Impacting your industry - Direct Action

What are the major issues for our industries that need to be raised and resolved?

As the opportunity opens up for industry to make submissions on the design of the Direct Action scheme and the operation of the Emissions Reduction Fund (ERF), Energetics has considered the key questions that must be resolved across each of Australia’s major sectors.

We urge all businesses to participate in the consultation process to ensure that issues specific to their business and industry are considered.

 

Power Generators

What is the current situation under the Clean Energy Act?

Liable for emissions associated with the combustion of coal. Electricity generators are the most impacted by carbon price, but are able to pass through the price to the customer. Incentives included for shutting down brown coal stations were not taken up.

What is proposed under the Direct Action Plan?

Electricity prices will reduce with the removal of the carbon price.
Emissions Reduction Fund to:

  • support improvements in performance of existing generators
  • possibility of funded shutdowns, though limited details of how to manage this process

Demand-side reductions in electricity consumption.

Direct Action will also have a focus is on protecting jobs. Funds will be available to develop ‘Clean Energy Hubs’. 

Issues to be addressed for business. What are the risks? What are the opportunities?

  • Will there be different baselines for brown and black coal generators?

  • Will this provide an incentive for more emission intensive generators to close? 

  • Will generators be able to pass through to customers any “penalty” costs for emissions above the baseline?

  • How will funds be accessed through ‘Clean Energy Hubs’ particularly for the La Trobe Valley?

Mining and mineral processing 

What is the current situation under the Clean Energy Act?

Mining companies are subject to the carbon price mechanism directly (e.g. through fugitive emissions and process emissions) and indirectly through energy prices. Liquid fuels are subject to the carbon price through an equivalent reduction in the fuel rebate or increased fuel excise. Businesses can elect to “opt-in” and pay for carbon liability directly. Liable entities are also subject to direct costs for their emissions. 

What is proposed under the Direct Action Plan?

The removal of the carbon price will reduce:

  • energy costs – liquid fuel, gas, electricity
  • direct liability

How the baseline will be established is a core question. There is a difference between an absolute baseline and an intensity baseline. The latter is more sensible if your production fluctuates: either contracting or expanding. There are opportunities for miners to support abatement projects through the Emission Reduction Fund.

Issues to be addressed for business. What are the risks? What are the opportunities?

How will the baseline be calculated? Will the baselines be intensity based?

For mines considerations include:

  • mines become deeper and head grades degrade over time. This means that intensities increase with time for the same output.
  • arguments to be made for an input- based intensity as opposed to an outputs-based intensity (EITE was outputs-based) as these will be less affected (though still affected) by increasing mine depth and reducing head grade.
  • miners will need to understand their performance relative to industry average.

Miners should start getting emission reduction projects ready so that they have first mover advantage for available funds. For example projects not progressed under EEO because of poor business cases should be revisited and re-evaluated.

Emissions-Intensive Trade -Exposed sectors including steel, cement (clinker) and aluminium

What is the current situation under the Clean Energy Act?

Any eligible trade-exposed emissions intensive sector has had either 66% or 94.5% of its overall activity emissions compensated for FY13.  Compensation was based on industry average baselines. Under the Clean Energy legislative package, the businesses that performed better than industry baselines were rewarded. Those operating on greener grids [notably examples are smelthers in Tasmainia and South Australia] should have made windfall profits [as the EITE electricity factor is 1tCO2e/MWh which is significantly lower than their actual grid factors]. This windfall will disappear.

Likewise, those EITE turning waste heat or gas into electricity which they then consumed, should have made some profit on this component, as EITE allowed some double dipping here, to provide reward for this “renewable” self generation [all self generation and subsequent consumption of electricity from waste heat of gas was also allocated an automatic 1tCO2e/MWh, while all direct emissions could be counted toward the core activity, without allocation to the electricity generated].

What is proposed under the Direct Action Plan?

Under baseline and credit, the “poor” performers will be rewarded if they act. Direct Action removes both the carbon price and associated compensation.  This creates an “effective” carbon price that was passed on by business.

EITE assistance [PEC – Partial Exemption Certificates] for the MRET will be removed. This means that power will cost more for EITE 94.5% companies as the carbon charge and compensation is removed, but PECs will be removed while LRET and SREC charges still remain.

Issues to be addressed for business. What are the risks? What are the opportunities?

Understand your market position relative to your competitors and how Direct Action could shift your business advantage. Have you lost any market advantage over your competitors? Uncertainty persists around the role of the RET for businesses.  For example, the Direct Action plan renewed a commitment for one million solar rooftops. This may equate to doubling the SREC charge if the costs are spread across all electricity users. Again, there would be no EITE-specific compensation available when compensation is removed.

Coal

What is the current situation under the Clean Energy Act?

Definition of “covered” and “liability” dominated by fugitive emissions and energy usage. Coal Sector Assistance Package provides targeted assistance to Australia's gaseous coal mines as well as providing support for the development of coal mining abatement technologies.

What is proposed under the Direct Action Plan?

Waste gas from coal mines is mentioned in the Direct Action Plan.  Is this defined the same way as fugitive emissions? Will this sector be covered? The Coal Sector Assistance Package is to be cancelled. There are no plans for a replacement scheme.

Issues to be addressed for business. What are the risks? What are the opportunities?

