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Executive Summary

Safeguard reforms legislated to drive down emissions

On 11 April, the Safeguard Mechanism (Crediting) Amendment Act 2023 (the Act) became law. The Act provides for the creation of safeguard mechanism credits (SMCs), imposes year on year baseline reductions on Australia's largest emitters and sets an expectation of no more than 100 million tonnes carbon dioxide equivalent (CO2-e) total emissions from Safeguard facilities in 2029-30.1

The amended Safeguard Mechanism Rules, published on 5 May, contain important detail on the operation of the scheme. It established the default baseline decline rate of 4.9 % per year to 2029-30, and a minimum baseline decline rate of 1% for manufacturing and 2% for others if they qualify for 'emissions-intensive, trade-exposed' (baseline adjusted) status.

The Safeguard reforms create clear incentives for on-site emissions reductions, but also maintain flexibility including through the use of Australian Carbon Credit Units (ACCUs). There is no limit on the legal number of ACCUs that Safeguard entities can surrender in order to keep under their declining baseline. Our analysis indicates sufficient ACCU supply available in the market in the short term, and that the market is likely to tighten over time as baselines decline.

The market may have already priced in some of the expected impact of the Safeguard reforms. The generic ACCU spot price declined by $0.60 to $37.90 in the two weeks following passage of the Safeguard Mechanism (Crediting) Amendment Bill 2023 with record trading of 5.3 million ACCUs during Q1 2023 in reported spot market sales.

We will continue to monitor and report on the market's reaction to the detailed Safeguard rules as entities implement their compliance strategies.

At the end of Q1 2023, there were 23.8 million ACCUs in the Australian National Register of Emissions Units (ANREU). We expect to issue just over 18 million units in 2023 with incremental growth likely for the foreseeable future.

We go into greater detail in the ACCU chapter.

Large-scale wind and solar new investment was modest in Q1 as expected

There was 432 MW of wind and solar capacity final investment decision (FID) announcements in Q1 2023. We said in the Q4 2022 report we expected a modest Q1 2023 following a very large Q4 2022, particularly in December 2022.

Capacity approved for large-scale generation certificates (LGC) in Q1 2023 was 384 MW, including the 245 MW Avonlie Solar Farm in NSW. Approved capacity has averaged 2.5 GW per year for the last 2 years and 2023 will likely see similar capacity reaching first generation.

There remains strong investment signals with the LGC spot price increasing to about $52 by the end of April and the need to replace earlier exit of coal fired generation. Near-term (2023 – 2025) forward prices have also seen increases suggesting the market is still pricing in the scarcity of certificates for some time yet.

LGC supply in Q1 2023 was a quarterly record, exceeding 13 million certificates primarily on the back of increased solar power station generation. Voluntary cancellations reached a new Q1 record of 1.2 million LGCs and we expect over 8 million non-Renewable Energy Target (RET) cancellations this year.

More information is available in the LGC chapter.

Additional rooftop solar on track for approximately 3 GW and big increase in air source heat pumps

Consumers continue to take action to reduce their energy bills.

Rooftop solar photovoltaic (PV) capacity continued the increasing trend that started in the second half of 2022. There was 681 MW of capacity installed in Q1 2023. While this is not a Q1 record, it is 20% higher than Q1 2022 and maintains the estimate of 3 GW new installed capacity for 2023.

While rooftop solar PV remains a popular choice with households and businesses, the installations of energy efficient water heaters has defied expectations. Nearly 24,000 air source heat pumps were installed in Q1 2023, 40% higher than Q1 2022. It will be interesting to see whether or not that level of increase is sustained for the rest of the year.

For the first time, NSW surpassed Victoria as the state with the highest number of air source heat pump installations in a quarter. Combined, these 2 states installed over 18,500 systems.

Upfront costs to consumers to install an air source heat pump continue to be very low where there are state government incentives in addition to the support from the small-scale renewable energy scheme (SRES).

More detail can be found in the STC chapter.


1Actual emissions in 2021-22 were 136 million tonnes.

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