Kate Lundy (ACT, Australian Labor Party, Parliamentary Secretary to the Prime Minister) Share this | Hansard source

This is a very important issue, and it is worth me spending a couple of minutes outlining the Energy Security Fund free allocation and why it is targeted. Senator Xenophon, the government's energy security package and assistance arrangements have been put together carefully and deliberately to facilitate the transition of the sector to lower-emissions sources and maintain energy security. The rationale is clearly set out in the explanatory memorandum to the bill, and in particular I draw your attention to paragraphs 6.9 to 6.19.

The object of providing assistance in the form of free carbon units under part 8 and associated cash payments is to help maintain energy security by reducing the negative impact of a carbon price on the operation of high-emissions-intensive generators in the short term. This will help generators that face the most acute losses in the value of their assets. This assistance will also support investor confidence in the electricity generation sector, which will underpin investment in the new energy infrastructure needed to meet our future energy needs.

Highly emissions-intensive coal fired generators are likely to face an increase in the operating costs greater than the general increase in the level of electricity prices. Competition from less emissions-intensive generators, including less intensive coal fired generators which face lower costs under the mechanism, may cause more emissions-intensive generators to lose profitability. So allocations of free carbon units and cash support facilitate a smooth transition for highly emissions-intensive coal fired generators to a carbon price by reducing the short-term financial impact on them and maintaining long-term investor confidence in the sector.

The design of this assistance was informed by the Treasury modelling, which utilised two specialist energy market modellers to examine the impact of carbon price on electricity markets. This included both the National Electricity Market and the South West Interconnected System in Western Australia. The design of the assistance was also informed by consultation with energy market institutions, most notably the regulators, affected generators and analysis previously conducted during the design of the Carbon Pollution Reduction Scheme. Because it is focused on energy security risks, the assistance is not intended for every coal fired generator, many of which are expected to pass on a large proportion of their expected carbon costs. It is this pass-through of carbon costs which is then dealt with by the generous household assistance measures.

Allocations of free carbon units and cash payments under the fund are not designed to change the incentives of recipient generators to reduce emissions. The liabilities of recipient generators are not reduced by the allocation of carbon units under the fund. Recipient generators are free to sell the carbon units that they receive from the government, bank them for future use or use them to meet liabilities under the mechanism. This is achieved by delivering assistance based on the historical energy and emissions intensity of eligible generation complexes and not on ongoing production or ongoing emissions.

I hope this explanation and further detail has been helpful to the chamber.