There is no industry baseline.  How will this be established? Ensure that the baseline is suitable for business  and caters for variations in:

  • fugitive emissions dependent on mine depth, seam location and state
  • changes in mine depth and complexity
  • different technologies (eg. truck/shovel, dragline, longwall, continous miner)

No assistance provided to offset any potential increases in costs due to Direct Action.

Oil and gas

What is the current situation under the Clean Energy Act?

  • The majority of onshore and offshore facilities have direct permit liabilities.

  • Emissions from LNG facilities are eligible for 66% assistance under the Jobs and Competitiveness program (JCP).

  • LNG projects (including emissions upstream from the LNG facility) are also receiving a supplementary allocation to ensure an effective assistance rate of 50% in relation to project emissions from their LNG production each year.

  • Petroleum refineries receive 94.5% JCP compensation.

What is proposed under the Direct Action Plan?

There is no specific mention of the oil and gas industry within the 2010 Direct Action Plan however repeal of the Clean Energy Act will mean:

  • All JCP assistance removed

  • No direct permit liabilities

  • Likely removal of mandatory NGER audit obligations

  • The fuel tax rebate will no longer be adjusted for carbon

Issues to be addressed for business. What are the risks? What are the opportunities?

Industry baselines for domestic gas, crude oil, LPG production, natural gas transmission, natural gas distribution and exploration activities don’t exist.  There are many technical and boundary considerations relating to the establishment of these baselines. Should the JCP framework be employed, the existing LNG baseline will be subject to pressure from industry as it was set prior to more intensive projects coming online.

Moving to higher order methodologies presents a big opportunity to improve performance against baselines if using NGER data from the past four years.

There will be significant considerations for unwinding carbon pass through clauses and accounting processes – especially for domestic gas, pipeline operators, contractors and JV partners.

There is a big upside for gas (vs. coal) for electricity generation when considering where gas-fired generators would sit compared to an industry baseline. 


Manufacturing 

Manufacturing sector including meat and meat processing, diary, fruit and vegetable, grain mill, bakery and other food products. 

What is the current situation under the Clean Energy Act?

Manufacturers typically experience an indirect impact of the carbon price mechanism through increased energy prices. This price increase has been offset by the Clean Technology Investment Program (CTIP).  Grants have been awarded and will be funded. Current applications are still being processed by AusIndustry.

Energy prices continue to cause for concern for manufacturers. Electricity costs have doubled over the last five years primarily due to increased network investments. Gas prices are expected to hit world parity (~$8-$10/GJ) as Australia’s LNG comes on line.

What is proposed under the Direct Action Plan?

CTIP funding for manufacturers will cease. Opportunity to participate in the Emissions Reduction Fund. Procurement uncertainties. How will carbon be accounted for in contracting?

Issues to be addressed for business. What are the risks? What are the opportunities?

  • Will companies be locked into a baseline and credit scheme if they have any liable sites?  

  • How can business access funding under the reverse auction?

  • During the transition period, what incentives/safe guards will operate in the interim?

  • Will the carbon cost be removed from the supply chain? Or will an effective price remain?

Transport and airlines 

What is the current situation under the Clean Energy Act?

Transport is accounted for by an equivalent carbon price through the changes in fuel tax credits, or excise. A carbon price is applied to domestic aviation, domestic shipping, rail transport, and non-transport use of fuels. 

What is proposed under the Direct Action Plan?

Carbon price will be removed. No mention of impacts to the fuel tax credits has been specifically stated by the new government.

Issues to be addressed for business. What are the risks? What are the opportunities?

  • Will the fuel excise and rebates be adjusted accordingly?

  • Or will an effective carbon price remain?

  • Businesses that elected to “opt in” will need to unwind their systems and the processes developed.

Buildings and commercial properties

What is the current situation under the Clean Energy Act?

No direct liability or compensation. Commercial building owners, developers and tenants typically experience an indirect impact of the carbon price mechanism through increased energy prices and building material costs. There are a number of complementary programs for the sector. The NSW ESS and Victorian VEET schemes have been providing support for the implementation of energy efficiency opportunities. The federal mandatory reporting requirement for the sale and lease of buildings over 2000m2 under Commercial Building Disclosure (CBD) has benchmarking for the sector.

Refrigerants: There is currently an import levy for an import of synthetic greenhouse gases at an equivalent carbon price.

What is proposed under the Direct Action Plan?

Within Direct Action, there is the intention is to achieve abatement of 30 million tonnes (approx 21% of total abatement by 2020 from green buildings/ energy efficiency). There is little detail about how this would actually happen.

Direct Action encourages energy efficiency as a source of abatement under the Emissions Reduction Fund. There will be an opportunity for commercial clients to participate in the abatement auction process, from the Emissions Reduction Fund. It is unclear exactly what this means, however it would imply that schemes like ESS and VEET, will be retained and potentially rolled out on a national basis under a National Energy Saving Initiative (NESI) scheme.

Refrigerants: With the Direct Action Plan there is no carbon price and so the carbon price component will be expected to be reduced to zero. It is unclear how any pass through costs from any penalties from the Direct Action plan will be applied.

Issues to be addressed for business. What are the risks? What are the opportunities?

It is not entirely clear how the proposal that the Emissions Reduction Fund will pay for emissions reductions below NGER-determined “business-as-usual baselines” fits in with the purchase of emissions abatement from specific projects. In particular, a business' baseline will be very difficult to apply as it will change over time with business restructuring (including sales and acquisitions), and variations in emissions levels against this baseline.

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