Amendments to Renewable Energy Target scheme passed

25 June 2010

Introduction

The Renewable Energy (Electricity) Amendment Act 2010 (the Amendment Act) was passed by the Federal Parliament on 24 June 2010, and will make a number of significant changes to the legislative framework of the Renewable Energy Target (RET) which, for the most part, take effect from 1 January 2011. For a summary of the RET scheme, and its current short comings, see our legal update.

The Amendment Act separates the RET scheme into two parts – the Large scale Renewable Energy Target (LRET) and the Small scale Renewable Energy Scheme (SRES). This involves the creation of separate small-scale and large-scale obligations for liable entities and two new categories of renewable energy certificates:

  1. large-scale generation certificates (LGCs), created in relation to the generation of electricity by accredited power stations; and
  2. small-scale technology certificates (STCs), created in relation to the installation of solar water heaters and small generation units.

The LRET

The obligations of liable entities under the LRET remain fundamentally unchanged to those imposed under the original RET.

Liable entities must purchase LGCs created by accredited power stations and surrender them annually.

The number of LGCs that must be purchased is determined in accordance with the Renewable Power Percentage (RPP), which will be adjusted in order to take into account the concurrent operation of the SRES. Specifically:

  • the target for large-scale renewable energy production will be 10,400 GWh of electricity from eligible renewable energy sources in 2011 (as opposed to the current projection of 14,825 GWh); and
  • the 2020 target is reduced from 45,850 GWh to 41,000 GWh of electricity from eligible renewable energy sources. Excess LGCs may be carried over and surrendered the following year.

Liable entities will incur a shortfall charge of $65 for each LGC by which they fall short of their obligations under the LRET.

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The SRES

The SRES imposes a number of new obligations on liable entities.

Most significantly, liable entities will be collectively obliged to purchase all the STCs produced under the SRES and demonstrate compliance to the Regulator by a lodging an annual energy acquisition statement.

The Amendment Act facilitates the operation of the SRES by:

  • allowing, under the Regulations, for a small-scale technology percentage (STP) to be set at the start of each year based on the estimated number of STCs expected to be created in that year. There is a ‘smoothing’ mechanism to adjust for any underestimation or overestimation in actual number of STCs created. This approach has been selected over an alternative model involving an uncapped liability of liable entities to ‘clear the pool’ of RECs created in each previous year, both of which were explored in the Federal Government discussion paper titled ‘Enhancing the Renewable Energy Target’ (Discussion Paper);
  • setting the shortfall charge for the SRES at $65 for each STC by which a liable entity falls short of its target as set in accordance with the STP;
  • establishing an optional ‘clearing house’ to transfer certificates from owners of small-scale installations to liable entities at a set price of $40 (excluding GST). The clearing house will operate on a first-in-first-out basis;
  • requiring liable entities to surrender STCs (in line with the STP) in quarterly increments throughout a compliance year to encourage the frequent transfer of STCs;
  • allowing for excess STCs to be surrendered in the following quarter;
  • strengthening the review process under the Act, with the Minister to be given independent advice on matters relating to STCs, including whether the $40 GST exclusive STC price remains appropriate over time; and
  • enabling the Regulator to adjust the Solar Credits multiplier in order to provide flexibility to deal with future changes to the cost of solar panels.
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Transitional provisions

In order to ensure a stable progression from the RET to the new LRET and SRES schemes, the Amendment Act establishes transitional arrangements for the treatment of existing banked RECs and RECs generated under forward contracts, as well as providing for a possible increase in the annual RET under the new schemes.

Banked RECs
  • All RECs created before the amendment commences will be taken to be LGCs. This means that liable entities will be allowed to use existing banked RECs (that is, RECs from both small and large scale technologies produced before the separation of the RET into the two new schemes) to meet LRET obligations, but not SRES obligations. This approach ensures that the changes to the RET will not impact on liquidity available in the market for RECs.
  • Concerns have been raised that disallowing the use of RECs produced under the SRES to meet liabilities under the LRET could reduce liquidity in the spot market, and cause liable entities to be unable to meet their obligations under the LRET if there are delays between the cut-off date for eligibility of RECs produced by small-scale technologies and large-scale projects coming on line to meet increased demand.
  • In its Discussion Paper, the Government explored two solutions to this issue:
    1. RECs from small-scale systems installed in 2010 could banked and used to meet only the 2010 compliance year LRET obligations; or
    2. LRET and SRES arrangements could be brought forward to commence from 1 July 2010.
  • Rather than adopt either of the above approaches, the Amendment Act prescribes that RECs produced from small-scale systems installed prior to the commencement of the Amendment Act will be taken to be LGCs until the end of the period within which, under the old Act and Regulations, certificates could be created in relation to the unit in question, and therefore will be able to be used to meet LRET obligations.
Forward contracts
  • In respect to forward contracts, where a written contract was entered into on or before 25 February 2010, and involves the sale of RECs that were to be created from small-scale technologies after the reform commencement, the Regulations may provide for some or all of the certificates, when they are transferred under the contract, to become, and to be taken to have been, LGCs. Further provisions concerning forward contracts will be dealt with in the Regulations.
Increases to 2012 and 2013 targets
  • In the event that the total value, in GWh, of valid RECs received in 2010 exceeds 34,500, the required GWh of renewable source electricity to be supplied under the RET in 2012 and 2013 will be increased, in order to provide greater investment certainty in light of the possibility of very high numbers of STCs being created in the next 6 months. The temporary increases will be offset by reducing targets by the same total amount of RECs between 2016 and 2019.
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Other Reforms

In addition to the introduction of the LRET and the SRES, the Amendment Act contains other changes to the legislative framework of the RET which:

  • preserve the effective rate of assistance for emissions intensive, trade exposed (EITE) activities;
  • amend the provisions relating to waste coal mine gas eligibility to allow for the commencement of eligibility of waste coal mine gas in the RET to be determined by regulations (not yet tabled);
  • insert new provisions to strengthen the compliance and enforcement regime, including establishing civil penalties; and
  • change the process for registration and creation of RECs in line with the division between the LRET and SRES.
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Summary

The Amendment Act’s provisions effectively decouple the incentive mechanisms for small and large scale renewable energy production. The changes allow the Federal Government to more effectively regulate and control the two different kinds of renewable energy generation. This means the Government may (through amendments to the Regulations) increase or decrease the incentives for small-scale renewable energy generation, such as solar hot water systems and solar panels, without affecting the incentives for large-scale, commercial renewable energy generators.

The result is likely to be a more stable market for RECs, providing the certainty required for the future development of large-scale renewable energy projects whilst addressing the Federal Government’s target of sourcing 20 per cent of Australia’s electricity supply from renewable sources by 2020.

Please contact a member of our Climate Change team if you would like further information on the amendments to the RET scheme.

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