First year of green credit trade complete -- Australia's 2% obligation

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Although much criticised for its lack of ambition, Australia's green power legislation has kick-started large scale wind power development where before there was none. Whether that interest will continue will depend on the results of this first year of renewable energy credit trade, due within the next few weeks when accounting at the end of the first compliance period is complete

Almost one year on and Australia's new renewable energy legislation has reached its first milestone -- the end of the first compliance period -- where "'liable entities" were required to surrender their proportion of renewable energy certificates (RECs) to the Office of the Renewable Energy Regulator (ORER). The legislation aims to stimulate a 2% increase in renewable energy's market share.

While it is expected to be some weeks before energy regulator David Rossiter collates and distributes the results, it is clear that with more than 560,000 valid certificates generated by the deadline of February 14, 2002, there were more than enough RECs available to meet the legislated target of 300,000 certificates, representing 300 GWh of new renewables generation.

Those that made a "relevant acquisition" of electricity since the legislation became effective from April 2001 (effectively electricity retailers) were required to surrender RECs accounting for 0.24% of the total wholesale electricity purchased, or face a penalty. This percentage increases incrementally to 2010 to meet the Mandatory Renewable Energy Target (MRET) of 9.5 million RECs or 9500 GWh of electricity being sourced from "new" renewable generation since the nominal baseline year of 1997. Next year the target is 1.1 million certificates.

The 2% target increase is based on the forecast for Australian electricity generation for 2010. More up to date estimates for electricity consumption now estimate that the 9500 GWh target will represent an increase in renewables generation of only 0.5% to 2010.

The legislation is a hybrid of a regulated but market-based system, where the cost of meeting the MRET is left to market forces. The non-tax deductible penalty is a fixed regulatory amount of A$40 MWh, but it is not linked to the consumer price index, which will lead to the real value of the penalty decreasing over time. The penalty can only be amended by government review, the first of which is scheduled for April 2003.

Generators accredited under the legislation are required to submit REC generator statements to the energy regulator and are charged with issuing one REC for every MWh of renewable generation sold. The owners of the RECs can then surrender them to meet their target, or sell them to another party -- either via a bilateral agreement or on the internet-based spot market, known as the Green Electricity Market.

The RECs system also ensures that electricity retailers meet their obligations to supply green power to customers who request to pay a premium to be supplied with electricity sourced from green power accredited renewable generators. While both this consumer-driven green power market and the MRET use RECs, they are discrete market drivers and are administered separately.

The major reason for administering these two obligations separately is that the criteria for accrediting "green power" generators is more stringent than that used by ORER to accredit generators under the MRET legislation. Native forest biomass is not permitted for accredited green power products. Electricity retailers surrender green power RECs to the Sustainable Energy Development Authority (SEDA) to meet their customer green power obligations. RECs from those generators accredited by both SEDA and ORER can be used to meet either green power or MRET obligations. Each REC, however, can only be used once.

RECs trading

There are effectively three types of RECs: ordinary RECs from clean renewable sources such as wind; certificates known to some as "dead koala" RECs, which are from native forest biomass; and green power RECs which are discharged to the Sustainable Energy Development Authority to meet green power obligations.

Louise Droltz of Tullett and Tokyo Liberty, the main RECs brokers, say that for the past four months certificates have been selling for A$33-36 each for ordinary RECs and up to $1 less for "dead koala" RECs, for which there was less demand due to public outrage associated with incinerating forestry wastes. Earlier trades were reported to be A$25-28. The lower prices were around A$24 for "deemed" RECs from solar water heaters. Unlike the A$40 MWh penalty for non-compliance, RECs sales are tax deductible.

Prices rose in the final months before compliance as companies manoeuvred to meet the deadline, but prices did not push to the penalty. Droltz says it is likely that low interest rates reduced the incentive to hold onto RECs. This could have avoided a price squeeze as companies which sought to buy RECs on the market found more than enough on offer. Earlier modelling also predicted that prices will be lower in the initial years as the low-cost options are exhausted first, leading to higher RECs prices in later years. It is still early days, however, and while its appears that the penalty may be acting as an effective price cap, no-one will confidently say what is affecting prices or what they may be in the coming months.

Commercial considerations have prevented The Marketplace Company, which administers the Green Electricity Market (GEM), from publicly releasing information about the index price or the number of RECs which have changed hands on the 13-member spot market. Once the GEM board's benchmark of five trades per week between its members is met, this information will be available from the web site on a weekly basis. That fewer than five trades in a week have occurred since the GEM went live in July 2001 is indicative of the small size of the current market. It is expected to be some years before the target increases to a size which will begin to put real pressure on power industry players to meet it.

Wind industry response

While the wind industry supports MRET as a legislative measure, few will speak positively about the regulation lest it send a message to legislators that it is a success. Many believe the fine print of the legislation, which they fear will lead to only the crème de la crème of wind projects being constructed, has impacted on industry growth and the legislation's integrity.

"Without the MRET the Australian wind industry would still be a handful of turbines subsidised mainly by green power schemes," says Corin Millais of Greenpeace. "It is creating a market, but is totally inadequate with the scale of Australia's wind resource and the problem [of emissions pollution]."

Graham White of Garrad Hassan Pacific, an offshoot of a UK wind consultant of the same name, says the MRET has been good for business and is an excellent way to increase the proportion of renewable generation. He adds, however, that the low target means that only a quarter of the proposed wind projects are likely to be developed. "The legislation is pushing projects to the highest wind speeds, meaning that vast stretches of inland areas, with nothing on them, won't be developed as the coast will be built out first," he warns. "It is always difficult to compete with coal and gas on price alone. There needs to be greater incentive."

Last month regulator David Rossiter said that of the RECs generated so far, 231,000 came from hydro, 158,000 from solar hot water systems and 102,000 from wind. Wind was always going to emerge as one of the technologies to benefit most from the MRET and, according to a recent report released by the Australian EcoGeneration Association (AEA), it will be the technology to benefit most from any future increase in the target.

The AEA report predicts that if the target remains at 9500 GWh by 2010, an estimated 2950 GWh will come from wind, 2000 GWh from bagasse and 1100 GWh from hydro. Green electricity to meet green power obligations is included in these figures and is predicted to reach 1500 GWh in the same period. AEA reports that if the target increased to a true 5%, or 21,400 GWh by 2010, wind will account for 10,400 GWh, outstripping all other renewable technologies due to its high relative efficiency.

Low target and penalty

The frustration of a low target is almost too much for many in the wind industry to bear, and most talk surrounding the market focuses on the inadequacies of the target and of the penalty. That 10% of the 9500 GWh target is likely to come from existing hydro-electric dams, is like rubbing salt in their wounds. According to Jeff Harding of Pacific Hydro, a legislation that delivers a 0.5% increase in market share is "barely worth the effort." He says the 1997 baseline which allows RECs from existing hydro-electric dams has "bastardised" the legislation.

Nonetheless wind capacity is steadily increasing due to the legislation, though this is doing little to mollify the critics. Significant results are sought and Australia's wind power installations are still meagre by world standards. In January 2001, installed wind capacity was just 11 MW, though by the end of the year it had grown to 73 MW and a number of 100-200 MW projects are approaching the development stage.

There is a lot riding on the April 2003 review of the legislation and lobbying has already started. Lobbyists will pressure the government to increase the MRET (to at least 5%), raise the penalty for non-compliance and link the penalty to the consumer price index. Some are also considering taking action to see the nominal 1997 baseline of "new" generation rewritten to preclude power from existing hydro-electric dams. "The legislation is in place, we don't have to start from scratch," says Millais. "What is now needed is political education."

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