Renewable Energy Certificate and Carbon Credit Schemes

Articles Written by Anthony Groom (Partner), John Keeves (Partner), Jee-Seon Lee (Partner), Candy Cheung (Associate)

In response to climate change, each of Australia’s Commonwealth, State and Territory governments have set their own targets relating to renewable energy, emissions reduction and net zero emissions as summarised in the table below.

 

Renewable Energy Target

Emissions Reduction Target

Commonwealth

23.5% by 2020 (met)

Net zero by 2050

Australian Capital Territory

100% from 2020

50-60% by 2025 (from pre-1990 levels)

Net zero by 2045

New South Wales

-

50% by 2030 (from 2005 levels)

Net zero by 2050

Northern Territory

50% by 2030

Net zero by 2050

Queensland

50% by 2030

 

30% by 2030 (from 2005 levels)

Net zero by 2050

South Australia

26% by 2020 (met)

100% by 2030

50% by 2030 (from 2005 levels)

Net zero by 2050

Tasmania

100% by 2022 (met)

200% by 2040

60% by 2050 (from 1990 levels)

Net zero by 2030

Victoria

40% by 2025

50% by 2030

28-33% by 2025 (from 2005 levels)

45-50% by 2030 (from 2005 levels)

Net zero by 2050

Western Australia

-

Net zero by 2050

 

The policy framework for reaching these targets is broadly made up of:

  • the Commonwealth government’s renewable energy certificates and carbon credit schemes and complementing schemes and programs established by State and Territory governments;
  • other strategies and funding programs to promote the development of renewable energy and emissions reduction projects including in relation to offshore renewable electricity, hydrogen and carbon capture and storage; and
  • proposed reforms to electricity markets to accommodate the rising demand for electricity generated from renewable energy sources.

Renewable Energy Target

The Commonwealth government established the Renewable Energy Target (RET) under the Renewable Energy (Electricity) Act 2000 (Cth) to ensure that at least 23.5% of Australia’s electricity (equivalent to 33,000 GWh) is generated from renewable sources by 2020. While this target has already been met, the RET will continue to operate until the end of 2030 to encourage additional generation of electricity from renewable sources.

There are two key elements to the RET:

  • the Large-scale Renewable Energy Target which applies to accredited power stations that generate electricity from eligible renewable sources including hydro, wind and solar; and
  • the Small-scale Renewable Energy Scheme which applies to small-scale installations such as solar water heaters and solar rooftop panels.

Under the RET, power stations and owners of small-scale systems are respectively issued with large-scale generation certificates (LGCs) and small-scale technology certificates (STCs) for every megawatt hour of power that they generate from renewable sources.

Liable entities (mainly electricity retailers) must purchase a specified number of LGCs and STCs from the market and surrender them to the Clean Energy Regulator for the electricity that they purchase. The required number of certificates is set each year by the “renewable power percentage” for LGCs and the “small-scale technology percentage” for STCs. A shortfall charge is payable if a liable entity fails to surrender the specified number of certificates. In certain circumstances, shortfall charges do not apply to LGCs and a liable entity may be able to claim a refund of shortfall charges paid in a previous year.

LGCs and STCs are also tradeable on a secondary market. This allows any person who wishes to voluntarily offset their energy emissions to purchase certificates from the market and surrender them to the Clean Energy Regulator under programs such as Green Power.

Certain States and Territories have established, or are in the process of establishing, their own scheme to complement the RET. The following summarises the approach taken in each State and Territory.

Australian Capital Territory

Under the Electricity Feed-in (Large-scale Renewable Energy Generation) Act 2011, the ACT government established a framework for procuring renewable electricity through a reverse auction process. To participate in the reverse auction, project proponents must (among other things) generate electricity from a large renewable energy generator that is connected to the NEM and be registered for LGCs under the RET. Successful proponents enter into a contract with the government and are granted an entitlement to receive payment from the electricity distributor for their generation which is based on the difference between the feed-in-tariff price (that is fixed for each proponent) and the price in the wholesale market. LGCs created by these generators are transferred to the ACT government who voluntarily surrenders them to the Clean Energy Regulator. As of June 2021, the ACT government has run 5 reverse auctions and awarded contracts for 840 MW of renewable electricity.

New South Wales

The Electricity Infrastructure Roadmap, enabled by the Electricity Infrastructure Investment Act 2020 (EII Act) sets out the NSW government’s plan to modernise the electricity system. A key initiative under the roadmap is to encourage private investment in new generation, long duration storage and firming infrastructure through the Electricity Infrastructure Investment Safeguard. The NSW government invited consultation on policy issues relating to the safeguard between August and October 2021. It is envisaged that under the safeguard, a Consumer Trustee will be appointed to run competitive tenders to offer Long-Term Energy Services Agreements (LTES Agreements) for generation, long duration storage and firming services. Successful proponents will enter into LTES Agreements with a dedicated Scheme Financial Vehicle under which proponents will have the option to supply energy services at a set minimum price. The policy paper released for consultation notes that LTES Agreements for generation services could require projects to provide LGCs to the Consumer Trustee if they exercise the option to provide services. The policy paper invites submissions on a number of matters which will inform a further tranche of regulations to the EII Act. The NSW government expects to finalise these regulations by October 2021.

