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Options to streamline administration arrangements for the Renewable Energy (Electricity) Regulations 2001 regarding Emissions-Intensive Trade-Exposed Activities

Consultation Paper

September 2017

Disclaimer

While reasonable efforts have been made to ensure that the contents of this publication are correct, the Commonwealth makes the information in this publication available in good faith but without any representation or warranty as to the accuracy or completeness of the publication. It is the responsibility of any person using or relying on the information in this publication to ensure that it is up to date and suitable for the circumstances of any proposed use. The Commonwealth cannot accept responsibility for the consequences of any use of the publication or any part thereof. To the maximum extent allowed under governing law, the Commonwealth will not be liable for any loss or damage that may be occasioned directly or indirectly through the use of, or reliance on, the contents of this publication.

© Copyright Commonwealth of Australia, 2017.

The Exemptions from the Renewable Energy Target for Emissions-Intensive Trade-Exposed Activities Consultation Paper is licensed by the Commonwealth of Australia for use under a Creative Commons By Attribution 3.0 Australia licence with the exception of the Coat of Arms of the Commonwealth of Australia, the logo of the agency responsible for publishing the report, content supplied by third parties, and any images depicting people. For licence conditions see: http://creativecommons.org/licenses/by/3.0/au/

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The Commonwealth of Australia has made all reasonable efforts to identify content supplied by third parties using the following format ‘© Copyright, [name of third party]

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CONTENTS

1 Introduction and purpose of this paper...........................................................................4

2 Making a submission.........................................................................................................6

3 Calculating exemptions.....................................................................................................7

3.1 Current exemption calculation and issues with delivering 100 per cent exemption.....7

3.1.1 Electricity baselines (EP)..........................................................................................7

3.1.2 Annual saleable production (ASP)...........................................................................7

4 Calculating exemptions based on electricity use...........................................................8

4.1 Measuring EITE activity electricity use.........................................................................9

4.2 Commencement...........................................................................................................9

5 Exemption certificate applications and timing.............................................................10

5.1 Details to be included in an exemption certificate.......................................................10

5.2 Timeframe for applying for an exemption certificate...................................................10

5.3 Details to be included in an exemption certificate application....................................12

5.4 Initial assessment of site electricity use......................................................................12

5.5 Determining the amount of exemption at the end of the year.....................................12

5.6 Ongoing verification of electricity data........................................................................13

6 Transitional measure.......................................................................................................14

7 Additional question for RET liable entities....................................................................15

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1 INTRODUCTION AND PURPOSE OF THIS PAPER

As part of the package of reforms to the RET legislation in 2015, the Parliament increased the rate of exemption for emissions-intensive trade-exposed (EITE) activities to 100 per cent in respect of electricity used in undertaking an EITE activity. The basis for calculating the exemption in the Renewable Energy (Electricity) Regulations 2001 (RET Regulations) – using annual saleable production and an industry average electricity baseline –was retained.

In the Explanatory Memorandum to the 2015 amendment Bill the Government committed to consult on the details of these Regulations regarding the method for determining EITE assistance1. The Department of the Environment and Energy (the Department) is seeking views from businesses undertaking EITE activities and RET scheme participants (liable entities) on a new method to calculate exemptions aimed at aligning exemptions with the electricity used.

This paper:

1. Outlines issues with the current method for calculating exemptions.

2. Outlines a new method to calculate exemptions based on electricity use.

3. Identifies streamlining opportunities to reduce regulatory burden on participants while maintaining the integrity of the scheme.

4. Invites comment from interested parties regarding the feasibility of the new method and streamlining improvements.

The RET Regulations prescribe the eligible EITE activities and the basis for allocating exemption. Any changes to the current exemption calculation method would require regulatory changes and these changes could impact businesses. The Department is seeking evidence regarding the potential costs and benefits of the proposed reform options and maintaining the current arrangements. Changes which would require amendments to the Renewable Energy (Electricity) Act 2000 (RET Act) are outside the scope of this consultation.

Please note – This consultation is not reviewing the eligibility of industrial activities for EITE exemption nor reviewing EITE activity definitions. This paper canvasses changes to the allocation of exemptions for the EITE activities that are already eligible under the RET.

