that this could result in

the CEFC underwriting

ACF, 350.org, Greenpeace Australia, Solar Citizens, Uniting Church in Australia, Synod of Victoria and Tasmania and WWF Australia Mr Oliver Yates The Australia Institute Climate Council

Ai Group

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 25

Issue Stakeholder/s

Opposed/Expressed concern

Supported/Not concerned

loss-making fossil fuel projects • that this provides unnecessary additional

Ministerial powers • that this will undermine the investment skills of CEFC staff and • that this is the remit of

ARENA in providing grants.

ACCR

Transfer of the UNGI program to the CEFC. ACF, 350.org, Greenpeace Australia, Solar Citizens,

Uniting Church in Australia, Synod of Victoria and Tasmania and WWF Australia ACOSS The Australia Institute

Expansion of the CEFC’s functions. The Australia Institute IGCC

The CEFC, as well as DISER and the CER, also made submissions to the Committee in regards to the Bill, with the CEFC stating it ‘stands ready, willing and able to administer the GRF including UNGI elements which may fit within the CEFC Act and Investment Mandate’.170 In evidence to the Committee, a representative of DISER argued that many of the concerns with the Bill arose from ‘a number of misconceptions about the effect of this bill’.171

The Northern Territory Department of Industry, Tourism and Trade also made a submission, welcoming funding opportunities for projects located in the Northern Territory.172

After the release of the Committee’s report it was reported that Mr Yates and four other former board members and executives of the CEFC and ARENA—former CEFC chair Jillian Broadbent, former CEFC board member Professor Andrew Stock, former ARENA chair Greg Bourne, and former ARENA chief Ivor Frischknecht—had written to MPs recommending they vote against the Bill in its current form.173 The letter, also signed by energy experts Simon Holmes à Court, Geoff Cousins and Miles George, states:

170. CEFC, Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, [Submission no. 26], 25 September 2020, p. 3; DISER, Submission, op. cit.; CER, Submission, op. cit.

171. J Evans (DISER), Evidence to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, (proof), 13 October 2020, p. 35. 172. Northern Territory Department of Industry, Tourism and Trade, Submission to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020,

[Submission no. 24], 28 September 2020, p. 1. 173. A Morton, ‘Green bank shouldn't fund gas-fired power, ex-officials tell federal MPs’, The Guardian (Australia), 10 November 2020.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 26

We support additional funding for the CEFC, including the $1 billion proposed through the CEFC Amendment Grid Reliability Fund Bill 2020 (the Bill), however this funding is not currently critical and should not come at the expense of the CEFC’s core mission or commercial success.

We do not support changes to the CEFC’s legislation that undermine its independence, low emissions remit, commitment to profitability, or its avoidance of fossil fuels as part of a clear commitment to assist in the reduction of Australia’s climate emissions.174

Financial implications The Bill will increase the CEFC’s appropriation by $1 billion through the establishment of a GRF special account, which may be increased through regulations. The GRF must also be credited with the CEFC’s surplus money related to GRF investments that is returned under section 54 of the CEFC Act. The money appropriated to the GRF is to be accounted for separately to the CEFC’s original $10 billion appropriation. The Explanatory Memorandum states that money appropriated to the GRF will not be a reallocation of the CEFC’s original appropriation.175

While the Bill provides for expanding the definition of investment through regulations to include activities that may not make a return, the Explanatory Memorandum states that it is expected that the GRF, as a whole, provides a return.176 The Bill:

… has a financial impact, both actual and prospective, in relation to the CEFC. However, the impact on the budget is positive because the investments made through the GRF will create a return for the Commonwealth over the long-term. 177

Under section 50 of the CEFC Act, the CEFC is able to request that ARENA receive payment of a specified amount, paid out of the earnings of the CEFC. The Bill inserts an amendment to exclude GRF investment earnings from this arrangement.178

Administrative funding for the GRF is appropriated separately to the CEFC by DISER.179

Special appropriations The GRF will be established as a special account for the purposes of the Public Governance, Performance and Accountability Act 2013 (the PGPA Act). A special account is a limited special appropriation that notionally sets aside an amount that can be expended for specific purposes.180 Under the PGPA Act, if an Act establishes a special account and identifies the purposes of the account, then the Consolidated Revenue Fund is appropriated for expenditure for those purposes, up to the balance of the special account at the time.181

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth) (Parliamentary Scrutiny Act), the Government has assessed the Bill’s compatibility with the human

174. J Broadbent, A Stock, O Yates, G Bourne, I Frischknecht, S Holmes à Court, G Cousins and M George, Joint statement: reject the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 in its current form, letter to MPs, n.d. 175. Explanatory Memorandum, op. cit., p. 8. 176. Ibid., p. 5. 177. Ibid., p. 2. 178. Ibid., pp. 7-8. 179. CEFC, Submission, op. cit., p. 3; CEFC, Annual report 2019-20, op. cit., p. 147. 180. Department of Finance (DoF), ‘Special appropriations: special accounts’, DoF website, last updated 12 October 2020. 181. PGPA Act, section 80.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 27

rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.182

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights stated that it had no comment on the Bill.183

