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Allens Arthur Robinson

Focus: Energy – August 2006

Victoria to introduce a renewable energy target

In brief: The Victorian Government has introduced a Bill to Parliament to create a renewable energy target scheme to supplement the Federal Government's mandatory renewable energy target. Partner Paul Kenny(view CV) and Articled Clerk Alan Grinceri discuss the proposed VRET scheme.

Background

The State Government proposed the Victorian Renewable Energy Target (VRET) scheme in response to the Federal Government's decision not to extend the Mandatory Renewable Energy Target (MRET).

The aim of MRET was to source an additional 2 per cent of Australia's energy mix from renewable sources by 2010. MRET, introduced in 1997, was recently amended to implement selected recommendations of the Tambling Review1.

A key recommendation of the Tambling Review was that the annual target levels of renewable energy, which were set at 9500GWh per year between 2010 and 2020, should be increased for the MRET objective to be maintained over this period. The Federal Government rejected this recommendation, so the proportion of additional renewable energy required by the MRET scheme will effectively decline over time as energy use increases.

As the Federal Government scales back the MRET scheme, the Victorian Government has introduced the VRET which will require Victorian energy retailers to increase the percentage of renewable energy purchased from the current level of 4 per cent to 10 per cent by 2016. The VRET scheme will drive investment in renewable energy projects in Victoria and help reduce greenhouse gas emissions.

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How VRET operates

The legislation to implement the VRET scheme is drafted in similar terms to the MRET legislation with the clear intention that the two schemes operate together. VRET, like MRET, will allow generators of electricity from renewable sources to create renewable energy certificates, which can be freely traded. Acquirers of electricity are required to surrender certificates for a percentage of the electricity they acquire or pay a shortfall penalty.

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Creating certificates

The VRET scheme will commence 1 January 2007. VRET certificates can be created for electricity generated after that date. It is likely that the first certificates required to be surrendered will be in early 2009 for electricity acquired in 2008.

The owner or operator of a power station can create certificates if they are registered with the Essential Services Commission (ESC) and the power station is accredited. Only power stations in Victoria or power stations in states with an approved renewable energy regime can be accredited.

A certificate can be created for each MWh of electricity generated by an accredited power station utilising 'scheme capacity'.

Scheme capacity is that part of a power station's capacity that the ESC considers has not been used to generate electricity before 1 January 2007 on a commercial basis.

This effectively means certificates can only be created by new power stations that start commercial operation on or after 1 January 2007, or power stations that expand their capacity on or after this date.

The renewable energy sources for which certificates can be created are the same as for the MRET. Additional eligible renewable energy sources can be added by an Order in Council. The ESC can make rules defining what constitutes an eligible renewable energy source.

Once electricity is generated, the relevant certificates may be created at any time in the remainder of that calendar year or the subsequent calendar year. Certificates will be electronic and the ESC is to keep a register of certificates. 

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Surrendering certificates and shortfall charge

Under VRET, certificates may be transferred to any person, even if that person does not acquire the electricity that allowed the certificate to be created. Any person may surrender a certificate to the ESC. Certificates become invalid once surrendered.

A person is required to surrender a certificate for each MWh of their 'required renewable energy' for the year. A person's required renewable energy for a year is the 'renewable power percentage' of their total 'scheme acquisitions' for the year. A person is liable for renewable energy shortfall penalty if they fail to surrender sufficient certificates. If a person surrenders more certificates than their required renewable energy, that surplus is carried forward to the next year.

In general terms, a scheme acquisition under VRET occurs when a person acquires electricity from NEMMCO for use in Victoria or uses electricity they generate in Victoria.

The renewable power percentage is fixed by the governor by an Order in Council or, when no such order is made, by a formula based on the prior year's percentage and required GWh of electricity from renewable energy sources for each year specified in the proposed VRET legislation.

The specified required GWh of electricity from renewable energy sources is zero for 2007 and 193GWh for 2008. It increases in increments of 385GWh for each year thereafter to 3274GWh by 2016 at which point it plateaus until 2022. The required GWh then declines with the VRET projected to wind-up at the end of 2030. Unless fixed by an Order in Council, the renewable power percentage for 2007 will be zero.

Renewable energy shortfall penalty is payable for each MWh of a person's required renewable energy for which they have not surrendered a certificate. The penalty rate is $43 per MWh for 2007 and is indexed based on CPI for each year thereafter.

