The Finkel Review: Making the Australian Electricity Sector Greener
3rd Oct 17
Cameron Quin

In June 2017, Australia’s chief scientist Alan Finkel published the Independent Review into the Future Security of the National Electricity Market, better known as the Finkel review. The document gives a snapshot of the Australian electric sector, while providing strategies that can help the country transition to greener electricity.

The Australian Electricity sector produces 35% of the country’s emissions, and 87% of all energy generated still comes from fossil fuels: black and brown coal represent 77% of generation and natural gas accounts for 10%. In spite of the recent growth experienced by solar and wind power in Australia, renewable energy sources only account for 13% of the electricity used in the country.

The Finkel review recommends the creation a Clean Energy Target (CET) that is enforced by legislation, and suggests two key mechanisms that can help achieve the goal. The suggested emissions reduction goal is 28% by 2030 and 100% by 2070, based on the levels measured in 2005. These targets align with the Paris Agreement.

The Finkel review also acknowledges that an abrupt transition from fossil fuels to renewable sources could disrupt the electricity sector, possibly leading to power outages and excessive energy prices. Therefore, carbon-intensive energy generators will be required to notify plant closures at least three years in advance, allowing the construction of greener power plants to supply the resulting gap in generation.

Clean Energy Target Compliance for Electricity Retailers

With a legally enforced clean energy target, electricity retailers would be required by law to purchase a minimum percentage of their energy from clean power plants. The Finkel review recommends an emissions benchmark of 700 kg of CO2 per megawatt-hour of electricity generated. Energy sources below this value are allowed under the CET, but any power plant above it does not count towards the goal.

Even the less polluting coal power plants are above 700 kg of CO2 per MWh, and some of the most polluting exceed 1200 kg of CO2 per MWh.In other words, the Clean Energy Target places a market limit for coal-based generation. Although carbon capture and storage (CCS) technology can bring coal-fired power plants under the benchmark value, the system is still very expensive.

Power plants fired by natural gas would be affected less, since emission values can go as low as 400 kg of CO2 per MWh. This allows natural gas to serve as a transition fuel between a carbon-intensive power network and a clean and renewable grid. Power plants operating below 700 kg of CO2 per MWh get clean energy credits, and retailers are allowed to purchase this credits if they fall below the CET – otherwise they are subject to significant fines.

It is important to note that the CET mechanism does not punish coal-fired power plants directly, but gradually reduces their market. As a result, the 77% share of coal generation in Australia will start to reduce. Dr. Alan Finkel estimates that coal generation could realistically be reduced to 53% by the year 2030.

In the case of solar power and other renewable energy sources, the CET gradually increases the market, attracting investors. In addition, clean energy credits are an extra source of income that makes renewable generation more profitable.

The Finkel review also emphasises the importance of planning and stronger governance in the Australian Electricity sector. It recommends the creation of an Energy Security Board and ongoing regional assessments of power network performance, as well as yearly reviews of energy objectives and results.

Alternative Strategy: Emissions Intensity Scheme

An Emissions Intensity Scheme (EIS) does not focus on energy retailers, but rather on the generation companies themselves. Like in the Clean Energy Target scheme, a benchmark emissions value is established, but the rules are different:

  • Energy generators below the benchmark value are awarded carbon credits, based on how far below the benchmark they operate. Therefore, renewable sources like solar and wind power would accumulate the most credits.
  • Energy generators above the benchmark must purchase credits from green generators, in proportion to their emissions intensity. Therefore, a coal power plant releasing 1200 kg of CO2 per MWh would be required to purchase more credits than another plant releasing 800 kg of CO2 per MWh.

The emissions threshold in an EIS can be gradually reduced, providing an extra source of income for clean generation while reducing the profits from high-carbon generation systems. The effect would be similar to implementing a Clean Energy Target for energy retailers: while a CET phases out coal by shrinking its market, an EIS achieves it by reducing the profitability of coal-based generation.

Why Focus on the Australian Electricity Sector?

In addition to representing 35% of Australia’s emissions, the electricity sector also provides an opportunity to help decarbonise other economic sectors. For example, if transportation starts a transition to electric vehicles, decarbonisation of the power grid would enhance the benefits of such a change. With the current energy mix in Australia, most electric vehicles would continue to run on fossil fuels indirectly – as previously mentioned, 87% of the electricity in Australia comes from coal and natural gas. This highest potential to decarbonise the Australian electricity sector is focused in the states of New South Wales, Queensland, South Australia, Tasmania and Victoria.

Some economic sectors also account for a fair share of emissions, but are much more difficult to decarbonise than the power grid. An example of this is agriculture, but it is an industry with much less economic power than the energy sector, and in fact farmers have been affected severely by increasing electricity prices.

Reducing Emissions in the Residential and Commercial Sector

Home and business owners can also help decarbonise the Australian electricity sector by using commercial solar power or other renewable generation systems. Although energy retailer customers are not required by law to use clean energy, in many cases it is the smartest thing to do – Australia has some of the highest electricity rates in the world. In addition, the Power Purchase Agreement (PPA) model allows home and businesses to deploy solar power without an upfront investment, while leaving operation and maintenance to the system provider.

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Cameron Quin

3rd Oct 17
Cameron Quin

Cameron Quin has been heavily involved in business development from an early age. After founding and selling two online companies, Cameron found a strong passion for renewables and the opportunities it brings for the commercial and industrial sector. Sharing the possibilities of solar and the knowledge from the Solar Bay team is his favourite pastime.