Archives for category: Clean Energy

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.

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.

To save you some time and effort, we have put together a timeline showing you the key dates for NGER and Clean Energy for the next two years or so:

(click on image for full-size)

In the coming months we will be working closely with our friends at the respected international law firm DLA Piper, to deliver to clients a complete picture of their carbon liabilities and risks – both direct and indirect. We believe effective carbon accounting and management is a multi-disciplinary field. With this in mind we have put together a team that can provide end-to-end advice in a systematic and comprehensive manner. We analyse and quantify the real risks across key aspects of the business, from legal, technical, data systems and financial aspects, and present findings that you can use immediately. Our methodology drills-down into five main areas:

Feel free to contact us if you would like more information or to arrange a meeting.

Dear readers, Happy New Year and welcome to 2012! This is going to be a very busy year for professionals in our space with the passing of the Clean Energy Act and a carbon price coming into effect on 1 July 2012.

In our December post, we mentioned that Ndevr Environmental Consulting is involved in the Clean Energy Regulator’s Pilot Regulatory Stakeholder Group. The Department of Climate Change and Energy Efficiency (DCCEE) have released much of the information presented at the first workshop.

There are important points included in the presentation, including detail about DCCEE’s long standing emissions and energy reporting tool, OSCAR. The replacement, ‘Emissions and Energy Reporting System’ (EERS) is under development and is targeted to be implemented prior to the 2012-13 reporting year. OSCAR will still be used for the 2011/12 period which is already over half-way through! EERS will include the additional functionality and security required under the carbon pricing mechanism.

The presentation also includes some important information in Parts 3 ‘Legislative overview of registration and reporting’ and, Part 4 ‘Registration—JVs, LTCs, OTNs, Liable Entities’. For more detail go to:

http://goo.gl/zWfgT

Another source of information we have found useful covers the consultation process, timelines, who is doing what and information about the Clean Energy Regulator which can be found at:

http://goo.gl/lXO6I

On Wednesday 14 December Ndevr Environmental Consulting’s Principal Consultant Matt Drum took part in the DCCEE run stakeholder reference group to discuss the Regulations that will sit under the Clean Energy Act 2011.

There is still a lot of detail to be finalised under the Act, however one thing is clear – all businesses whether directly or indirectly liable will face increased energy and compliance costs. Some other less thought of factors such as solid waste removal and waste water services will also have a carbon cost applied.

Trying to calculate exactly what this means to your bottom line is a complex exercise, but some issues organisations will need to consider are:

Direct Liability – where the Clean Energy thresholds are triggered

  • Is your company directly liable?
    • Facility level thresholds apply on covered sources.
  • The cost of purchasing permits and cash-flow concerns.
    • Permits or ‘units’ have to be acquired in two ‘tranches’ – an interim purchase (75% of projected emissions), and a ‘true-up’ where the remainder of reported liable units must be acquitted
  • The cost of other compliance obligations
    • Additional reporting and assurance requirements
    • Improving measurement and reporting accuracy and audibility

 Indirect Liability – where carbon costs occurring elsewhere will be passed to you from common energy sources and waste services

  • Grid  electricity
    • Each generator will face different carbon costs depending on their generation mix
    • Some emissions intensive generators in Victoria will receive some free permits which may limit the pass through cost
    • Competitive forces will come into play in Australia’s complex electricity markets as generators and retailers decide the amount of cost to pass on the amounts to absorb
    • Pass-through of the carbon cost associated with transmission/distribution line losses may or may not be applied
    • It may be time to re-evaluate procurement strategies and request the ‘itemised’ carbon cost to be applied by your retailer when the Act comes into play
  • Natural Gas
    • A carbon cost will be applied to natural gas – this may shift slightly due to the energy value embodied in the gas
    • Large users can apply for an Obligation Transfer Number (OTN) that allows them to manage their own carbon liability – effectively they have a direct liability
  • Liquid Fuels
    • Depending on when a liquid fuel is used for stationary or transport purposes will have an effect on how the carbon cost is applied and the net cost to business
  • Waste removal
    • As solid waste breaks down in landfills methane is released and this is a covered source under the Act. Landfill operators are currently working out their liabilities going forward, which will be passed back to your business via waste services contractors
    • Waste water also emits Kyoto gases covered under the Act. Similarly to solid waste, water service providers will be looking to pass this cost back to the consumers

The legislation is extremely complex, and just as business is grappling with how it will affect them, government is grappling with exactly how they will administer it from the start date, which is only six months away.

There is however some strategies you should consider as soon as possible to reduce your risk:

  1. Supply chain analysis: Understand the costs you can reasonably expect to be passed through. Your NGER report and procurement team can be key sources of information here.
  2. IT systems: Ensure your current system appropriate. IT implementations do not happen overnight, your system should have; change control, password protection, links to source data such as invoices or higher order emissions and energy content data.
  3. Funding opportunities: Investigate your eligibility for funding such as that administered under the Clean Energy Finance Corporation (CEFC)?
  4. Audit and compliance: Confirm whether or not you will be required to undergo mandatory audits. Consider a voluntary audit of your 2011/12 NGER report as this will be your last ‘free-hit’ before the Act takes affect
  5. Procurement: Arm yourself with the knowledge you need to negotiate with suppliers (step 1 above is the basis for this).
  6. Brief the Executive and/or Board: Ensure the leaders understand the impact the Act will have on your business and make sure budgets reflect the risk
  7. Opportunities under Carbon Farming Initiative: Your business may have opportunities to generate credits under the CFI – which can be used internally or sold on a market.

If you have any questions on the issues raised above, or would like to analyse these issues in more detail, please contact us.


%d bloggers like this: