Recent Climate Change & Energy Efficiency Initiatives Introduced In Victoria

On 17 July 2006, the Victorian Government released Our Environment, Our Future – Sustainability Action Statement, which outlines the government’s proposal to introduce a package of sustainability initiatives to, among other objectives, respond to the challenge of climate change, to maintain and restore Victoria’s natural assets and to use resources more efficiently.

Of the initiatives proposed, possibly the two most significant measures, both in terms of impact on industry and the Government’s ability to implement the key goals of the Sustainability Action Statement, are the mandatory Victorian Renewable Energy Target and Environment and Resource Efficiency Plans.

On 19 September 2006, legislation was enacted in Victoria to create the Victorian Renewable Energy Target (VRET).

The Victorian Renewable Energy Act 2006 aims to ‘promote the development of renewable energy generation through the establishment of a scheme that provides for the creation and acquisition of renewable energy certificates and requires the surrender of renewable energy certificates’. It is targeted to reach a 10% renewable energy level for Victoria by 2016.

The VRET scheme largely builds on the existing Federal Mandatory Renewable Energy Target (MRET). Using the same model as the Federal MRET, the VRET scheme will require electricity retailers to acquire and surrender Renewable Energy Certificates (RECs) to meet renewable energy targets set under the scheme.

The VRET scheme is to be administered by the Essential Services Commission (ESC).

The requirements of the new scheme will come into operation on 1 January 2007.

The amount of renewable energy which a relevant entity under the VRET scheme is required to acquire each year, and therefore the amount of RECs a relevant entity is required to surrender each year, is determined according to the ‘renewable power percentage’ for that year.

The ‘renewable power percentage’ for each year will be fixed by an Order in Council on or before 31 May each year or in accordance with the formula outlined in the legislation. The renewable power percentage will rise in accordance with the increases in the amount of electricity required from renewable energy sources each year to meet the overall target.

The obligations under the VRET scheme apply to ‘relevant entities’. A ‘relevant entity’ is a person who makes a ‘scheme acquisition’ as defined under the legislation. This generally includes retailers of electricity and wholesale purchasers of electricity acquired for use in Victoria.

Relevant entities are required to:

• Lodge an audited energy acquisition statement for the year on or before 30 April in the following year. The energy acquisition statement must specify:

• The amount of electricity acquired under the scheme during the year.

• The value (in MWh) of any RECs being surrendered. RECs can only be surrendered if they are valid, created before 31 January in the year following the year in which the statement is made, and registered as owned by the entity.

• Any surplus RECs being carried forward.

• Carry out either of the following:

• Surrender the required amount of RECs for the year in which the relevant acquisition is made.

• If notified by the ESC that they have a REC shortfall, pay the shortfall penalty rate for that year. The rate for 2007 (to be indexed) is $43 per MWh of REC shortfall.

The legislation provides a range of methods by which the ESC can enforce a requirement to surrender additional certificates or a requirement for payment of the penalty.

The REC shortfall requirements under the VRET scheme are likely to be tougher than the current requirements under the MRET scheme for two reasons:

• Unlike the MRET scheme, the VRET scheme will not allow a shortfall leeway of 10%. The MRET scheme currently permits a REC shortfall of less than 10% of the renewable energy requirement to be carried forward to the next year. However, relevant entities under the VRET scheme will be required to pay the REC shortfall penalty if they have not surrendered the required amount of RECs for that year.

• The shortfall penalty under the VRET scheme is higher than the MRET shortfall penalty. The VRET penalty is $43 per MWh and indexed each year, whereas the shortfall penalty under the MRET scheme is $40 per MWh and is not indexed.

RECs under the VRET scheme can only be created by power stations accredited under the VRET scheme.

In order to be eligible for accreditation, power stations must be located in Victoria or in another state or territory in which an approved interstate renewable energy regime applies. An interstate regime will generally be approved if it meets the criteria set out in the legislation, which includes that the regime must complement and not detract from the purposes of the legislation and not impose unreasonable costs on purchasers of electricity in Victoria.

