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Will the AER become a secondary carbon market regulator?

Jason Cox — June 2011

Emerging Issue: The carbon debate in the electricity sector has been dominated by questions facing generators: but what about impacts on the regulated transmission and distribution businesses?

The Australian Energy Regulator (AER) is responsible for the economic regulation of the majority of electricity transmission and distribution businesses, and allows monopoly businesses to recover “at least the efficient costs” they incur in providing essential services. The government’s CPRS discussion papers assume that electricity (and gas and water) utilities are unlikely to be significantly impacted by a CPRS as long as “the regulatory regime allows the pass-through of reasonable carbon costs”.

With the carbon debate reignited, it is now necessary to ask “what is a reasonable carbon cost for a regulated utility?” Indeed, what is the reasonable emissions level for a regulated electricity business?

The Marginal Abatement Cost Curve has a number of energy efficiency opportunities available to businesses that will actually save businesses money. Will this be taken into account? In the case of a market-based system, will the market price be applied, and if so, will this price be a forecast or retrospective price? And what costs will be allowed for the relatively simple task of managing and reporting on carbon obligations?

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