14 Feb 2013

The carbon pricing mechanism is up and running, so what now?

by Brad Wylynko, Monty Neate

Although the first emissions liability surrender period is not until 15 June 2013, energy consumers and suppliers should be taking steps now to ensure they're ready.

The start of the new year means we are now more than halfway through the first year of the Federal Government's carbon pricing mechanism (CPM).

Although the first emissions liability surrender period – when liable entities will need to surrender eligible emissions units for 75% of their emissions liability, or pay a unit shortfall charge – is not until 15 June 2013, the price imposed on carbon is beginning to be felt and passed through the Australian economy (albeit in less sensational fashion than some anticipated).

The lead-up to the introduction of the CPM saw a flurry of contract negotiation and amendment as energy users and their suppliers took action to be "carbon ready' before the 1 July 2012 scheme commencement date. With the ink now drying on CPM-specific carbon clauses, it's a good time to consider the key issues that energy suppliers and energy users will need to address to ensure the first compliance period doesn't generate any unnecessary headaches.

Aside from meeting the relevant administrative obligations under the Clean Energy Act, carbon cost pass-through appears to be the issue of primary importance. Whether you're an energy supplier, energy consumer, or both, the question of transparency is central to all associated discussions.

So what now for energy consumers with existing energy contracts?

Energy consumers with existing energy contracts should review their carbon clauses, in light of any carbon cost component included in energy bills they may have received from their suppliers, in order to determine whether:

  • the correct "carbon costs" are being passed-through. This should include, where relevant, an assessment of the emissions intensity of energy supplied, and consideration of whether any "direct" and "indirect" costs being passed through fit within the negotiated terms of the contract; and
  • energy suppliers are maximising all opportunities to minimise liability under the scheme (including technical measures as well as exploring all options under Commonwealth Government programs and initiatives), if that is indeed a requirement under the contract.

And energy suppliers?

Energy suppliers with liabilities under the Clean Energy Act should revisit their contractual position to consider whether they have:

  • settled on an appropriate formula for calculating the liability of their customers to whom a carbon cost has or will be passed through;
  • all relevant paperwork and systems in place to ensure the full "carbon cost" has been determined; and
  • where relevant, obtained the requisite number of free carbon units to meet their emissions liability (or a portion thereof) under the Jobs and Competitiveness Program, or from their customers under any contractual arrangements for the transfer of carbon units.

15 June will arrive sooner than expected. Appropriate consideration of these issues now will assist entities on both sides of the energy fence to anticipate and hopefully avoid any conflicts at the 11th hour.

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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.