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Presentation at G'Day USA – Energy efficiency benefits from market mechanisms

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21 November 2016

16 January 2013

Chloe Munro, Chair

Contents​

Preamble

Good morning, I am delighted to be back at G'Day USA for another year. I have been lucky enough to be involved in this great event in my former role as Chair of the National Water Commission. Even though this is an event focused on energy and yesterday we had a similar event on carbon pricing, there is a lot to learn from the world of water also. In Australia, the water markets have been used very successfully to address an environmental problem, so it's very pleasing to now see the power of markets being utilised to combat the complex problem that climate change presents.

It's particularly pleasing to be back here as the Chair of the organisation tasked with the operational backbone of the Australian Government's Clean Energy Future Package, including the Renewable Energy Target, the Carbon Pricing Mechanism and the Carbon Farming Initiative. I'll describe each of these in a minute.

I have been fortunate to have had the opportunity to play a role at various times in developing new markets in energy, water and other natural resources and it is over 20 years since I first thought about carbon pricing. So it is very satisfying to be able to lead an organisation which is putting into effect such a major reform as Australia's carbon price.
Today, I hope to provide you with an insight into how these market mechanisms will work to transition Australia to a low carbon economy, and how they are designed to encourage energy efficiency and ultimately change the energy mix in Australia.

Introduction to the Clean Energy Regulator

The Clean Energy Regulator was established in April 2012 as an independent statutory authority to administer the market-based elements of Australia's climate change law. These include the carbon pricing mechanism, the Carbon Farming Initiative and the Renewable Energy Target, together with the National Greenhouse and Energy Reporting system and the National Registry of Emissions Units. Although our name might imply that we regulate the technical performance of the energy industry, we are better characterised as an economic regulator with an environmental objective. Our purpose is to support Australia's transition to a low carbon economy through an informed and efficient market for carbon and investment in renewable energy.

The market mechanisms are underpinned by legislation and are all in varying stages of maturity. Australia's Renewable Energy Target was one of the world's first renewable certificate market mechanisms and has been in operation for over 10 years. By contrast the carbon pricing mechanism has only been in operation for the last seven months.

A brief overview of the schemes

The carbon pricing mechanism and the Renewable Energy Target create the demand for carbon units and RECs respectively by placing obligations on certain businesses. Over 350 large carbon emitters and gas suppliers are liable under the carbon pricing mechanism and around 90 electricity retailers are liable under the Renewable Energy Target. Demand for units is based on the legislated obligation on large emitters to surrender units to the Clean Energy Regulator in proportion to their carbon emissions: one unit per tonne of CO2 equivalence. The renewable energy target works in a similar way with one certificate equivalent to 1 megawatthour of electricity. We regulate demand by ensuring that liable businesses report correctly, accept their obligations and acquit their liability within the required timeframes.

The cost of acquiring units can be passed through to customers but is constrained by competition in those markets. The conduct of those markets is regulated by the Australian Competition and Consumer Commission.
The Clean Energy Regulator also regulates supply of units with ownership recorded in the Renewable Energy Certificate Registry and the Australian National Registry of Emissions Units. Units have been created for electricity generated or displaced by over 350 renewable energy power stations under the Renewable Energy Target.

Under the carbon pricing mechanism, units are available from several sources. In the first three years of the scheme, the price is fixed, being AUD23 in the current year. In this phase a large proportion of liability will be met by businesses acquiring the units direct from the Regulator and surrendering them immediately. We are very busy preparing for the first cycle of payments which are due by 17 June. Coal fired generators and emissions intensive trade exposed industries can also access industry assistance under the Jobs and Competitiveness Program through the issuance of free units. So far we have issued over 77 million units worth nearly $1.8 billion. A fair proportion of these units have been on-sold and holders can also sell back to the Regulator at a published daily price ($22.53 today).
From 2015–16 the price will be set by the market under a 'cap and trade'system. Units will be sold at auction and there will be access to international units through the linking arrangement Australia has entered into with the European Union Emissions Trading Scheme and through the Kyoto protocol mechanisms.