The power station must also generate some or all of its electricity from a renewable energy source specified under the VRET scheme. Specified sources include hydro, wave, wind, solar, biomass and geothermal.

A person registered under the VRET scheme may also apply for provisional accreditation of the proposed components of an electricity generation system that the person considers, if assembled, would be a power station eligible for accreditation. Provision accreditation will enable a power station to obtain accreditation once its components are assembled, provided that the ESC is satisfied that it is not materially different from the provisional components.

A REC can be created for each MWh of electricity generated utilising the power station’s ‘scheme capacity’, which is to be determined by the ESC at the time of accreditation. A power station’s ‘scheme capacity’ is generally its capacity to generate electricity in excess of its ‘pre-scheme’ capacity. A REC can be created at any time after the generation of the final part of the electricity in relation to which the REC is created and before the end of year after the year of generation.

Accredited Power Stations must lodge audited electricity generation returns for a year to the ESC by 14 March of the following year. The returns must specify the following:

• The amount of electricity generated by the power station during the year.
• The amount of that electricity generated from an eligible renewable energy source.
• The number of RECs created during the year.

RECs are registered in an electronic register and given a unique identification code. A REC will not be valid under the scheme until it is registered under the scheme. Registered RECs can be transferred and the transferee will be recorded as the owner of the REC in the register.

The legislation provides for the creation of RECs by small generation units installed on or after 1 January 2007. Special rules will apply to the generation of these certificates.

The legislation also contains penalties for improperly creating RECs.

It is envisaged that further details on the requirements of the scheme will be set out in rules made by the ESC.

As the VRET scheme has been closely modelled on the MRET scheme, renewable energy generators currently operating within the MRET scheme should be able to either work within both schemes or switch to the VRET scheme with relative ease.

However, generators should note that the VRET scheme does not permit the creation of VRET RECs from electricity for which MRET RECs have been created. Generators seeking accreditation under the VRET scheme who are already accredited under the MRET scheme may be required to give an undertaking to the ESC that they will not create a MRET REC in relation to electricity generated utilising VRET scheme capacity if a VRET REC has already been created. Other undertakings relating to the sharing of information between the two scheme administrators and notification of participation in the MRET scheme may also be required.

Accordingly, in order to generate RECs under the VRET scheme, existing generators will need to demonstrate additional generating capacity.

In choosing between the two schemes, the key deciding factor for generators is likely to be the difference in value of the RECs created under each of the schemes. Due to the fact that the VRET shortfall penalty requirements are likely to be more stringent, the value of VRET REC may be higher.

The other factor that may influence REC value and therefore choice between the two schemes is the uncertain future of the MRET scheme. The Federal Government has recently decided not to extend MRET beyond its target of 2% renewable energy by 2010, which means that the annual target under MRET will remain the same between 2010 and 2020, when the scheme comes to an end. The targets under VRET will continue to rise until the scheme meets its overall target of 10% of electricity from renewable energy sources in 2016.

The Environment Protection (Amendment) Act 2006 (the Act), recently passed by Parliament, introduces a suite of amendments to the existing environment regulatory framework established under the Environment Protection Act 1970, including the introduction of a requirement on Victoria’s largest water and energy users and waste producers to consider ways in which to improve their resource efficiency through mandatory Environment and Resource Efficiency Plans (EREP).

The amendments implementing the EREP scheme came into operation on 30 August 2006. However, most of the detail relating to the requirements of the scheme is to be prescribed by regulation. These regulations are proposed to be made next year. Accordingly, while the amendments have come into operation the scheme will only have practical effect next year when the relevant regulations are made. Nevertheless, the current amendments provide a clear indication of the way in which the EREP framework is proposed to operate.

The new EREP framework requires occupiers of premises at which a scheduled activity is being undertaken to register the activity with the Environment Protection Authority (EPA) (and notify the EPA of ongoing changes to their activities) and, unless they have obtained an exemption, to prepare an EREP in accordance with the prescribed criteria under the framework.

