White Certificate Scheme in New South Wales, Australia

The White Certificate Scheme in New South Wales, Australia Dr David Crossley Managing Director Energy Futures Australia Pty Ltd

IEA Demand Side Management Programme Task 14 Workshop on White Certificates Paris, France, 14 April 2005

Disclaimer ● During 2003, David Crossley was engaged by the Administrator of the New South Wales Greenhouse Gas Abatement Scheme to provide advice on the establishment of the demand side abatement component of the Scheme ● David’s engagement finished at the end of the trial period for the Scheme ● The Scheme Administrator has provided information for this presentation ● However, the presentation does not represent the views of the Scheme Administrator, the New South Wales Independent Pricing and Regulatory Tribunal or the New South Wales Government 2

Australia – not Wales

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…or a Different View of the World

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State of New South Wales

● Sydney

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NSW White Certificates ● White certificates in New South Wales are part of a larger scheme, the NSW Greenhouse Gas Abatement Scheme ● Obligations to reduce GHG emissions under the NSW GHG Abatement Scheme were imposed from 1 January 2003 and the Scheme started operating in mid-2003 ● This makes the NSW Scheme the first operational white certificates scheme in the world 6

Outline of Presentation ● New South Wales Greenhouse Gas Abatement Scheme ● Environmental Credits (NGACs) in the NSW GHG Abatement Scheme ● What is demand side abatement? ● Demand side abatement projects ● How are demand side abatement NGACs created? ● Methods for calculating the number of NGACs generated by demand side abatement projects ● Performance of the NSW GHG Abatement Scheme ● Trading of NGACs ● Issues with white certificate in the NSW Scheme 7

Not in Presentation ● This presentation covers only operational aspects of the NSW GHG Abatement Scheme ● It does not cover the policy context, objectives and outcomes of the NSW Scheme

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New South Wales Greenhouse Gas Abatement Scheme

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NSW GHG Abatement Scheme ● The NSW GHG Abatement Scheme is a mandatory scheme to reduce the GHG emission intensity of electricity generation in NSW ● Commencing on 1 January 2003, electricity retailers and other parties are required by legislation to meet mandatory targets for reducing the emission of greenhouse gases resulting from the electricity they supply or consume ● Therefore the NSW Scheme is a “baseline and credit” scheme (typically giving rise to environmental credits) rather than a “cap and trade” scheme (typically using permits and allowances) 10

NSW GHG Emission Benchmark ● The NSW Government has set a state-wide benchmark (baseline) for reducing greenhouse gas emissions in New South Wales ● The benchmark requires a reduction to 7.27 tonnes of carbon dioxide equivalent per capita by 2007 ● This is five per cent below the per capita emissions in New South Wales in the Kyoto Protocol baseline year of 1989/90 11

NSW GHG Emission Targets (1) ● To ensure continual progress towards the 2007 benchmark, progressively tighter targets have been set year-on-year ● The initial target in 2003 was 8.65 tonnes of carbon dioxide equivalent per capita ● The target is being progressively reduced, leading to the final benchmark level of 7.27 tonnes of carbon dioxide equivalent per capita in 2007 ● The level of 7.27 tonnes per capita will then be maintained until at least 2012 12

NSW GHG Emission Targets (2) Benchmark: 5% reduction in 1989/90 emissions by 2007

Carbon dioxide emissions per capita (t CO2-e)

9.0

8.5

8.65 8.31

8.0

7.96 7.5

7.62

7.0

6.5 2002

2003

2004

2005

2006

7.27

7.27

7.27

7.27

7.27

7.27

2007

2008

2009

2010

2011

2012

Calendar year Source: NSW GHG Abatement Scheme Administrator

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Benchmark versus Emissions 75

millions tCO22-e

70 65 60 55 50 45 40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

■ Benchmark (actual) ■ ■(forecast) Benchmarks ■ Benchmark

■ Emissions (actual) ■ Emissions ■■Emissions (forecast)

