Archives for the month of: February, 2012

Many of our ‘Clean Energy liable clients’ are currently grappling with the complexities of tracking, managing and projecting for carbon units under the Clean Energy Act 2011. Historic emissions and energy systems have not typically been designed to account for carbon units, and some key regulations are yet to be established. Another piece of the puzzle has recently been added to the mix regarding the flexible price period – when carbon units will be auctioned by the Government and subsequently acquitted and/or traded on the secondary market.

The Climate Strategy and Markets division of DCCEE have released their position paper on the auction process for carbon units under the Act during the flexible price period (2015/16 onwards). Submissions are now being accepted up until the 24th February 2012 on the auction process. To save you some time and energy, the key recommendations and concepts described in the paper have been summarised as follows:

  • Auctions for permits under the flexible price period commence in 2013/14 (during the fixed price period).
  • Auctions are to be held for vintages up to three years ahead[1] (i.e. you can buy a 2016/17 permit in 2013/14).
  • Auctions will follow a sequential ascending clock format (more on this below).
  • Up to 4 auctions will be held each year approximately once per quarter.
  • Units from each vintage will effectively be distributed over 8 auctions;
    • Auctions 1-3: once per year for the three years leading up to the vintage year (1/8 +1/8+1/8 of the total units for the vintage per year)
    • Auctions 4-7: four auctions in the vintage year itself (1/8 + 1/8 + 1/8 + 1/8 of total); and
    • Auction 8: one following the end of the vintage year allowing liable entities to finalise their permit acquisition and satisfy liabilities (the final 1/8 of units)
  • Until a cap on permit numbers is set in the 2014 budget statement (based on national abatement targets/trajectories) only 15M units will be auctioned per session (first two sessions).
  • Unsold units will be carried forward to be auctioned in the next vintage period.
  • The regulator will set a reserve price based on the price floor; this will be announced at least 14 days prior to the auction date.
  • An electronic registry will be utilised, anyone with a registry account can participate in the auction.
  • Minimum bid is for one unit while the maximum is 25% of the total number of units up for auction in the session.
  • Proxy bids are allowed and settlement will be on a T + 3 basis (three days after transaction).

The Ascending Clock Auction format is generally meant to auction goods/services where there are significant numbers of non-unique items that need to be cleared fairly quickly. The auction process runs as follows:

  1. Auction commences with a low starting price for units.
  2. Participants nominate the number of units they are willing to purchase at the starting price.
  3. If the aggregate demand is greater than supply, the auctioneer increases the unit price and the next round begins.
  4. Participants then adjust the number of units they are willing to purchase at the increased price. Participants may only reduce the number of units requested as the price increases.
  5. This continues until the aggregate demand is less than or equal to supply at which point participants of the final round are allocated their permits with the price equal to the previous round.
  6. Should there be ‘left-over’ permits i.e. in the final round the aggregate demand is less than supply, the Regulator may choose to exercise an intra-round bid. In this participants of the final round nominate a price they are willing to pay for the remaining units which is greater than that of the second-last round but less than the last round.
  7. Permits will be auctioned in sequence based on their vintage year.

The Department have also released a tentative auction schedule as shown in the table below.


[1] Except the first auction will only apply two years in advance

Last week we mentioned the DCCEE were looking at introducing a materiality threshold for the NGER legislation. We have since spoken to the Department who informed us any amended legislation is still some way off. Their policy team is currently working furiously on the Clean Energy subordinate legislation, and materiality threshold is not part of this package. Our thoughts are that it is very unlikely to be applied to the current reporting year and may not apply until 2012/13 or beyond. With this in mind emissions and energy managers must continue to capture small sources, and use incidental provisions where appropriate to minimise your compliance costs. We will let you know when any consultation is undertaken by the Department so your input is considered.

Amendments to the National Greenhouse and Energy Reporting (NGER) Act 2007, requires a nomination of operational control to be made, in circumstances where more than one person that could reasonably satisfy the operational control test. This is essentially a new requirement and the amendments will take effect on 1 July 2012.

Operational control is central in determining who has the reporting (and carbon price) liability for a facility. Generally speaking it sits with the person that has greatest authority to introduce and implement; operating, OH&S and environmental policies at the facility. This can be quite ambiguous to apply in practice and often causes confusion where more than one organisation is involved in activities at a facility.

Everyone captured under the NGER and Clean Energy Acts will soon have to nominate who has operational control (via a formal process), where it is not immediately clear who has the greatest authority to introduce and implement operating, OH&S and environmental policies. Significant penalties can apply to late and absent nominations.

Don’t go looking in the NGER Act for the amendment, as it will not be added until 1 July 2012 when it comes into effect (the amending legislation is the Clean Energy (Consequential Amendment) Act 2011). That being said there are a few things you need to know now:

  • If operational control is not clear (which it often is not) a formal, joint application must be made where interested parties ‘officially’ nominate who has operational control.
    • In the past, under NGERs, where operational control was ambiguous, reporters would often have a gentleman’s agreement where one party would ‘assume’ operational control and report. Often this would only be as formal as an email or letter confirming such an agreement.
  • Two different due dates apply for nominations:
    • 30 April 2013 for an entity that has to provide an interim emissions number (if an entity emitted >35 ktCO2-e in 2011/12, is likely to emit  >35 ktCO2-e in 2012/13, and had an NGER report submitted for 2011/12 you will need to provided an interim emissions number); and
    • 31 August 2013 where an interim emissions number is not required (<35 ktCO2-e in 2011/12).
  • The amendment comes into effect 1 July 2012, and applies to the 2012/13 compliance year onwards.
  • Penalties can apply for late or absent nominations (1,000 penalty units which is currently equal to $110,000).
  • If no nomination is made, the penalty may apply to all participants and the carbon price liability is divided equally among the participants.
  • Forms and further explanatory materials should be provided in the coming months.