Northern Territory

In 2017, an expert panel commissioned to advise the NT government on options to reach the NT’s renewable energy target delivered the Roadmap to Renewables. The roadmap outlines 11 recommendations. Among other things, the roadmap recommended that the NT government develop a whole-of-government policy to purchase renewable electricity through a competitive tendering process such as a reverse auction and direct Jacana Energy (government owned corporation) to procure LGCs from renewable energy sources. While the NT government supports each of the roadmap’s recommendations in principle, this recommendation is yet to be implemented.

Queensland

Under the Powering Queensland Plan, the Queensland government conducted a reverse auction in 2017 for up to 400 MW of renewable energy capacity (including up to 100 MW of energy storage capacity). To participate in the auction, proposed projects had to generate electricity from renewable sources recognised under the Commonwealth government’s Large-scale Renewable Energy Target. Following the shortlisting of 10 projects, the Queensland government announced in April 2020 that it has entered into a power purchase agreement with Acciona to purchase 400 MW of new capacity at the MacIntyre Wind Farm.

Tasmania

In 2020, the Tasmanian government released the Tasmanian Renewable Energy Action Plan. The plan notes that while Tasmania is already 100% self-sufficient in renewable energy, the majority of hydro-electricity generated in the state is considered “below-baseline” under the RET and is therefore not eligible to be accredited with renewable energy certificates that can be traded in the market. To enable the traceability and verification of such “below baseline” generation, the Tasmanian government is working with the Clean Energy Regulator to develop an interim Tasmanian Renewable Energy Guarantee of Origin Scheme. The Tasmanian government is working towards having the interim scheme operational during 2021 to ensure that project proponents have certainty that their project’s renewable credentials are appropriately recognised.

Victoria

In August 2021, the Victorian government launched the Second Victorian Renewable Energy Target Auction (VRET2) to source at least 600 MW of new renewable energy capacity. Successful project proponents will be awarded a 10-year supply contract under which they will receive payment for their generation equal to the difference between a “strike price” (put forward in their auction bid) and the reference price for electricity sold in the NEM. LGCs generated by VRET2 projects will be voluntarily surrendered by the Victorian government to the Clean Energy Regulator.

VRET2 builds on the success of the first Victorian Renewable Energy Target Auction (VRET) conducted in 2017 which delivered 6 wind and solar projects totalling 927 MW in capacity, exceeding the government’s target of 650 MW at the time. VRET and VRET2 are key pillars of the Victorian government’s renewable energy strategy as set out in Victoria’s Renewable Energy Roadmap and Renewable Energy Action Plan.

South Australia & Western Australia

The governments of South Australia and Western Australia have not established a separate scheme to complement the RET. The approach taken by these States to incentivise the development of renewable energy is largely shaped by funding programs and other initiatives.

Carbon Credit Schemes

Commonwealth

Emissions Reduction Fund & Climate Solutions Fund

The Emissions Reduction Fund (ERF) is a voluntary scheme established under the Carbon Credits (Carbon Farming Initiative) Act 2011 (Cth) (CFI Act) to incentivise the adoption of emissions reduction technologies. The ERF was established with $2.55 billion in funding. In February 2019, the Commonwealth government established the Climate Solutions Fund (as part of the Climate Solutions Package) to provide an additional $2 billion in funding to the ERF.

Under the ERF, Australian Carbon Credit Units (ACCUs) are issued to eligible offset projects set out in methodology determinations made by the Clean Energy Regulator.

  • Each ACCU represents one tonne of carbon dioxide equivalent stored or avoided by a project. There are two types of ACCUs: Kyoto ACCUs or non-Kyoto ACCUs. Kyoto ACCUs are issued for projects that result in carbon abatement that can be used to meet Australia’s climate change targets under the Kyoto Protocol or any other successor international agreement. Non-Kyoto ACCUs are ACCUs other than Kyoto ACCUs.
  • To date, methodology determinations have been made for projects that utilise a range of technologies including carbon capture and storage, soil carbon sequestration, avoided land clearing, landfill gas captures, coal mine waste gas, commercial building modifications and improvements to heavy transport vehicles. On 1 October 2021, the Commonwealth government announced that it will develop new methods including electric vehicle charging, injection of hydrogen into gas networks, and integrated farming.
  • Projects must also meet the ERF eligibility criteria which, among other things, include that the project is new and has not commenced implementation, is not required by law and is unlikely to be carried out under another Commonwealth, State or Territory government program in the absence of registration under the ERF.

