Integrating Australia’s Safeguard Mechanism with the National Electricity Market would create a direct carbon price signal for generators, potentially unlocking billions in stalled wind investment and forcing integrated generator-retailers to accelerate coal and gas retirements rather than passing compliance costs to consumers.
How the Safeguard Mechanism and electricity market currently operate in isolation
The Safeguard Mechanism, reformed in 2023, sets declining emissions baselines for facilities emitting more than 100,000 tonnes of CO2-equivalent annually. Covered entities – primarily LNG plants, mines, and heavy industry – must either reduce on-site emissions or surrender Australian Carbon Credit Units (ACCUs) or Safeguard Mechanism Credits (SMCs) for every tonne above their baseline. The electricity sector, however, is largely excluded from direct liability because its emissions are accounted for indirectly through the grid average emissions factor applied to downstream users.
Meanwhile, the National Electricity Market (NEM) operates on a marginal-cost dispatch model that rewards energy-only revenue. Wind and solar farms earn revenue when they generate, but receive no explicit payment for the avoided emissions they deliver. Since the 2014 repeal of the carbon price, the NEM has had no economy-wide carbon signal. The Renewable Energy Target (RET) provided a certificate-based subsidy for new build until 2030, but its large-scale generation certificate (LGC) price has collapsed from over $80/MWh in 2019 to under $15/MWh in 2024 as the 33,000 GWh target was met early and banked certificates flooded the market.
Gentailers – AGL, Origin Energy, and EnergyAustralia – sit at the intersection. They own the majority of the NEM’s coal and gas fleet while also retailing electricity to households and businesses. Their current incentive structure favors extending the life of depreciated thermal assets: they capture high wholesale prices during scarcity events, hedge their retail books with their own generation, and face no direct carbon liability for their power station emissions under the Safeguard Mechanism. The Australian Energy Market Operator’s 2024 Integrated System Plan still models coal retirements driven by age and economics, not policy compulsion.
Why linking the two regimes changes the investment calculus for wind
If the Safeguard Mechanism baseline were applied to electricity generators – or if a sectoral baseline were created for the NEM – every tonne of CO2 from coal and gas generation would acquire an explicit opportunity cost equal to the marginal abatement cost of the cheapest available SMC or ACCU. Current SMC spot prices trade around $35-40/t CO2-e, roughly half the EU ETS price and a fraction of the social cost of carbon estimates used in US regulatory analysis. Even at this level, a $35/t carbon adder translates to roughly $30/MWh for black coal and $20/MWh for combined-cycle gas, based on typical emission intensities of 0.9 and 0.4 t/MWh respectively.
That points to a fundamental shift in new-build economics. A wind farm with a levelised cost of energy (LCOE) of $55-65/MWh – typical for projects reaching financial close in 2024 – currently struggles to secure offtake above $50/MWh in a market where LGCs contribute almost nothing. Add a $30/MWh carbon signal flowing through wholesale prices, and the same wind farm faces a merchant revenue stack of $80-90/MWh, comfortably above its cost of capital. The mechanism effectively internalises the externality that the RET once subsidised, but through a market price rather than a certificate subsidy.
By comparison, the US Inflation Reduction Act’s production tax credit (PTC) provides roughly $27/MWh (inflation-adjusted) for wind, phased down over ten years. Australia’s hypothetical carbon signal would be larger, permanent, and technology-neutral – benefiting any zero-emission generation, including firmed renewables, nuclear (if deployed), or gas with carbon capture. It would also avoid the boom-bust cycles of certificate markets by tying value directly to the physical displacement of fossil fuel generation.
Cross-cutting dynamics: capacity investment, firming, and the role of the Capacity Investment Scheme
The federal government’s Capacity Investment Scheme (CIS) aims to underwrite 32 GW of new renewable capacity and 9 GW of firming by 2030 through competitive tenders for revenue floor contracts. If a Safeguard-linked carbon signal materialises, the CIS strike prices required to clear tenders would fall – potentially by $20-30/MWh for wind – reducing the fiscal exposure of the scheme. That points to a virtuous interaction: the carbon signal does the heavy lifting on energy revenue, while the CIS targets the residual revenue gap for firming assets (batteries, pumped hydro, gas peakers) that the energy-only market still undervalues.