Claim of incompatibility The Environmental Defenders Office, acting on behalf of Greenpeace Australia Pacific (Greenpeace), has written to the Committee, as well as the Parliamentary Joint Committee on Human Rights (PJCHR) and the Minister for Energy and Emissions Reduction. The letter argues that the Bill’s Statement of Compatibility with Human Rights fails to consider the impacts on human rights that will be affected by climate change, which are relevant based on Greenpeace’s view:

… that the effect of the CEFC Amendment Bill is to redirect funds away from renewable energy, and instead to fossil fuel projects, particularly gas. In this way, our client considers that the CEFC Amendment Bill is likely to result in an increase of Australia’s greenhouse gas emissions at a time when immediate and deep cuts in emissions are required in order to meet the goals of the Paris Agreement and avoid the most dangerous impacts of climate change. 184

On this basis, the letter requests the Bill be remitted back to Parliament for reconsideration of its compliance with the Parliamentary Scrutiny Act, and/or for reconsideration by the PJCHR.185

Key issues and provisions The Bill introduces amendments to the CEFC Act to establish a $1 billion GRF special account and to establish some rules around how the CEFC can administer investments under the fund. The amendments also make clear that the GRF is in addition to the existing $10 billion CEFC funds, and is excluded from the requirement that at least half of those funds must be invested in renewable energy technologies. An amendment also expands the scope of the definition of low-emission technology that the CEFC Board may invest in.

New definition of ‘investment’ Item 3 replaces the existing definition of investment in section 4 of the CEFC Act. At present an investment is defined by section 4 as ‘any mode of application of money or financial assets for the purpose of gaining a return’, including giving a guarantee. This definition applies to all investments made by the CEFC under its investment function in Part 6 of the CEFC Act.

The proposed definition maintains the applications made for the purpose of gaining a return in the same terms as the existing definition, but adds as an alternative any relevant thing prescribed by regulations, in the following terms:

(c) doing a thing prescribed by the regulations for a purpose related to making a grid reliability fund investment.

A definition of grid reliability fund investment is also inserted by the Bill and discussed further below.

182. The Statement of Compatibility with Human Rights can be found at page 3 of the Explanatory Memorandum to the Bill. 183. Parliamentary Joint Committee on Human Rights, Human rights scrutiny report, 11, 2020, 24 September 2020, p. 81. 184. Environmental Defenders Office, Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 - Failure to comply with the Human Rights (Parliamentary Scrutiny) Act 2011, letter to the Senate Environment and Communications

Legislation Committee, 30 October 2020, p. 4. 185. Ibid., p. 9.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 28

As some submissions (summarised above) to the Environment and Communications Legislation Committee noted, the ability to prescribe a ‘thing’ by regulation could significantly broaden the scope of the investment function of the CEFC. DISER has stated that the new ‘prescribed investment types may not necessarily provide a return in the short term, could be revenue neutral, or could create a contingent liability for certain risks which allows a clean energy investment to proceed.’186

In particular, the regulations could be used to permit GRF related investments that do not make a return. The Explanatory Memorandum states that such an expansion of the investment function may be necessary to implement the GRF, for example through a particular type of revenue floor arrangement underpinning a GRF investment, but that it is intended that such things would be defined narrowly so that ‘the GRF as whole provides a return to the Government.’187

As any new investment type prescribed as a thing under this definition would be made by regulations, changes would be subject to the standard parliamentary disallowance process.188

Investment instruments Currently, CEFC investments are made in accordance with the CEFC Act, the Investment Mandate, and a set of investment policies formulated by the Board under section 68 of the Act. Investment instruments the CEFC can currently use include: senior debt; subordinated debt; preferred equity/convertible debt; common equity; interests in pooled investment schemes, trusts and partnerships; and net profits interests, royalty interests, and entitlements to volumetric production payments.189 The CEFC is able to provide concessional loans and guarantees, although this is limited by the Investment Mandate.190

The CEFC must carry out its investment activities while seeking to achieve a target performance in accordance with the portfolio benchmark return and risk profile established in the Investment Mandate. The current Investment Mandate, issued in May 2020, requires the Board to target an average return of the five-year Australian Government bond rate +3 to +4 per cent per annum

over the medium to long term as the benchmark return of the portfolio.191 However, the targeted rate of return is different for investments made under the Clean Energy Innovation Fund and the Advanced Hydrogen Fund, which both have a target average return of at least the five-year Australian Government bond rate +1 per cent per annum.192

Rationale for new investment types DISER’s submission outlines the rationale for expanding the types of investments that can be made by the CEFC:

Such instruments may be necessary to support the development of new transmission links and the establishment of Renewable Energy Zones. For example, CEFC may need to underwrite the early feasibility works, fill a financing gap where other investors are not willing to accept deferred returns, or carry the risk of delays in new generation being deployed to support the revenue requirements of a Renewable Energy Zone.

186. DISER, Submission, op. cit., p. 5. 187. Explanatory Memorandum, op. cit., p. 5. 188. The Senate, ‘No. 19 Disallowance’, Guides to Senate Procedure, Parliament of Australia website, last reviewed June 2019. 189. CEFC, CEFC investment policies, CEFC, Melbourne, August 2020, p. 16. 190. Clean Energy Finance Corporation Investment Mandate Direction 2020, clauses 9 and 10. 191. Ibid., clause 7. 192. Ibid., clause 7 and subclauses 14(1) and (5).

