Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2010 Report to Minister NSW Greenhouse Gas Reduction Scheme July 2011 © Independent Pricing and Regulatory Tribunal of New South Wales 2011 This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included. ISBN 978-1-921929-27-4 CP61 Inquiries regarding this document should be directed to a staff member: Margaret Sniffin (02) 9290 8486 Independent Pricing and Regulatory Tribunal of New South Wales PO Box Q290, QVB Post Office NSW 1230 Level 8, 1 Market Street, Sydney NSW 2000 T (02) 9290 8400 F (02) 9290 2061 www.ipart.nsw.gov.au ii IPART Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2010 Contents Contents Foreword 1 1 Executive summary 3 1.1 What is GGAS? 3 1.2 What is IPART’s role? 4 1.3 NSW Benchmark Participants’ compliance 5 1.4 Abatement Certificate Providers’ compliance 5 1.5 Audit activities 6 1.6 Registration, ownership and surrender of certificates 6 1.7 Projected supply of and demand for certificates in coming years 7 1.8 What does the rest of this report cover? 7 2 Developments in GGAS during 2010 8 2.1 Changes to the GGAS Rules 8 2.2 Closure of GGAS to new participants 9 2.3 Cessation of Category A Generating systems 10 2.4 IPART internal review of GGAS 10 2.5 Inter-department review of GGAS 10 2.6 GGAS in the national climate policy context 12 3 NSW Benchmark Participants’ compliance performance 14 3.1 Summary of Benchmark Participants’ compliance performance in 2010 16 3.2 Number of abatement and Renewable Energy Certificates surrendered 17 3.3 Types of abatement certificates surrendered 22 3.4 Greenhouse shortfalls carried forward 22 3.5 Greenhouse Gas penalties 23 4 Abatement Certificate Providers’ compliance performance 24 4.1 Summary of Abatement Certificate Providers’ compliance performance and key accreditation statistics 24 4.2 Compliance outcomes 25 4.3 Accreditations approved in 2010 28 4.4 Accreditations amended in 2010 30 4.5 Accreditations cancelled in 2010 30 4.6 Accreditations remaining at the end of 2010, by rule 31 Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2010 IPART iii Contents 5 Audit activity 35 5.1 Summary of audit activity 35 5.2 Audit and technical services panel 36 5.3 Selection and management of auditors 37 6 GGAS Registry – registration, ownership and surrender of certificates 40 6.1 What is the Registry? 40 6.2 Trends certificate registration 41 6.3 Certificates surrendered 45 6.4 Certificates voluntarily surrendered 46 6.5 Certificate transfers 46 7 Supply and demand for certificates 48 7.1 Developments in 2010 that may influence future supply and demand 49 7.2 Assumptions we used in projecting supply and demand for certificates 53 7.3 Scenarios for which we projected supply and demand for certificates 56 7.4 Results of our projections for supply and demand from 2011 to 2014 56 7.5 Projected values for the NSW Pool Coefficient 60 Appendices 65 A Overview of GGAS 67 B Categories of the Generation Rule 80 C Registry data 83 Glossary 125 iv IPART Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2010 Foreword Foreword On 10 July 2011 the Commonwealth Government announced its proposals for a national carbon price and emissions trading scheme. While termination of GGAS is a matter for the NSW Government, most participants expect GGAS to close soon after the commencement of an equivalent national scheme if this occurs. Hence, it is timely to reflect on the achievements of GGAS and the implications of its possible closure. GGAS commenced operation in 2003 and was the world’s first mandatory carbon trading scheme. It replaced a previous ineffective licence condition that required retailers to have a plan to reduce emissions without any requirements to demonstrate that the plan was implemented or achieved any reductions in emissions. GGAS has shown that a carbon trading scheme can be successful at modest cost and without a large bureaucracy. In 2010 a team of around 12 staff (full-time equivalents) were responsible for the administration of both GGAS and ESS. One of the critical issues for GGAS has been measurement of the reduction in carbon emissions. We have drawn upon existing models but also developed and enhanced new approaches such as dealing with uncertainties associated with measuring the energy content of waste gases, especially landfill gas. It has been pleasing to see that some of the measurement frameworks developed under GGAS have been adopted by other schemes, including international schemes operating under the Kyoto protocol. In their recent reviews of emissions reduction policies in Australia, both the Productivity Commission (PC) and the Grattan Institute found that GGAS has the lowest total cost to society per tonne of emissions abated at $5 and $15 to $40, respectively. This variation in the estimates of