Source: NSW GHG Abatement Scheme Administrator

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Benchmark Participants (1) ● Under the NSW GHG Abatement Scheme, parties who are required to meet targets for greenhouse gas emissions are called “benchmark participants” ● Each year, the Scheme sets individual benchmark reductions of greenhouse gas emissions for each benchmark participant based on their contribution to the supply of electricity in New South Wales ● Each benchmark participant then has to reduce the average emissions of greenhouse gases from the electricity they supply or consume to the pre-set individual benchmark level 15

Benchmark Participants (2) ● Benchmark participants comprise: ► retail electricity suppliers who hold NSW electricity retail licences (“electricity retailers”); ► electricity customers taking supply directly from the Australian National Electricity Market; ► electricity generators with contracts to supply electricity directly to large customers located in NSW; ► certain other parties who consume large quantities of electricity in New South Wales and who elect to participate directly in the Scheme, rather than have their electricity retailer manage the emission reduction obligation in relation to the electricity they consume 16

Penalty for Non-Compliance ● A penalty for non-compliance is payable when a benchmark participant does not reduce the average emissions of greenhouse gases from electricity they supply or consume to their pre-set individual benchmark level ● Benchmark participants are allowed to carry forward a greenhouse shortfall of up to 10% of their greenhouse benchmark from one year to the next ● Currently, the penalty is AUD 10.50 (EUR 6.25) per tonne of CO2-e above the participant’s benchmark; the penalty is increased in line with inflation ● The penalty is not tax-deductible; therefore at the Australian company marginal tax rate of 30%, the financial impact of the penalty is about AUD 13.65 (EUR 8.15) per tonne of CO2-e 17

Environmental Credits (NGACs) in the NSW GHG Abatement Scheme

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Environmental Credits ● Under a baseline and credit scheme, credits are awarded for either: ► doing something; or ► not doing something, that results in a favourable impact on the environment ● Environmental credits are usually tradeable - they have a value ● Under the NSW GHG Abatement Scheme, environmental credits are awarded for reducing the GHG emission intensity of electricity generation in New South Wales 19

NSW Greenhouse Abatement Certificates (1) ● The environmental credits applicable to the NSW GHG Abatement Scheme are called New South Wales Greenhouse Abatement Certificates (“NGACs”) ● NGACs are surrendered by benchmark participants to offset their excess emissions above the level of their greenhouse gas benchmark ● One NGAC represents the abatement of one tonne of CO2-e associated with the consumption of electricity in New South Wales

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NSW Greenhouse Abatement Certificates (2) ● To create NGACs, parties must be accredited by the Scheme Administrator; they are then called “Accredited Abatement Certificate Providers” ● NGACs can be created in four ways: ► through low-emission generation of electricity; ► through activities that result in reduced consumption of electricity (“demand side abatement”); ► through the capture of carbon from the atmosphere in forests (“carbon sequestration”); ► through industrial activities that reduce on-site GHG emissions not directly related to electricity consumption 21

NGACs - Supply and Demand Supply

Demand

Accredited Abatement Certificate Providers

Benchmark Participants

►

Low emission electricity generation

►

Demand side abatement

►

Forest-based carbon sequestration

►

Industrial processes

►

Electricity retailers

►

Market customers

►

Generators who supply electricity directly

►

Large electricity users (elected in)

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What is Demand Side Abatement?

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What is Demand Side Abatement? ● Demand Side Abatement is a reduction in greenhouse gas emissions resulting from actions taken on the customer side of the meter (“the demand side”) ● In the NSW GHG Abatement Scheme, demand side abatement is defined and governed by the Demand Side Abatement Rule (“DSA Rule”) which is a statutory instrument 24

Demand Side Abatement Activities ● Demand side abatement comprises five types of activities: ► Energy efficiency: modifying existing installations ► Energy efficiency: replacing existing installations ► Energy efficiency: implementing a new installation that uses less electricity than an installation of the same type ► Fuel switching: substituting one source of energy for another ► On-site electricity generation: replacing supply from the National Electricity Market ● NGACs created through energy efficiency projects are “white certificates” 25

Non-DSA Activities ● Demand side abatement excludes: ► activities for which NGACs can be created under other Rules in the NSW GHG Abatement Scheme ► Green Power purchases ► reduction of losses in electricity transmission or distribution networks ► installation of solar water heaters which are eligible to create Renewable Energy Certificates under Australian federal government legislation 26

