11 Jul 2011

Clean Energy Future's impact on industry: Sector-by-sector

by Brendan Bateman

While assistance to Emissions Intensive Trade Exposed activities remains largely unchanged, specific industries have been singled out for additional assistance while others have been left out, once again. This is the impact of the Government's new "Jobs and Competitiveness Program".

A key component of the Clean Energy Future package is the revamped EITE assistance program, called the "Jobs and Competitiveness Program". It provides details about the assistance to specific activities and industries. In this article we'll give a brief overview sector by sector, and a fuller analysis in the next few days.

EITE assistance

As many operators of Emissions Intensive Trade Exposed Industry (EITE) activities would be aware, negotiations and discussions with the Department of Climate Change and Energy Efficiency about qualification and levels of assistance that started during the CPRS in 2009-10 quickly recommenced after the announcement of the framework for the Carbon Price Mechanism in February this year by the Multi-Party Climate Change Committee. Accordingly, considerable work has already been done in defining eligible activities for assistance, and determining the quantum of assistance.

The rates for EITE assistance proposed under the CPRS (+GFC top up) remain largely unchanged, with highly intensive activities receiving 94.5% of permits for free, and moderately intensive activities receiving 66%. Where there have been changes are to:

  • the rate of decay in the level of assistance, called the "carbon productivity contribution" – this will now be 1.3% pa.
  • the period of notice that the Government will give of changes to levels of assistance. This has been reduced from five years to three.

Activities eligible for assistance at the higher level include aluminium smelting, steel manufacturing, flat glass making, cement, zinc smelting and most pulp and paper manufacturing activities. Moderately intensive activities include plastics and chemical manufacturing, tissue paper manufacturing and ethanol production. Other key points of the Jobs and Competitiveness Program for EITE activities include:

  • assistance based on previous year's production with a true up to account for actual production;
  • during the fixed price period, permits will be allocated generally in line with the progressive payment obligations. During the flexible price period, allocation will be made early in each compliance year;
  • assistance is provided in respect of both direct and cost of indirect emissions, with no caps on existing activities;
  • allocative baselines for activities are based on historic industry average level of emissions per unit of production. This means that a business which conducts an eligible activity and its emissions are less than the average for the industry, it will receive a benefit; and
  • necessity for, and levels of, assistance will be reviewed by the Productivity Commission, with the first review to occur in 2014.

Stationary energy

Just as Ross Garnaut's view that the stationary energy sector should not receive any compensation has mellowed, so too has the Government's proposed treatment of the sector, albeit only slightly.

The Jobs and Competitiveness Program proposes the establishment of an Energy Security Fund and Energy Security Council. The Fund will include three key initiatives:

  • payments for closure – the Government intends to negotiate the closure or partial closure of emissions intensive generators to remove up to 2,0000 MW of capacity before 2020. This will occur on an expression of interest basis with eligible generators to have an emissions intensity greater than 1.2tCO2-e per MWh of electricity on an "as generated basis". It is likely that generators such as Hazelwood in Victoria which have already flagged its preparedness to negotiate a closure will benefit from this initiative;
  • limited transitional assistance to strongly affected generators involving a mixture of payments and permits, estimated at $5.5 bn over six years. Such assistance will be limited to generators with an emissions intensity above 1.0tCO2-e per MWh which will preclude most black coal fired generators; and
  • loans for the purchase of future vintage carbon permits for the first three years of auctions. The Government will also consider making loans available where generators need to refinance their debt but finance is not available on commercial terms.

Generators receiving allocations of free permits will be required to provide Clean Energy Investment Plans to identify proposals to reduce pollution from existing facilities and invest in research and development of new low emission capacity. These plans are to be made public.

The Energy Security Council will advise the Government on systemic risks to energy security arising from financial impairment of any market participants.

Resources sector

The Government predicts that most coal mines will incur only minor cost impacts from the imposition of a carbon price, about $1.40 per tonne in respect of fugitive emissions. However, the Government has estimated that, without assistance, the average "gassy" coal mines could face a cost of $7.40 per tonne of coal produced, while the most "gassy" could have a cost of around $25 per tonne.

The Government proposes a $1.3bn Coal Sector Jobs Package over six years to provide assistance to the most emissions intensive mines. Eligibility is limited to existing mines and does not apply to expansion of such mines. Eligible coal mines will have a fugitive emissions intensity of at least 0.1tCO2-e per tonne of saleable coal produced, with assistance up to 80% for the fugitive emissions above this threshold. Assistance will be based on historical emissions intensity so that there is an incentive for gassy coal mines to reduce their intensity.

The LNG sector had also been seeking exemption from, or at least full compensation from the impact of a carbon price. The package announced yesterday however, proposes that LNG projects will receive a supplementary allocation to ensure an effective assistance rate of 50% in relation to LNG production each year.

