Renewable Energy Target split

Large-scale Renewable Energy Target (LRET)

Split Legislation

The LRET will operate the same as the existing RET, with the same certificate creation mechanisms and surrender obligations.

The RECs under the LRET will be called Large-scale Generation Certificates (LSGCs).

The major difference against the existing RET is that a smaller overall target will apply, with the annual targets reduced by 4,000 GWh per annum (being the target set for the SRES). This will not affect the mechanics of the LRET. LSGCs will still be issued on the same basis and liable entities (ie power retailers and some self-generators) will have the same general obligations. The change will be to reduce the number of LSGCs that must be surrendered by liable entities, in proportion with the reduced target. The LRET targets will not be affected by exceedances of the SRES target.

RECs created up to 31 December 2010 (including from small generation units and solar water heaters) will be treated as LSGCs following the Split.

For greater detail on the current operation of the RET, and therefore how the LRET will continue to operate, see our article ‘Renewable Energy Target Update’.²

Senate Committee report

The Greens noted a concern that unlimited banking of LSGCs could delay early investment in large-scale projects, and stated they will endeavour to move an amendment to mitigate the risk. No other recommendations were made in the Senate Committee report regarding the LRET.

Small-scale Renewable Energy Scheme (SRES)

Split Legislation

The SRES will apply to ‘small-generation units’ and solar hot water systems.

The RECS under the SRES will be called Small-scale Technology Certificates (SSTCs).

The number of SSTCs issued (including the multiplier) and who they are issued to (ie to owners or installers) will be the same as under the current RET.

A nominal SRES target of 4,000 GWh per annum is set, but will be uncapped. This target is expected to be exceeded given 9,000 GWh was claimed from small-scale technologies in 2009.

Liable entities, in addition to their LRET liability, will be obliged to surrender SSTCs. If they do not surrender sufficient SSTCs then a shortfall charge will apply, set at the same level applying under the RET/LRET, at $65/MWh.

The number of SSTCs which a liable entity will need to surrender for a year will be set at the start of the year. This is the same mechanism as under the RET in respect of RECs, which will be continued under the LRET. The SSTC surrender obligations will be designed to ensure that all SSTCs issued in a year are acquired and surrendered. Whereas under the RET/LRET liable entities surrender only at the end of the year, liable entities will need to surrender SSTCs quarterly.

Liable entities will be able to acquire SSTCs and SSTC holders will be able to sell their SSTCs, either:

1. through a government-operated clearing house, at $40 per SSTC. The SSTC holder will only receive payment when their SSTCs are purchased through the clearing house. There may be a delay between making SSTCs available and the final sale and payment, given surrenders will only be required quarterly, or
2. by separate arrangement, where the SSTC price and payment time is not legislatively set and can be commercially determined. Presumably the SSTC prices set under these arrangements would be for less than $40.

Senate Committee report

The Senate Committee report recommended that the government consider mechanisms to manage potentially high SRES demand, but did not identify potential options. The Opposition recommended a fixed annual quota cap for the first two years, with the quota announced before the commencement of the year and set at levels consistent with the 4,000 GWh per annum target. The Greens stated their concern and that they would move an amendment (without detailing its likely form).

The Opposition also recommended the government consider amending the multiplier, to increase the maximum allowable system size and decrease the size of the multiplier.

Existing forward contracts

References in existing contracts to RECs treated as references to LSGCs

Contracts which:

• were entered into before the Split Legislation receives Royal Assent, and
• refer to RECs under the RET legislation before amended by the Split Legislation,

will be treated as referring to LSGCs from commencement of the Split on 1 January 2011, subject to:

• any contrary intention expressed in the contract (which does not by itself include that the RECs were to be created by a solar water heater or small generation unit)
• any agreement to the contrary effect between the parties to the contract, and
• the RET regulations, which do not currently contain any relevant provisions, but could in the future.

This treatment of contractual references to RECs as LSGCs may result in a party to a contract needing to supply LSGCs when the party only has access to SSTCs from small generation units or solar water heaters.

Limited conversion of SSTCs to LSGCs

The Split Legislation proposes a limited transitional mechanism to address the above situation.