In addition ACCUs can be sourced through the Carbon Farming Initiative offset scheme. The Carbon Farming Initiative allows farmers and land managers to earn carbon credits by storing carbon and reducing greenhouse gas emissions on the land. Currently we have over 130 registered offset entities and 22 eligible projects. The Clean Energy Regulator has issued approximately 348,000 Australian Carbon Credit Units which is equivalent to AUD$8 million. There are also forward contracts in the secondary market which are anticipating delivery next year. This secondary market is regulated by the Australian Securities and Investment Commission. The Clean Energy Regulator only regulates the primary market.
The National Greenhouse and Energy Reporting scheme is the engine room for establishing liability under the carbon pricing mechanism. This is how liable entities report their emissions data. Approximately 850 entities report through the scheme and it is a source of a wide range of data for other uses such as the national greenhouse inventory.

How a carbon price drives clean energy choices and energy efficiency

Relative prices have a powerful influence on business and household choices and particularly on capital investment decisions. Market mechanisms work by directing the forces of competition and choice towards socially desirable outcomes. The Carbon Pricing Mechanism together with Carbon Farming Initiative and the Renewable Energy Target have been designed to use markets to achieve their policy objectives which are complementary but distinct: reducing greenhouse gas emissions and increasing the use of renewable energy. The carbon price also encourages energy efficiency, not through direct intervention, but by providing a strong economic incentive to reduce energy consumption.
The diagram here illustrates how liability can drive choices towards clean energy and energy efficiency.

Although the carbon price will be paid by only around 350 entities this year, this covers approximately 60 per cent of Australia's carbon emissions including from electricity generation, stationary energy, landfills, wastewater, industrial processes and fugitive emissions.

For many of those businesses the combination of emissions and energy reporting and the prospect of a carbon price has focussed management attention on this part of their cost base in a new way.

Energy efficiency

The first option liable companies might consider in order reducing their costs is to reduce their emissions intensity and energy efficiency measures are often the quickest way to do this. A 2012 report by Deloitte for the Carbon Disclosure Project, surveyed the largest listed Australian and New Zealand companies, asking them to define what climate change means for their business. The report stated that energy efficiency initiatives are emerging as the preferred approach to emissions reduction, with 60% of respondents reporting initiatives relating to energy efficiency – a 10% increase on 2011. Eighty per cent of responding companies had at least one active emissions reduction initiative in the reporting year. Companies are also embracing innovation as a means to manage and capitalise on climate change business impacts with 44% of companies making it part of their response.

Liable entities are already taking action to reduce emissions and at least partially their response can be attributed to the price signal. Rio Tinto is targeting a reduction in the emissions intensity of their products by 6 per cent by 2013 and by a further 4 per cent by 2015. BHP Billiton achieved an aggregate group target of 6 per cent reduction in greenhouse gas emissions per unit of production in the 2011-2012 financial year. One of Australia's largest listed companies and employers, Wesfarmers, recorded a 7.49 per cent reduction in National Greenhouse and Energy Reporting emissions for the 2011-2012 financial year. Their total energy use decreased approximately 11 per cent in the same year and they have instigated a number of long-term energy efficiency strategies such as introducing night blinds on refrigeration cases and automatic lighting controls in their supermarkets to minimise lighting during non-trading periods.

According to a report by pitt & sherry the overall demand for electricity supplied by the National Electricity Market has fallen by 2.5 per cent overall compared with the year ended 2011. Demand fell by 8 per cent in New South Wales and 11 per cent in Victoria. The report states that changes in demand in electricity on this scale are unprecedented in the entire 120 year history of electricity supply in Australia and notably attributes some of the change to government energy efficiency measures. The carbon price will reinforce this trend as it increases the return on investment in energy efficiency measures, which generally require some upfront capital.

Renewables

Of course energy efficiency isn't the only option available to a business which is aiming to reduce its carbon price liability. In some cases it may make better business sense to reduce emissions intensity by switching to renewables or to do a combination of both. The Renewable Energy target and the carbon price are acting as complementary measures as between them they make investment in large-scale renewable energy power stations competitive with new coal or gas fired plants.

