Electricity Sector Adjustment Scheme

In the CPRS White Paper the Australian Government committed to provide limited assistance to the coal-fired electricity generation sector through the Electricity Sector Adjustment Scheme (ESAS) to help the transition to a low emissions economy under the Carbon Pollution Reduction Scheme (CPRS). This commitment is reflected in the CPRS legislation introduced into Parliament on 2 February 2010.

Why do we need an Electricity Sector Adjustment Scheme?

The CPRS imposes a carbon cost on all fossil fuel-fired generators. The most emissions intensive generators may be constrained in their ability to pass on these costs, leading to a decline in their asset values. Recognising these effects, the Government established the ESAS to manage a smooth transition to a lower carbon electricity generation sector while maintaining security of supply, promoting stable energy contracting markets and supporting investor confidence in energy markets.

Ongoing investment in lower emissions generation is essential to maintain energy security in a carbon constrained future. The ESAS helps guard against risks of supply disruptions and supports the investor confidence necessary to deliver new investment and long-term energy security under the CPRS.

How does the Electricity Sector Adjustment Scheme work?

As outlined in the CPRS legislation, the ESAS provides a fixed administrative allocation of up to 228.7 million permits to generators over the ten years to 2020/21 (delivering around $7.3 billion of assistance in nominal terms).

Assistance is provided to coal-fired generators that have an emissions intensity above 0.86 tonnes of carbon dioxide equivalent per megawatt hour generated, and that were in operation, or committed to be constructed, on 3 June 2007. Assistance is targeted to those generators that are likely to be most significantly affected by the introduction of the Scheme. Assistance is allocated to individual generators on the basis of historical energy output and emissions intensity data. The arrangements have been carefully designed to maintain generators’ incentives to reduce emissions in response to the carbon price.

Maintaining secure energy supplies

ESAS arrangements have been designed to support ongoing energy security, without impeding a transition to a lower carbon electricity generation sector.

ESAS assistance is conditional on the recipient complying with the ‘power system reliability test’. This test can be met in three ways:

  • The generator maintains its capacity at the same level as at 3 June 2007. The capacity must remain available to generate in the event it is required to do so for system security reasons by the market operator. The test does not require the generator to produce any particular amount of electricity – for example, the provision of ESAS does not require a generator to maintain its pre-CPRS level of output.
  • The generator withdraws some capacity, but receives certification from the relevant market operator that this will not be likely to cause a breach of power system reliability standards.
  • The generator withdraws some capacity, but replaces it with less emissions-intensive capacity, under the Low Emissions Transition Incentive. New investment that is eligible for Low Emissions Transition Incentive will be required to have an emissions intensity less than current best practice coal-fired generating capacity in Australia.

Windfall gain review

The assistance will also be subject to a ‘windfall gain’ review. Once the ESAS is in operation, the Australian Climate Change Regulatory Authority (the Authority) must assess the impact of the CPRS and the value of ESAS assistance over a fifteen year period to consider whether a windfall gain is likely for a particular generator. If the Authority finds that a windfall gain is likely for a particular generator, the Government is able to withhold half of the assistance available for that generator in the last three years of the ESAS.

Energy Security Assurance Mechanism

As part of the 24 November 2009 negotiated amendments to the CPRS, the Government announced it will provide additional assurance to energy security under the CPRS by establishing an Energy Security Assurance Mechanism under the guidance of an Advisory Board. The Advisory Board’s role will be to advise the Treasurer on any remaining low probability systemic risks to electricity market security and, if so, actions necessary to address these risks.