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 29

The amendment will also facilitate the CEFC’s involvement in the Underwriting New Generation Investments (‘UNGI’) program and similar initiatives into the future. The UNGI program … addresses an identified market failure that there are insufficient long-term offtake agreements available in the market to underwrite new generation projects.193

DISER also notes the CEFC will retain its discretion, with the proposed change ‘simply increasing the number of support tools at the CEFC’s disposal.’194

The CEFC’s submission notes:

… that the Explanatory Memorandum of the GRF Bill states that, “overall, it is important that the GRF as a whole provides a return to the Government”. In doing so, the CEFC will continue to invest the GRF funds responsibly and manage risk prudently.195

Key issue—investments without a return Stakeholders raised significant concerns in regards to the CEFC being able to make loss-making investments. For example, Mr Yates strongly opposed amendments to enable the CEFC to make investments without a return, raising concerns that this will ‘threaten the CEFC’s successful business model by undermining its commerciality, independence, culture, staffing and highly specialised skills.’196 Mr Yates also argued that ARENA, as a grant making body, is better placed to make such investments.197 The Climate Council also argued that the CEFC ‘is not an appropriate vehicle for providing financial support to loss-making endeavours.’198

The Ai Group, however, considered the amendment to be ‘appropriate’:

… the ability to offer one-sided support may be useful in supporting more innovative, and risky, projects. The continuing requirement to achieve portfolio returns serves as a firm constraint on the overall scope of risk and non-return arrangements that CEFC could contemplate.199

Key issue—additional Ministerial powers through regulations A number of submissions raised concerns that this amendment could be used by the Minister to direct CEFC investments. For example, a joint submission by the Australian Conservation Foundation, 350.org, Greenpeace Australia, Solar Citizens, Uniting Church in Australia, Synod of Victoria and Tasmania and World Wildlife Fund (ACF and other organisations) raised concerns that this would infringe on the CEFC’s independence and credibility:

Loss-making investments are contrary to the core mission of the CEFC, and such ministerial direction to fund particular loss-making activities would be a clear infringement on the independence of the CEFC and its Board.

By allowing loss-making investments directed by the designated Minister, there is a clear risk that the Grid Reliability Fund could be mis-used to fund the Minister's personally preferred projects. At the very least these proposed changes would unnecessarily put public funds at risk and jeopardise the CEFC’s investment reputation, which is critical to the credibility, trust and partnerships the CEFC has built across the investment community.200

193. DISER, Submission, op. cit., p. 5. 194. Ibid. 195. CEFC, Submission, op. cit., p. 5. 196. Yates, Submission, op. cit., [p. 4]. 197. Ibid., [pp. 3-4]. 198. Climate Council, Submission, op. cit., p. 3. 199. Ai Group, Submission, op. cit., p. 4. 200. ACF et al, Submission, op. cit., p. 6

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 30

The Climate Council expressed similar concerns, stating:

… there is no reason that the Minister should have the unfettered power to determine how and where loss-making ‘investments’ should be made. 201

The Australia Institute considered:

There is some logic behind this (for example, the amendment may allow investment in transmission lines - that alone may not make a return on investment). However, by providing the Minister with the power to direct which loss-making profits can be made, the Bill also opens up the possibility of the CEFC becoming a loss-making underwriter of fossil fuel projects. 202

However, the CEFC submission notes:

As set out in the CEFC Act, Investment Mandate and the PGPA Act, the Board is accountable for investment decisions, independent of Government. As such, it has responsibility for overseeing the efficient and effective operation of the CEFC, including prudent oversight and governance of investment decisions and risk management.

The CEFC notes that, with respect to the GRF Bill, the Explanatory Memorandum states that it, “will not change the CEFC’s ability to make individual investment decisions independent of Government”. 203

A representative of DISER also addressed these concerns during the Committee hearing:

… at a portfolio level the CEFC must still show a positive return on the Grid Reliability Fund. This is a similar type of obligation that the CEFC holds for the $10 billion fund where the overall rate of return is specified at a portfolio level, not at an individual project level. The use of regulations that is also in the bill to prescribe the additional form of investment is subject to the normal disallowance procedures of each house of parliament under the Legislation Act 2003. There's been some misconception that there's no further control … from parliament over the regulations that the minister might make under the amendments to the act.204

Expanded CEFC functions Item 5 inserts a new corporate function for the CEFC:

(ba) at the request of a responsible Minister, to assist Commonwealth agencies in the development or implementation of policies or programs relating to supporting the reliability of energy grids.

