Energetics' Energy and Carbon Summer Reading Pack 2013

Energy and Carbon Summer Reading Pack 2013

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ENERGY AND CARBON SUMMER READING PACK 2013

Table of contents

Electricity: falling demand in the NEM ..........................3

Changes are ahead for Australia’s east coast gas markets ......................................................................5

Financing solutions to lower your energy costs and climate change risks ...............................................7

Unearth hidden savings by building energy and carbon skills, systems and processes. Video interview ................................................................9

EEO – insights from Energetics’ clients ........................ 10

Could 2014 be the year of the battery? ...................... 12

Comparing submissions on the Emissions Reduction Fund – what are the industry experts saying? .............................................................. 14

Designing the Emissions Reduction Fund ...................20

Contact Details ..............................................................24

“Since 2009-10, electricity consumption in Australia’s largest interconnected electricity market, the National Electricity Market (NEM), has fallen by 4.5 per cent.”1

In November the NEM market operator, the Australian Energy Market Operator or AEMO, updated its 2013 Statement of Opportunities. The Statement of Opportunities is the long-term assessment of energy demand. Energy forecasts provide a key input into electricity infrastructure planning. The November update confirms the continuing downward trend in electricity demand. “In the first quarter of 2013-14 (July 2013 to September 2013), AEMO observed a variance of -3.5% in NEM-wide actual electricity consumption compared to the forecast.2”

The falls are not only limited to the NEM. Australia’s other large electricity network, the South West Interconnected System (SWIS) which supplies south-west WA has recorded flat growth, despite the resources boom.3

What is driving these reductions?A number of reasons have combined to impact electricity demand growth and outlook:

•AsustainedgrowthindomesticrooftopPVinstallationsthroughdeliberate policy initiatives, such as the various state and federal rebates and reduced system installation prices.

•Lowerthanexpectedgrowthinmostindustrialsectors,stemmingfrom a downturn in manufacturing and a higher Australian dollar.

•Impactofenergyefficiencymeasures,suchasimprovementsinenergy efficient appliances and changes in building standards and regulations.

•Reductionsinelectricityusageasconsumersreacttohighelectricity costs.

How does a reduction in energy demand flow through to wholesale electricity prices?Orthodoxeconomictheorydictatesthatfallingelectricitydemand should lead to falling wholesale electricity prices.

ThereisnoquestionthattherecurrentlyexistsanoversupplyofgenerationcapacityintheNEM.AGLhaverecentlyfoundthatthis‘under-demand’hasproducedabout9000MWinexcessgeneration capacity in the NEM, equating to around 16% of the market.4

“ThesechangesresultinallregionsexceptQueenslandhavingadequate generation capacity over the 10-year outlook period.5 QueenslandenergygrowthwillbedrivenbyLPGplantinvestment.

Although wholesale electricity prices have fallen in recent times due to the fall in demand and the subsequent oversupply, the impact on total energy costs may not be so predictable.

Recentcommentaryhassoughttounderstandwhyelectricityprices have been rising despite falling demand over a number of years.6

EnergypriceincreaseshavesubstantiallyexceededCPI.Theintroductionofacarbonpriceexplainssomeofthisincrease,howevernetworkchargeshaveexertedthegreatestupwardpressure on energy costs. This may continue. Therefore we need to understand the link between energy and network costs.

For some time, it has been observed that the billions of dollars spent on network assets will have to be recovered7, despite the potential reduced need for this network capacity as energy usage falls

Although the energy and network components are priced independentlyofeachother,theyareinextricablylinked.Lastweek’s Grattan report8 asserts that network cost increases can offset the reduction in wholesale electricity costs, for some sectors. A large portion of network costs are recovered by the network operators based on electricity volume, so that if volume falls, prices will rise to offset the loss in usage.


Electricity: falling demand in the NEM

Electricity consumption across the Australian electricity markets is in decline. This paper discusses the causes of falling demand evidenced over 2013.

1 Wood,T.,Carter,L.,andHarrison,C.,2013,Shock to the system: dealing with falling electricity demand, Grattan Institute, page 3.

2 2013NATIONALELECTRICITYFORECASTINGREPORTUPDATEFortheNationalElectricityMarket, page 2.

3 Wood,T.,Carter,L.,andHarrison,C.,2013,Shock to the system: dealing with falling electricity demand, Grattan Institute, page 4.

4 Wood,T.,Carter,L.,andHarrison,C.,2013,Shock to the system: dealing with falling electricity demand, Grattan Institute, page 12

5 AEMO,2013ELECTRICITYSTATEMENTOFOPPORTUNITIES,Executivesummary,iii.

6 Wood,T.,Carter,L.,andHarrison,C.,2013,Shock to the system: dealing with falling electricity demand, Grattan Institute

7 Jutsen,J:“Whyelectricitypricesarerising–thehorsehasbolted”,ReNeweconomy,24.8.2012.

8 Wood,T.,Carter,L.,andHarrison,C.,2013,Shock to the system: dealing with falling electricity demand, Grattan Institute, page 12

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This problem is compounded by an overspend on the networks, which means their regulated asset base is inflated. A network operator’srevenueisdeterminedtoalargeextentbythisregulated asset base. Most of the network spend in recent times has been a response to the need to meet rising peak electricity demand – i.e., making sure the network can supply electricity in times of very high consumer demand. While most large commercial and industrial customers have paid significant fees for this demand availability, through the peak demand components on their network tariffs, many users are not being charged for this capacityandinstancesofcrosssubsidymayexist.Anunderlyingdriver of this peak network investment has been the saturation of residential air conditioning.

These are complicated issues which will require considerable thought on the part of policy makers.

What is the outlook for 2014?On a final note, the other unknown which has the potential to apply downward pressure on wholesale electricity prices, is the expansionofPVinstallationintothecommercialmarket.TherolloutofPVhashadamarkedimpactonenergydemandfromthe grid – as highlighted in the AEMO forecasts, but to date this has only been limited to the residential market. The commercial and industrial market is yet to fully embrace this technology, which ifrepeatedonthesamescaleasresidentialPVtake-up,couldhave dramatic impacts on the energy supply market.


Electricity: falling demand in the NEM

Please contact one of our experts to discuss the approach your business should take.

David West Mark Bourne

PrincipalConsultant SeniorConsultant

(02) 9929 3911 (02) 9929 3911

[email protected] [email protected]

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Energetics can provide further advice on how these developments may impact your future electricity costs and steps you cantaketomaximisetheopportunitiespresented by these changing market conditions.

Gas market dynamics are evolvingHistoricallyAustralia’seastcoastgasmarkethasbeenisolatedfrominternationalmarkets.However,$50billioninvestmentcommittedtobuildingthreeLNGfacilitiesinGladstoneandassociated gas production and pipeline infrastructure (catching upwiththe$116billioninvestedinwestcoastLNG)haschangedallthat.ThefirstshipmentofLNGtooffshoremarketsisdueinlate2014. This represents a key shift in the dynamics of the east coast gas market. Eastern state domestic gas prices will no longer be determined in isolation, but will instead be linked to international prices. And this means a jump from the low prices that our economyhasgrowntoexpect.

Prices are going upTo date the gas market has not been transparent, with prices tending to be based on long-term contracts.

Many of Energetics’ clients are used to seeing gas prices in the rangeof$3-$4/GJ(commodityonlyatthewellhead,excludingcarbon). This compares to markets in our region that are paying around$15/GJ.Countriesthatimportgasexperienceadditionalcoststothosecountriesthatproducedomestically.Liquefying,shippingandthenre-gasifyingLNGaddsaround$5-$6perGJ.

This means that an export parity price of $9 - $10/GJ is what domestic users of gas may be forced to pay for contracts in the future.

Contracting approachesThe gas market is a seller’s market. There are fewer respondents to gas tenders leading to less room to negotiate favourable terms andconditions.Clientsshouldexpecttopaymoreandthatcontract terms will tend to be shorter as suppliers adjust to the changing nature of the market.

One solution is to take shorter term contracts that match retailers’ currentcontractswiththeirsuppliers,whichwillmostlyexpirein2014.Longertermcontractshavetheexpectationofexportparitypricing built in. While this may only delay the inevitable large price increases, it allows time for more local volumes of unconventional gas to be proved, especially coal seam gas in NSW and shale gas inVictoria.ThisissimilartowhathashappenedintheUS.

We are also seeing smaller gas producers, who are not aligned to theLNGexportprojectcompanies,lookingtosupplyconsumersdirectlythroughthewholesalemarketand/orestablishthemselvesas gas retailers. Watch for further developments and potential opportunities for your business.


Changes are ahead for Australia’s east coast gas markets

Addressing the escalating price of gas has become a priority for Australian business as prices in the eastern half of the country trend towards export parity net-back pricing. In this article we outline the key factors driving Australia’s evolving gas market and the steps business should follow to secure the best gas supply contract.

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David West Daisy Correa

PrincipalConsultant Consultant

(02) 9929 3911 (02) 9929 3911


The future of gas markets The changes coming to Australian gas markets should be considered against the backdrop of the growing global demand for gas. This demand is being met by a major structural change to the gas market - the development of technology allowing the economicextractionofso-called‘unconventionalgas’.Themostcommontypesofthisarecoalseamgasandshalegas.Provenand probable gas reserves in Australia have tripled between 2005 and 2012 – with the majority of this due to coal seam gas. Similar increasesinprovenreserveshavebeenseenglobally,withtheUSseeing a transformation of its industry due to the discovery and development of vast reserves of shale gas.

Givenenergypricesareapoliticallysensitivetopic,theextentofgovernment intervention will be keenly watched by market participants.Reservationpolicieswherebyaportionofgasismandated by law to be sold domestically have been advocated bysomeinindustry.Communityconcernsoverthedevelopmentof unconventional gas reserves will need to be addressed as will transparency in the market. This is beginning to be introduced but there is more to be done. Future carbon pricing policies will also play their part.

There are many variables – but one certainty in the short to medium term is that prices are increasing. Energetics energy marketsexpertscanprovideforecastingandcontractingadviceand services


Changes are ahead for Australia’s east coast gas markets

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The rapidly evolving nature of the gas market will provide an interesting ride overthenextdecade.AbigvariablewillbewhethertheUSwillliftrestrictionsonexportsprovidingdownwardpressureoninternational prices.

Today’s article considers how you can better position your business by implementing projects that reduce your energy costs and emissions using smart financing solutions. With previous sources of governmentfunding,suchastheCleanTechnologyInvestmentProgramandtheCleanEnergyFinanceCorporation,notcurrentlyavailable, now is a particularly compelling time to consider financing solutions. These financing solutions overcome cash flow, capital and technical risk barriers to your projects.

How to get projects ready for implementation and financingBefore seeking finance for your projects, you need develop business cases that define their scope and assess project risks.

The main elements you should consider when developing your business cases are shown in our framework.

These business case elements include:

•Technical–Definethetechnicalrequirementsfortheproject.Assess whether the project is technical suitable for a site, includingconsiderationofanypossibleinterferencewithexistingequipmentandoperations.Assessthecomplexityoftheproposed project, maturity of suppliers for project implementation, and the level of risk of the project not achieving the desired energy and carbon savings once implemented.

•Environment – Assess the likely impact of projects on the environment and the community.

•Financial–Conductfinancialanalysis,includingwholeoflifemodelling, to determine the financial needs of the project and expectedreturns.Runsensitivityanalysestoquantifyprojectfinancialrisks.Havingafinancialmodelofaprojectisrequiredtodetermine suitable ownership and financing options.

•Commercial–Undertakeacommercialassessmentoftheviability of the projects and identify relevant state or federal legal orregulatoryconstraints.Considerpossibleguarantees,insurances and mechanisms that could assist in overcoming potential implementation hurdles.

With a completed business case, you are ready to determine which financing solutions suit your project.


Financing solutions to lower your energy costs and climate change risks

Commercial• Policy framework• Legal / regulatory issues• Guarantees and insurances• Life of asset / exit issues

Technical• Site requirements• Security considerations• Equipment suppliers• Implementation

Financial• Viable finance approaches (e.g. Capital lease, PPA, EPC, etc.)

• Sources of funding• Budgets• Performance indicator

Environmental• Community• Safety• Land use incl heritage

Op

po

rtun

ity id

entification and business case developm

ent fram

ewo

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Risk assessment and management framework

With the carbon price yet to be repealed and the details of the Emissions Reduction Fund still unclear, climate policy uncertainty remains high. However, the fundamental drivers for implementing projects to reduce your energy use and greenhouse gas emissions have not changed. Energy prices are high and forecast to continue rising, businesses need to reduce their costs to stay competitive, and climate change risks continue to threaten business resiliency.

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http://www.energetics.com.au/insights/latest-news/climate-change-matters/changes-for-Australias-east-coast-gas-market

http://www.energetics.com.au/insights/latest-news/climate-change-matters/managing-the-risks-created-by-any-delay-in-action

http://www.energetics.com.au/insights/latest-news/climate-change-matters/managing-the-risks-created-by-any-delay-in-action

The best financing solution for your projectThe Australian market for energy efficiency equipment financing has become more mature in recent years. There are now a number of financing options offered by the big four banks, some energy services companies and other financiers.

Youshouldconsiderwhichoptionbestfitsthescopeoftheproject, as defined in your business case, your risk preferences and your financial constraints.

The options available include:

•Capital and operating leases: rather than buying energy efficiency equipment yourself, you can lease this equipment for terms up to fifteen years. With a lease, this equipment can either be off balance sheet (operating lease) or on balance sheet (capital lease).

•Targeted bank loans: a number of the banks now offer loan products specifically for energy efficiency equipment. Some of these banks have pools of money targeted at this market, and in some cases offer better terms for such loans compared to regular loans.

•Energy Performance Contracts: project is implemented by an energy services company which guarantees the savings that will be achieved by the project over the life of the contract. This can include financing, or be combined with another financing option.

•On-bill financing: financing is provided by or through your energy retailer. The repayments are incorporated as a separate line on your energy bills.

•Environment Upgrade Agreements: these are similar to on-bill financing, however repayments are incorporated as a line on the building owner(s) council rates bills.

•Range of Energy Service / Supply Agreements:externalfinancewitharangeofoperatingmodels;includingPowerPurchaseAgreements and Build, Own, Operate and Transfer agreements.

•Self-financing: financing directly from your cash flows.

Youshouldconsiderthefollowingquestionswhenselectingtheright option for your project:

•Whatareyourcapitalconstraints?Doestheprojectneedtobeoffbalancesheet?

•Whatrepaymentmechanismbestmatchesyourcashflows?

•Doyouneedtoowntheasset,eithernoworattheendofthefinancingagreement?

•Whatistheriskthattheexpectedenergysavingswon’tbeachieved?Whoisbesttomanagethisrisk–youoranenergyservicescompany?

•Doyouneedtocontractforcommissioningandmaintenanceoftheequipment?Ifyoualreadyhaveamaintenanceagreement in place, how will contracts for the new equipment tieinwiththisexistingagreement?


Financing solutions to lower your energy costs and climate change risks


Gilles Walgenwitz Susie Kaye

PrincipalConsultant Consultant

(02) 9929 3911 (02) 9929 3911


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There are financing solutions that will suit your specific projects and requirements. Reviewyourprojectstodaytobettermanage your energy costs and climate change risks.

Over the past five years, Australian business has had to adjust t o the reality that energy is no longer cheap. On top of that, governments, investors and consumers have required better management of resources such as energy, waste and water and reductions in greenhouse emissions.

However,whatmanybusinessesmaynotrealiseisthatsignificantsavings in energy use remain. Below are some recent figures that outline the savings potential.

– Mining, manufacturing and transport estimated that a further 11.4% of their total energy spend could be saved1.

– Potentialsavingsperannumacrossthissectorwereintheorderof$2.1billion2.

– Companiesreportedthatthreepracticesincombinationincrease energy efficiency outcomes by 218%. Those practices are:

• Regularanalysisofenergydata

• Energymanagementincludedinpoliciesandoperationalguides

• Seniormanagementoversightofenergy3.