‘So what does this mean for my company?’ You need to start by completing a thorough stock-take of facilities and identify those likely to be affected by the amendment. Some examples might be where:

  • a large contractor is responsible for implementing many of the policies;
  • more than one corporation operates out of the same site; and
  • the facility boundaries are difficult to define.

Essentially it appears the Department of Climate Change and Energy Efficiency (DCCEE) has attempted to formalise liability and remove the ambiguity. We are continuing to liaise with DCCEE on exactly how this might be applied in practice, and some questions still stand, such as:

  • ‘How clear cut does operational control have to be before a nomination is not required?’
  • ‘How will this be enforced?’ and;
  • ‘How does this effect liable entities within the same corporate group?’

During 2011 the Australian National Audit Office (ANAO) audited the DCCEE to determine how well the National Greenhouse and Energy Reporting (NGER) scheme program is being administered. Reporting corporations and carbon and energy professionals were surveyed and interviewed to gain their insights on the NGERs scheme (NEC Principal, Matt Drum was interviewed in our Melbourne Office in May 2011). Yesterday the ANAO released the report and today it was featured in Fairfax publications:

http://www.theage.com.au/environment/weather/auditors-report-on-emissions-errors-a-blow-to-green-dream-20120207-1r5k5.html

The 124 page ANAO report included some really interesting findings and recommendations; one in particular that might make our clients happy. The DCCEE are looking to introduce a materiality threshold into regulations to reduce the reporting burden in 2012/13. This would effectively allow reporters to exclude certain small emissions and energy sources that take a great deal of time and effort to calculate. Although incidental provisions are included in the Regulations to allow you to estimate small sources, a materiality threshold would allow them to be excluded completely. The question of “how do you know if it’s under thresholds unless you measure it anyway” remains, however your previous NGER reports should provide you the answers.

As for liable emissions under the Clean Energy Act, these are generally not the small, incidental sources likely to be excluded by a materiality threshold – e.g.: liquid fuel use from small contractors, oils and greas etc. That being said, the regulators will need to include a safety net to address this.

We are talking to DCCEE at the moment to find out some more information, if anyone would like to be involved in discussions please contact us. Our guess is that an amendment may be put forward with the Clean Energy Regulations currently being drafted.


Another really interesting point was the high rate of adverse and qualified findings from the pilot audit program – where DCCEE sent in auditors to complete mandatory audits under the NGER Act. This was not really reported in the Fairfax article that concentrated on ‘17% of reports having significant errors.’ The 17% figure quoted in the Age came from the DCCEE verification, where an Officer conducts a (desktop) review of the final submitted report and look for basic errors (see page 85 of the ANAO report for the frequency and types of errors).

The DCCEE verification is nowhere near as in-depth as the reasonable assurance audits (which will include site visits, interviews and other audit functions). The mandatory audits came back with four ‘qualified’ conclusions and four ‘adverse’ conclusions. In total, 47% of the reasonable assurance audits had either a qualified or adverse finding. Although the sample size is quite small, and the Department may have picked its targets, the results are poor. With the Clean Energy Act coming into force 1 July 2012, and the outcomes of the pilot audit program, the DCCEE will continue to ramp up its compliance and enforcement efforts, with mandatory audits remaining a central component.

Our advice: consider (if you haven’t already) undergoing a voluntary audit for 2011/12 and reduce your risks.


Late reporting has been recognised as an issue. At June 2011, 43 corporations were yet to lodge their 2009/10 report. The exact words from the ANAO report are “late reporting has been a challenge and will need to be addressed more firmly—particularly given the importance of greenhouse and energy data in underpinning the price on carbon”. We believe it won’t be long until a corporation is fined for not providing a report by October 31 under NGERs, and there will be very little tolerance under the Clean Energy Act.

Our advice: start early, shorten your internal reporting process as much as you can and investigate carbon and energy reporting solutions to replace manual spreadsheets. Quarterly, monthly (and even daily) automated reports are much more efficient and accurate than an annual rush.


To save you some time, we have summarised other key findings from the report:

  • 70% of those surveyed rated DCCEE support and guidance as ‘good’ to ‘very good’.
  •  71.1% relied exclusively or primarily on manual spreadsheets.
    • Only five corporations (2.8 per cent) reported that they had fully automated systems.
    • Many reporting corporations are actively seeking automated data collection and reporting systems, while some are concerned about the costs.
    • 47% used some form of verification.
    • 35.9% are facing challenges in meeting record keeping requirements.
    •  An ANAO IT security audit of OSCAR, undertaken as part of the broader audit, identified significant security vulnerabilities. The subsequent report made forty specific recommendations to improve system security. Eight of these recommendations were classified as high priority.
    • A (small) sample of corporations provided indicative estimates of their capital (22 corporations) and recurrent costs (68 corporations) of reporting. Capital costs range from $5000 to $3 million, and recurrent costs $1500 to $1.5 million.
    • 53% said measuring and reporting had delivered tangible benefits, including “improved cost controls and reduced outlays for energy use—$2 million per annum for one registered corporation.”
    • 47% registered no benefits, only compliance burden.
    •  DCCEE has tabled the frequency of errors noted from their desktop quality assurance of reports – see Figure 3.5 (from the ANAO report) below.

Image

For the full report go to:

http://www.anao.gov.au/~/media/Uploads/Audit%20Reports/2011%2012/201112%20Audit%20Report%2023/201112%20Audit%20Report%20No%2023.pdf

If you have any other topics you would like to hear about, or insights, please feel free to contact us.

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