Federal Mandatory Renewable Energy Target (MRET)

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T H E U N I V E R S I T Y O F N E W S O U
T H W A L E S ? S Y D N E Y ? A U S
T R A L I AS C H O O L O F E L E C T R I C
A L E N G I N E E R I N G T E L E C O M
M U N I C A T I O N S S U S T A I N A B L E E N
E R G Y R E S E A R C H G R O U P
Experience with Market-based Approaches to
Climate Change Regulation in the Australian
Electricity Industry
Iain MacGill Hugh
Outhred Karel Nolles
i.macgill_at_unsw.edu.au

• Federal Mandatory Renewable Energy Target (MRET)
• MRET requires all Australian electricity
  retailers and wholesale customers to buy an
  increasing amount of new renewable electricity.
  It trades in Renew-able Energy Certificates
  (RECs) representing 1 MWh from new renewables.
• MRET has been operating for two years. Liable
  parties have comfortably met the targets to date.
  However, many argue that the 9500GWh/year target
  for 2010 is too low, and other problems include
• Public opposition to the classification of
  biomass from native forests as a renewable energy
  source
• Baselines for some existing large-scale hydro
  appear to have been set too low, They can earn
  RECs without making additional investment. They
  also benefit from natural annual variability,
  earning RECs in years when output is above
  baseline, yet not losing them when output falls
  below. Some 35 of the MRET target may be met
  this way.5
• Price uncertainty from only a single annual
  acquittal of RECs to ORER. Also generators are
  permitted to register RECs at any time after
  their creation this information asymmetry
  advantages large suppliers.3
• Investment uncertainty with the recent CoAG
  Review recommendation to scrap the scheme. This
  has damaged the prospects of numerous proposed
  renewable projects.6
• The NSW Benchmarks Scheme
• This scheme sets greenhouse reductions benchmarks
  for NSW electricity retailers based on imputed
  per-capita electricity related emissions The
  tradeable instruments are NSW Greenhouse
  Abatement Certificates (NGACs) representing a
  notional avoided tCO2-e emissions.
• While the scheme only commenced in 2003 there are
  concerns about its likely performance for reasons
  including

• Summary
• Here we outline some recent developments in
  market-based environmental regulation of
  greenhouse emissions in the Australian
  electricity industry. In particular, we consider
  the objectives, design and experience to date
  with
• Electricity industry restructuring
• Federal Mandatory Renewable Energy Target (MRET)
• NSW Greenhouse Benchmarks Scheme
• Government accredited Green Power
• The mixed performance of these Australian schemes
  to date illustrates the need for great care in
  designing such market-based approaches.

• Electricity industry restructuring
• Mitigating climate change is one of three
  nationally agreed energy policy objectives.1
  Restructuring of the electricity industry has,
  however, been driven by economic objectives for
  example, the Code for Australias National
  Electricity Market (NEM) has no specific
  environmental objectives.
• There was, nevertheless, an expectation by at
  least some government policy makers that
  restructuring would also help reduce greenhouse
  emissions through competition and more rational
  energy investment.2
• Unfortunately, projections now suggest this will
  not be achieved for reasons including low coal
  generation costs, reduced energy efficiency
  because of lower prices, a market design that
  favours incumbents and the supply-side
  orientation of reforms to date.3
• Thus, electricity competition does not, in itself
  guarantee environ-mental improvements. However,
  it may improve responsiveness to price signals
  from market-based regulation.4
• CoAG (2002) Energy Market Review
• CoA (1997) Australias 2nd National Report to
  UNFCCC
• MacGill et al (2003) 26th IAEE Conference,
  Prague.
• IPCC (2001) Third Assessment Report
  Mitigation.
• 5. BCSE (2002) RECS, Baselines and Industry
  Development.
• 6. Outhred et al (2002) Submission to CoAG
  (2002)7. www.greenpower.com.au

Greenpower Greenpower schemes allow consumers to
voluntarily pay a premium for electricity from
green sources. Because networks mix all
generation, green power cant be physically
delivered. Instead, retailers contract with
green generators to cover the volume sold to
customers.This necessary abstraction creates a
challenge in counting and certifying premium
price green power from different types of new and
existing green sources. External auditing can
increase consumer confidence in such
arrangements. Australia has a national government
backed accreditation scheme run by NSW SEDA. It
requires an increasing amount of greenpower to be
sourced from new (post 1997) generators.
Biomass generation from native forests is not
accepted. Consumer interest remains limited. Over
95 of Australian electricity consumers now have
access to accredited Greenpower, yet sales in
2002 represented only around 0.25 of total
electricity consumption.7

• Key Lessons to date
• Numerous abstractions and design choices are
  required when implementing market-based tools,
  and these can have a marked impact on scheme
  effectiveness and efficiency
• Setting appropriate baselines in baseline and
  credit schemes to ensure additionality is
  particularly problematic, and moral hazards arise
  for policy makers during this process
• The broad reach of some market-based tools
  increases the potential for them to interact with
  other policy measures in ways that reduce their
  environmental effectiveness

• There are serious market for lemons risks with
  tradable instruments that have measurement,
  verification and additionality difficulties
  poor quality yet low-cost projects can crowd
  out more expensive yet high quality activities
• Creating transparent, liquid markets for these
  schemes that allow efficient price discovery and
  risk management by participants can be
  challenging
• It is proving harder to effectively design and
  implement these market based tools than many had
  expected because of the complex framework
  required to effectively exploit their flexibility
  and efficiency

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