Nowisthetimetore-examineyourenergymanagementcapabilities as national energy efficiency skillsets are formally recognised through TAFE and grant funding can be accessed to support skills, processes and systems development in energy, waste, water and greenhouse emissions management. Grant funding is available through bodies such as the National Workforce Developmentfund,variousindustrysectorinnovationandR&Dfunds, as well as subsidised energy assessments available via NSW’s OfficeofEnvironmentandHeritageandSustainabilityVictoria

Watch our video to learn more about building capacity using collaborative forumsPhilhasworkedwithbusinessesasdiverseasWindsorFarmFoods,AussieFruitandVeg,BradkenFoundries,vineyards,fisheries,governmentandXstrataCoalwiththeaimofembeddingawholeofbusinessmanagementapproach.WetalktoPhilaboutthebenefits he’s seen companies derive from bringing together the leadership team in a collaborative (multi disciplinary) forum.

Video chapters00:07 – Objective of a leadership forum (workshop)

00:55 – What are the topics covered in a leadership forum and howdoesittypicallyrun?

3:28 –Whatarethebenefits?

6:19 –Havetherebeensomesurprisingresults?

8:50 – Why should companies focus on energy and resource managementnow?

13:15 – Why should companies invest time and money in building skills, systems and processes in the area of energy management?


Unearth hidden savings by building energy and carbon skills, systems and processes. Video interview.

We recently interviewed Phil Shorten, a Principal Consultant with Energetics who leads our capacity building services. Phil conducts workshops with leadership teams to develop solutions to the challenges of rising energy costs, reducing greenhouse emissions and sustainable resource management.

Contact Phil Shorten for more information

Phil Shorten

PrincipalConsultant

(02) 9929 3911

[email protected]

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1 ClimateWorksAustralia:“IndustrialEnergyEfficiencyDataAnalysis”, http://www.climateworksaustralia.org/project/current/industrial-energy-efficiency-data-analysis, May 2013.

2 Ibid

3 ClimateWorksAustralia:“TrackingProgressTowardsaLowCarbonEconomy”, http://www.climateworksaustralia.org/project/current/tracking-progress-towards-low-carbon-economy, July 2013.

http://www.energetics.com.au/insights/latest-news/climate-change-matters/building-energy-and-carbon-skills-systems-process

This paper summarises some of the views held, and approaches taken, by Energetics clients and contacts located in a large number of participating EEO corporations across all industry sectors. The paper will address some of the administrative aspects oftheprogram(includingDepartmentofIndustry[DI]interactionswithparticipants,verification,AssessmentPlansubmission/reviewetc), recent changes in the EEO program, the approach that Energetics’ clients are taking into the second cycle of EEO and some of the practical lessons learned by clients in the first cycle that inform their approach.

Energeticsrecognisesthatdifferentsectorshaveexperiencedsignificantly different economic conditions over the life of the EEO program, in particular in the past few years. As such, it is not unreasonabletoexpectthattheopinionheldofprogramssuchasthe EEO program may differ across sectors as a result. Furthermore, asaproductofexposuretoenergycostorhistoricalfactors,different industry sectors (or even individual participants) demonstrate greater or lesser resonance with the objectives of the program, with subsequent impacts upon the nature of their response. Where it makes sense, these industry-specific views are differentiated in this paper.

Administration of the EEO programOurclientshavenotedaclearchangeinthewaythattheDIEEOprogram team have approached EEO. This change most likely started in the latter years of the first cycle of EEO, and carried through more markedly to the first few years of the second cycle of EEO. A more collaborative approach has been noted, with the EEO team open to understanding current business systems and their ability to fulfil aspects of the Assessment Framework. Some clients have appreciated this amenability, and have benefitted fromaflexibleandhelpfulapproachfromDI.Othershaveclearlyfound the approach to be overbearing, most evidently during reviewsofsecond-cycleAssessmentPlansin2012.TherewasasignificantamountoffeedbackprovidedbyDIaboutthecontentsofdraftAssessmentPlans.Thefeedbackwasregardedas meaningless or inconsequential, or requested information that was a requirement of assessments rather than the actual AssessmentPlan(e.g.toomuchenergy-useanalysisdetailwassought).

SomeofourclientswanttheDIEEOprogramteamtoadministertheAct/Regulations,beclearaboutwhatisrequiredandwhatisnot, and not get into “grey” areas around what might suffice under the Assessment Framework. Others are more comfortable with the collaborative approach and progress based on a negotiatedagreementwithDI.

The verification program for participants of the EEO program has sparked interest for Energetics’ clients. Significant effort has been spent compiling data and information to demonstrate compliance with the EEO program for those participants subject to verification. This significant effort suggests two things:

1. Audit trial information is not assembled particularly well during theassessmentperiods.Mostofthedocumentationexists,butnot in a form that immediately lends itself to verification.

2.ParticipantstakeEEOverificationveryseriously,mostnotablydrivenbythefactthattheCEO(orequivalent)isdirectlysentthe outcomes of the verification audit.

Recent updates to the RegulationsRecentupdatestotheRegulationshavebeenconsideredbyEnergetics’ clients.

Optionsforamoreflexibleapproachtopublicreportinghavebeen embraced by several clients. Other approaches relating to greaterflexibilityintheAssessmentFrameworkhavebeenlessenthusiastically embraced, primarily because of the need to submit an amendment to an approved Assessment Plan in order to take advantage of specific options. In many cases, Energetics’ clientsandcontactsdonotwanttorevisitAssessmentPlansfortwo reasons. Firstly, because of the perceived effort required (as per the efforts in 2012 to achieve an approval status on second-cycleAssessmentPlans)and/orsecondly,becausesomeparticipant representatives have insufficient authority under the currentAssessmentPlantoimplementEEO,andfeara“wateringdown” of requirements will further diminish their influence.

TheextensionoftheRegulationstocover New Developments is relativelynew.However,severalthingsareclearamongourclientsand contacts:

•MostnewparticipantsbroughtinbecauseofthisextensionhavehadnoexposuretoEEOpreviously.

•ThereisastrongdesiretopushspecifictasksandaccountabilitiestoconstructionpartnerssuchasEngineering,ProcurementandConstructionManagement(EPCM)contractors.

•Clientsarehopingtolimittheworkrequiredbysensiblyrevisingonly significant impacts to energy efficiency during concept and detailed design, and construction. This is particularly the case where interaction may be required between contractors and owners for decision-making.


Insights from EEO Second Cycle

The second five-year cycle of the EEO program is leading participating corporations to refine and improve their approach, and to benefit from first-cycle assessments.

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Approach to second cycle assessmentThere is a cohort of participants that have effectively “dusted off” first-cycle data analysis and project lists and are providing updates (via public and government reports) for these projects. In doing so, they avoid significant assessment activity in the second cycle. On the other hand, Energetics has observed many participants learningfromtheexperienceofthefirstcycleandemploying strategies to improve performance.

In many cases we see participants regarding EEO as a stand-alone program. As a result, the effectiveness of the program suffers because it is not able to absorb broader business opportunities.Discussionsaroundwhetheranopportunityis“anEEO project” are frustrating, as most improvement projects can be included in EEO, and the program used as a conduit for business improvements.Despitesomesignificantexamplestothecontrary,Energetics is yet to see EEO integrated into business improvement programstotheextentthatmighthavefirstbeenanticipated.

We note that, among our clients, the language of energy efficiency is being replaced by the language of energy productivity,namelyshiftingenergyuseKPIsfromGJ/T(forexample)to$/GJ.Thisisallowingconversationsacrossmultiplemanagement levels in organisations, and we anticipate that this will elevate the discussion of energy improvement beyond narrow technical improvements to broader benefits.

Much of the first cycle of EEO was characterised by positive business conditions and a growing economy featuring increasing commodity prices. These conditions impacted on the way that resource sector corporations delivered EEO in the first cycle. Energy efficiency projects were competing on a level playing field with capital that could be deployed to deliver volume. This competition for funds meant that while there were genuine opportunities to install new efficient equipment and implement practiceswhilevolumewasbeingincreased.Retrofittingopportunities were difficult as the improvement projects were competing with the value of new production.

In the second cycle of EEO, changes in economic outlook continue to influence participants’ approach. As the focus on growth in the resources sector is replaced by a focus on improving theefficiencyofexistingoperations,someclientsreportedashiftto more retrofit changes, which alters the project economics (e.g. production halts must be included as a cost).