This is in addition to the CEFC’s current functions in section 9 of the CEFC Act, which are its investment function, and to liaise with relevant persons and bodies, including ARENA, the Clean Energy Regulator, other Commonwealth agencies and state and territory governments, for the purposes of facilitating its investment function.205

Stakeholder comments This amendment was not widely commented on by stakeholders, although the Australia Institute raised concerns that ‘this appears to be set up to facilitate the UNGI program, bleeding the roles of Government and independent financing institution’.206 Indeed, DISER’s submission to the Committee notes that this amendment:

201. Climate Council, Submission, op. cit., p. 6. 202. The Australia Institute, Submission, op. cit., p. 7. 203. CEFC, Submission, op. cit., p. 3. 204. Evans, Evidence, op. cit., p. 35. 205. CEFC Act, section 9. 206. The Australia Institute, Submission, op. cit., p. 6.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 31

… will allow the Government to draw upon the CEFC’s expertise when structuring finance or settling terms and conditions in relation to any shortlisted UNGI projects not taken on by the CEFC. It will also allow the CEFC to provide advice to the Government on any of its other initiatives to improve and support grid reliability.207

The Investor Group on Climate Change (IGCC) considered:

In principle this is an appropriate expansion of the CEFC’s function and will allow the Government's broader policy suite to include greater financial sector expertise in how the government policies can be rolled out.208

Establishing the Grid Reliability Fund Items 23 to 32 introduce provisions into the CEFC Act to establish a Grid Reliability Fund and to permit the CEFC to administer investments under that fund in addition to the existing general CEFC investment functions.

Item 23 inserts proposed Division 1A—Grid Reliability Fund Special Account, into Part 5 of the CEFC Act, which deals with the CEFC’s financial arrangements. Proposed Division 1A consists of proposed sections 51A to 51E. Proposed section 51A will establish a GRF Account and proposed section 51B will credit the account with $1 billion on the day the Act commences.209

Proposed section 51C provides that the purpose of the GRF Account is to make payments to the CEFC as authorised by the Minister. Proposed sections 51D and 51E provide for the CEFC to request payments, and for the Minister to provide authorisation for payments to the CEFC.

Section 53 sets out how the CEFC can spend its money. Proposed subsection 53(2A) provides that GRF money must only be used by the CEFC in performing its investment function in relation to GRF investments; paying or discharging the costs, expenses and other obligations of its GRF functions; and returning surplus money to the Commonwealth under section 54.210

Item 32 inserts proposed section 58A to set out the qualifying criteria for a grid reliability fund investment. As well as requiring that such an investment must be made for the purposes of the CEFC’s investment function, the investment must be made to support:

• energy storage

• electricity generation, transmission or distribution or

• electricity grid stabilisation.

Proposed paragraph 58A(c) further requires that a grid reliability fund investment must meet ‘the criteria (if any) set out in the Investment Mandate relating to its role in supporting the security or reliability of the energy system in Australia.’

The Explanatory Memorandum states that ‘(i)t is intended that the Investment Mandate will provide detailed criteria for what will constitute supporting the reliability or security of the electricity grid and what investments should be prioritised.’211

In the absence of any additional criteria, the categories of investment listed under proposed section 58A are quite broad and appear to include most technologies related to the energy

207. DISER, Submission, op. cit., p. 6. 208. IGCC, Submission, op. cit., p. 6. 209. Proposed paragraph 51B(a). 210. Item 28. 211. Explanatory Memorandum, op. cit., p. 10.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 32

market. For some discussion of the issues related to leaving detailed qualification criteria to be set out in a non-disallowable instrument, see the section below.

Key issue—additional Ministerial powers through the Investment Mandate As noted above, the new category of GRF investment must meet criteria set out in the Investment Mandate. The Explanatory Memorandum states:

It is intended that the Investment Mandate will provide detailed criteria for what will constitute supporting the reliability or security of the electricity grid and what investments should be prioritised.212

According to DISER, this will be in the form of a separate GRF Investment Mandate that will be issued following passage of the Bill.213

Concerns have been raised that, through the Investment Mandate, the Minister could direct the CEFC to invest a given proportion of the GRF in gas powered generation. During the Committee hearing a representative of DISER addressed this concern, confirming that ‘there is some prospect’ that the Investment Mandate could ‘have some sense’ of a proportion of funding towards gas, but noted that the Minister could not direct the CEFC to invest in a specific gas project.214

Some submissions made note of the fact that the Investment Mandate is a non-disallowable instrument, and expressed concerns that leaving investment criteria to be defined by the Investment Mandate provides excessive and inscrutable power to the Minister.215 This issue was also raised by the Senate Standing Committee for the Scrutiny of Bills, and addressed by the Minister (see ‘Committee Consideration’ section).

Key issue—UNGI program Since its announcement the Government has made it clear that the GRF is intended to fund eligible shortlisted projects under the UNGI program.216 This intention is reiterated in the Explanatory Memorandum.217 However, the CEFC Act provides that the Minister must not give direction ‘that has the purpose, or has or is likely to have the effect, of directly or indirectly requiring the Board to, or not to, make a particular investment.’218

The ACF and other organisations consider the transfer of pre-selected UNGI projects to the CEFC to impact the CEFC’s independence and commercial rigour:

Transferring the UNGI program to CEFC is a form of direction, since there are already 12 short-listed projects. Most (i.e. the five gas projects and one coal project) would not meet the current CEFC guidelines for low emissions investment, and they may also be loss making propositions that CEFC would not otherwise consider.

