The long-awaited Finkel review of Australia's electricity market will promise lower energy prices for households and business under a new Clean Energy Target, compared to under an emissions intensity scheme or the current business-as-usual scenario.
Power generators looking to shut a coal-fired power plant would have to give three years notice before doing so, to avoid a repeat of the Hazelwood shutdown, which took place in just six months, and to ensure energy security.
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Chief Scientist Alan Finkel's review will be released at a Council of Australian Governments meeting in Hobart on Friday. It will offer a path forward for the Turnbull government to end the political stand-off over climate policy, while finally delivering business and investors certainty on energy policy.
It lays out a trajectory that would see the power sector reduce its emissions by 28 per cent by 2030, against 2005 levels, in line with Australia's Paris Accord commitments. This implies the electricity sector merely do its "fair share" of cuts even though it's been widely expected generators would do more of the heavy lifting.
A Climate Change Authority report from last August indicated the electricity sector's cuts would have to be closer to two-thirds by 2030 to meet a two-degree warming limit that Australia and other Paris signatories agreed on.
Fairfax Media has been told the Finkel review will focus on four key outcomes: how to deliver energy security, reliability, affordability for households and business, and meet Australia's emissions reductions targets.
Dr Finkel told a briefing of state and territory energy ministers on Thursday that under a clean energy target (a CET, rather than a LET, or low emissions target), coal would not be phased out as quickly as it would be under an emissions intensity scheme and that business-as-usual would do the most to hasten the demise of coal.
Gas would play a less prominent role in Australia's energy mix in a CET, because of its higher relative price, but there would be a greater role for renewable sources such as solar and wind.
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The CET would deliver cheaper prices than business-as-usual, mostly because it would bring more investment and greater long-term confidence to operators.
Its advantage over an EIS from a political point of view would be that the coal-fired power sector would escape a penalty.
"It's more pro-coal [than an EIS] because it won't be a tax on coal," one source said.
The new clean energy target would begin operating from 2020. The current renewable energy target [RET] would operate until then.
To tackle reliability problems in the national electricity market, new renewable energy power plants would have to have "despatchable capacity"; that is, baseload power back-up in the form of a battery, pumped hydro storage or even a gas-fired power station.
This could drive up the cost of investment in renewable energy and impact on their competitiveness.
Some 42 per cent of Australia's electricity sector could come from renewables by 2030, the review predicts.
Dr Finkel has suggested state-based emissions reduction targets should be reviewed, but stopped short of calling for their outright abolition.
To improve energy security, generators will face new obligations to integrate into the system more seamlessly; to improve affordability of power, Dr Finkel will recommend incentive payments for business and consumers to reduce their usage at peak demand times.
On Australia's 26-28 per cent emissions reduction target by 2030, while Dr Finkel said either an EIS or a CET could meet that target, but a CET would have less impact on prices for consumers and business.
The report will also suggest a new Energy Security board be created and that the Australian Energy Market Operator should have beefed-up powers. Governance changes, to allow for easier rule changes in the energy market, are also called for.
The report is expected to canvass a range of low emissions targets close to 0.7 tonnes of carbon per megawatt hour for the electricity sector to help send a price signal to the sector.
But Dr Finkel told the meeting the exact figure would be a matter for politicians to work out.
Labor leader Bill Shorten, who has called for an end to the "climate wars" and offered to work with government, warned on Thursday the government's policy response to the review had to be credible.
"If there is a price signal on emissions, which ensures that we get investment going forward into new sustainable forms of energy, which doesn't guarantee just repeated investment in new coal-fired power stations then we think there's a deal there to be done," he said.
Australia Institute executive director Ben Oquist said that a CET did send a modest price signal to the market "in the same way that the RET scheme put a price signal into the market. But without a CET, the uncertainty means that prices would be higher still."
Business is demanding certainty on climate policy after years of political debate but, already, there are rumblings from former prime minister Tony Abbott and conservatives on the government backbench over the review.
The government is expected to look to deliver a formal response to the report in July, when the next COAG energy council meeting is held.
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