Overall, it may be said that participants have reined in the ambition of their EEO program, shifting focus to more pragmatic project delivery. Many participants reported during the first cycle that the list of identified opportunities was overwhelming, and that more opportunities did not mean more implemented projects. Now, rather than generating a list of +50 opportunities and trying to advance them all without success, participants are seeking to identify and deliver quick wins with low upfront cost. As an example,onecorporationknowntoEnergeticshasfourzero-to-low capital opportunities that they are pursuing. This can be compared to the outcomes for this participant in the first cycle of EEO, where more than 30 opportunities were being pursued at the equivalent stage.

Apart from the influence of the business cycle described above, thischangeinapproachreflectstheexperienceofthosetaskedwith delivering EEO. It is important for the reputation of the program that projects are seen to be delivered and savings realised. Experiencedoperatorshaverealisedthis.

Duringthefirstcycle,EEOandNGERdrovebusinessestoset up systems and resources to manage energy more strategically,

which in turn drove them to establish corporate strategies and targets. These corporate strategies and targets are now significant drivers. Identified opportunities have been shown to be more successful where they also address the broader corporate energy and emissions goals.

The following sections address specific aspects of the Assessment Framework.

LeadershipThe value of conspicuous leadership in energy efficiency in participating corporations has been obvious and will be maintained in the second cycle.

Drawingparallelswiththemethodsusedtocommunicatesafetymessages through businesses, leadership is a low-cost, high-return step that assists in the development of a culture that fosters energy efficiency.CommunicatingtheoutcomesoftheEEOprocessreinforces the value and relevance of the program and engages staff in the process.

SuccessfulexecutionofKeyElement1.1supportsexecutionof1.2.When leaders can see the value that the program brings to the company, they are more likely to make staff and resources available when assessments and project delivery commence.

With this in mind, many senior managers have made energy management a priority in the second cycle. The leadership has extendedfromcompanyheadstoseniorandline-itemmanagers,looking to energise their teams and realise cost savings.



CompliantEEO

Assessment

5.Decision-making

6.Communicate

Outcomes

3.Data

Analysis

2.People

1.Leadership

4.Opportunities

If you’re not looking at cost reduction, you’re in the wrong business.

EEO participant

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PeopleIn general, participants are more discerning when deciding who should take specific roles with in the delivery team for EEO. The list of contributors invited to participate in opportunity identification workshops is informed by lessons learned in the first cycle.

In the second cycle, opportunity identification workshops are primarily attended by operations and maintenance personnel, and the role of environmental engineers is limited to that of a coordinator. This is driven by the desire to deliver practical projects more closely aligned to core business drivers (e.g. production, qualityetc).Participantshaverealisedthatthoseworkingmostclosely with process equipment are best able to judge the feasibility and value of an opportunity as the opportunities are raised during the workshop.

Linkedtothedeliveryfocus,multi-site opportunities are now identified in site workshops, but delivered at the corporate level, to matchthecorporatedecisionmakingprocess.Forexample,anopportunity involving the tuning of settings used on a comminution circuit was raised in a recent site workshop. Since this opportunity had the potential to apply to multiple sites, corporate head office was able to take a coordinating role in both the evaluation and delivery of the project across multiple sites.

Information, data and analysisDataqualityandaccessremains a significant issue in many corporations.However,EnergeticshasnotedgreaterparticipantconfidenceinregardtotheKeyRequirement.

The first cycle identified shortcomings in the coverage and accuracy of data, but formulating a business case for new sub-metering remains difficult. The potential opportunity must be large to provide enough savings to cover the sub-metering and possible subsequent energy efficiency project. Metering projects have not been widely implemented as a result.

Beyond this problem, the data that is available is frequently of poor quality and difficult to use. Many remote sites do not have a comprehensiveSCADAsystemsandrelyondatahistoriansattached to the meters and sub-meters to collect data. As these can be interrupted, damaged or misused, and are not well monitored, the data is frequently incomplete or corrupted. As with the sub-metering business cases mentioned above, the costs of solving these problems far outweigh the benefits.

The first cycle drove more metering projects across some sectors, butinmanycasesthesewerenotinformedbyexperienceandsothe planning of the data that should be collected was absent. This has meant that the data being collected now may not be fit for purpose. Some meters are measuring the wrong parameter, but more frequently they are measuring at the wrong resolution, meaning the amount of data is overwhelming and unworkable, or inadequate. Ideally businesses would have identified data needs during the first cycle, then allocated budget and implemented appropriate sub-metering for the second cycle.



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Commercialclientsinparticularhavebenefited from the growth in energy analysis capabilities and are taking lessons into the second cycle. There has been increasing sophistication in the analysis of representative sites, lowering the cost of assessment while still delivering bankable projects. There has also been improved internal communication regarding future developments and site closures, ensuring less effort is wasted.

Opportunity identification and analysisThe process of opportunity identification has matured from the first to the second cycle. Workshops are more targeted, with fewer disinterested attendees. The style of projects being pursued is characterised by two schools of thought, but with broadly the same outcome. Because of the intense competition for capital, participants are pursuing the highest value opportunities. For some this means the low-to-zero capital projects (including behavioural change and operational improvements), while others are using the opportunity to design large capital projects that deliver more significant savings.

An increased focus on productivity is likely to characterise the approach among a significant number of Energetics’ clients in the secondcycleofEEO.Forexample,monitoringandimprovingblowdowneventsintheoil/gassector,orwasteinmanufacturingprocesses, directly impacts upon the specific energy use indicator, reflecting improved energy efficiency or final product delivery. CouchingEEOasawhole of business improvement opportunity denominated against energy consumption has gained traction, and elevates the discussion from environment and engineering teams to financial controllers and senior management.

Energetics has noted an increasing appetite for improvements to be measured against business as usual. This approach lends itself to recognising energy efficiency improvements while actual energy use increases (i.e. where an increase in energy use is offset by a proportionately greater increase in production).

Decision makingParalleldecisionmakingisoutoffavourinthesecondcycleofEEO, with more companies seeking to use existing decision-making processes to drive energy efficiency projects where they exist.

Comparisonofthemeritsofindividualprojectsacrossoperations,borders and activities has helped businesses make wiser investments. Energetics has delivered many carbon and energy abatement cost curves on the back of EEO assessments, providing decision making support by comparing opportunities in disparate locations and activities. Often, though certainly not always, these toolsareusedtosetinternal(andsometimesexternal)targets,built from the ground up of real opportunities.

Communicate outcomesFew corporations have had the opportunity to go to the board or communicateoutcomesinthesecondcycle.However,manyhave identified that this was done poorly in the first cycle and are looking to improve for the second cycle.

AsnotedintheLeadershipsection,manycorporationsviewcommunicating of outcomes as a valuable opportunity to demonstrate leadership and are investigating ways of incorporating this into their normal reporting and communication channels. Ideas being discussed at the moment include using the CEO’sblogmorefrequentlyorusingtheexistingsafetycommunication channels to also communicate efficiency messages.



For more information contact our EEO experts

Brian Innes Graham Winkleman

GeneralManager–BusinessDevelopment PrincipalConsultant

(08) 9429 6400 (03) 9691 5500


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In a paper presented to the 2nd Summer Study into Energy EfficiencyandDecentralisedEnergyinearlyin2013,Energeticsexploredanumberofquestionsrelatedtoenergystorage. These included whether the time is right to consider energy storage, whether it is cost effective and the implications for other network users.

Thesethemeswereexploredmanymoretimesin2013,withanemerging picture that energy (primarily electricity) storage is close butnotquitethere.ButtheimpactofsolarPVandotherformsofdistributed generation on business models is already being felt by network operators and generators. Batteries will only increase that impact.

The economic status quo is well presented in the following graph, whichwasincludedinatalkgivenbyMarkusHoehnerCEOoftheInternational Battery and Energy Storage Alliance at the San Francisco InterSolar conference in July. The graph shows the current situation in Germany, where the installation of an appropriatelysizedbatterytosupportsolarPViscosteffectiveintheresidentialmarketi.e.thesolarPVsystemwithbatteryhasapositivenetpresentvalue(NPV).However,theNPVislowerthantheNPVofasolarPVonlysystemandsothestoragesystemisnotyet adding value. Interestingly, that situation would be different if the cost of the electricity rises or if the cost of the batteries fell from thecurrent€2250/kWhtoaround€900/kWh.