What is clear is that CEFC has not had the opportunity to apply its current level of risk management and investment scrutiny to these projects, the process of choosing them has been extremely opaque and the UNGI program itself has never been fully defined. While it is possible that some of the UNGI projects

(i.e., the six pumped hydro projects) would be good candidates for CEFC investment, none of them should be forced on the CEFC.219

212. Explanatory Memorandum, op. cit., p. 10. 213. DISER, Submission, op. cit., p. 4. 214. Evans, Evidence, op. cit., p. 43. 215. ACF et al, Submission, op. cit., p. 5; Yates, Submission, op. cit., [pp. 4-5]. 216. Morrison et al., $1 billion boost for power reliability, op. cit. 217. Explanatory Memorandum, op. cit., p. 2. 218. CEFC Act, section 65. 219. ACF et al, Submission, op. cit., p. 7.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 33

The Australia Institute has also raised concerns in regards to the UNGI, noting in its submission:

The legal advice commissioned by the Australia Institute suggests that Federal Government has no other way of funding the UNGI program, and specifically the coal-fired power plant upgrade.

The GRF media release states that ‘the Government will only refer UNGI projects that reflect the CEFC’s legislative mandate for consideration under the Fund’. Given the Bill proposes expanding the legislative mandate, there is little stopping the CEFC from proceeding with the UNGI shortlisted coal-fired power plant.220

DISER’s submission states:

It will also remain at the CEFC’s discretion which, if any, UNGI projects it chooses to support through the GRF, and by which method those projects would be supported. The CEFC will not be expected to consider any UNGI projects which are outside of the CEFC’s legislative mandate. 221

Changes to the scope of clean energy technology investments The CEFC Act requires investments by the CEFC to be ‘complying investments’, which are investments that are in ‘clean energy technologies’; solely or mainly Australian-based; and not in a prohibited technology.222

Clean energy technologies are defined by section 60 of the CEFC Act as energy efficiency technologies; low-emission technologies; and renewable energy technologies. The CEFC must ensure that at least half of the funds invested on or after 1 July 2018 are invested in renewable energy technologies.223 Section 62 currently prohibits investments in technology for CCS, nuclear technology or nuclear power.

Subsection 60(2) provides that energy efficiency technologies include technologies, including enabling technologies, related to energy conservation or demand management technologies, and subsection 60(3) provides that renewable energy technologies include hybrid technologies that integrate renewable energy technologies and technologies, including enabling technologies, related to renewable energy technologies.

Low-emission technologies, for the purposes of CEFC clean energy technology investments, are currently determined under subsection 60(4) by the Board being satisfied that they comply with Board guidelines. These guidelines must be made in writing by the Board and must not be inconsistent with the Investment Mandate.224 The Board has established formal guidelines, as required by subsection 60(5) of the CEFC Act, setting out the matters to which it will have regard in satisfying itself that a technology is a low-emission technology.

Under the current guidelines, complying low emissions technologies are expected to result in emissions being substantially lower than the current average of the most relevant baseline, with technologies solely for electricity generation expected to achieve an emissions intensity of less than 50 per cent of the existing generation system as connected to the grid, such as the NEM, or

220. The Australia Institute, Submission, op. cit., p. 8. 221. DISER, Submission, op. cit., pp. 5-6. 222. CEFC Act, subsection 59(2). 223. Ibid., subsection 58(3). 224. Ibid., subsections 60(5) and (6).

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 34

where not connected to a grid, less than 50 per cent of the emissions intensity of the baseline activity.225 The guidelines are not a legislative instrument and so are not disallowable.226

Item 33 inserts a new definition of low-emission technology by amending subsection 60(4) of the CEFC Act.

This new definition inserts, in addition to maintaining the existing ability for a technology to be defined as a low-emission technology in guidelines made under subsection 60(5), that a technology may be a low-emission technology if it ‘supports the achievement of low emission energy systems in Australia’ and is for any of the following:

• energy storage

• electricity generation, transmission or distribution

• electricity grid stabilisation.227

As noted in relation to the criteria for GRF investment under proposed section 58A, the categories of investment listed under amended subsection 60(4) are quite broad and appear to include most technologies related to the energy market. It is not clear what restriction is placed on the scope of the definitions by the requirement for the technologies to support ‘the achievement of low-emission energy systems in Australia’, however the Explanatory Memorandum states ‘for clarity’ that the phrase ‘low-emission energy system’ is not intended ‘to be restricted by the definition of ”low-emission technology” in subsection 60(4)’.228

Maintaining the existing provision for alternative criteria for low-emission technologies to be set by guidelines also adds uncertainty to the scope of the investment function.229

The Minister, Angus Taylor, provided some indication of the Government’s intent as to the scope of these investments in his Second Reading speech, particularly noting that future investments could include gas but not coal:

While there is no shortage of investment in clean energy, the government has identified a lack of investment in the dispatchable generation needed to balance increasing intermittent generation.

The additional funding will enable investment in:

• Energy storage projects, such as pumped hydro and batteries

• Electricity generation, transmission and distribution; and

• Grid stabilising technologies.

Gas projects, which the CEFC can already invest in, including new gas-fired generation will be included in the fund when a project supports the achievement of low-emissions energy systems.

Battery technologies are intended to be eligible, regardless of how they source electricity.