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Special rules for small generation units

Similar to the MRET, special rules to simplify compliance will be available for small generation units installed on or after 1 January 2007. Details of these rules are yet to be worked out by the ESC, but it is understood that a certain number of certificates will be deemed for the life of a small generating unit and not be required to be created as electricity is generated. The right to create certificates for small generating units may be assigned to another registered person.

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Administration of the scheme

The ESC will be responsible for administering the VRET scheme. The ESC's administrative functions include registering persons to create certificates, accrediting and provisionally accrediting power stations, determining the scheme capacity of power stations and maintaining a register of certificates. The ESC may be requested by an affected person to reconsider certain decisions it makes in administering the scheme.

The ESC is required to develop rules for numerous aspects of the scheme including concepts such as scheme capacity, defining what constitutes eligible renewable energy sources and record keeping. The ESC must follow consultation procedures for draft rules.

The ESC will also be responsible for monitoring compliance with the scheme and enforcing renewable energy shortfall penalties. For these purposes, the ESC is armed with various powers including information gathering powers and the power to enter premises under a monitoring warrant.

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Interaction between the VRET and the MRET

A VRET certificate cannot be created for the same MWh of electricity used to create an MRET certificate, thereby overlap between the two schemes is avoided. A generator eligible to create certificates for both schemes must choose between the two.

While the two schemes appear similar, there are some notable differences:

  • Under the MRET, no renewable energy shortfall charge is payable where the renewable energy shortfall is less than 10 per cent of the required renewable energy for that year. (Any shortfall is, however, carried forward to the next year.) The MRET also provides that the renewable energy shortfall charge can be refunded when the liable entity surrenders certificates to cover the shortfall within three years. The VRET scheme does not provide such concessions, which means retailers should take care to ensure they surrender sufficient certificates for each year.
  • The MRET renewable energy shortfall charge is fixed at $40 per MWh and is not indexed, despite a recommendation in the Tambling Review for it to be indexed after 2010. By contrast, the VRET shortfall penalty will be set at $43 for 2007 and will be indexed for each subsequent year. This higher penalty may lead to a difference in value of the two certificates.
  • The MRET scheme allows certificates to be created for solar water heaters, but this is not provided for under VRET.

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Impact on generators

Generators eligible to create VRET certificates must register with the ESC and apply for accreditation of their power stations. Provisional accreditation will be available for planned power station projects. Where a project receives provisional accreditation, the ESC provides a notice that a project will be accredited when completed if it is not materially different from the plans provided to the ESC.

An important decision for generators may be whether to create VRET certificates or to create MRET certificates. This will require an analysis of the market for each certificate.

The Bill to create the VRET proposes penalties for creating certificates when there is no entitlement to do so, and for 'gaming' by a series of interconnected power stations. Gaming occurs when interconnected power stations coordinate electricity generation with the result that a greater number of certificates can be created than would normally be the case. Generators should develop procedures to ensure they are not subject to these penalties.

Generators will be required to lodge an annual electricity generation return with the ESC for each accredited power station. The return must be audited in accordance with rules to be made by the ESC before its lodgment.

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Impact on retailers and other electricity acquirers

As the VRET scheme is more rigorous than the MRET in requiring a person to surrender a certificate for every MWh of its required renewable energy, retailers and other persons who make scheme acquisitions should review their procedures to ensure they surrender sufficient VRET certificates for each year.

A person who makes a scheme acquisition will be required to lodge an energy acquisition statement with the ESC each year they make a scheme acquisition. The return must be audited in accordance with rules to be made by the ESC before its lodgment.

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Towards the future

As outlined, certain important details of the VRET scheme are yet to be finalised, including the renewable power percentage for the initial years of VRET and rules to be determined by the ESC. These details may have a significant impact on how the VRET scheme operates.

The VRET scheme contemplates other states implementing complementary schemes by allowing power stations and small generation units in such states to create VRET certificates. It is uncertain at the moment whether other states will follow Victoria in this initiative.

An efficient market for trading certificates is important for the effectiveness of the VRET scheme. Previous attempts to develop a market for trading MRET certificates encountered difficulty. The VRET might overcome these problems by increasing the size of the market for trading renewable energy certificates.

Footnotes
  1. See Focus: Energy – April 2006 and Focus: Energy – February 2004.

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