01 Mar 2012

So, you've rebuilt your renewable energy power station. Are you eligible for more RECs?

by Nick Thomas, Trisha Cashmere

Renovating a renewable energy power station didn't alter change the power station's eligibility to create renewable energy certificates.

Don't assume you can clear out a generating baseline for renewable energy certificates (RECs), and create more RECs, just because you have redeveloped your power station.

In a rare decision under the Renewable Energy (Electricity) Act 2000 (Cth), the Administrative Appeals Tribunal (AAT) has decided that a recent $500M renovation and re-construction of a pulp mill and biomass power station do not change the power station's eligibility to create renewable energy certificates (RECs), and has reimposed its 1997 renewable power baseline. This means that the power station will create RECS only for the electricity it generates above its 1997 baseline, despite the renovation works.

How the REC scheme works

The Act establishes a scheme for trading in RECs, with a view to promoting the generation and use of sustainable renewable energy. As a starting point, the Act:

  • establishes a system of RECs, each of which represents 1 megawatt (MW) of renewable energy, and which are created by the generation of electricity from renewable sources (eg. wind, solar, hydro, geothermal, biomass and others); and
  • imposes a liability on wholesale purchasers of electricity (ie. electricity retailers and large scale electricity users) to surrender RECs each year in an amount which is calculated by reference to the amount of electricity they purchase in the preceding year.

The price for large scale RECs (ie. RECs created from large-scale electricity generating activities) is currently around $38.

A person who has registered under the Act can apply to the Renewable Energy Regulator for accreditation of the person's generating facility as an "eligible power station", in order to create RECs from the generation of electricity from that power station.

If a renewable energy power station that produced electricity before 1997 is accredited, then the terms of accreditation will include an "eligible renewable power baseline", which is an electricity generation threshold measured in MW/h. The power station operator will create RECs for the generation of electricity only to the extent it exceeds that baseline.

Renovating the Maryvale Mill Power Station

The Maryvale Mill, in Victoria's LaTrobe Valley, produces wood pulp for paper milling. A by-product of the pulping process, called "black liquor", is refined at the Mill and then burnt in an adjacent power station to generate electricity. Given the essentially organic nature of the black liquor, it is considered a biomass renewable energy source, and so the Maryvale Mill Power Station (MMPS) was accredited in 2002 as an "eligible power station" for the purpose of creating RECs.

However, since the MMPS had been generating electricity using this method for many years, its accreditation includes an "eligible renewable power baseline" of about 154,000MW/h, which was determined by averaging the MMPS' electricity generation for three years before 1997. Consequently, the MMPS is eligible for RECs only for electricity it generates in excess of about 154,000MW/h per year.

Several years ago, the Maryvale Mill's operator, Australian Paper, carried out a feasibility study for the Mill and decided that the Mill and the MMPS should be redeveloped in stages. The redevelopment of the Mill and the MMPS cost more than $500M and involved several shutdowns during works, but eventually it was completed in 2008.

Australian Paper then applied for accreditation of the redeveloped MMPS under the Act. The Renewable Energy Regulator rejected the application, and instead varied the prior accreditation to take account of the new componentry in the MMPS. This meant that the 1997 eligible renewable power baseline continued to apply.

Australian Paper appealed the decision to the AAT, but the AAT affirmed the Regulator's decisions.

The importance of additional renewable energy

Australian Paper argued that the MMPS in 2008 is not the same power station as the MMPS in 2002 – instead, it is a new power station eligible for fresh accreditation. Its components are materially different and it uses different processes resulting in the production of an increased volume of black liquor which has an increased capacity to generate electricity and, therefore, to reduce environmental impacts. The works that have been undertaken have been significant both in scale and cost and have led to a new power station’s replacing the old. The MMPS accreditation should not be prejudiced by the fact that the new MMPS is on the same site as the old MMPS.

However, the AAT adopted many of the Regulator's arguments instead. It focused on a key objective of the Act "to encourage the additional generation of electricity" (AAT emphasis), and held that it would not be consistent with that objective to remove the 1997 baseline for the MMPS.

The AAT also found that, although some of the componentry had changed, this related primarily to the production of the black liquor, which is not a component of electricity generation because it is not "integral to" the generation process. The AAT contrasted this situation with the dam wall and pipes which carry water to the turbines in a hydroelectric power station – it indicated that those components were likely to be "integral to" the generating process of such a power station.

In the words of the AAT president:

"What we have done is to look at what was and what is. Despite the extensive work that has been undertaken and the considerable expense that has been incurred, in the context of the Act, the power station at the Maryvale Mill remains the power station at the Maryvale Mill. Certainly, it is an upgraded and refurbished power station but it remains what it was ie. a system for the generation of electricity from a renewable energy source for use at the Maryvale Mill."

Effect on REC price irrelevant

However, it was not all the Regulator's way. The Regulator argued that Australian Paper's approach was wrong because it would put additional RECs into the market without generating additional renewable energy and that would drive REC prices down. REC prices have been a sensitive issue for the renewable energy scheme, and so the Regulator was particularly concerned about the impact Australian Paper's proposal would have in this regard.

However, the AAT said that the effect on the REC price was irrelevant to the determination as to whether to accredit a power station or to adjust its eligible renewable power baseline.

What this means

The decision provides some helpful guidance on the Act, not only for the renovation of older renewable energy facilities, but also for the meaning of what is integral to a biomass generating facility, the relevance (or not) of impacts on REC prices to the accreditation of a facility, and the importance of applying the Act's objects in interpreting the Act.

Australian Paper has an opportunity to appeal the AAT's decision to the Federal Court, but that opportunity expires soon.

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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.