Disclaimer: The proposals set out in this paper are for the purpose of consultation only. They do not represent Australian Government policy, or a commitment to make legislative amendments.

1 Explanatory Memorandum to the Renewable Energy (Electricity) Amendment Bill 2015

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2 MAKING A SUBMISSION

The Department invites written submissions on the consultation paper. Written responses to this consultation paper should address the specific questions and provide supporting evidence where appropriate.

Submissions are due by 5.00pm AEST, Friday 29 September 2017. Any submissions received after this date will be considered at the Department’s discretion.

Submission instructions

Where possible, submissions should be sent electronically, preferably in Microsoft Word or other text-based formats, to the email address listed below. Submissions may be sent to the postal address below.

Submissions can be forwarded to:

Email: [email protected]

Postal:

EITE submissionRenewable Energy Policy TeamClean Energy BranchDepartment of the Environment and EnergyGPO Box 787CANBERRA ACT 2601

Confidentiality statement

All submissions will be treated as public documents, unless the author of the submission clearly indicates the contrary by marking all or part of the submission as ‘confidential.’

Public submissions, including any personal information of the author(s) and/or other third parties contained in the submission, may be published in full on the Department’s website.

If a submission contains the personal information of any third party individuals, please indicate in the submission whether they have provided consent to the publication of their information.

Any request made under the Freedom of Information Act 1982 for access to a submission marked confidential will be determined in accordance with that Act.

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3 CALCULATING EXEMPTIONS

3.1 Current exemption calculation and issues with delivering 100 per cent exemption

The intention of the RET EITE exemption scheme is that electricity supplied for use in carrying on an EITE activity is exempt from costs associated with the RET. Through submissions to the Government’s 2017 review of climate change policies and the recent Independent Review into the Future Security of the National Electricity Market, some EITE businesses have raised concerns regarding the operation of the 100 per cent exemption for EITE activities, including that they do not receive 100 per cent exemption from their individual RET costs.

There are four factors that determine the amount of exemption for an individual EITE business:

Exemption = EP x ASP x k% x G%

1. An industry average electricity intensity baseline for relevant EITE product (EP);

2. The volume of relevant production from the previous financial year (including the adjustment for the earlier financial year’s production) (annual saleable product (ASP));

3. The exemption rate (100% for all activities) (k%); and

4. The percentage of RET liable electricity used at the site of the EITE activity (G%).

The application of the EITE activity baseline (EP) and annual saleable production (ASP) can result in the amount of exemption for a given year not being equal to the actual amount of RET liable electricity used in that year.

3.1.1 Electricity baselines (EP)

The amount of exemption is determined using an electricity baseline, which represents the weighted industry average electricity use per unit of output produced by undertaking the EITE activity. The electricity intensity baselines were established using electricity data from the 2006-07 and 2007-08 financial years.

The extent to which an individual business uses more or less electricity in undertaking an EITE activity compared to the electricity baseline contributes to whether or not the EITE business receives a 100 per cent exemption. In some cases, the baselines may no longer reflect average electricity use per unit of output. This means the policy of 100 per cent exemption is not able to be delivered in practice.

3.1.2 Annual saleable production (ASP)

The amount of the exemption is based on previous financial year production as a proxy for actual production for the calendar year to which the exemption is to apply. An adjustment to the amount of production is made for any expected new or additional production, as well as a true-up to correct for the difference between the previous year’s allocation and the actual production in that financial year. Previous financial year production is used to allow exemption certificates to be issued early in a RET compliance year.

The use of financial year production data is intended to minimise regulatory burden and align auditing and reporting of production with general financial reporting timeframes.

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However, basing exemptions on previous financial year production creates a time delay between when a business uses electricity in an EITE activity (and incurs RET costs) and when the exemption in relation to that electricity applies.

Where there are fluctuations in production year to year, exemptions could be greater or less than 100 per cent of the calendar year electricity used in EITE activities. This results in excess or lower exemption that is trued-up the following year. In practice, given that exemption certificates are surrendered by a liable entity at the end of a calendar year, an EITE business may not be able to realise the full benefit of the exemption until 18 months after the period of EITE production, despite incurring RET costs for that electricity the year earlier.