Action is being taken to try to drive down the cost. As with the situationwithsolarPV,Germanyisleadingtheway.


Could 2014 be the year of the battery?

Energy storage was a hot topic in 2013, and there were some exciting developments. As well as the establishment of targets for electricity storage in Germany and California, some innovative funding options were introduced into the market. Serious studies that explored the economics of battery storage showed that batteries have not quite arrived except in particular circumstances such as remote renewable power generation.

However, the growing role of renewable energy especially solar PV should see batteries providing the most cost effective options for grid support and for the supply of peak capacity.

Australia, more than most, should benefit from these developments as we have a relatively high penetration of solar PV, and significant demand in remote and fringe area of the grid.

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Today

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NPV PV system and battery prices – Germany

NPV PV system depending on battery system prices

NPV PV System incl. Storage (GER) NPV only PV (GER) Source: EuPD Research 2013

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Setting targetsSince 1 May 2013 the German government has provided an energy storage subsidy, which provides a grant to lower the upfrontcostofinstallinganenergystoragesolutioninaPVsystemupto30kWinsize.Thesubsidyequatestoeuro€600/kW,oramaximumof30%oftheeligiblecosts,forabattery-basedenergystoragesysteminstalledinanewPVsystem.JustastheGermansupportforsolarPVhelpsdrivedownthecostofsolarPV,soshouldthe support for storage drive down the cost of batteries.

Germany is not the only jurisdiction promoting energy storage. On 17Octoberthisyear,theCaliforniaPublicUtilitiesCommission(CPUC)establishedanenergystoragetargetof1,325megawattsby 2020, with installations required no later than the end of 2024. The objectives of the proposal were the optimisation of the grid, the integration of renewable energy and the reduction of greenhouse gas emissions to 80 percent below 1990 levels by 2050, asperCalifornia’sgoals.TherecommendationbuiltonworkbytheElectricPowerResearchInstitute(EPRI)andbyDNVKEMAEnergy&Sustainability(DNVKEMA).Forinstance,theworkbytheEPRI1 showed that the majority of storage scenarios considered had a benefit to cost ratio above 1.0. These scenarios covered three different general use cases, including transmission-connected bulk energy storage, short-duration energy storage to provide ancillary services, and distribution-connected energy storage located at a utility substation.

LuxResearchanticipatesthattheresidentialmarketwillleadthewayinuptake,ridingontheshouldersofrooftopsolarPV’sphenomenal growth globally.2ButtheyalsoseeCalifornia’sproposal having an immediate and lasting impact on the grid storage market3,whichLuxResearchestimatedwillbeworth$10.4billionin2017risingfromjust$200millionlastyear.Citialsoexploredthe coming boom in energy storage.4 Germany provides a good exampleofthetrend.Thehighsolarpenetrationratesareinevitably steering Germany towards power storage to stabilise the grid and to mitigate the need for capacity payments to keep conventionalpowerplantsavailable,butoff-line.Citisawbatteriesas being more economically efficient for addressing peak demand than alternatives like capacity payments to generators.

The challenge is to realise this potential growth, and a couple of developments during the year may point the way.

Innovative fundingStemInc,basedinCaliforniaoffersanenergystoragesolutionthatreduces costs by shifting load from peak to off-peak periods. The key is an algorithm which integrates data from various sources and applies machine learning to provide highly precise energy usage forecasts and so optimise the use of the stored electricity. Their market is the industrial and commercial sector. In October this year, Stem is offering a leasing option for the storage system with zero upfront payment.5 The company has secured funding to allow up to 15 MW of energy storage to be deployed. Just as solar leasing and related models have broadened the solar market, presumably bringing in a large number of customers who wouldn’t

have gone solar using another route, this financing model is now being applied to the energy storage market.

PerhapsamoreinterestingdevelopmentisinNewZealand,whereVector6 is offering a trial run of leases to its customers to install rooftop solar and battery storage for around the same cost as relying entirely on the grid. The solution integrates highly efficient battery storage and smart controllers with traditional solar panels. ItenableshomeownerstomaximisetheireconomicreturnsbymaximisingtheuseofelectricityfromthesolarPVmodules.VectorseessolarPVandstorageasbeinggoodforthenetwork,andforits business7.RoughcalculationssuggestthatthelevelisedcostofthesolarPV/storagepackageisaroundNZ$0.21/kWh.ThecurrentaveragetariffisaroundNZ$0.25/kWh.

All drivers point to the growing importance of energy storage. The broad global trend of winding back feed-in-tariffs for small-scale solarpowermakeitlessdesirabletoexportpowergeneratedbysolar panels and consumers will look to batteries to allow them to getmaximumvaluefromthesolarpanels.Thecostofbatteriesshould continue to fall, encouraged by the setting of targets in Germany,Californiaandelsewhere.Finally,theexpandingpenetrationofsolarPVintothenetworkswilldrivenetworkoperators to look for storage based solutions to better manage their networks.

Many of these factors are in play in Australia.

Storage in Australia?InthefirstweekofDecember2013solarpowerinstallationsinAustralia reached 3GW in total. This follows the passing of the one-million solar power systems milestone in April. One in seven AustraliandwellingsnowhasasolarPVsystem.InSouthAustralia,the figure is one in four. The state with the largest volume of solar PVisQueenslandwithalmost1GWofinstalledcapacity.According to SunWiz8, businesses are purchasing solar power withapproximately5%ofrecentlyinstalledsystemsexceeding 8kW in size.



1 “Cost-EffectivenessofEnergyStorageinCalifornia”,EPRI,June2013

2 “FindingthePerfectPartnerintheGlobalGridStorageMarket”,LuxResearch, March 2013

3 “Theenergystorageholygrail”,BradenReddallandNicholaGroom,ClimateSpectator,22 August 2013

4 “Batterystorage–thenextsolarboom?”,CitiResearch,April2013

5 http://www.stem.com/archives/7459

6 http://www.vector.co.nz/solar

7 “Cultureshock:Networkofferssolarstorageleasestocustomers”,GilesParkinson,RenewEconomy,14June2013

8 “SpecialAnnouncement:Australiareaches3GWofPV”,availablefromhttp://www.sunwiz.com.au/index.php/2012-06-26-00-47-40/269-3gw-of-australian-pv.html

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Analysis also performed by SunWiz showed that at midday on 29 September, solar power contributed around 9.3% to electricity demand in the National Electricity Market, and 28% of South Australia’sdemand.ThepenetrationofsolarPVinSouthAustraliaissimilartothelevelsseeninGermanywherePVpowercancovermore than 30% of demand on sunny days.9 These numbers are importantinthelightoftheresearchdonebyCiti4whichhighlighted the need for network operators to look for storage based solutions to better manage their networks when the penetration of solar is relatively high.

Likeothercountries,batteriesarenotyetcosteffectiveforbusinesses. Typical levelised costs for battery storage ranges starts fromaround$0.20/kWhafteraccountingfortheefficiencyofstorage and constraints on the depth of discharge. For instance thecapitalcostoftherecentlydevelopedGEDurathonBatteryisaround$1500/kWhforalargesystemwhichequatestoabout$0.30/kWhoftheanticipatedlifeofthebattery.Thisfigureishigherthan typical electricity prices and also higher than the differential between peak and off-peak power costs. So a battery will not provide a cost effective option for load shifting or for displacing purchased electricity.

However,thepricesforbatteriescoupledwithrenewableenergygenerators such as wind are comparable to the cost of power at remote off-grid sites such as mines that use diesel generators. Australia also has a relatively large number of electricity users on the fringe of the networks, especially in remote areas of Queensland,NSWandWesternAustralia.AstudycommissionedbytheCleanEnergyCouncil10 argued that fringe and remote electricity systems would seem to be ideal first candidates for energy storage deployment.

2014 will be an interesting year should current trends accelerate.



9 “RecentfactsaboutphotovoltaicsinGermany”,HarryWirth,FraunhoferISE,Sep12,201310“EnergyStorageinAustralia,CommercialOpportunities,BarriersandPolicyOptions”,CleanEnergyCouncil,November2012

For further information contact

Dr Gordon Weiss

PrincipalConsultant

(02) 9929 3911

[email protected]

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The modelling discussed in the report showedthatamaterialopportunityexists for storage to support fringe and remote electricity systems. The report also states that the total commercial market for storage in Australia could be approximately3,000MWby2030.

