Environmental policies have increasingly become important tools to reduce the impact of industrial processes and, more recently limit the production of greenhouse gases. These policies have a direct impact on the design and operation of electricity markets. Working Group C5.21 has produced Technical Brochure 710 on Impacts of Environmental and Energy Policy on Power Markets. The brochure does not comprehensively review all environmental policies but rather captures the impacts of regulations and schemes that most directly interact with power markets. The Australian member of the working group was Tim Baker. The topic is directly relevant in Australia to the current considerations in relation to the National Energy Guarantee.
The working group examined case studies from Australia, China, Japan, USA, Ireland, South America and the Gulf States to determine the electricity market impacts and how implementation delivered against intended or anticipated impacts. In general, the WG concluded most environmental policies can be categorised as either a Prohibition Regulation or an Incentive Scheme and these are illustrated below.
All of the case studies showed impacts of the various policies from at least one of the above categories and the Technical Brochure provides a detailed analysis of these impacts.
As an example of an incentive scheme the brochure examines the impact of the Australian Renewable Energy Target (RET) on the Australian electricity market. The RET allowed renewable resources to create tradable certificates for each MWh of energy produced. Liable entities (generally electricity retailers) are obligated to purchase certificates on an open market and surrender them annually to the Clean Energy Regulator to demonstrate compliance. Parties obligated to surrender certificates must pay a penalty fee if they fail to surrender a sufficient number of certificates. The RET scheme objective was to create a market that provides financial incentives for increased investment in both large-scale renewable power stations and owners of small-scale systems.
In 2011, the target was split into two schemes with two different types of certificates. The Large-scale Renewable Energy Target (LRET) creates incentives to develop renewable energy power stations, such as wind and solar farms and hydroelectric plants. The Small-scale Renewable Energy Scheme (SRES) creates incentives for households, small businesses and community groups to install small-scale renewable energy systems such as solar water heaters, heat pumps, and solar PV systems.
The case study concludes the RET contributed to wholesale price suppression particularly in the NEM with retail costs of the scheme being passed on as higher electricity charges. There was also an increase in ancillary service market volatility due to the ratio of non-synchronous/synchronous generation rising leading to a reduction in availability of primary frequency response providers in certain areas.
The case study observes the RET has been successful from the perspective that its primary objective was to bolster the amount of renewable generation in Australia. However, at the time the scheme was created, policy makers anticipated that the increasing generation from renewables would meet a projected increase in demand. The intrinsic nature of the SRES contributed to a decrease in net demand. Policy makers likely did not intend to create the levels of oversupply and demand growth slowdown that have led to wholesale price suppression, thermal power station closures and concern about network revenue adequacy.
A key observation of the brochure is that increased transparency between policymakers and market operators will foster increased alignment and understanding about the goals of the policy, potential impacts, and potential efficiencies from working together.