4 CALCULATING EXEMPTIONS BASED ON ELECTRICITY USE

An alternative to the current method for calculating exemptions is to base the exemption on an individual site’s RET-liable electricity that is used in carrying out an EITE activity for the calendar year to which the exemption applies.

This method would involve removing the use of average electricity baselines and removing the time delay between actual electricity consumption and receiving an exemption. This would better align with the policy intent of providing 100 per cent exemption for RET-liable electricity used in undertaking an EITE activity.

Under this method, the amount of exemption would be:

calculated based on metered electricity that is used in undertaking the EITE activity (in accordance with the EITE activity definition established as part of the EITE activity’s eligibility assessment process2); and

determined at the end of a calendar year.

Several issues would need to be addressed for the method to be implemented, including:

determining how to measure electricity that is specific to the EITE activity;

determining the proportion of total site electricity consumed in non-EITE activities;

establishing a formula for determining the amount of eligible exempt electricity used in an EITE activity to account for any self-generation;

determining the electricity specific to the EITE activity that has a RET liability;

consideration of transitional measures to allow for circumstances where electricity that is specifically used in EITE activities is not able to be measured initially;

consideration of how the new method would be implemented where:

o multiple EITE activities are undertaken at a site;

o the EITE activity is conducted as an activity group across multiple sites;

o an exemption needs to be apportioned between multiple liable entities in relation to the same EITE activity at a site; or

o the liable entity for an EITE site changes during the year.

2 Details of each EITE activity boundary were included in the explanatory statements to the respective amendment regulations which added each EITE activity into Schedule 6 of the RET Regulations.

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4.1 Measuring EITE activity electricity use

Exemptions apply in respect of RET-liable electricity at a site that is used in undertaking the specific EITE activities defined in the RET Regulations. Businesses that undertake EITE activities usually also undertake other production or administrative activities on site that are not eligible for an exemption.

In order for the Clean Energy Regulator to provide an exemption based on the amount of electricity used in a specific EITE activity, data would need to be provided on the amount of RET-liable EITE electricity consumption at a site. For some sites, it may be possible to determine the amount of EITE-specific electricity through on-site electricity metering that is directly related to the EITE activity.

If direct metering of electricity consumed in the EITE activity is not possible, the EITE applicant could agree an alternative methodology with the Clean Energy Regulator to determine the proportion of metered site electricity consumption that is associated with the EITE activity.

Section 5 provides further detail on how the amount of exempt EITE electricity could be determined. Section 5 also outlines a potential timeframe for applying for an exemption certificate, what would be required to be included in an application, what is specified on an exemption certificate and when the exemption amount would be determined.

4.2 Commencement

Should the Government decide to implement the proposed change to the calculation of exemptions, it would seek to commence the new arrangements for the 2018 application year though amendments to the RET Regulations.

That timeframe would require EITE businesses to be in a position to collect data on electricity used in EITE activities it undertakes from the beginning of 2018. This would require metering arrangements to be in place. A method to estimate the proportion of total site electricity used in an EITE activity would be determined as part of the application process.

This may not be achievable for all EITE businesses, in which case, transitional measures could apply for 2018. Possible transitional arrangements are discussed in Section 6.

5. Stakeholder views are sought on:

1. The relative merits of basing exemptions on activity-specific electricity use by an individual business, compared to retaining the existing production-based approach;

2. The feasibility of issuing exemptions on the basis of electricity used in an EITE activity, including:- whether specific metering is already in place, or could be cost-effectively put in

place, to ascertain data on electricity usage in an EITE activity; and- whether the EITE business would be in a position to shift to the new method for

calculating exemptions from the start of the 2018 application year.