Different approaches taken by ERF submissions With such a diverse collection of stakeholders, a variety of submissionswastobeexpected.Someexaminedthespecific elementsoftheERFrelevanttothem,whileotherschosetoaddress more general issues. For instance, the submission by the PropertyCouncilpreparedbyACILAllenConsultingprovidedacomprehensive review of the many issues that the Government mustaddressinthedesignoftheERF.Inparticular,theirsubmissionprovided detailed recommendations on the operation of the reverse auction to ensure efficient operations and price discovery. However,thesubmissiondidnotmakerecommendationsaboutbaselines and penalties despite discussing the issues to be addressed.ClimateWorksandtheMineralsCouncilofAustralia(MCA)alsoframedtheirsubmissionsinmoregeneralterms.

ClimateWorksexploredthelikelysourcesofabatementthatcouldbe purchased by the Fund, and noted that “the major focus areas include capture of waste methane from coal mines, increased deep retrofitting of commercial buildings and industrial facilities, and carbon farming and forestry. These could represent over 140 MtCO2e of annual abatement in 2019-20 with the right mix of incentives.” They also highlighted the importance of other policy measurestocomplementtheGovernment’sDirectActionplantoeffectively reduce emissions in each sector of the economy. Energetics has highlighted this same issue in our own revision of the national greenhouse emissions forecast1, where we stressed the importanceofexistingmeasuresandespeciallytheRenewableEnergy Target in delivering abatement.

In this paper we consider the submissions made by the major stakeholdersasoutlinedinTable1.CertainlytheNationalGeneratorsForum,theBusinessCouncilofAustralia,theAustralianPetroleumProductionandExplorationAssociationandtheMineralsCouncilofAustraliarepresentorganisationsthatareresponsible for most of Australia’s greenhouse emissions.

We also reviewed the Clean Energy Finance Corporation’s (CEFC) submission.


Comparing submissions on the Emissions Reduction Fund – what are the industry experts saying?

More than 150 submissions were received by government in response to the terms of reference published for the design of the Emissions Reduction Fund. Common themes include:

- the challenges raised by the imposition of penalties where emissions exceed business-as-usual baselines

- the need to protect the international competitiveness of Australia’s industry

- the need for simplicity.

The key policy question yet to be addressed is the role of a market based mechanism to reduce the cost of compliance. Looking across submissions, we see suggestions that carbon trading is not only the most pragmatic response, but also the most cost effective. Questions are also raised about the role of complementary measures. For example, how does an ERF work with other energy policy measures such as the Renewable Energy Target?

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1 Weiss, G: “Big shifts in energy use over 2012 deliver dramatic falls in Australia’s greenhouse gas emissions”, Energetics, 29.7.2013.

Table 1: the submissions reviewed

Organisations representing major energy users Other industry associations Energy suppliers Advocacy groups

Australian Industry Group (Ai Group)

InstituteofCharteredAccountants

AGL TheClimateInstitute

Australian Industry Greenhouse Network (AIGN)

AustralianLandfillOwnersAssociation(ALOA)

PacificHydro CarbonMarketsInstitute(CMI)

BusinessCouncilofAustralia(BCA)

AustralianLocalGovernmentAssociation(ALGA)

Energy Supply Association of Australia (ESAA)

Sustainable Business Australia (SBA)

AustralianPetroleumProduction&ExplorationAssociation(APPEA)

National Generators Forum (NGF)

ClimateWorks

MineralsCouncilofAustralia(MCA)

EnergyUsersAssociationofAustralia(EUAA)

PropertyCouncil

Key issues to be resolved

Is the ERF meaningful without penalties?

Many of the submissions looked at the question of penalties for exceedingbaselines.Somestakeholdersstronglysupportedpenalties, and saw them as an essential part of the operation of theFund.Forinstance,TheClimateInstitutebelievesthatbaselinesshould be binding and penalties for non-compliance should apply.PacificHydroalsobelievedthattheERFmustincludepenalties.

Several other stakeholders gave qualified support for penalties but highlighted the challenges confronting the Government. Both the BCAandtheAIGNnotedchallengeswiththesettingofbusiness-as-usual baselines. The AIGN noted that “‘business-as-usual’ encompasses a diverse variety of commercial activity and can be assessed in various ways; establishing a business-as-usual baseline is perhaps more complex than it first appears. There are numerous options for baseline measurement. All potential options, including absolute emissions and emissions intensity, present different opportunities for industry sectors, and different administrative costs.”

Intheirsubmission,theMineralsCouncilstatedthattheuseofbusiness-as-usual(BAU)baselinesforthelevyingofpenaltiesmustnotseefirmsloseinternationalcompetitiveness.TheuseofNGERreporting provides a useful tool for Government, but should not be seen as the sole criterion for an economy-wide emissions managementregime.MCAseesarangeofmeasuresthatwillinfluence the business-as-usual baseline such as declining ore grades, deeper operational requirements and changing geologicalprofilesthatwillnotbecapturedbyNGER.

Many other stakeholders saw specific problems that must be addressed. For instance, the ESAA noted that using site level baselinesriskspenalisingearlymovers.APPEAraisedanumberofpoints related to setting appropriate baselines for new facilities withspecificreferencetoLNGproduction.Inthiscase,therearealimitednumberofLNGtrainsintheworldandsoevenestablishingindustrybestpracticewillbedifficult.APPEAalsosuggestedthatthe mechanism to apply to emissions above the threshold should be consistent with the Government’s stated objective of applying it only to emissions above business-as-usual, and not as a mechanism for raising revenue. This could mean implementing a processofwarnings,followedbyarequesttoexplainhowcompliance will be achieved and only if the response is unsatisfactory would penalties be applied.

TheEUAAquestionedtheuseofNGER.Theybelievedthatlargeindustrial energy users would prefer to have thresholds based on scope1emissionsandbesite/facilitybasedratherthanindustrybased.Concernsalsorelatetotheuseofemissionsintensityfactors. The relationships between various emissions intensity factors are not correlated and variations could occur from other factors-abaselineshouldaccountforthesevariations.TheCEFCalsosawchallengeswithadaptingNGERtoequitablyrecognisegrowth,changesinproductmixandexistingenergyefficiencyperformance (perhaps focussing on emissions intensity).

Sustainable Business Australia (SBA) commented that an emissions baseline should be established for each sector, typically on a CO2/unitofproductionbasis.Theparticipantswouldearncreditsifemissions were below their baseline and surrender credits if emissionsexceedthebaseline.SBAeffectivelyrecommendedtheuse of a trading scheme.

Protecting international competitiveness

Most submissions support Australia reducing global greenhouse gas emissions in line with global efforts and require the mechanisms to support Australia’s future economic growth and maintain the globalcompetivenessofAustralia’sindustries.Further,theERFmustprovide for reductions in greenhouse gas emissions at lowest cost.

Not surprisingly, stakeholders that represent Australian businesses see the protection of international competitiveness as a key considerationinthedesignoftheERF.Thisthemewasaddressedby the AIGN who believe that Australia’s climate policy approach shouldnotdisadvantageoperationsinAustraliabyexposingtrade-exposedindustriestocostsnotfacedbycompetitorsinother countries. Others who adopted this position included the AiGroupandtheMineralsCouncil.

A related question is the use of international offsets to address Australia’s obligations. Several stakeholders felt that international offsetscanbeusedtooffsetemissionswhenabusinessexceedsitsbaseline(AiGroup,AIGN,CMIandAPPEA).AiGroupaddedthequalifierthatinternationaloffsetscannotbeboughtbytheERF.TheNationalGeneratorsForumthoughtthattheERFshouldinclude as many abatement options as possible, including internationalpermitstomaximisetheopportunityforlowcostabatement.

BCAfeltthattheGreenPapershouldexaminetherolethatdomestic versus international abatement could have in reducing Australia’s emissions.

