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Focus: Expanded renewable energy target scheme

24 December 2008

In brief: The Federal Department of Climate Change recently released an exposure draft of legislation and regulations for the Federal Government's proposed expanded national renewable energy target scheme.  Partner Grant Anderson (view CV) and Lawyer John Henderson look at the draft legislation and some associated proposals.

How does it affect you?

  • By 2020 wholesale electricity purchasers will be required to take 20 per cent of their energy requirements from renewable energy sources – this is a significantly more onerous obligation than under existing schemes and will increase electricity prices.
  • Whether trade-exposed industries will receive any assistance in meeting these higher electricity prices, or whether their electricity purchases will be exempt from liability under the scheme, is being considered as part of a separate consultation process.  It has been suggested that the provision of any such assistance may be conditional upon the disclosure, and possibly publication, of the terms of any long-term contracts under which the recipient of that assistance purchases its electricity.
  • Submissions on the draft legislation and the treatment of trade-exposed industries need to be made by 13 February 2009.

Background

The Federal Government has committed to a 20 per cent renewable energy target (RET) for Australia, to be reached by 2020.  Following the release of a COAG Working Group discussion paper, 'Design Options for the Expanded National Renewable Energy Target Scheme', in July, the Government has now settled on its preferred model for this scheme, and has released for public comment draft legislation and regulations that implement this model.

There are currently two legislated RET schemes operating in Australia: the Mandatory Renewable Energy Target (MRET) scheme at the federal level, and the Victorian Renewable Energy Target (VRET) scheme.  The expanded RET scheme will build on the existing MRET scheme, and the Federal Government is currently working on arrangements with the Victorian Government to transition the VRET scheme into this scheme (it is expected that these transitional arrangements will be finalised early in 2009, and will entail minor legislative amendments to the legislation that establishes the MRET scheme).

Under the Renewable Energy (Electricity) Act 2000 (the RE Act), which is the legislation that establishes the MRET scheme and that is to be amended to give effect to the new 20 per cent RET, wholesale purchasers of electricity ('liable parties') are required to meet a share of the renewable energy target in proportion to their share of the national wholesale electricity market.  The Government's proposals will see this target increase from 9,500GWh (in 2010), under the existing MRET scheme, to 45,000GWh (in 2020) under the expanded RET scheme.

The RE Act provides for the creation of renewable energy certificates (RECs) by renewable energy generators.  One REC represents one MWh of electricity generated from an eligible renewable energy source such as wind, solar, hydro, wave, geothermal or wood waste.  Solar water heaters and small generation units (including rooftop solar photovoltaic units, small wind turbines and micro-hydro systems) are also able to create RECs under deeming arrangements prescribed in the regulations.  The RECs, once registered, can be traded and sold to liable parties who then surrender them to the Renewable Energy Regulator in order to meet their renewable energy requirement under the scheme and avoid paying a shortfall charge. 

Design of new RET

In its July discussion paper, the Government canvassed two design options for its new RET scheme.  There were two principal differences between these options:

  • The first difference is that, under option one, there would be no time limits on the entitlement of renewable energy projects to create RECs, whereas under option two renewable energy projects would only be entitled to create RECs for a maximum of 15 years.  The effect of this is that option one favours renewable energy generation from established technologies (such as wind), which can be brought on stream early on in the life of the scheme, while option two provides a more even incentive for investment in technologies that are only likely to come on stream in the latter half of this decade (such as solar, wave and geothermal generation).
  • The second difference is that, under option one,  the RET scheme will be phased out from 2024 to 2030 (ie no RECs will be able to be created, and no liability will arise, in respect of electricity generated on or after 1 January 2031).  In contrast, under option two, the RET scheme will be phased out more gradually, with the phase out still commencing in 2024 but RECs being able to be created up until the end of 2035.