Kyoto ACCUs may be sold to the Commonwealth government under a carbon abatement contract if a project proponent is successful at a reverse auction. The reverse auction is run by the Clean Energy Regulator who selects projects solely based on price bids. Successful project proponents will then enter into either a fixed delivery contract or an optional delivery contract with the Clean Energy Regulator. Under a fixed delivery contract, the project proponent will provide a set number of ACCUs at a set price during the term of the contract. Under an optional delivery contract, the project proponent has the right but not the obligation to sell ACCUs at an agreed price within a set time.

Both types of ACCUs are tradeable on a private market. State and Territory governments and private organisations may wish to purchase ACCUs to meet their obligations under the Safeguard Mechanism (see below), participate in voluntary programs such as Climate Active (a partnership between the Australian government and businesses), and to be certified carbon neutral under programs such as the National Carbon Offset Standard.

Safeguard Mechanism

Corporations that meet specified thresholds under the National Greenhouse and Energy Reporting Act 2007 (Cth) (NGER Act) must report their greenhouse gas emissions, and energy production and consumption to the Clean Energy Regulator each year. The NGER Act also established the Safeguard Mechanism to ensure that certain designated large facilities with direct scope 1 emissions of more than 100,000 tonnes of CO2 equivalent each year do not exceed the applicable baseline emissions set by the Clean Energy Regulator. This means that the Safeguard Mechanism covers facilities in the industrial, manufacturing, transport, mining and oil & gas sectors. Persons with operational control of a facility being a “responsible emitter” must comply with the Safeguard Mechanism.

If a facility has or is likely to exceed its baseline during the monitoring period (generally a year), the responsible emitter may surrender ACCUs to the Clean Energy Regulator to offset its excess emissions. The responsible emitter can purchase ACCUs from the market or generate its own ACCUs under the ERF.

A responsible emitter may manage excess emissions in other ways including applying for a baseline variation, a multi-year monitoring period to allow additional time to reduce emissions or an exemption where the excess emissions are due to exceptional circumstances such as a natural disaster.

New Safeguard Crediting Mechanism

In August 2021, the Commonwealth government released a discussion paper on a new Safeguard Crediting Mechanism. The purpose of the new mechanism is to incentivise the deployment of low emissions technology.

Under the proposed mechanism, Safeguard Mechanism Credits (SMCs) will be issued to safeguard facilities (being those facilities that must comply with the Safeguard Mechanism) for reducing their emissions below a crediting baseline by undertaking transformative abatement projects. It is envisaged that:

  • the Safeguard Crediting Mechanism will be a voluntary scheme;
  • SMCs may be surrendered by responsible emitters to meet their compliance obligations under the Safeguard Mechanism;
  • similar to ACCUs, SMCs may be purchased by the Commonwealth government under the Climate Solutions Fund following a reverse auction or other process conducted by the Clean Energy Regulator; and
  • SMCs will be tradeable on a secondary market and may be purchased by the private sector or State and Territory governments to voluntarily offset their energy emissions.

In the 2021-22 Budget, the Commonwealth government committed $279.9 million over 10 years to allow the Clean Energy Regulator to purchase SMCs under the new Safeguard Crediting Mechanism.

Following consultation, draft legislation to implement the Safeguard Crediting Mechanism within established frameworks will be developed before July 2022. The discussion paper notes that the mechanism will be legislated through amendments to the NGER Act and the Australian National Registry of Emissions Units Act 2011 (Cth) in relation to the issue of SMCs and the CFI Act in relation to purchasing arrangements for SMCs.

States and Territories

Queensland and Western Australia have established their own ACCU purchasing schemes to complement the ERF. Other States and Territories have established programs to support the ERF. The following summarises the approach taken by each State and Territory.

Queensland

The Land Restoration Fund (LRF) supports landholders, farmers and First Nations peoples to develop carbon farming projects. Eligible projects participating in the LRF must be registered with the ERF and generate ACCUs. Under the LRF, the Queensland government purchases “premium” carbon credits from carbon farming projects which are made up of ACCUs plus the environmental, economic, social and/or First Nations co-benefits that are aligned with the objectives set out in the Priority Investment Plan. The LRF differs from the ERF in that the price per ACCU not only takes into account the cost of generating those ACCUs but also benefits that the project will deliver to the state. ACCUs purchased by the LRF are either traded to enable funding for further projects or surrendered to the Clean Energy Regulator to support the Queensland government’s emission reduction targets.

The LRF Investment Round 2 opened on 8 October 2021 and will close on 4 February 2022. In this round, the LRF is committing $25 million to support carbon farming projects located in Great Barrier Reef catchments or are focussed on vegetation restoration.

