Australian National Electricity Market

(www.nemmco.com.au)

Federal Mandatory Renewable Energy Target (MRET)MRET requires all Australian electricity retailers and wholesale customers to buy an increasing amount of ‘new’ renewable electricity. It trades in Renew-able Energy Certificates (RECs) representing 1 MWh from ‘new’ renewables.

MRET has been operating for two years. Liable parties have comfortably met the targets to date. However, many argue that the 9500GWh/year target for 2010 is too low, and other problems include: Public opposition to the classification of biomass from native forests as a

renewable energy source 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

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

Investment uncertainty with the recent CoAG Review recommendation to scrap the scheme. This has damaged the prospects of numerous proposed renewable projects.6

The NSW Benchmarks SchemeThis 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’ tCO2-e emissions.

While the scheme only commenced in 2003 there are concerns about its likely performance for reasons including:

Use of ‘imputed’ rather than physical emissions – the two may diverge

Very different activities – low emission generation, demand side abate-ment and sequestration – are all treated as measurable and fungible

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

Double counting across policy measures may allow the scheme to ‘free-ride’ off other existing policy measures; for example, NSW retailer’s MRET obligations can be counted towards their benchmark targets

The unwieldy complexity of ‘imputed’ emissions and baselines

Jurisdictional overreach –the scheme allows low emission generation anywhere in the NEM to be counted as contributing to NSW abatement.

Experience with Market-based Approaches to Climate Change Regulation in the Australian Electricity Industry

                                                             

Iain MacGill Hugh Outhred Karel Nolles i.macgill@unsw.edu.au

SummaryHere 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:

Electricity industry restructuring Federal Mandatory Renewable Energy Target (MRET) NSW Greenhouse Benchmarks Scheme Government accredited Green Power

The mixed performance of these Australian schemes to date illustrates the need for great care in designing such market-based approaches.

T H E U N I V E R S I T Y O F N E W S O U T H W A L E S S Y D N E Y A U S T R A L I AS C H O O L O F E L E C T R I C A L E N G I N E E R I N G + T E L E C O M M U N I C A T I O N S

S U S T A I N A B L E E N E R G Y R E S E A R C H G R O U P

U N S W S U S T A I N A B L E E N E R G Y R E S E A R C H G R O U P @ w w w . s e r g o . e e . u n s w . e d u . a u

Key Lessons to date Numerous abstractions and design choices are required when

implementing market-based tools, and these can have a marked impact on scheme effectiveness and efficiency

Setting appropriate baselines in ‘baseline and credit’ schemes to ensure additionality is particularly problematic, and moral hazards arise for policy makers during this process

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

GreenpowerGreenpower 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

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

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

Electricity industry restructuringMitigating 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 environ-mental improvements. However, it may improve responsiveness to price signals from market-based regulation.4

1. CoAG (2002) Energy Market Review2. CoA (1997) Australia’s 2nd National Report to UNFCCC3. MacGill et al (2003) 26th 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 CoAG (2002)7. www.greenpower.com.au

Liable partiesRetailers

Must acquit RECs to ORER annually equiv. to elec. mkt share of target = 9500 GWh/yr by 2010

REC creators

GeneratorsList of eligible technologies

Post-1997 ‘new’ renew. generation Otherwise, calc’dbaseline

RE Certificate market

PPAs, Spot and OTC trading

Certify Certificates Maintain register Ensure liable parties oblige

Scheme administrator (ORER)