The Government has settled on option one.  As a result, under the expanded RET, an annual renewable energy target will be set for each year up to and including 2030.  These annual targets are illustrated in graphic form below.  As can be seen, the 2010 target is relatively high, reflecting the higher 20 per cent target (as well as the renewable energy targets under existing and proposed state and territory RET schemes which are to be subsumed within the national RET).  The annual targets then increase in a linear manner, although the rate of increase is lower for the years 2011 to 2015 than the years 2016 to 2020, reflecting the higher starting position and the expectation that new technologies will develop, and economies of scale improve, as 2020 approaches.  The annual targets for 2021 to 2024 then flatten out at 45,000GWh, after which they decline.  By this stage it is expected that carbon prices under the proposed Carbon Pollution Reduction Scheme (CPRS) will be sufficiently high to encourage the development of renewable energy generation without the RET.


 
The expanded RET scheme will enable the creation of RECs from the same activities as qualify under the existing MRET scheme.  However, in contrast to the discussion paper, which proposed that existing renewable energy projects would not be able to create RECs after 2020 (the expiry date of the existing MRET scheme), the expanded RET scheme permits such projects to continue to create RECs until 2030.  This may be regarded as providing a windfall to existing projects because the investment in them was presumably made on the basis of a REC revenue stream until 2020 rather than 2030.

Under the expanded RET scheme, RECs will  continue to be able to be banked for the life of the scheme so that RECs created in the earlier years can still be surrendered to meet a liable party's renewable energy requirement in the later years.  This is another aspect of the scheme that potentially discriminates in favour of proven renewable energy technologies and against renewable energy technologies that might only become proven in the later years of the scheme.

If a liable party fails to surrender enough RECs to meet its liabilities under the expanded RET scheme, a shortfall charge will continue to apply.  It is envisaged that this charge will be a fixed (un-indexed) amount set at a level marginally above the projected peak REC price.  Setting the shortfall charge in this manner signifies that its purpose is not so much one of imposing a cap on the REC price as to encourage scheme participants to acquit their liabilities by surrendering RECs rather than by paying the shortfall charge.  The exact amount of the shortfall charge has not yet been determined by the Government.  However, given that there is to be an initial $40/tCO2-e cap on the price of carbon pollution permits that are issued under the CPRS (which corresponds to around $40/MWh – the amount of the shortfall charge under the current MRET scheme), it may well be that the existing shortfall charge of $40/REC will remain.

An independent review of the RET scheme will be undertaken in 2015.  Unfortunately the draft legislation does not outline the parameters that may be changed following such a review, and this may have an unsettling effect on investment in renewable energy projects between now and 2015.

The RET scheme and the CPRS

The expanded RET is one of the four major elements of the Federal Government's climate change mitigation strategy, the other three being the proposed CPRS, the promotion of carbon capture and storage, and improving household energy efficiency.  The RET scheme has been criticised as cutting across the operation of the CPRS by subsidising zero emissions (but higher cost) renewable energy generation at the expense of low emissions (but lower cost) alternatives, thereby resulting in higher electricity prices.  However, the  relatively low emissions reduction targets that are being proposed under the CPRS (between a 5 per cent and 15 per cent reduction on 2000 level emissions by 2020) suggests that the expanded RET will, at least initially, be a more important driver of investment in renewable energy technologies than the CPRS.

In addition, the Federal Government has announced that it will accelerate the funding that it is providing for the development of renewable energy technologies through the $500 million Renewable Energy Fund so that, instead of investing that fund over 2009-2015, it will be fully invested within a shorter 18-month timeframe.

Small generation units

Generally, small generation units1 , such as rooftop solar PV units, are able to create one REC for each MWh of electricity that they are deemed to generate under the regulations.  In contrast, under the draft legislation, small generation units that are installed between 1 July 2009 and 30 June 2015 will be able to create multiple RECs for each MWh of electricity that they are deemed to generate (namely, 5 RECs per MWh for units installed between 1 July 2009 and 30 June 2012, decreasing to 4 RECs for units installed in the year ending 30 June 2013, 3 RECs for units installed in the year ending 30 June 2014 and 2 RECs for units installed in the year ending 30 June 2015).  However this multiplier effect only applies to the first 1.5kW of the rated output of the unit, and then only in respect of the first unit that is installed at premises where no RECs have been created by any other units at those premises.  Moreover, multiple RECs can only be created for the first deeming period that is chosen in respect of the unit (this may be one, five or 15 years depending on the nature of the unit).  In subsequent deeming periods RECs will only be able to be created at the rate of 1 REC per MWh of electricity that is deemed to be generated by the unit.

