Australia’s National Electricity Market (NEM) is in a period of long term transition. Older high-emissions generators are closing due to high costs, and the proportion of renewable generation is growing, albeit off a small base. Australia has committed, via the Paris Climate Agreement, to reduce our carbon emissions to less than three quarters of 2005 levels over the next thirteen years, and reach zero emissions in the second half of the century.
In the last year, the market has also seen a high degree of volatility, controversy and uncertainty. Wholesale electricity prices have fluctuated, there have been high-profile electricity outages, and energy policy reform has been the subject of intense and polarised public debate.
In our analysis the main market drivers are:
Various carbon reduction mechanisms have been considered, or adopted, then reviewed or abandoned by successive governments. Relevant policies have included a price on carbon, which was introduced in 2012 and repealed in 2014, the currently active RET, and an Emissions Intensity Scheme (EIS). The RET was introduced in 2001, but placed under review from 2014 to 2015.
An EIS has had significant support from stakeholder groups including the Business Council of Australia, the National Farmers Federation, Energy Networks Australia, retailer Energy Australia, AGL, the Climate Change Authority and CSIRO. The Coalition has previously, however, ruled out adoption of an EIS.
In this context, in June 2017, The Australian Government released the Independent Review into the Future Security of the National Electricity Market led by Australia’s Chief Scientist Dr Alan Finkel (Finkel Review). The Finkel Review included, amongst its 50 recommendations, the adoption of a Clean Energy Target (CET) as a mechanism to reduce the NEM’s CO2 emissions. Under the CET, if new generators’ emissions intensity is less than a set threshold, they would earn certificates in proportion to the extent the intensity falls below the threshold. Electricity retailers would be obliged to buy certificates. The Finkel Review did discuss an EIS as well, but did not recommend it. Some attribute the recommendation of a CET over the EIS to have been made in consideration of the high likelihood of an EIS being rejected by government. The government had not resolved its position on the CET, as of a month after the Finkel Review’s release, although they had approved the Finkel Review’s other recommendations.
The policy uncertainty has created anomalies in the market for renewable energy generation facilities and projects. Project developers and investors are attempting to reduce their exposure to policy uncertainty by seeking to enter into long-term offtake contracts, or Power Purchase Agreements (PPA) at fixed prices. However, these agreements have been challenging for electricity sellers to obtain because the larger utilities have indicated they would only contract their residential loads, and corporate buyers of electricity appear cautious to enter long-term arrangements. Accordingly, projects and facilities with long-term offtakes trade at a premium.
We consider that the main market drivers producing high electricity prices will create an environment conducive to new investment in renewables. However, there remains considerable uncertainty in the long-term.
 P33 & 38 “State of The Energy Market May 2017.” Australian Energy Regulator (AER), May 2017.
 Finkel, Alan. “Blueprint for the Future: Independent Review into the Future Security of the National Electricity Market.” Text. Department of the Environment and Energy, June 9, 2017.
 “2017 New Energy Outlook” Bloomberg New Energy Finance, June 2017
 NEM – covering all states and territories of Australia other than NT and WA
 Frydenberg, Josh. “Record Renewable Investment Growth Puts RET in Sight.” Australian Financial Review, May 3, 2017.
 Saddler, Hugh. “National Energy Emissions Audit – Electricity Update.” Australia Institute, July 2017.
 AER State of the Energy Market Report May 2017
 The EIS mechanism would have awarded credits for emissions below a set baseline, but also demanded credits for emissions above that baseline. The CET certificate as proposed, would apply to the entirety of new generators’ output, but for existing generators, the certificates would only be available for output above their historical output. The EIS would be applied to all electricity generators on the NEM. Refer to the Finkel Review for more detail on the CET and EIS.
 Chan, Gabrielle. “Australia’s Peak Business Lobby Calls for Emissions Intensity Scheme.” The Guardian, March 16, 2017, sec. Australia news.
 Coorey, Phillip. “Green Energy Fund to Be Used for Coal: Josh Frydenberg.” Australian Financial Review, May 30, 2017.