Demand Side Abatement Projects

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Types of DSA Projects DSA Projects Accredited as at January 2005 On-site generation Fuel switching 8% 2%

Residential Energy Efficiency 16%

Industrial Energy Efficiency 25%

Commercial Commercial Energy Energy Efficiency Efficiency 39% 49%


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Commercial Energy Efficiency ● Commercial energy efficiency projects include: ►lighting upgrades ►boiler and chiller upgrades ►installation of variable speed drives on fans and pumps ● Sites include banks, supermarkets, hotels, clubs…

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Residential Energy Efficiency (1)

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Residential Energy Efficiency (2)

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Industrial Energy Efficiency Hydrogen H2

Electricity Salt (NaCl) Water (H2O)

Hydrogen (H2) Chlorine (Cl2) Chlorine Production Caustic Soda (NaOH)

Hydrochloric Acid Production

Ferrous Chloride FeCl3

Sodium Hypochlorite Production Process where electricity consumption reduction occurred Sodium Hydroxide NaOH (Caustic Soda)

Sodium Hypochlorite NaOCl

Hydrochloric Acid

Ferric Chloride Production

Chlorine Gas Cl2

Ferric Chloride FeCl4

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On-site Generation

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How Are Demand Side Abatement NGACs Created?

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Responsibility for Creating DSA NGACs ● In the DSA Rule, the person responsible for creating NGACs is termed “the Abator” ● Initially, the Abator for a DSA project is the person contractually responsible for paying for the energy consumption at the abatement site ● The initial Abator may nominate in writing another person to be the Abator ● Assignment of the ability to create NGACs enables third parties to specialise in the creation of DSA NGACs 35

Abator Nomination Form

Source: Advertisement by Low Energy Supplies and Services

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Timing for Creating DSA NGACs (1) ● Generally, NGACs may be created only after the corresponding demand side abatement has taken place ● NGACs must be created no later than six months after the end of the calendar year in which abatement occurs ● Timing of NGAC creation may be varied for projects which generate only small quantities of NGACs – this applies particularly to DSA projects 37

Timing for Creating DSA NGACs (2) ● For small projects, the timing for creating NGACs may be varied to allow up to 2000 NGACs to be created at one time ● The Abator may create up to 2000 NGACs before abatement of the corresponding 2000 tCO2-e actually occurs ● For example, the Abator may elect to deem that 2000 tCO2-e have been abated on the date on which the abatement first commences and create the corresponding 2000 NGACs at that time ● Once the abatement has actually occurred, the abator may continue creating NGACs in lots of 2000 38

Eligibility to Create DSA NGACs ● To be eligible to create NGACs, an Abator must be accredited with the Scheme Administrator as a DSA Abatement Certificate Provider ● To be eligible to generate NGACs, a DSA project: ►must be implemented in NSW ►must be implemented after 1 January 2002 ►must result in reduced GHG emissions after 1 January 2003 39

Accreditation Process (1) ● During the accreditation process, the Scheme Administrator examines ► the eligibility of the proposed DSA project; and ► the calculation methods used to estimate the number of NGACs the project will generate ● Detailed guidance is provided by the DSA Rule ● An audit may used to obtain assurance about the record keeping methodology proposed and specific uncertainties in relation to the project 40

Accreditation Process (2)

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Compliance and Performance Monitoring ● The objectives are: ► to assist in monitoring compliance (baselines, accreditation conditions, annual reporting) ► to bring transparency to the operation of the Scheme ► to assist in annual reporting on the Scheme to the Minister ► to contribute to the overall integrity of the Scheme ● Compliance is monitored through: ► the audit regime (both before and after project implementation) ► periodic reporting ► incident reporting ► controls within the Registry 45

Methods for Calculating the Number of NGACs Generated by DSA Projects

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How Many NGACs? ● Demand Side Abatement occurs when a project results in a reduction in GHG emissions compared with the level of emissions without the project ● Therefore, calculating the number of NGACs generated by a project requires measuring the GHG emissions before and after the project is implemented

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Methods for Calculating DSA NGACs Number of NGACs = Emissions Abated Calculated using following methods