A ‘scheduled activity’ is defined under the Act to mean:

1. the use at a premises of environmental resources in excess of the threshold prescribed for resources of a kind prescribed for the purposes of this definition;
2. the disposal of waste off-site from a premises in excess of the threshold prescribed for wastes of a kind prescribed for the purposes of this definition. The legislation envisages that the kinds of resources, wastes and thresholds for the purposes of the definition of ‘scheduled activity’ will be prescribed by the Regulations.

The EREP must include the following:

• A description of the relevant environmental resource and use and disposal of waste off-site of the scheduled activity.
• A plan of actions to achieve environmental resource efficiency gains and waste disposal reductions.
• Timeframes within which the actions are to be implemented.
• A description of how the implementation of the EREP is to be monitored.
• The period of time in which the EREP is to operate.

EREPs must be submitted to the EPA with the required supporting material for approval. The EPA must approve the EREP if it is satisfied that the EREP has been prepared in accordance with section 26H and submitted in accordance with section 26J of the Act. The EPA may also request further information to enable it to determine whether to approve the EREP. The Act also provides scope for EREPs to be substituted or revoked with the consent of the EPA.

A party required to prepare an EREP may apply to the EPA for a whole or partial exemption from the requirement. The relevant criteria and considerations according to which the EPA will grant an exemption are to be prescribed by the Regulations. An exemption may be revoked if the criteria and considerations applying to the initial exemption cease to apply.

A failure to comply with the requirements relating to the preparation of an EREP or implement the EREP within the required timeframes is an offence under the Act. The penalty for such offences is 300 penalty units (one penalty unit is currently $107.43 in Victoria). A Pollution Abatement Notice (PAN) may also be served on a party who fails to comply with any of the obligations of the EREP scheme. A PAN allows the EPA to require the occupier of a premises to cease or not commence carrying on an activity, or to carry on or modify an activity in a particular manner or take other measures specified in the PAN.

The Act empowers the EPA to make regulations in relation to the following:

• Prescribing the kinds of thresholds of resources and wastes to be applicable to the scheme.
• Prescribing registration and reporting requirements for scheduled activities.
• Regulating the development and implementation of EREP.
• Prescribing any matter necessary to give effect to the scheme.

The State Government has indicated that energy, water and waste reduction actions under the EREPs are to have a three year or better pay back period.

The Government has also suggested that in addition to the mandatory EREP scheme, there will be a voluntary program for other large users through industry associations and targeted programs for key areas such as smaller commercial and industry resource users.

There are a number of other significant amendments made to the Environment Protection Act 1970 by the Act. We propose to review these amendments in our next Environment update.

The EREP scheme builds on the EPA’s existing functions under the Environment Protection Act 1970 and existing action plan models implemented as part of the EPA’s Greenhouse Program which aims to reduce greenhouse gas emissions and improve energy efficiency in industry.

The Program requires EPA licence holders that are medium to large scale energy users and businesses applying for EPA works approval or a new EPA licence to incorporate energy efficiency best practice improvements with a three-year payback period. New applicants are required to document this information as part of information on environmental management procedures and programs submitted to the EPA with their application. Existing licence holders are required to take additional steps and prepare action plans documenting measures for reducing energy use and/or non-energy related greenhouse gas emissions.

The Program’s requirements are enacted through the State Environment Protection Policy (Air Quality Management) (SEPP). The details of the program are set out in the Protocol for Environmental Management (Greenhouse Gas Emissions and Energy Efficiency in Industry), an incorporated document in the SEPP. The Protocol is intended to provide guidance on the implementation of the requirements in the SEPP.

Large water and energy users and waste producers should consider undertaking the following actions:

• Track the development of regulatory tools.
• Gain an understanding of your organisation’s water and energy use and waste production and consider undertaking an audit of your facility.
• Consider any energy, water and waste saving strategies that have already been put in place within the facility.
• Explore other energy, water and waste reduction opportunities.
• Gain an understanding of the additional reporting requirements under the EREP scheme.
• Review current reporting procedures.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.