the costs highlights the uncertainties in the modelling. Another indication of the achievement of GGAS comes from examining its practical impact on specific projects. One example is TRUenergy’s 400 MW combined-cycle gas plant at Tallawarra that generates energy with lower emissions than conventional coal-fired plants. While this plant may have proceeded without GGAS, TRUenergy made it clear in their submissions to government that the income from the sale of certificates under GGAS was an important factor in their decision to proceed when they did. Another example is the strong growth in projects that capture waste methane gas and use this to generate electricity. Many of these projects use methane gas from waste landfills. Advisors who have evaluated these Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2010 IPART 1 Foreword projects have indicated that the income from the sale of certificates was of critical importance for the decision to proceed with these projects. GGAS also attracted public attention. In 8 years of operation, members of the public have voluntarily surrendered approximately 1.2 million certificates. This volume suggests GGAS had become a useful mechanism for public participation in emissions reduction. This abatement has been achieved without significant increases in the cost of electricity, which is both a strength and weakness of GGAS. For a given carbon price, GGAS provides the same incentives to switch to relatively lower emission generation as the proposed national carbon trading scheme but without any significant increase in retail prices. However, this is also a weakness. It means that the costs of emissions are not signalled to the users of energy and the potential impacts on energy consumption (as opposed to generation) are lost. If GGAS is closed, we would seek to ensure an orderly approach is followed that maintains the integrity of the scheme. We are concerned about the potential for invalid creation of certificates in the final stages of GGAS that may not be recovered subsequently. For this reason we intend to monitor the patterns of certificate creation in 2011 and 2012 more closely and critically review requests for increased annual limits on certificate creation. In 2010 we commenced amending the accreditation conditions for all certificate providers to require the commissioning of an audit three months prior to the closure of the scheme. These audits will establish whether certificates have been created in accordance with the legislation and represent valid abatement. Furthermore we will start working with the members of our audit panel to discuss the practical challenge of ensuring that these audits are completed promptly to minimise the risks for the Scheme and its participants. If GGAS were to continue beyond 2012, the ongoing surplus of certificates that is suppressing the trading price will need to be addressed. We have suggested to government that, if GGAS continues, it should consider reducing the emission targets and removing the recognition of Renewable Energy Certificates (RECs) from the scheme. Currently RECs are double counted because retailers can claim credit under GGAS for RECs surrendered to the Commonwealth under their national renewable energy obligations. At this critical point in the history of GGAS, I would like to thank the current and past team members who have shaped GGAS and contributed to its significant achievements. In particular, I would like to thank the current General Manager, Margaret Sniffin. I would also like to thank my colleagues on the Committee, Peter Egger and Eric Groom, for their counsel and participation in decision making. James Cox PSM Acting Chairman 2 IPART Compliance and Operation of the NSW Greenhouse Gas Reduction Scheme during 2010 1 Executive summary 1 Executive summary As part of our functions as Compliance Regulator and Scheme Administrator for the NSW Greenhouse Gas Reduction Scheme (GGAS), the Independent Pricing and Regulatory Tribunal of NSW (IPART) monitors and reports annually to the Minister for Energy on the scheme participants’ compliance, and other aspects of the scheme’s performance and operation. This report covers the 2010 calendar year, which was the 8th year of operation for GGAS. 1.1 What is GGAS? GGAS is a mandatory greenhouse gas emissions trading scheme, established under Part 9 of the Electricity Supply Act 1995 (the Act). It commenced in NSW on 1 January 2003 and the Australian Capital Territory on 1 January 2005. It will operate until either a national climate change mitigation scheme is introduced or 2021. The objectives of GGAS are to reduce greenhouse gas emissions associated with the production and use of electricity, and develop and encourage the reduction of emissions from non-electricity-related activities.