Australia's energy markets
15 October 2014
Chloe Munro, Chair
Contents
Introduction
Thank you for the invitation to address you this morning. This conference brings together a great number of innovators and entrepreneurs in the clean energy sector. It's very heartening to see so much activity and I'm looking forward to walking round the exhibition later on.
The Clean Energy Regulator was established in 2012 to administer the Australian government's legislated schemes for businesses to measure, manage, reduce or offset their carbon emissions.
We summarise our purpose as accelerating carbon abatement for Australia.
In many ways the National Greenhouse and Energy Reporting Scheme is the cornerstone of everything we do. It's the authoritative source of emissions data across a large proportion of the economy.
NGER data are used by businesses in their own reporting, by government to inform policy and to compile the nations' emissions inventory.
NGER data were also used to establish carbon price liability and they will play a role in the Emissions Reduction Fund.
The Australian National Registry of Emissions Units is the vehicle for tracking Australia's obligations under the Kyoto protocol. It also allows the issuance and exchange of carbon units, which will be the currency used in the Emissions Reduction Fund.
The Carbon Farming Initiative was designed to provide incentives for carbon abatement in the land sector.
Currently there are 166 eligible offset projects and to date we have issued just short of nine million ACCUs.
Australian Carbon Credit Units issued under the CFI could be used to offset carbon price liability, including for the final true-up which is due by 2 February 2015.
The Carbon Farming Initiative will continue in an expanded form as part of the Emissions Reduction Fund as I'll describe shortly.
The Renewable Energy Target has been in existence for over a decade and has evolved through a number of phases over that period.
It's currently under review but there's no suggestion the market mechanics of the scheme might change.
So while we've seen a lot of policy change in a short period with the introduction and then abolition of the carbon price, the planned introduction of the Emissions Reduction Fund and potentially amendments to the Renewable Energy Target, there's also a lot of continuity as well.
We have built an excellent reputation based on a constructive relationship with our clients.
Our first priority is to administer the law as it is and to keep our clients informed every step of the way about what they need to do to discharge their obligations. As a result we have achieved an extremely high level of voluntary compliance.
We continue to improve our systems and processes to make it easier to do business with us and we involve our clients in design discussions and user testing. We provide a lot of guidance material on our website including very popular webinars for NGER reporters.
We will take the same approach with our new responsibilities under the Emissions Reduction Fund.
The Emissions Reduction Fund
The Emissions Reduction Fund is the centrepiece of the government's direct action plan.
A full description of the ERF can be found in the government's white paper on the Department of the Environment's website.
The government committed $2.55 billion to the ERF in this year's budget and enabling legislation is currently in the Parliament. You may have seen recent press articles on amendments proposed by Senator Xenophon. These amendments do not alter the elements of the scheme that I'll discuss today and may help secure cross-bench support in the Senate.
We're getting our systems and processes to operate the Fund ready now and we will be open for business as soon as the legislation has passed.
So let me explain how it will work.
The ERF has three components: crediting emissions reductions, purchasing emissions reductions, and safeguarding emissions reductions.
Crediting genuine emissions reductions
Projects must meet some basic qualification tests to be eligible to participate. In particular, they must be new, they must go beyond standard business activities and they must not be required by regulation or funded by other government programmes. These are the so-called additionality requirements – to confirm that any credited abatement is additional to business as usual.
Also, to be eligible the project must use a method approved by the Minister to measure the abatement it delivers. So your first stop, in considering whether you might be able to put forward an eligible project, would be to see whether there is a method that applies to your idea.
When a project submits a report on the abatement it has achieved, it receives one Australian carbon credit unit for each tonne of CO2 equivalent of sequestered carbon or avoided emissions. This is exactly how the Carbon Farming Initiative works today.
Unlike the carbon farming initiative, the Emissions Reduction Fund will be open to a much wider range of methods beyond the land sector. The scheme will apply to a wide range of activities such as:
- upgrading commercial buildings
- improving energy efficiency of industrial facilities
- capturing waste coal mine gas
- upgrading vehicles and improving transport logistics, and many others.
Purchasing emissions reductions
The Clean Energy Regulator will enter into contracts with project owners to purchase Australian carbon credit units from them over a period of years. We've already consulted with stakeholders on the standard form of these contracts – they're on straightforward commercial terms based on payment for delivery against an agreed schedule.
Most of the feedback has been about contract length – which the government is currently considering – and whether the contract should be firm or non-firm. We intend to allow a modest degree of flexibility in this regard but the contract is not simply a put option. However the contractor is not tied to their own project and can deliver Australian carbon credit units from any source. We have seen a very healthy secondary market develop in our existing schemes and we see a role for it in the Emissions Reduction Fund too.