Project Impact Assessment

Metered Baseline

Default Abatement Factors

Generation Emissions

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Project Assessment Method (1) ● The Project Assessment Method is most appropriate when: ►the abatement is small compared to electricity consumption at the site ►baseline energy consumption data for the site is unavailable ►unexplained variation in the baseline is high

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Project Assessment Method (2) Emissions Abated

Reduced Energy Consumption

Estimated from engineering assessment

X

Emissions Coefficient

Pool coefficient or scheduled emissions factor

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Project Assessment Method (3) Number of NGACs

Emissions Abated

Calculated from engineering assessment

X

Confidence Factor

Depends on level of accuracy of engineering assessment

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Metered Baseline Method (1) The Metered Baseline Method may only be used where the measurements of energy consumption are of a standard and duration enabling the number of NGACs to be determined to a level of accuracy acceptable to the Scheme Administrator

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Metered Baseline Method (2) Emissions Abated

Reduced Energy Consumption

Calculated from before and after metering

X

Confidence Factor

Depends on level of unexplained variance in the baseline

X

Emissions Coefficient

Pool coefficient or scheduled emissions factor

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Metered Baseline Method (3)

Number of NGACs

Emissions Abated

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Metered Baseline Method (4) There are our different approaches to calculating the reduction in energy consumption, depending upon the relationship of the baseline to output and the extent of variability in the baseline Metered Baseline Method

Baseline unaffected by output

Baseline per unit of output

Normalised Baselines

Australian Building Greenhouse Rating

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Default Abatement Factors Method (1) ● The DSA Rule specifies Default Abatement Factors for certain common equipment and installations ● These include: ►compact fluorescent lamps ►refrigerators ►washing machines ►certain electric motors ►replacing an electric hot water system with a gas one 56

Default Abatement Factors Method (2) ● The Default Abatement Factors Method may only be used if: ►a Default Abatement Factor for the equipment or installation is included in the DSA Rule ►the equipment or installation, once installed, remains in place and operative for the Default Service Lifetime specified the DSA Rule 57

Default Abatement Factors Method (3) Default Emission Abatement Factors Gas hot water system replacing an electric one

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Compact fluorescent lamp rated at 8000+ hours

0.5

Compact fluorescent lamp rated at 5000+ hours

0.3

AAA showerhead connected to an electric hot water system

4.0

AAA showerhead connected to a hot water system with an unknown energy source

3.1

Refrigerator 3.5 to 6 star rating

0.1 to 2.5

Clothes washer 2.5 to 6 star rating

1.3 to 3.5

Clothes dryer 3 to 6 star rating

0.3 to 1.2

Dishwasher 4 to 6 star rating

0.1 to 0.5 58

Default Abatement Factors Method (4)

Number of NGACs

Number of Installations

Determined after completion of project

X

Default Abatement Factor

Specified in DSA Rule

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Generation Emissions Method ● Applicable only to electricity generated and used on site ● Similar approach to the Generation Rule which is used for low GHG emission generation by large scale electricity generators ● Not relevant for energy efficiency NGACs (ie white certificates) 60

Caveats for Calculation Methods ● The result must reasonably reflect the extent to which emissions are abated by the DSA project undertaken ● The assumptions used must be reasonable and follow common engineering practice ● The NGACs calculated must be reasonably attributable to the DSA project undertaken ● The time period over which NGACs are calculated must reasonably reflect the time period over which GHG emissions are abated by the DSA project undertaken ● The calculation must exclude GHG emissions from the consumption or combustion of non-stationary energy sources 61

Performance of the NSW GHG Abatement Scheme

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Overall Scheme Performance To March 2005 ● 137 projects of all types accredited ● Total of 11.6 million NGACs registered ● 6.2 million NGACs surrendered to date ● >920,000 demand side abatement NGACs registered (8%)


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Demand Side Abatement NGACs (1) DSA NGACs Registered as at January 2005 Residential Energy Residential Energy Efficiency Efficiency Commercial 6% 6% Commercial Energy Energy Efficiency Efficiency 5% 5% Industrial Energy Industrial Energy Efficiency Efficiency 11%

11%

On-site generation 78%

Fuel switching