TheMineralsCouncil(MCA)notedthechallengesaheadindesigningtheERFandtheimportanceofdeliveringabatementinan economically efficient manner. They saw the need to position DirectAction“in the context of a comprehensive and integrated energy policy; that is, integrated with the development of the proposed Energy White Paper and the review of the Renewable Energy Target.”Importantly,theMCAsawarolefortheProductivity Commission in providing guidance on a design for DirectActionthatisatlowest cost and does not adversely impact the competitiveness of different sectors of the economy. This positionwassupportedbytheAiGroup,TheClimateInstituteandtheBusinessCouncilofAustralia(BCA).Itwillbeinterestingtoseehow the Government responds to this recommendation, given its criticismofthepreviousLaborGovernment’sfailuretorefertheNBNtotheProductivityCommission.



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A key message repeated across a number of submissions was that whatever is implemented, it must allow Australia to meet its international emissions reduction commitments at least cost. This wassoughtbytheAiGroup,APPEAandSBA,allofwhichsupported a trading scheme.

Simplicity in the operation of the scheme

MoststakeholdersrecommendedthattheERFbesimple.Forinstance,theInstituteofCharteredAccountantsbelievedthattheFund needs to strike the right balance between robustness and simplicity.APPEAnotedthattheCFIisnotagoodmodelfortheERFasitistoocumbersomeandtheGovernmentmuststreamlinetheprocess.TheMCAusedthecurrentNGERschemeasitsbenchmark and it felt that a more streamlined version of the existingNGERmeasurement,verificationandauditingarrangements should be a default method for pre-qualification for auctions or compliance requirements post-auction.

Making it all work

A closer look at types of abatement

Of those submissions that dived into the detail on how the mechanism could work, two areas received particular attention:

• Banding of emissions reduction. Banding would mean that separate pools of funds would be available for different sources of abatement. This was approached from both ends of thespectrum,whereforinstance,theCMIsuggestedthattheERFshouldincorporatebandingtosupportadiverseportfoliooflowcostabatementprojects,whereastheAustralianLocalGovernment Association advocated banding to ensure that long term projects such as landfill capture are competitive in the reverse auctions.

• Thechallengeofsupporting long term abatement and promotedcontractsforabatementthatextendwell beyond 2020.

For the purpose of gaining widespread coverage of emissions sources,theCEFCandothersthoughtbandingcouldbeusedtoaddress concerns about non-delivery of contracted abatement. By offering separate auctions for ‘guaranteed’ and ‘non-guaranteed’ abatement, provision is made for the more speculative projects to still participate in the auctions but in a way that does not distort the price of abatement offered for more certain abatement. So ‘guaranteed’ abatement would include

make-good provisions should abatement fall short, and because it reduces the Government’s risk, result in high auction prices.

Recommending a trading scheme

Many different stakeholders acknowledged the value of a trading schemeinreducingtheburdentobecarriedbytheERF.TheCEFCproposedaschemethatwouldincludetheERFforthefunding of voluntary actions to reduce emissions and a mandatory baselineandcreditschemederivedfromNGER.TheCarbonMarkets Institute remarked that a baseline-and-credit mechanism linkedtotheERFshouldprovideincentivesforcompaniestooperatebelowtheirbaselineandcostsforcompaniesexceedingtheir baseline. Any penalties could be in the form of purchasing ACCUs,acashcontributiontotheERForpurchasinginternationalpermits.

Others promoting a trading scheme included the Ai Group and AGL(attheleast,tradingwithincorporategroups)andtheESAA.

Many submissions advocated the use of recognised offsets to reduce the level of emissions reported by organisations. Offsets shouldincludeAustralianoffsetsgeneratedundertheCFIincludingtheuseofAustralianCarbonCreditUnits(ACCUs)purchasedonmarket.Forexample,thispositionwassupportedbytheAIGN,APPEAandtheESAA.

The ESAA suggested that a range of provisions could be used to meet targets, including trading of offsets generated when emission levels or the use of credible international emissions reduction units.

Australia has been debating its response to climate change for more than a decade, and fighting elections over climate change formuchofthattime.TheDirectActionplanisthelatestchapterin this story. The government insists it has a mandate to implement theDirectActionplan.WithintheprincipleslaidoutinDirectAction, there is potential for a scheme that addresses the concerns of business for equity and certainty. A baseline and credit scheme could provide robust mechanisms to meet the national abatement target and ensure that Australia maintains its global competitive advantage for future generations.

No single policy will, in isolation, enable Australia to meet its 2020 emissionsreductiontarget.TheCarbonMarketsInstitute(CMI)feltthattheERFneededavarietyofcomplementarymeasuressuchas a baseline-and-credit mechanism, private sector investment and the possible purchase of international units to meet the target.



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For further information on the Direct Action policy contact

Dr Gordon Weiss Dr Peter Holt

PrincipalConsultant PrincipalConsultant

(02) 9929 3911 (02) 9929 3911


ClimatechangepolicyinAustraliaissettochange.ThenewgovernmentintendstorepealtheCleanEnergyFuturepackage(withthecarbontaxatitscentre)andreplaceitwiththeDirectActionplan.ThedebatenowcentresonthedesignoftheDirectAction plan and how it will be legislated. The plan includes a number of elements including support for solar energy (one million solar roofs), energy employment hubs and renewable energy.ButthemajorelementistheEmissionsReductionFundwhich will purchase greenhouse gas abatement in pursuit of the national emissions reduction target of 5% compared to 2000 emissions levels.

Writtenin2010,DirectActionexistsessentiallyasasetofprinciples– some of which appear problematic and, at times, contradictory. It has been called the “do nothing” policy option, but this would benefit no one. There is no certainty in this option, as Australia’s international obligations will eventually require action to reduce emissions. We instead have an opportunity to design a scheme that is meaningful, equitable and positions Australia for future prosperity.

In this paper, Energetics will summarise the views of businesses on the Fund and outline a number of the challenges that the designersoftheEmissionsReductionFund(ERF)mustaddress.


Designing the Emissions Reduction Fund

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Direct Action: key principles:1. ERF.“Abatementwillbepurchasedviaamarket

mechanism to achieve the lowest price of carbon abatement. A reverse auction mechanism will be used to competitively procure lowest cost emission reductions.”

2. TheFundwillusetheexistingNGERActtomeasureoverall company carbon emissions.

3. Businesses that reduce their emissions will be able to offerthisCO2abatementforsaletothegovernment.

4. Small businesses and other entities not currently coveredbyNGER(can)‘opt-in’.

5. TheCleanEnergyRegulatorwill…approv(e)themethodologies,and…ensurethatthemethodologies support genuine and verifiable emissions reductions.

6. Long-termcontractsforabatementwillbeavailableto assist organisations to secure finance to undertake projects. The payment will depend on delivery.

7. Businesses that undertake activity with an emissions level above their ‘business as usual’ levels will incur a financial penalty. The value of penalties will be on a sliding scale at levels commensurate with the size of thebusinessandtheextenttowhichtheyexceedtheir ‘business as usual’ levels.

8. Provisionwillbemadetoensurepenaltieswillnotapplytonewentrantsorbusinessexpansionat‘bestpractice.’

The Federal Government has begun the process of fleshing out the Direct Action plan to define the mechanisms that will reduce Australia’s greenhouse gas emissions by 5% in line with our international obligations. Energetics has been proactive in speaking with our clients to get their views on Direct Action and in particular the Emissions Reduction Fund which is the centrepiece of the Plan.

This paper is a condensed version of a recent five-part series on the Emissions Reduction Fund, published in Climate Spectator. Energetics reports on the views of our clients and, informed by these, propose options for the ERF. These options are in keeping with the principles of Direct Action, will allow Australia to drive down its emissions and provide business with the certainty that it craves.

Both before and after the recent election, Energetics sought the views of the business community on the features of the Emissions ReductionFundthatwouldmakeitworkableandacceptable.Some of the findings included:

•Abiastowardsachievingequityratherthansimplicity

•Strongsupportfortheprotectionofinternationalcompetitiveness

•Anacceptanceoftheneedforpenaltiesforexceedingafairbaseline

•Acleardesireforamarketbasedmechanism

There are three major risks:

•“additionality”-therequirementthattheabatementprojectisbeyond business-as-usual. In the absence of support from the ERF,theprojectdoesnotmeetinvestmentbenchmarks.

•participation–voluntaryvscompulsorywhilstbeingequitable

•deliveryinasimpleandrobustway.

Trying to manage all three elements concurrently will be a balancing act.