Some concern has been expressed that allowing the creation of multiple RECs for only 1 MWh of electricity generation will effectively result in a reduction in the amount of renewable energy that is generated under the RET scheme.  However, the Government has stated that this is not its intention. 

The provision of multiple RECs in connection with household solar units is intended to replace the Government's rooftop solar panel rebate scheme, effectively shifting the cost of supporting rooftop solar panel installations from the Commonwealth budget to electricity users.

Trade-exposed industries

As stated above, the new RET scheme will increase electricity prices.  As foreshadowed in the July discussion paper, the Government will consult on the kind and amount of assistance (if any) that is to be given to trade-exposed industries which may have their international competitiveness compromised as a result of this increase in electricity prices.  For this purpose the COAG Working Group on Climate Change and Water has released another discussion paper 'Treatment of electricity-intensive trade-exposed industries under the expanded national Renewable Energy Target scheme'.  This discussion paper canvasses four options:

  • no assistance, which is the position under the existing MRET scheme;
  • exempting electricity purchases relating to specified trade-exposed activities from liability under the RET scheme, which would result in other electricity consumers bearing even higher electricity costs;
  • allocating free RECs to the relevant trade-exposed activities to compensate them for their additional electricity costs – the Government would source the necessary RECs from the market and fund this purchase out of the general revenue (it would be necessary to carefully manage these purchases to minimise their impact on the market for RECs); and
  • providing cash assistance to the affected trade-exposed activities to subsidise their electricity purchases.

It is proposed that any such assistance would only be provided to activities that are considered to be trade-exposed and emissions-intensive for the purpose of the CPRS, and then only if those activities would experience a material impact on their costs as a result of the increase in electricity prices caused by the expansion of the RET scheme.  While the discussion paper does not specify the materiality threshold to be employed for this purpose, the aluminium industry is an obvious candidate for assistance because the cost of the RECs attributable to electricity supply to that industry (at $40/REC) is estimated to be 1.8 per cent of industry revenue in 2013, rising to 4 per cent in 2020.

It might be queried why it is appropriate to confine this assistance to trade-exposed emissions-intensive activities, as opposed to trade-exposed activities.  It is conceivable that some trade-exposed activities which are conducted by large electricity users will not meet the thresholds for EITE assistance under the CPRS because they have low direct emissions, but should still receive some assistance in meeting the high electricity costs that derive from the expanded REC scheme.

On the other hand, it is noteworthy that the compensation that is to be given to households under the CPRS measures does not take into account increases in the price of electricity due to the expanded RET scheme.

In any event, industry participants that consider themselves likely to suffer a material increase in their electricity costs under the expanded RET scheme are invited to respond to the discussion paper by providing information of their affected activities, the electricity consumption of those activities and the pricing of the output from those activities.  However, it should be noted that any such assistance will be conditional on the provision of details of any long-term electricity supply contracts that may apply to those activities so as to enable the Government to ascertain whether the industry participant is in fact liable to have the increased electricity costs passed through to it.  Rather ominously (and, it is suggested, unnecessarily) the discussion paper foreshadows that the terms of this contract may need to be made public 'in line with normal standards of accountability for the expenditure of public funds'.  This is not a requirement which has been flagged as necessary in the context of the CPRS.

The next step

The Government plans to have final legislation to implement the expanded RET scheme in place by mid-2009, with the new targets to commence from 2010.  Interested parties are invited to provide submissions in response to the exposure draft legislation and regulations, and the possible treatment of trade-exposed industries, by 13 February 2009.  If you would like assistance in preparing these submissions, or any other information relating to the RET scheme, please contact any of the people below.

Footnotes
  1. Small generation units are hydro generators with a rating of up to 6.4kW, or wind generators with a rating of up to 10kW, and that generate no more than 25MWhpa or solar photovoltaic units with a rating of up to 100kW that generate no more than 250MWhpa: Renewable Energy (Electricity) Regulations 2001 (Cth), reg. 3(2).  

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