225. CEFC, CEFC complying investments guidelines, [p. 1]. 226. As provided for in subsection 60(8) of the CEFC Act. 227. Proposed paragraph 60(4)(a). 228. Explanatory Memorandum, pp. 10, 11. 229. Proposed paragraph 60(4)(b). Note that the guidelines referred to are to be made in writing by the Board (subsection 60(5))

and must be ‘not inconsistent with the Investment Mandate’ (subsection 60(6)). Subsection 60(8) further states that the guidelines are not a legislative instrument.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 35

Low-emission technologies under the CEFC Act would not extend to coal-fired generation. 230

Key issue—Definition of low emissions energy system The Explanatory Memorandum states that any technology related to energy storage, electricity generation, transmission or distribution, or electricity grid stabilisation, and that meets the new criteria of supporting the achievement of low-emission energy systems in Australia ‘will be considered a low-emission technology by default.’231 DISER’s submission provides some clarity on the key term low-emission energy systems:

Low-emission energy systems are achieved through creating an interconnected network of energy assets, such as generation, transmission and distribution infrastructure, that operate collectively to supply low emission energy to consumers and includes a region of an interconnected network with security and reliability needs substantially independent of the network as a whole.232

However, this key term is not defined in the Bill. The ACF and other organisations called this ‘unacceptably vague’, the Climate Council said it ‘is irredeemably unclear’, and Ai Group said it ‘seems excessively ambiguous’.233 Similar concerns were raised by the Australia Institute and IGCC.234

It is not clear how this term will be defined. DISER’s submission to the Committee suggests that the term low-emission energy systems ‘will be stipulated and explained in a CEFC Grid Reliability Fund Investment Mandate.’235 However, in the Committee hearing, DISER representatives said that a definition was left out of the Bill:

… to allow the CEFC Board to take its own view on whether or not these technologies would contribute towards what they consider to be a low-emission energy system.

It will be up to the CEFC Board to interpret that part of the act.236

The Ai Group recommended that the Bill be amended to require the CEFC Board to make guidelines defining low-emission energy system, as it is currently required to do for the existing definition of low-emission technology.237 A similar suggestion was made by the IGCC.238

GRF technologies A number of submissions pointed out that the CEFC can already make investments of the kind stipulated as GRF technologies by the Bill.239 Indeed, in addition to low-emission technologies, the CEFC Act allows the CEFC to invest in ‘enabling technologies’ that are related to renewable energy or energy efficiency.240 Since 2018, the Investment Mandate has ‘strongly encouraged’ the CEFC to

230. Taylor, ‘Second reading speech’, op. cit., pp. 5749-5750. 231. Explanatory Memorandum, op. cit., p. 10. 232. DISER, Submission, op. cit., p. 4. 233. ACF et al, Submission, op. cit., p. 3; Climate Council, Submission, op. cit., p. 5; Ai Group, Submission, op. cit., p. 6. 234. The Australia Institute, Submission, op. cit., p. 7; IGCC, Submission, op. cit., p. 5. 235. DISER, Submission, op. cit., pp. 4-5. 236. Evans, Evidence, op. cit., p. 46. 237. Ai Group, Submission, op. cit., p. 6. 238. IGCC, Submission, op. cit., p. 6. 239. Broadbent et al., Joint statement, op. cit., p. 2; Yates, Submission, op. cit., [p. 5]; Climate Council, Submission, op. cit., p. 4;

ACF et al, Submission, op. cit., p. 4. 240. CEFC Act, subsections 58(2), 60(2) and 60(3).

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 36

‘prioritise investments that support reliability and security of electricity supply.’241 The CEFC’s most recent Annual Report highlights a number of such investment commitments, including:

• finance for the installation of a synchronous condenser at Victoria’s largest solar farm and

• finance to expand capacity and demonstrate grid-scale inertia services of the Hornsdale battery in South Australia.242

DISER’s submission to the Committee states:

These changes … remove ambiguity as to whether the CEFC is able to invest in certain types of projects including gas electricity generation where this is contributing to a low-emissions energy system. 243

DISER representatives, when questioned about the necessity of this amendment, also stated:

… another way to look at this classification of low-emissions technologies for [grid] reliability investments is that they're the only types of technologies that the new GRF could be used for. It's saying that the GRF can only be used for these things, but the main $10 billion fund can still be used for the broader set of technologies. 244

Key issues—fossil fuel investments Many stakeholders interpreted this amendment to be intended to enable or increase CEFC investment in fossil fuel generation, particularly gas powered generation. Indeed, comments by the Minister for Energy and Emissions Reduction, Angus Taylor, suggest that support for gas powered generation is a key intention of the GRF:

… for the renewables sector to continue to grow, the grid must be balanced. We know that gas is the perfect partner to intermittent renewables. The Chief Scientist has said as much. Far from competing with renewables, it complements them. It complements them by helping to stabilise the grid, reduce emissions and drive lower prices. That's why we've recently introduced to this place the $1 billion Grid Reliability Fund, focused on dispatchable generation and transmission.245

As noted above, the Minister’s Second Reading speech specifically identifies new gas powered generation, as well as batteries, as dispatchable generation technologies intended to be eligible for the GRF.246