Western Australia

In July 2021, the WA government announced the $15 million Carbon Farming and Land Restoration Program. The program is made up of 2 streams:

  • ACCU Plus which offers funding for new ERF carbon farming projects that deliver one or more priority environmental, economic or social co-benefits as specified in the Priority Investment Co-benefits Standard in return for an agreed number of ACCUs. The price of ACCUs will incorporate the value of the project’s co-benefits; and
  • Future Carbon which provides grants to projects to develop new or amended ERF carbon sequestration methods relating to sustainable agricultural practices.

Expressions of interest for round 1 of funding under the program closed in August and October 2021.

The program is in addition to the Carbon for Conservation Initiative which provides an opportunity for carbon farming service providers to partner with the WA government to develop a carbon farming project on candidate sites in the State’s national parks and reserves. The WA government released an Opportunity Statement in August 2020 to invite project proposals. Eligible projects include those participating in the ERF or other accredited certification schemes.

Another key feature of the WA policy framework is the Environmental Factor Guideline – Greenhouse Gas Emissions (Guideline) which outlines how the WA Environmental Protection Authority (EPA) will consider greenhouse gas emissions in the environmental impact assessment process for proposals referred to it for assessment under the Environmental Protection Act 1986 (WA). If the EPA identifies greenhouse gas emissions as a preliminary key environmental factor for a proposal, the EPA may require the proponent to provide a Greenhouse Gas Management Plan that demonstrates how the proponent will contribute to WA’s net zero emissions target. The EPA recognises that compliance offsets under the Safeguard Mechanism and voluntary offsets purchased to reduce residual emissions such as ACCUs may contribute to a proponent’s Greenhouse Gas Management Plan.

Northern Territory

The Aboriginal Carbon Industry Strategy builds on the ERF by supporting the development of greenhouse gas emissions abatement and carbon sequestration activities on Aboriginal land. The strategy identifies 5 priority areas for action:

  • developing a policy framework to provide certainty and a stable base for industry growth;
  • promoting the industry within the wider community;
  • addressing barriers to long term growth and project development;
  • identifying new opportunities for growth and development; and
  • streamlining access to support services for industry start up and development.

In September 2021, the NT government released the Greenhouse Gas Emissions Management for New and Expanding Large Emitters Policy (Large Emitters Policy) and the Greenhouse Gas Emissions Offsets Policy (Offsets Policy) for public comment. The Large Emitters Policy identifies the minimum requirements for how greenhouse gas emissions are to be managed from new or expanding industrial and land use development projects. Projects that are covered by the Large Emitters Policy are required to prepare a Greenhouse Gas Abatement Plan to demonstrate how the project will contribute to the NT’s net zero emissions target. The draft Greenhouse Gas Emissions Offsets Policy and Technical Guidelines contemplate that ACCUs and alternative emissions offset units may be used under the NT Offsets Framework.

South Australia

The Blue Carbon Strategy for South Australia 2020-2025 establishes a program to protect and restore coastal ecosystems. Due to the carbon sequestration and storage potential of these ecosystems, focus areas of the strategy include supporting the development of blue carbon methods for the ERF in partnership with the Commonwealth government, and exploring and assessing models for financing blue carbon demonstration projects.

Tasmania

Under the Landcare Action Grants Program, the Tasmanian government provides State-funded grant opportunities to co-invest with farmers and other community organisations on landscape and riverine health, stability and resilience activities. The program provides opportunities for landlords to implement carbon farming initiatives and access carbon markets including the ERF.

To assist primary producers in entering the carbon market, the Tasmanian government has established the Carbon Farming Advice Rebate Pilot Program which is scheduled to commence in November 2021. Under the program, primary producers will receive rebates of up to $10,000 for advice sought on the costs and benefits of accessing carbon credits, auditing requirements, and projects that are eligible for carbon credits. The program will run until the total funding available for the pilot is $250,000 is exhausted.

In the 2021-22 Budget, the Tasmanian government allocated $900,000 over 4 years to continue the Landcare Action Grants Program, building on the $1.8 million funding provided in previous years.

Victoria

As part of the 2020-21 Budget, the Victorian government announced the $92.3 million program - Growing jobs in land restoration and carbon storage. The program will be delivered in 2 streams:

  • the $76.98 million Nature restoration for carbon storage – BushBank program to support revegetation and restoration of native vegetation across public and private land over 16 years; and
  • the $15.3 million Carbon Farming Program to support private landowners to plant agroforestry and shelterbelt trees.

The program is designed to help landowners access existing carbon markets, realise on-ground benefits and develop new income streams.

Australian Capital Territory & New South Wales

The governments of the ACT and NSW have not established a separate scheme to complement the ERF. The approach taken by these governments to achieve their emissions reduction target is largely shaped by policies to increase the uptake of renewable energy and other funding programs and initiatives.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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