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30 Mar 2012

Moving towards a Clean Energy Scheme: Exposure Drafts released for comment

As we move closer to the commencement of the Clean Energy Scheme on 1 July 2012, the functional and procedural aspects of the Scheme are still being implemented through legislation and regulations.

Earlier this month, the exposure draft regulations amending the Clean Energy Regulations 2011 and the National Greenhouse and Energy Reporting Regulations 2008 were released for public comment.

Below we highlight key changes and impacts of those draft regulations.

Netting-out for LNG, LPG and CNG exported from Australia

In an important change, the Clean Energy Amendment Regulation 2012 makes clear that for manufacturers of liquefied natural gas (LNG), liquefied petroleum gas (LPG) and compressed natural gas (CNG), emissions can be netted out for LNG, LPG and CNG that is exported or subject to excise duty.

This overcomes a significant issue which would otherwise arise where gas purchased on the east coast of Australia is sent through transmission and distribution systems to be partially used in liquefaction, storage and transport facilities and then exported overseas. Without this netting-out provision, a person purchasing gas for partial use and then subsequent export of the balance, and quoting an OTN when doing so, would find themselves liable for the embedded combustion emissions of gas which is exported and combusted overseas. Allowing for the netting-out of emissions for LNG, LPG and CNG exported overseas removes this risk.

Defining a natural gas liability

The Clean Energy Amendment Regulation clarifies what will constitute a supply of natural gas for the purposes of determining both the point of liability for natural gas supplies and the time at which the supply occurs for the purposes of the Clean Energy Act 2011.

"Natural gas supply pipeline" encompasses the definition of "pipelines" in the National Gas (South Australia) Act 2008 (SA). Gas that is not withdrawn from a "natural gas supply pipeline" does not count towards these provisions, nor do pipelines that are part of upstream production operations.

A "withdrawal" of natural gas occurs where natural gas exits a point on a pipeline where the amount of natural gas supplied to a person for use is ascertained at the point by a natural gas supplier or their agent. It will also occur when natural gas is combusted in machinery or equipment attached to a pipeline. Wholesale gas supply arrangements (for example those where gas is supplied to a natural gas retailer or end user who takes delivery of the gas at a delivery point within a pipeline) are excluded from the definition of "withdrawal".

"When supply of natural gas occurs" is also defined as the point at which the gas is withdrawn from the natural gas supply pipeline. This enables an alignment of the time of supply and the time of withdrawal of the natural gas.

There is still a difficulty, however, where the gas is delivered at one point on the pipeline and withdrawn by the buyer at another point at which the supplier or its agent does not have metering.

There is also still a double-counting difficulty where a trader of gas uses part of the supplied gas in a small consuming facility (such as a standby generator) and on-supplies the balance to another purchaser. There is likely to be a gas supply liability on both supplies.

Other notable amendments brought in by the Clean Energy Amendment Regulation

The Clean Energy Amendment Regulation provides for circumstances in which a facility can cease to be a large gas consuming facility (LGCF) and liability will revert to the OTN holder. These include where:

  • a LGCF can demonstrate consistently reduced natural gas emissions (less than 25,000 tonnes CO2-e); or
  • a facility has a "one-off year" in which its natural gas emissions are unusually high, triggering the 25,000 tonne threshold.

The Clean Energy Amendment Regulation also sets out the procedural requirements for an application for a designated joint venture, participating percentage declaration, corporate group liability transfer certificate and financial control liability transfer certificate.

Defining exclusions under the National Greenhouse and Energy Reporting Amendment Regulation 2012

The National Greenhouse and Energy Reporting Amendment Regulation has incorporated and amended definitions which provide for greater clarity and consistency with the Clean Energy Act. It now includes definitions for biofuels, biogas, biomass and "decommissioned underground mine" as emissions are excluded from being counted towards Australia's emissions obligations.

Other notable amendments

In addition to detailing information to be provided when a liable entity nominates operational control of a facility for the purposes of sections 11AA, 11AB, 11B and 11C of the National Greenhouse and Energy Reporting Act, the Regulations also include a method for adjusting energy consumption for publication which reflects the outcome of a consultation process undertaken in November last year.

Further, the draft regulation also set out mandatory audit requirements. Persons with an emission number corresponding to over 125,000 tonnes CO2-e in a financial year must arrange for a "reasonable assurance" audit to be undertaken by a Category 2 or 3 auditor. In addition to controlling corporations that currently must report, reporting obligations also extend to liable entities under the carbon pricing mechanism and the holders of liability transfer certificates.

Next steps

The regulations are intended to be finalised in April 2012. Comments must be submitted on the exposure draft regulations by Monday 2 April 2012.

If you would like more information on how these changes may affect your organisation, please contact the Clayton Utz Climate Change team.

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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.