Turning to price: our goal is simply to buy as much abatement as we can for the funds available.
Purchasing takes place through an auction process, which selects between offers purely on price. The White Paper specifies a simple single-round sealed bid process for the initial auctions. We will have the flexibility to adapt the process as the market develops.
To participate in an auction, you'll need to have an eligible project and agree to the contract terms in advance. We'll assess the credibility of your proposed delivery schedule, before you can register for the auction. This will prevent the auction from being distorted by offers based on highly unrealistic assumptions or projects that have no hope of proceeding. We're planning this step now and we will consult on the minimum information necessary and the best way to capture it.
Once you're registered, the auction itself will be a very simple process. You will submit your offer, consisting of a delivery schedule and unit price, on a standard form, by a secure channel specified by us.
The Clean Energy Regulator will accept offers in order of unit price up to a limit of 80 per cent of the volume of abatement offered at that auction.
Having a cut-off point will enhance competition and encourage bidders to offer the lowest price at which it would be worth their while to carry out their abatement project.
We will pay each successful bidder for ACCUs as they are delivered to schedule, at the price offered. As a result we expect to purchase at a range of price points. Large projects will have a significant influence on the average prices and so we will be particularly concerned to see them priced competitively.
Once both the Regulator and the market have better information about prices offered and accepted it is likely that a more sophisticated auction format will be required to force price disclosure.
Secondary markets
As I've said, a contractor is not tied to their own project and can deliver Australian carbon credit units from any source. We have seen a very healthy secondary market develop in our existing schemes and we see a role for it in the Emissions Reduction Fund too.
Given the funds we have available, I expect the ERF will be the main buyer in the primary market for ACCUS. However they can also bought by participants in the voluntary market who want to offset their emissions in order to meet their internal emissions reduction objectives.
A secondary market will start to form when there is a healthy supply of credits. Some projects will achieve more abatement than they have contracted to sell to the Emissions Reduction Fund. Once they have fulfilled their contract, they will have additional units to sell.
Other projects may fall short of their projected abatement, and to fulfil their contract on schedule they can look to the secondary market to make up the ACCUs they need.
As with other markets, we would expect to see a spot price based on the supply-demand balance as well as a contract price based on the auction outcomes. Over time, the two should come into equilibrium.
Safeguarding emissions reductions
The third pillar is a mechanism to lock in the gains made through the purchasing mechanism by constraining growth in emissions elsewhere in the economy. The safeguard mechanism will apply only to the largest emitters and will work through the National Greenhouse and Energy Reporting framework. Businesses covered by the safeguard will be required to keep their emissions below a set baseline. They will be able to surrender ACCUs to offset any emissions over the baseline and so this is another potential market for abatement from ERF projects.
Emissions baselines will be set using data reported under the National Greenhouse and Energy Reporting Scheme and will be based on absolute emissions over a historical period.
How to participate
Broadly speaking, these are the
steps involved to participate in the ERF.
Everyone in the crediting scheme will need to do steps 1 and 4.
However, if you wish to contract with the government for a guaranteed price for the ACCUs, this purchasing arrangement will involve all of the steps.
Keep an eye on our website for new information – we'll be loading up guidance materials as new methods become available and well ahead of the first auction.
The best strategy for auction success is to price realistically – the lowest price at which it is worth your while to do the project. You will have to take into account the fact that the contract works on payment on delivery so you need to price in all your costs, including financing costs, that are not covered by other revenue or offsetting cost reductions such as electricity savings. In other words, you will need a well thought out business plan to decide whether you are likely to be eligible and at what price it would be worth your while to participate.
We hope there will be a lot of opportunities for clean energy business to get involved in the ERF, either as direct participants or as suppliers to others.
Relevant to you will be a number of energy efficiency methods. These methods will apply broadly to commercial, industrial and aggregated energy efficiency operating models.
The Department of the Environment has already released some draft ERF methods for public comment. They include landfill gas, alternative waste treatment, waste coal mine gas, avoided clearing of native regrowth and commercial building energy efficiency. The Department has developed these draft methods in consultation with technical working groups from industry.
Public consultation on the commercial building energy efficiency method closes on 23 October, so do take a look on the Department's website if you are interested. This method will apply to projects that undertake energy efficiency upgrades in existing commercial buildings, using the National Australian Built Environment Rating System (NABERS) to inform additionality assessments and quantify abatement.