Industrial sectors

While EITE assistance is available for the more emissions intensive activities, non-EITE support is also proposed in the form of a $1.2 bn Clean Technology Program to help improve energy efficiency in manufacturing and support research and development in low polluting technologies. The program has three elements:

  • a $800m Clean Technology Investment Program to support investment in energy efficient capital equipment, and low pollution technology process and products;
  • a $200m Clean Technology Food and Foundries Investment Program to support investment into lower emission technology and processes in food processing and metal foundries / forgeries; and
  • a $200m Clean Technology Innovation Program to support research and development for renewable energy, low pollution technologies and energy efficiency.

All of the programs will be delivered on a co-contribution basis. The Government believes that these programs will deliver $4 bn in direct investment, and $400m investment in research and development.

Singled out for special additional assistance is steel manufacturing. In addition to the EITE assistance, the steel sector will receive an additional $300m over five years in assistance through the "Steel Transformation Plan", complemented by a small increase in free permits allocated to the steel industry from 2016-17 onwards. The object of this additional assistance is to enable the steel manufacturing process to become more efficient and sustainable. The Productivity Commission will review treatment of the steel industry as part of its EITE review in 2014-15. This component of the package, however, does not have MPCCC support with the Greens indicating that they are not in favour of it.

Transport sector

With fuel being excluded from the Carbon Price Mechanism, there has been a significant reduction in the number of liable entities. In so far as a "carbon price equivalent" will be imposed on users of fuel through cuts to fuel tax credits, this will be limited to domestic shipping, rail, heavy road transport and non-transport emissions from businesses which use liquid fuels. Households, agriculture, forestry and fishery industries will not pay a carbon price on fuel, nor will light commercial vehicles. Fuel tax credit reductions will apply to fuels acquired after 1 July 2012.

As fuel tax credits are not available for aviation fuels, domestic aviation fuel excise will be increased by an amount equivalent to the effect of the carbon price. This will apply after 1 July 2012. International aviation fuel use is subject to international negotiation, but it is noteworthy that the EU ETS is proposing to impose liability on airline operators that enter the EU.

It is proposed that the Productivity Commission review the proposed fuel excise arrangements. That said, there remains a question mark about whether cuts to fuel tax credits to heavy road transport will pass, with independent MPs Tony Windsor and Rob Oakeshott both opposing the cuts. The Government has indicated that these cuts can be achieved through regulation, but the prospect of those regulatory amendments being disallowed exists.

Complementary measures

Apart from the detail of the Carbon Price Mechanism, the Government also announced as part of its Clean Energy Future package a number of initiatives to support clean and renewable energy, and energy efficiency.

Renewable energy

In relation to renewable energy, the Government proposes two new initiatives:

  • the establishment of a Clean Energy Finance Corporation to invest $10 bn over five years from 2013-14. The corporation will invest in the commercialisation and deployment of renewable energy and enabling technologies, energy efficiency and low-emission technologies. It will not invest in carbon capture and storage technologies. Finance will take the form of loans, loan guarantees and equity. The Corporation will have an independent board comprising experts in banking, investment and clean energy, low emission technologies; and
  • the establishment of the Australian Renewable Energy Agency (ARENA), a statutory authority with an independent board. ARENA will provide funding through a range of competitive grant programs to support research and development, demonstration and commercialisation of renewable energy technologies. $3.2 bn in existing programs will be managed by ARENA, including the Solar Flagships Program, with the potential for more funding from dividends earned by the Clean Energy Finance Corporation.

The $200m Clean Technology Innovation Program available under the Clean Technology Program (see above under Industrial Sector) is also available to support investment in renewable energy.

The Government hopes to drive a total of $20bn in investment in renewable energy by 2020 and predicts that the renewable energy sector will be 18 times its current size by 2050, with 40% of electricity generated from renewable sources by 2050.

The consolidation of many existing programs under the one agency with independent oversight will hopefully reduce the uncertainty created by policy changes and back-flips when it comes to the renewable energy sector. By also establishing a special purpose investment corporation with requisite expertise, there is the potential for investment at scale in new and emerging technologies.

Energy efficiency

A disappointing element of the Clean Energy Future package is the absence of any "step change" type initiatives to encourage energy efficiency. Since the Prime Minister's Task Group's Report on Energy Efficiency was released last year, the Government has so far been muted in its response. The package released yesterday details the Government's response to each of the recommendations of the report, but there are only a few specific actions, among a number of commitments to consider possible initiatives.

The Government proposes "further work" on a national energy savings initiative or "white certificate" scheme, under which energy retailers have obligations to help households and business implement energy savings, and expansion of the Energy Efficiency Opportunities program to include energy generators, transmitters and distributors. One specific commitment is to the implementation of a mandatory CO2 emissions standard for light vehicles, but there remains a vague commitment to aim for national consistency in various State energy efficiency standards and programs.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.