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5 EXEMPTION CERTIFICATE APPLICATIONS AND TIMING

5.1 Details to be included in an exemption certificate

For an exemption to directly correspond to the amount of electricity consumed in undertaking an EITE activity, the exemption amount would need to be calculated at the end of each calendar year. However, there would not be enough time to read meters after the end of the calendar year, apply for an exemption certificate and have it issued before the 14 February surrender deadline. This would also reduce the EITE business’s ability to negotiate the benefit of the exemption with its electricity retailer for that year.

To address this, the Clean Energy Regulator could issue an exemption certificate before the end of the calendar year which prescribes a formula for determining the amount of eligible exempt electricity used in an EITE activity. Issuing a certificate before the end of a calendar year would also allow time for EITE businesses to negotiate and trade their certificate with their electricity retailer(s) in return for a reduction in the RET cost of electricity that is supplied to them.

The formula to be included on the exemption certificate may refer to a specific electricity meter for the calendar year that reflects the electricity solely supplied to the EITE activity and that meter reading would be the amount of eligible exempt electricity. For example, the formula could state that the eligible exempt electricity is 100 per cent of the electricity going to the site through a specified meter.

There will be cases where EITE activities and several non-EITE activities (such as other production activities) are conducted on site and there is no specific metering of the electricity used in the EITE activities. In these cases, the exemption certificate may state a method to apportion the total site electricity consumption between EITE and non-EITE activities. For example, the formula could state that electricity consumed by an eligible EITE activity is 98 per cent of the electricity going to the site through a specified meter.

The amount of the exemption would then be determined at the end of the calendar year based on the relevant meter reading and in accordance with the formula prescribed in the exemption certificate. Further information on determining the amount of exemption is in section 5.5.

5.2 Timeframe for applying for an exemption certificate

Allowing exemption certificate applications to be made before the end of a calendar year would avoid the time pressure associated with applying for, and issuing, exemption certificates after the calendar year has ended and before the final date for surrender of Large-scale Generation Certificates in February the following year. This would also allow more time for the Clean Energy Regulator to assess an exemption application and issue an exemption certificate, and would allow time for the EITE business to negotiate the benefit of the exemption certificate with relevant liable entities.

An example of the timeframe for issuing exemption certificates in the transition year 2018 is illustrated in Figure 1 below.

Figure 1. Exemption certificate process timeline for the 2018 application year

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Going forward, the final closing date for applications could be later in the previous year or early in the exemption year. Three mutually exclusive options are proposed for the closing date for applications:

i. 31 August of the previous year. This would allow exemption certificates to be issued before the end of November and provide certainty for commercial electricity supply negotiation before the commencement of the year. For example, for 2019, an application for an exemption certificate could be made by 31 August 2018.

ii. 30 November of the previous year. This allows the exemption certificate to be issued very early in the exemption year. For example, for 2019, an application for an exemption certificate could be made by 30 November 2018.

iii. 30 March of the exemption year. For example, for 2019, an application for an exemption certificate could be made by 30 March 2019.

In any case it is expected the Clean Energy Regulator would allow applications to be received from August in the year before the exemption year.


3. Issues with the application timeframe, particularly the final date of EITE applications;4. Any particular issues such as multiple liable entity or change of liable entity

application process.

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5.3 Details to be included in an exemption certificate application

The current requirements for an exemption certificate application would be retained, such as making an annual application to the Clean Energy Regulator that includes information to demonstrate that the eligible EITE activity was undertaken.

The application could also include a requirement to report the amount of relevant production in the previous calendar year and a forecast of anticipated production in the exemption year. This would assist the Clean Energy Regulator to verify that the electricity consumption related to production of outputs within the EITE activity definition. Reported production levels would not need to be audited.

Additional reporting may be necessary to verify that the electricity being claimed for exemption relates to an eligible EITE activity. For example, consideration may be given to a requirement that EITE applicants provide verification, such as through an independent audit report, that the specified meter refers to electricity used in the EITE activity.

In making regulatory amendments to change the approach to calculating exemptions, there may be opportunities to streamline some administrative requirements such as reducing the requirement to provide repetitive information each year if there have been no changes. Also, reducing regulatory burden such as allowing electronic lodgement of applications.