Activities to reduce energy consumption in commercial buildings could involve modifying, removing or replacing energy-consuming equipment in the building, changing energy use within the building, or changing the components or shell of the building to influence energy consumption.
The method also provides for multiple buildings to be included in a single ERF project. This is a good example of a method that will be attractive to aggregators.
The draft method requires projects to achieve a one-star increase in NABERS rating for a commercial building and associated reduction in electricity consumption, as compared to the pre-project baseline from a certified NABERS rating.
The aggregated metered baseline method will be released for public consultation shortly.
Projects using this method would reduce emissions by undertaking energy efficiency upgrades at existing sites, or encouraging behaviour change to improve energy efficiency. This method is being adapted from the NSW Energy Savings Scheme (ESS).
Projects can reduce emissions by modifying, replacing, installing, or removing end-user equipment, or modifying the use of end-use equipment.
It will apply a similar concept to medical trials of a new drug. Aggregated abatement from energy efficiency improvements to houses [or small businesses] will be compared to a baseline. The baseline is measured from a control group that did not receive energy efficiency improvements.
It is likely that different methods will suit different business models. Already we can see a few different models emerging:
- Specialist aggregators like those operating in the RET and CFI and in the state-based energy efficiency schemes
- Intermediaries or project owners who anticipate very variable production levels who will operate purely in the secondary market
- Businesses with major facilities that can identify process improvements or plant upgrade that would reduce their emissions, possibly to stay within the baseline set for them under the safeguard mechanism.
New methods won't be made into legislative instruments until after the legislation has passed. In the meantime, the government is allowing some leeway on the "newness" test. If you've done your research on potential projects and want to start work on one now, you can submit a notice of intent to conduct a project to us at the Clean Energy Regulator. It's a very simple form.
This lets us know that you intend to start a project before the legislation is passed through the Parliament. It means your project will not fail the "newness" requirement as part of the qualification tests. All other eligibility criteria still apply.
RET Review
Looking to the future it would be reasonable to think that wherever there are emissions, there are abatement opportunities. The current CFI methods apply to the land and waste sectors and the new methods under development address fugitive emissions and potentially industrial processes. They leave plenty of room for new ideas in different sectors. In particular, it is possible for a bespoke method to be developed for any large project that is capable of producing 250 000 tonnes of abatement per year.
This could include projects in the electricity generation sector, which remains responsible for around a third of Australia's total emissions. This takes me to the Renewable Energy Target, which has amongst its objectives to encourage the additional generation of electricity from renewable resources and to reduce greenhouse gas emissions in the electricity sector.
I know there will be a number of you interested in the outcome of the RET review. The release of the Expert Panel has precipitated extensive debate and I need scarcely add to it here.
So let me just run through the narrative that I believe was established by the report of the expert panel:
"The panel found that the Renewable Energy Target has broadly met its objectives". And:
"The administration of the Renewable Energy Target is generally efficient and meets the expectations of stakeholders". That's a tick for the Regulator.
However, the panel formed its view that change is required based on the un-forecast success of the small scale scheme and the un-forecast decline in electricity demand.
I have here extracts from the report:
"Installations of small-scale systems have exceeded expectations, with output from these systems already exceeding levels anticipated for 2020."
"Electricity demand in 2020 is now expected to be much lower … the cost of renewable technologies has fallen."
"…The economic landscape has shifted…leading to questions about whether the objectives for the Renewable Energy Target remain appropriate."
"The Renewable Energy Target should be amended in light of the changing circumstances in Australia's main electricity markets and the availability of lower cost emission abatement alternatives."
Of course, different conclusions could be drawn from the same data and the government is seeking bipartisan support for any changes to the scheme that might be made.
What is clear, however, is that on any scenario short of outright repeal, the basic architecture would remain in place. In the meantime it's business as usual and we will continue our monitoring and compliance regime to maintain the integrity of the scheme. We have also just released a major upgrade to our RET Registry system and we anticipate it will be in use for many years to come.
Close
As I've said, the Emissions Reduction Fund is the central plank of the government's climate change policies. Once legislated, it has significant capacity to assist businesses in the clean energy sector and to promote carbon abatement.
Both the purchasing and the safeguard components of the Emissions Reduction Fund take advantage of existing infrastructure – NGER for reporting and CFI and ANREU for the ability to issue and trade carbon units. They can be the foundations of a long-term policy to shift Australia's emissions trajectory in the right direction.
However, the Emissions Reduction Fund will only be successful if there are plenty of participants with a good pipeline of projects. I hope this includes many people in the room today. We have a common cause after all – accelerating carbon abatement for Australia.