What the market saysAustralia’s largest energy users and emitters have been tracking, managing and reporting their greenhouse emissions for years. Leadingcompanieshavedevelopednationalenergyefficiencyprograms, invested in greenhouse mitigation technologies and increasingly, renewable energy options. In this section, we report on the feedback received from a survey of some of Australia’s largestenergyusers,aswellasthepollresultsfromourDirectAction webinar series. More than 20 senior business representatives with responsibilities for energy and carbon management participated in a survey assessing their design preferences across keyaspectsofthegovernment’sEmissionsReductionFund.

The questions covered five major design issues:

•thetypeofbaselinetobeapplied

•penaltiesandhowtheywillbeimposed

•voluntaryversusmandatoryparticipationintheFund

•typesofemissionsreductionprojectsthatshouldbeallowedintothe Fund auction process

•thetimingoffundingawarded,andtheuseofrevenuesraisedthrough the operation of the Fund.

The results are summarised in Figure 1.

Figure1:DirectActionsurveyfeedback

The overwhelming feedback shows that business favours a scheme that is equitable even if it results in a degree of complexity.Australiancompaniesbelieveina‘fairgo’andlookfor certainty to conduct business. This informs their view on climate policy.



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Simple

Funds only availablefor entities exposed

to a cost impact

Penalties based onabsolute measures

Non-market mechanismsets penalties rate

Consistent andequitable

Funds from penaltiesavailable to allabatement activities

Penalties based onrelative measures

Market based mechanism sets penalties rate

Baselines, penalties and trading schemesOur polling shows that business is prepared to accept appropriate penalties for underperforming businesses, provided there is a level playing field. There is also a clear message that the level of penalties should be determined by a market-based mechanism, andthatfundsraisedfromthelevyingofpenaltiesforexceedingthe baseline should be recycled to support all forms of abatement activities.

DirectActionspeaksofpenaltiesforbusinessesthatproduceemissionsabovetheir‘businessasusual’levels.Yetthereislimitedinformationavailableonthetype,formandextentofpenalties.Surveyed businesses overwhelmingly (73%) indicated that penalties should be set at a level that matches the cost of efforts to reduce emissions.

Figure 2: Business feedback on the application of penalties

The role of the baseline (and how it is defined) is central to the operation of the Fund. The baseline:

•dictatestheextenttowhichafacilityispotentiallyliabletopaypenalties

•establishesthevolumeofabatement(alongwiththepoolofmoneyavailable)whichcanbesoldtotheERF.

DirectActionproposesthatbaselineswillbeadjustedtoreflectchanges in production. Across the briefings held, this principle was well received with strong support for site-specific baselines. Businesses want to see baselines derived from emissions intensity rather than absolute emissions levels, and emissions intensities used to determine the baselines should be site-specific where possible. If designed correctly, intensity based emissions baselines can create a level playing field.

However,concernwasexpressedastohowabaselinecanbesetforanewentrantwherethereisnoexistingsiteintensityfactor.DerivingthehistoricaveragebaselinefromNationalGreenhouseandEnergyReporting(NGER)dataiseasy.Businessesandgovernmenthavethisinformation.ButNGERdatadoesnotprovidetheappropriatedenominators(e.g.unitvolume,ROMtonnes, etc) for establishing site-specific emissions intensity nor does it take into account adjustments to reflect changing business activity. Also, defining and maintaining baselines at the site or facility level poses challenges, as businesses differ so much in age, type of activities, underlying foundations and the technologies used are often very different.

Finally, the use of site-level baselines can disadvantage businesses that have already taken action to reduce emissions. These companies are likely to have lower than average baselines, and fewer low cost abatement opportunities. Site-level baselines may not be equitable.

Following the establishment of robust and appropriate baselines, shifting straight into baseline and credit emissions trading makes sense and is relatively simple. Open to companies that create emissions reductions below their baseline, they could sell offsets intotheERF,providedthegovernmentisnottheonlybuyer.

Show me the moneyTheDirectActionplanclearlyspellsoutprinciplesforanEmissionsReductionFundwhichwouldpurchaseabatementfromthemarket via a reverse auction. Two principles are stated: the Fund should only purchase realised abatement, and abatement must be beyond business as usual. Worthy aims, but the devil is in the detail.

“Additionality”, the requirement that the emissions reduction measure be beyond business-as-usual, means that without support fromtheERF,theprojectwouldnotmeetthebusiness’investmentbenchmarks.However,whatdoesabusinessneedtodotoshowa measure is genuinely beyond business-as-usual, given every businessisfreetosetitsownfinancialhurdles?Also,demonstratingadditionality for every measure may create an administrative burden that discourages businesses and especially small businesses from participating.

Businesses are concerned about monitoring, verification and compliance. The proposed approach of using forward contracts to purchase abatement as it is realised provides some payment certainty, but it will carry transaction costs and an administrative burden.Continueduninterruptedemissionsreductionsovertimeare hard to quantify and the risk of non-delivery is real. Further, as many abatement measures have long payback periods (eg. renewable energy generation), business participation in the auction process may be limited by cash flow and the need for assistancewithcapitalexpenditure.



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There should be no penalties for exceedingthe baseline.

There should be penalties that are set at a level belowthe cost to achieveemissions reductions.

Penalties should be set ata level that matches thecost of action to reduceemissions.

15%

12%

73%

Which of the following statements best matches your position?

How to do Direct ActionEnergetics’ proposes a structure for the Fund that addresses the concerns raised by business and provides certainty, remains true totheprinciplesoutlinedintheDirectActionplan,andconsidersanumber of drivers.

The lack of bipartisan support for the mechanism to achieve the national emissions target is driving investment away from Australia. GivenLabor’ssupportforanemissionstradingscheme,Energeticsbelieves that a failure to implement a scheme that largely satisfies the policy objectives of the current Opposition merely introduces uncertainty sometime in the future. Further, the Government needs to implement a scheme that can deliver abatement reductions deeper than the current target in keeping with our international obligations.

WebelieveDirectActionmustconsistoftwocomponents.

The first is a reward and penalty system centred on site baselines developed from industry-wide activity-based emissions intensities. Sites or facilities that achieve emissions below their baseline can offer the abatement for sale to the Fund or to any other buyer suchascorporationswhoseemissionsexceedtheirbaseline.Sitesor facilities that achieve emissions above their baseline must either pay a penalty or purchase verified abatement from other participants. The level of the penalties will be set at the current price offered by the Fund plus a margin.

The second is a project based program generating abatement for sale to the Fund and to other participants. The abatement generated by the project would be determined by approved methodologies.AbatementcanbeofferedtosaletotheERFortoany approved participant in the reward and penalty system. Projectsthathaveapaybackoflessthantwoyearswillbeconsidered to be ‘business as usual’ and cannot sell abatement to the Fund. Beyond this, there will be no requirement to ensure financial additionality.

Several features will ensure that the scheme can evolve with Australia’s changing international obligations.

1. The baselines can be adjusted to reflect changing international obligations. The mechanism is to adjust the emissions intensity factors used to generate the site or facility baselines. These adjustments can be made on a sectoral basis.

2.Participantsliabletopayapenalty,ortheERFitselfshoulditbefacing a shortfall in abatement, can supplement domestic abatement by purchasing approved international offsets.

The scheme defines a market for abatement which offers an economically efficient means to address changing obligations. It is essentially a baseline and credit trading scheme with a secondary mechanism to generate abatement beyond what is needed to meet the baseline targets.

Australia has been debating its response to climate change for more than a decade, and fighting elections over climate change formuchofthattime.TheDirectActionplanisthelatestchapterin this story. The Government insists it has a mandate to implement theDirectActionplan.WithintheprincipleslaidoutinDirectAction, there is potential for a scheme that addresses the concerns of business for equity and certainty. A baseline and credit scheme could provide robust mechanisms to meet the national abatement target and ensure that Australia maintains its global competitive advantage for future generations.



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For further information contact

Dr Gordon Weiss Dr Peter Holt Emma Fagan

PrincipalConsultant PrincipalConsultant Consultant

(02) 9929 3911 (02) 9929 3911 (03) 9691 5500

[email protected] [email protected] [email protected]

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Documents

Energetics' Energy and Carbon Summer Reading Pack 2013