Suppliers will be able to apply to have SSTCs issued after the Split converted to LSGCs where they can show:

• they entered into a contract on or before 25 February 2010 (the date the Split was announced)
• the contract relates to the transfer of RECs after the Split, and
• the contract relates to a certain quantity of RECS that were to be supplied and created from a small generation unit or a solar water heater after the Split.

Implications

Parties to existing REC supply contracts, or considering new arrangements, will need to carefully consider their contractual obligations as a result of the Split.

Emissions-intensive, trade-exposed (EITE) activity assistance

RET EITE Regulations

The government made regulations earlier this year that provide for assistance to EITE activities for costs under the RET as expanded in 2009 (RET EITE Regulations). The broad intention of the RET EITE Regulations is that electricity supplied for use in carrying on an EITE activity will be partially exempted from liability under the expanded RET. EITE activities will be partially exempt from:

• the higher annual targets under the expanded RET (ie to 20% renewable by 2020), but they will still need to comply with the previous Mandatory Renewable Energy Target scheme (MRET), and
• any increased REC costs above a $40 minimum for meeting the previous MRET targets.³

The RET EITE Regulations draw on many aspects of the proposed Carbon Pollution Reduction Scheme (CPRS) EITE assistance regime, including the same compensation rates of 90% and 60% respectively for highly and moderately EITE activities.

However, the RET EITE Regulations can act independently of the proposed CPRS, because they essentially replicate the CPRS EITE concepts rather than cross-referring to the as yet unpassed and decidedly uncertain CPRS legislation. However:

• only activities assessed by the government as being EITE activities and included in the RET EITE Regulations qualify. It had been expected that the assessment process would continue through 2010, but that is now uncertain given the CPRS delay. This may affect activities that expect to be EITE eligible but have not yet been formally recognised, for example: LNG and gold mining, and
• compensation for any increased REC costs above a $40 minimum for meeting the previous MRET targets is dependent on the introduction of the CPRS.

For greater detail on the expanded RET see our article ‘Renewable Energy Target Update.’⁴

Split Legislation

The Split Legislation would not affect the RET EITE Regulations, other than making the partial exemptions apply to Liable Entity’s LRET and SRES liabilities.

Senate Committee report

A number of EITE related submissions were made. However, the Committee’s report did not recommend any amendments. The Opposition recommended that the government consider measures to remove any linkage of EITE exemptions under the RET to the passage of the CPRS and simplify the operation.

Enforcement and penalties

In addition to effecting the Split, the Split Legislation will also strengthen the RET compliance and enforcement regime, including introducing a civil penalties regime, enforceable undertakings, injunctions and executive officer liability.

Next steps

Senate passage

To be passed the Split Legislation needs to be supported in the Senate by either:

• the Opposition, or
• the Greens and two of the independents Nick Xenophon and Stephen Fielding or other Opposition Senators.

The Opposition and Greens have both stated their in principle support for the Split. However, in the Senate Committee report they both noted concerns and recommendations or an intent to move amendments.

Timing issues

The Senate Committee report recommended that, subject to the matters identified in the report, the Senate pass the Split Legislation during the 2010 winter sittings (between 15 and 24 June). We understand that the government and Opposition are holding discussions this week, delaying a Senate vote until the second week of the winter sittings (starting 21 June). Negotiations between the government, Opposition and potentially the Greens and independent senators may threaten passage during the winter sittings.

If the Split Legislation is not passed during the winter sittings then its passage may be affected by the timing of the upcoming Federal election. It has been suggested that the election is likely to be in either in August, early September, or between the 16th and 30th of October.⁵ However, recent falls in the government’s popularity could delay the likely election date. The Split Legislation would need to be passed before the election is called for it to commence by 1 January 2011.

An August election would require the Split Legislation to be passed during the winter sittings.

Subject to when the election is called, the Senate is scheduled to next sit:

• between 15 and 24 June
• between 24 August and 2 September, and
• between 20 and 30 October.

This article written by John Taberner, Consultant, Sydney and Michael Voros, Senior Associate, Sydney/Perth.

Endnotes

1. The Senate Committee report 
2. Freehills article, ‘Renewable Energy Target Update’
3. Commentary on the draft regulations relating to partial exemptions under the Renewable Energy (Electricity) Act 2000, December 2009
4. Freehills article, ‘Renewable Energy Target Update’ 
5. Antony Green’s Election Blog, 9 June 2010

More information

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