However, the interaction cuts both ways. If the carbon signal is perceived as uncertain – subject to political reversal or baseline adjustments – developers will still demand CIS contracts as a hedge, limiting the fiscal savings. The credibility of the Safeguard Mechanism’s decline trajectory (4.9% per year to 2030) is therefore a prerequisite for the carbon signal to substitute for policy subsidies. Any indication that baselines will be loosened for trade-exposed generators, or that electricity will be carved out, would collapse the forward price curve for SMCs and undermine the investment case.
Another cross-cutting dynamic involves green hydrogen and industrial electrification. The Safeguard Mechanism already incentivises facilities to switch from gas to electricity for process heat – but only if the grid emissions factor falls. A carbon signal on generators accelerates that decline, creating a feedback loop: cleaner grid power makes electrification more attractive under the Safeguard, which increases electricity demand, which improves utilisation and revenue for new wind and solar. The Australian Industry Energy Transitions Initiative estimates that electrification of industrial heat could add 15-20 TWh of annual demand by 2030 – roughly 8% of current NEM consumption – if grid emissions fall below 0.3 t/MWh.
Who this affects
- Wind and solar developers: A credible carbon price signal above $30/t CO2-e would shift merchant revenue from below LCOE to above it for most new-build wind, enabling financing without long-term offtake agreements or CIS revenue floors – though firming revenue would still require separate contracting.
- Gentailers (AGL, Origin, EnergyAustralia): Direct carbon liability on their thermal fleets would force a choice: retire coal early, invest in replacement renewables and firming at scale, or buy SMCs/ACCUs at escalating cost – eroding the “gentailer hedge” model that has delayed decarbonisation.
- Industrial facilities under the Safeguard Mechanism: A falling grid emissions factor driven by generator liability reduces their Scope 2 emissions automatically, lowering their compliance cost and making electrification projects more viable without waiting for behind-the-meter renewables.
- Storage and firming developers: Higher wholesale price volatility from carbon-cost-driven coal retirements increases the value of arbitrage and capacity payments, but only if the Capacity Investment Scheme or a future capacity market provides revenue certainty for assets with low utilisation.
- State governments (NSW, Victoria, Queensland): Their renewable energy zone (REZ) transmission build-outs and offshore wind targets would benefit from stronger private investment signals, potentially reducing the need for direct state underwriting – but they lose policy leverage if the Commonwealth carbon signal becomes the primary driver.
What to watch next
- Climate Change Authority’s 2025 review of the Safeguard Mechanism: The statutory review must assess whether the mechanism should expand to cover electricity generators directly, or adopt a sectoral baseline for the NEM – the single most consequential policy decision for the carbon signal’s credibility.
- SMC forward curve development: Emergence of liquid forward contracts for Safeguard Mechanism Credits beyond 2026 would signal market confidence in the decline trajectory; absence of forwards would indicate developers cannot hedge carbon revenue risk.
- Gentailer capital allocation announcements: Watch for accelerated coal closure dates (beyond current 2030-2035 commitments), firm renewable build targets backed by balance-sheet capex (not just PPAs), and disclosure of internal carbon prices used in investment hurdles.
- CIS tender results in late 2024 and 2025: If strike prices for wind fall below $50/MWh (in $2024 terms), it suggests the market is pricing in a carbon signal; if they remain above $70/MWh, developers are not yet banking on Safeguard linkage.
- Grid emissions factor trajectory in AEMO’s quarterly updates: A sustained decline below 0.4 t/MWh (from ~0.55 t/MWh in 2023) would confirm that existing policies plus market forces are moving the needle – or reveal stagnation that strengthens the case for direct generator liability.
Bottom line: Linking the Safeguard Mechanism to the electricity market is the only policy lever that simultaneously creates a durable revenue floor for wind, removes the gentailer incentive to prolong coal, and aligns industrial decarbonisation with grid decarbonisation – but its effectiveness hinges entirely on the political credibility of the baseline decline trajectory through multiple election cycles.
Read the full report at RenewEconomy
Original source: RenewEconomy (Australian clean energy news)
Note: facts and figures attributed above to RenewEconomy (Australian clean energy news) reflect that outlet's original reporting. Broader context, cross-sector connections, and forward-looking scenarios reflect independent analysis by our editorial team.
About this article: Drafted by Energy Ai with AI-assisted research and writing based on public reporting, then reviewed under our editorial process before publication.
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