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 THE UNIVERSITY OF NEW SOUTH WALES SYDNEY AUSTRALIA SCHOOL OF ELECTRICAL ENGINEERING + THE UNIVERSITY OF NEW SOUTH WALES SYDNEY AUSTRALIA SCHOOL OF ELECTRICAL ENGINEERING + TELECOMMUNICATIONS SUSTAINABLE ENERGY RESEARCH GROUP Experience with Market-based Approaches to Climate Change Regulation in the Australian Electricity Industry Iain Mac. Gill Hugh Outhred Karel Nolles i. [email protected] edu. au Summary Federal Mandatory Renewable Energy Target (MRET) Here we outline some recent developments in market-based environmental regulation of greenhouse emissions in the Australian electricity industry. In particular, we consider the objectives, design and experience to date with: Ø Electricity industry restructuring Ø Federal Mandatory Renewable Energy Target (MRET) Ø NSW Greenhouse Benchmarks Scheme Ø Government accredited Green Power MRET requires all Australian electricity retailers and wholesale customers to buy an increasing amount of ‘new’ renewable electricity. It trades in Renewable Energy Certificates (RECs) representing 1 MWh from ‘new’ renewables. The mixed performance of these Australian schemes to date illustrates the need for great care in designing such market-based approaches. Electricity industry restructuring Mitigating climate change is one of three nationally agreed energy policy objectives. 1 Restructuring of the electricity industry has, however, been driven by economic objectives; for example, the Code for Australia’s National Electricity Market (NEM) has no specific environmental objectives. There was, nevertheless, an expectation by at least some government policy makers that restructuring would also help reduce greenhouse emissions through competition and more rational energy investment. 2 Unfortunately, projections now suggest this will not be achieved for reasons including low coal generation costs, reduced energy efficiency because of lower prices, a market design that favours incumbents and the supply-side orientation of reforms to date. 3 Thus, electricity competition does not, in itself guarantee environmental improvements. However, it may improve responsiveness to price signals from market-based regulation. 4 1. Co. AG (2002) Energy Market Review 2. Co. A (1997) Australia’s 2 nd National Report to UNFCCC 3. Mac. Gill et al (2003) 26 th IAEE Conference, Prague. 4. IPCC (2001) Third Assessment Report: – Mitigation. 5. BCSE (2002) RECS, Baselines and Industry Development. 6. Outhred et al (2002) Submission to Co. AG (2002) 7. www. greenpower. com. au Australian National Electricity Market Greenpower (www. nemmco. com. au) Greenpower schemes allow consumers to voluntarily pay a premium for electricity from ‘green’ sources. Because networks ‘mix’ all generation, green power can’t be physically delivered. Instead, retailers contract with ‘green’ generators to cover the volume sold to customers. This necessary abstraction creates a challenge in counting and certifying premium price green power from different types of new and existing green sources. External auditing can increase consumer confidence in such arrangements. Australia has a national government backed accreditation scheme run by NSW SEDA. It requires an increasing amount of greenpower to be sourced from ‘new’ (post 1997) generators. Biomass generation from native forests is not accepted. Consumer interest remains limited. Over 95% of Australian electricity consumers now have access to accredited Greenpower, yet sales in 2002 represented only around 0. 25% of total electricity consumption. 7 Key Lessons to date Ø Numerous abstractions and design choices are required when implementing market-based tools, and these can have a marked impact on scheme effectiveness and efficiency Ø Setting appropriate baselines in ‘baseline and credit’ schemes to ensure additionality is particularly problematic, and moral hazards arise for policy makers during this process Ø The broad reach of some market-based tools increases the potential for them to interact with other policy measures in ways that reduce their environmental effectiveness MRET has been operating for two years. Liable parties have comfortably met the targets to date. However, many argue that the 9500 GWh/year target for 2010 is too low, and other problems include: Ø Public opposition to the classification of biomass from native forests as a renewable energy source Ø Baselines for some existing large-scale hydro appear to have been set too low, They can earn RECs without making additional investment. They also benefit from natural annual variability, earning RECs in years when output is above baseline, yet not ‘losing’ them when output falls below. Some 35% of the MRET target may be met this way. 5 Ø Price uncertainty from only a single annual acquittal of RECs to ORER. Also generators are permitted to register RECs at any time after their creation – this information asymmetry advantages large suppliers. 3 Ø Investment uncertainty with the recent Co. AG Review recommendation to scrap the scheme. This has damaged the prospects of numerous proposed renewable projects. 6 The NSW Benchmarks Scheme This scheme sets greenhouse reductions benchmarks for NSW electricity retailers based on ‘imputed’ per-capita electricity related emissions The tradeable instruments are NSW Greenhouse Abatement Certificates (NGACs) representing a notional ‘avoided’ t. CO 2 -e emissions. While the scheme only commenced in 2003 there are concerns about its likely performance for reasons including: Ø Use of ‘imputed’ rather than physical emissions – the two may diverge Ø Very different activities – low emission generation, demand side abatement and sequestration – are all treated as measurable and fungible Ø Baselines have to be estimated for this wide range of possible activities. It will be difficult to ensure that only activities additional to BAU progress will be credited – this is particularly hard for demand side abatement Ø Double counting across policy measures may allow the scheme to ‘freeride’ off other existing policy measures; for example, NSW retailer’s MRET obligations can be counted towards their benchmark targets Ø The unwieldy complexity of ‘imputed’ emissions and baselines Ø Jurisdictional overreach –the scheme allows low emission generation anywhere in the NEM to be counted as contributing to NSW abatement. Ø There are serious ‘market for lemons’ risks with tradable instruments that have measurement, verification and additionality difficulties – ‘poor quality’ yet low-cost projects can crowd out more expensive yet ‘high quality’ activities Ø Creating transparent, liquid markets for these schemes that allow efficient price discovery and risk management by participants can be challenging It is proving harder to effectively design and implement these market based tools than many had expected because of the complex framework required to effectively exploit their flexibility and efficiency UNSW SUSTAINABLE ENERGY RESEARCH GROUP @ w w w. s e r g o. e e. u n s w. e d u. a u