Offsets

Businesses can also net out their emissions liability through offset projects. They may invest in the project directly to reduce their total emissions or they may buy Australian Carbon Credit Units from Carbon Farming Initiative accredited projects such as environmental plantings. Some projects, such as methane capture from landfill waste have the benefit of both reducing future carbon price liability and generating income through the Carbon Farming Initiative. If the methane is used to generate electricity, the project owner will reduce their power bill and generate Renewable Energy Certificates.

The voluntary market

The design of the schemes also supports a voluntary market which allows businesses to back up their corporate social responsibility goals, which may go as far as carbon neutrality. For example During the 2012 financial year Origin energy offset 100% of greenhouse gas emissions from its non-energy producing sites such as emissions related to commercial offices, car and air travel through the purchase of offset units. Australia's seawater desalination plants have contracted to buy Renewable Energy Certificates (which will then not be used towards the RET) to offset their energy use, to allay concerns that desalination is otherwise a very carbon intensive way to augment urban water supplies.

Pass through

The extent to which a liable entity can pass the carbon price through to customers depends on their competitive position and generally they would only be able to pass it through to the extent of the most carbon efficient operator in their market. Because our energy markets are so dominated by fossil fuels – coal and gas – a significant proportion is being passed through to customers, with regulated retail electricity prices have risen about 9% with respect to the carbon price. Network charges have increased even more significantly and as a consequence customers are paying more attention than ever to their electricity bills. Where it's deregulated, the retail electricity market is fiercely competitive and customers can certainly shop around for a better deal. However bigger savings can always be made by reducing consumption.

For this reason, many companies that are not directly liable under the carbon pricing mechanism are also considering emissions reduction and energy efficiency as a key priority. For example Australia's largest telecommunications and information services company, Telstra, reduced its carbon emissions intensity by 36 per cent in the 2011-2012 financial year and has implemented a nine million dollar program of energy efficiency initiatives including the installation of fresh air cooling systems in mobile sites, new economy cycle systems, lighting control systems and air-conditioning control system upgrades.
Householders and businesses can also choose to reduce their exposure to retail electricity prices by purchasing a solar panel system or solar water heater. The Renewable Energy Target offers a financial incentive for the installation of these systems through the creation and sale of certificates attached to these systems.

Demonstrated success of market mechanisms

Finally, I just want to show you a couple of charts which demonstrate how effective market mechanisms can be, drawing on the ten years' experience of the Renewable Energy Target which has the objective of meeting 20% of Australia's electricity demand from renewable sources by 2020.

LRET

You can see here the steady growth in renewable energy generation above the 2001 baseline, noting that the final number for 2012 has not yet been reached. New investment in renewable energy power stations attached the Renewable Energy Target jumped by AUD$1.29 billion between April and early December 2012. In particular, the number of large-scale generation certificates created by wind farms has been increasing steadily, rising from approximately 3 million in 2008 to 6 million in 2012.

Small scale

Australians have installed over 1.6 million small-scale renewable energy systems benefiting from the scheme since 2001 and electricity generation from solar photovoltaic systems increased by 204 per cent from 2010 to 2011. Not all 2012 installations have yet submitted their claims and so the final figure at year end will be significantly higher.

Where to from here

The Clean Energy Regulator aims to have data on emissions levels by mid-2014 after the mechanism has completed a full cycle. Liable entities will have to report their emissions numbers for the next cycle by mid-2014. This report will determine how many units they will need to purchase and surrender. We will be able to compare the emissions data for 2012-2013 and 2013-2014 and ascertain the extent to which companies have responded to the price signal.

We are already seeing that many Australian companies are recognising that a proactive approach towards reducing emissions and increasing energy efficiency gives them a competitive advantage. This fundamental shift in thinking is going to be good for the sustainability of Australia and will, in turn, contribute to the global effort to reduce the effects of climate change. As the CEO of the Clean Energy Regulator I'm very proud to be a part of such an endeavour and am committed streamlining our activities to ensure we support the markets that are so much a part of this change.

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