As noted above, under subsection 60(4) of the CEFC Act, the CEFC Board sets guidelines for satisfying itself that a technology is a low-emission technology. This currently comprises an emissions reduction test, where the technology must result in a substantial emissions reduction compared to baseline emissions.247 The proposed definitional change will insert ‘supports the achievement of low-emission energy systems in Australia’ as an alternative to the CEFC Board’s guidelines. The ACF and other organisations considered this to be ‘designed to require the CEFC to invest in projects that do not currently meet the CEFC’s emissions reduction tests’, potentially including fossil fuel projects.248

241. Clean Energy Finance Corporation Investment Mandate Direction 2020, clause 13. 242. CEFC, Annual report 2019-20, op. cit., pp. 24-27. 243. DISER, Submission, op. cit., p. 5. 244. P Murphy (DISER), Evidence to the Senate Environment and Communications Legislation Committee, Inquiry into the Clean

Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020, (proof), 13 October 2020, p. 38. 245. A Taylor, ‘Answer to Question without notice: Energy’, [Questioner: T O’Brien], House of Representatives, Debates, 31 August 2020. 246. Taylor, ‘Second reading speech’, op. cit., p. 5750. 247. CEFC, CEFC complying investments guidelines, [p. 1]. 248. ACF et al, Submission, op. cit., p. 4.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 37

This raised deep concerns that this would delay the transition to a low-emission energy system and stymie efforts to meet Australia’s Paris Agreement commitments.249 Experts in East Asia’s clean energy shift, Associate Professor Elizabeth Thurbon, Dr Sung-Young Kim, Emeritus Professor John Mathews and Associate Professor Hao Tan, noted:

… the proposal to amend the CEFC’s mandate and direct public money towards fossil-fuel related technologies and industries - especially gas - will compromise not only Australia’s environmental ambitions, but our economic ambitions as well. More specifically, the proposed Bill will reduce

Australia’s first-mover advantage in the zero-emissions industries of the future, and thus our ability to capitalise on the remarkable export opportunities currently presented by East Asia’s ambitious clean energy shift. 250

The Climate Council and the Australasian Centre for Corporate Responsibility both referenced AEMO’s ISP as evidence that new gas powered generation is not required in future grid development.251

Alternatively, the APGA and APPEA supported the amendment, both arguing that new gas powered generation has a critical role to play in supporting and balancing increasing levels of wind and solar in the grid.252

Ai Group noted:

There has been some controversy over the fact that, as the Bill’s Explanatory Memorandum notes, a GRF investment could potentially include support for a gas-fired electricity generator.

In principle this need not be concerning. Low-utilisation gas peaking generation is fairly high-emitting in its own right but is also currently the most common option for firming the electricity system as cheap-but-variable renewables grow. While peakers are expensive to run they are cheap to build, and their combination with renewables can mean a lot of power at low overall cost and emissions. Other technologies can contribute to reliability and/or security (pumped hydro, batteries, demand response, synchronous condensers, grid-forming inverters, more) with lower or no emissions - though they are all within CEFC’s expanded scope too, and would be competing for CEFC support.253

The Explanatory Memorandum and the Minister’s Second Reading speech both state that low-emission technologies under the CEFC Act would not extend to coal fired generation technologies.254 The Australia Institute raised concerns that the Bill itself does not preclude CEFC investment in coal:

The only indication that coal-fire power generation will not be supported is in the Explanatory Memorandum … However, this does not preclude the CEFC funding upgrades to existing coal-fired power stations, and is merely a statement of intention, not black letter law. 255

Renewable energy technology requirement In performing its investment function, subsection 58(3) of the CEFC Act provides that the CEFC must ensure that, at any time on or after 1 July 2018, at least half of the funds invested at that time for the purposes of its investment function are invested in renewable energy technologies.

249. ACF et al, Submission, op. cit., pp. 5-6; Yates, Submission, op. cit., [p. 4]; ACOSS, Submission, op. cit., p. 2; The Australia Institute, Submission, op. cit., p. 7. 250. Thurbon et al., Submission, op. cit., p. 1. 251. Climate Council, Submission, op. cit., p. 6; Gocher, Evidence, op. cit., p. 29. 252. APGA, Submission, op. cit., p. 2; APPEA, Submission, op. cit., p. 2. 253. Ai Group, Submission, op. cit., p. 5. 254. Explanatory Memorandum, op. cit., p. 11; Taylor, ‘Second reading speech’, op. cit., p. 5750. 255. The Australia Institute, Submission, op. cit., p. 8.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 38

The remaining funds may be invested in the other classes of clean energy technologies, those being energy efficiency and low-emission technologies, as discussed above.

As noted above, in a submission to the Environment and Communications Legislation Committee, the CEFC noted:

Managing the 50% renewable energy technologies threshold is a major administrative and compliance burden for the CEFC that diverts agency resourcing from more productive activity. [And] … may impact the CEFC’s ability to invest in energy efficient and low emission technologies that would otherwise be eligible for CEFC investment. 256

Item 31 inserts proposed subsection 58(3A) to make it clear that any GRF investments are not to be considered for the purposes of subsection 58(3). This means that GRF funds do not have to meet the investment requirement of subsection 58(3), nor are they to be used in its calculations. Therefore, as well as being in addition to existing clean energy funds, GRF funds do not increase the funds that are required to be invested in renewable energy technologies. To put it another way, any investment of GRF funds will be in addition to the amount (up to half) of clean energy funds that are available to be spent on the other classes of clean energy technologies, including low-emission technologies.