5.4 Initial assessment of site electricity use

During the initial application for an exemption to be based on electricity use, applicants would need to provide independent verification of the electricity that is consumed at a site by an EITE activity. An audit report would be provided by registered greenhouse and energy auditors, due to their expertise with reviewing electricity consumption data and metering standards.

The initial assessment will ensure that meters have been correctly identified, and any apportioning of total site or metered electricity is appropriate. This will allow the Clean Energy Regulator to determine an appropriate method for determining eligible exempt electricity. An audit report may still be applied under the same thresholds that apply now (only applicable where the exemption is greater than 15,000 MWh).

5.5 Determining the amount of exemption at the end of the year

At the end of the calendar year, the Clean Energy Regulator would determine the amount of exemption based on the relevant meter readings and in accordance with the formula prescribed in the exemption certificate. The Clean Energy Regulator would, where possible, rely on third party data from AEMO or other market bodies to determine the final meter readings.

The Clean Energy Regulator will then upload the resulting exemption amount to the exemption certificate registered in the REC Registry. It is proposed that all EITE exemptions will be issued in the REC Registry. The EITE applicant would then notify the relevant liable entity.

The Clean Energy Regulator would also update the amount of exemption the following year if there were any discrepancies between the meter reading at the end of the calendar year and when the final meter data is produced (generally 30 weeks later).

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5.6 Ongoing verification of electricity data

After the initial assessment, the framework for verification of electricity data for EITE applications in subsequent years would include:

- A notification requirement

: Placing a requirement on EITE applicants to notify the Clean Energy Regulator of changes to site operations which invalidate the method to calculate the amount of exemption. These changes may include scheduled maintenance, unforeseen shut downs, or reduction in production for the calendar year compared to forecast.

: This notification requirement would be similar to other schemes where notification needs to be provided a specified time of the change occurring. Appropriate penalties could be applied for failing to notify.

- An audit requirement

: Audits could be separate from the EITE application process. The Clean Energy Regulator would select businesses to be audited based on various risk factors and the level of exemption. As it is currently done, these audits would be paid for by the applicant.

: It is expected that audits would be conducted every 3 to 5 years.

Consideration may be given to determining the frequency of audits according to the amount of exemption applied for. For example, business which apply for the largest 10-20 per cent of exemption amounts would be selected for audit on a more frequent basis.

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9. The proposed initial reporting requirements;10. The proposed ongoing reporting requirements, in particular the audit

requirements;11. The proposal to require a forecast of production to be provided with the

annual application documents; and12. The process for finalising an estimate of electricity consumption within an EITE

activity;13. The proposed requirements for EITE businesses to get online accounts to

access the REC Registry for issued exemption certificates.

6 TRANSITIONAL MEASURE

Subject to the proposed changes outlined in this paper being approved and in-place, EITE applicants who are able to meet the criteria for calculating exemptions based on electricity use, may apply using the electricity-based method in 2018.

However, in cases where there are difficulties in ascertaining activity-specific electricity data, EITE businesses could continue to use the current production-based method for 2018 to calculate exemptions. Businesses that continue with the current framework for 2018 would follow the same reporting requirements as were applied for 2017. This includes the audit requirements for exemption that exceeds 15,000 MWh.

From 2019 onwards, all EITE applicants would adopt the electricity-based method.

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14. Transitional issues in moving from a production-based calculation; and15. Phasing-in a new exemption calculation framework from 2018.

7 ADDITIONAL QUESTION FOR RET LIABLE ENTITIES

The proposal outlined in Sections 4 and 5 may result in some additional complexity in determining exempt electricity for the purpose of RET liability and quarterly surrender under the Small-scale Renewable Energy Scheme.

This could be addressed by ensuring that the appropriate measures are in place between the EITE business and the liable entity to determine the amount of electricity that would be eligible for exemption in order to determine those quarterly obligations.

This determination of exempt electricity would also support any application the liable entity submitted under section 38AF where an existing liable entity may propose an amount by which to reduce their small-scale technology certificate quarterly liability requirements.

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16. Issues with certificate surrender with electricity and calendar year based calculation; and

17. Phasing-in a new exemption calculation framework from 2018 and quarterly surrender issues.

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