The Explanatory Memorandum states that this is to allow the GRF to be ‘technology neutral’ and to ‘focus on the best investments to improve grid reliability without being constrained by a renewables requirement’.257

Stakeholder comments The ACF and other organisations and ACOSS both recommended the CEFC retain its existing requirement to invest at least half its funds in renewable energy technologies. Both submissions suggested that Government investment was still needed in renewable energy technologies and enabling infrastructure, and to widen the use of renewable energy to more sectors of the economy, such as transport, heating and industry.258 The ACF and other organisations stated:

This is a very poor time to remove the CEFC’s investment requirement supporting renewable energy technologies. In 2020, investment in large-scale renewable energy projects fell to the lowest levels since 2017 due to grid delays and policy uncertainty. The recent investment boom was largely driven by the tail end of the Renewable Energy Target (RET). The RET has been met and there is no climate and energy policy to provide the necessary investment certainty.259

Former CEFC and ARENA executives and energy experts also suggested retaining this requirement to ‘uphold the CEFC’s core objective “to facilitate increased flows of finance into the clean energy sector”’.260

As noted above, the CEFC specifically addressed the 50 per cent renewable requirement in its submission to the Committee, stating that it is ‘a major administrative and compliance burden’.261 According to the CEFC, due to the fluidity of the CEFC investment portfolio, the CEFC must actually target a renewable energy threshold of 55 per cent. Furthermore, ‘the CEFC must occasionally

256. CEFC, Submission, op. cit., p. 4. 257. Explanatory Memorandum, p. 10. 258. ACF et al, Submission, op. cit., p. 3; ACOSS, Submission, op. cit., p. 2. 259. ACF et al, Submission, op. cit., p. 3. 260. Broadbent et al., Joint statement, op. cit., p. 2. 261. CEFC, Submission, op. cit., p. 4.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 39

slow or cease investing in non-renewables, or sell current non-renewable investments down, just in order to maintain the threshold.’262

The Explanatory Memorandum states that this amendment is designed to ensure:

… that the GRF can be technology neutral and enables the CEFC to focus on the best investments to improve grid reliability without being constrained by a renewables requirement. 263

The APGA and Ai Group both supported this amendment and a technology neutral approach.264 However, the Australia Institute noted that being technology neutral ‘goes against the very purpose of the CEFC - to increase investment in clean energy projects.’265

Important criteria to be set out in non-disallowable instruments As a consequence of the amendments described above, the CEFC Act would allow important investment criteria to be set in non-disallowable instruments. This will be the case for the new GRF and the low-emission technology proportion of the existing clean energy funds, the instruments being the Investment Mandate and the subsection 60(5) guidelines respectively.266 In the case of the GRF, these criteria are in addition to the other requirements for an investment, and in the case of low-emission technologies they may be set as alternative criteria for determining qualification as such a technology.

As noted above, the Scrutiny of Bills Committee raised concerns ‘that details of the investment criteria for the Fund are being left to non-disallowable delegated legislation and will therefore not be subject to effective parliamentary oversight.’267

As the Minister noted in reply to the Committee, both the subsection 60(5) guidelines and the Investment Mandate are pre-existing aspects of the CEFC Act, and it is long-standing practice that Ministerial directions to government bodies are in the form of non-disallowable instruments.268 The Investment Mandate must also not be inconsistent with the object of the CEFC Act.269 Nevertheless, the fact remains that significant funds are involved under the investment functions of the CEFC, and it is for the Parliament to consider the propriety of placing such criteria beyond its scrutiny.

Overlap between the criteria for general and Grid Reliability Fund investments In light of the criteria for both the new GRF and the amended definition of low-emission technologies, as well as existing classes of clean energy technologies, it may be possible that certain investment projects could qualify for investment under both the general CEFC fund and the new GRF. For example, certain gas projects may be considered to qualify as ‘electricity generation, transmission or distribution’ for the purposes of both proposed subparagraph 58A(b)(ii) and amended subparagraph 60(4)(a)(ii).270

262. Ibid. 263. Explanatory Memorandum, op. cit., p. 10. 264. APGA, Submission, op. cit., p. 2; Ai Group, Submission, op. cit., pp. 4, 6.

265. The Australia Institute, Submission, op. cit., p. 5. 266. Items 32 and 33. 267. Senate Standing Committee for the Scrutiny of Bills, Scrutiny digest, 11, op. cit., p. 5. 268. Taylor, Minister’s Response to the Senate Standing Committee for the Scrutiny of Bills, op. cit. 269. CEFC Act, s 65. The object of the Act, under section 3, is to establish the CEFC and ‘to facilitate increased flows of finance into

the clean energy sector’. 270. Items 32 and 33.

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Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 40

In such cases, the Explanatory Memorandum states that ‘it is intended that where a particular investment could be capable of being funded under either of the general or the GRF portfolios, the Board can choose which portfolio to place it into.’271

Other provisions The remaining provisions provide consequent amendments to the CEFC Act to permit the administration of the GRF or to clarify references to the existing CEFC Account and the proposed GRF Account.

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271. Explanatory Memorandum, p. 10.