I am writing in respect of Professor Ross Garnaut's presentation at the Paddington Town Hall on Thursday 10 July 2008 on the 'Garnaut Climate Change Review Draft Report June 2008' (the 'Report'). Having recently returned from the United Kingdom where I was working as a Waste and Renewables lawyer for the best part of 7 years, I was very interested to hear Professor Garnaut present an overview of the Report, in particular, the proposed financial drivers for technological change (i.e. bankability).
In the United Kingdom, the bankability of a technology is satisfied if a funder will provide debt/equity funding for a technology (i.e. sign off by its credit committee). One of the core elements of bankability is having a 'proven' technology either currently operating on commercial terms or having satisfied a rigorous demonstration phase.
As you know, the United Kingdom does have an Energy Trading System (UK ETS)1 as does Europe2. However, the UK and EU ETS are not the main drivers of technical advancement in the renewable sector nor are they the main source of funding for renewable energy projects, although the Kyoto Protocol flexibility mechanisms of the Clean Development Mechanism (CDM) and to a lesser extent the Joint Implementation Mechanism (JI) do have an impact.
The main sources of funding in the United Kingdom are as follows:
- PFI credits (if the Project is a PFI Project) will be a source of upfront funding for the capex from the Government3; and/or
- Renewable Obligation Certificates (ROCs) provide a financial benefit to a renewable generator under the Renewable's Obligation. The ROC is a financial derivative which is granted to an eligible renewable generator (i.e. wind/solar/wave/tidal/CHP) and is currently valued in the market place at Ł48 per megawatt hour. Fossil fuel generators are not eligible for this financial incentive. Banks will look to the ROC as part of its funding package in agreeing to fund a Project4;
- The Levy Exemption Certificate (LEC) is a tax on electricity generation from fossil fuels. The tax is broken down into different values per feed stock (i.e. oil/gas etc). The principal concept is that renewable generators are exempt from this tax and therefore incentivised to develop renewable technologies5
I put to Professor Garnaut the proposition that in order to facilitate development of technology to assist Australia move forward and prosper in the climate change era such financial incentives would be ideal and was he looking to implement similar concepts. His response was that the intention of the AU ETS (now called the Carbon Pollution Reduction Scheme (CPRS)) is to provide all the necessary incentive for technology providers to design, demonstrate, build, fund and operate new technologies to assist with Australia's battle against climate change. This in part is hoped to be achieved by a high Australian Emission Units (AEU) price in future years as well as a reinvestment of proceeds of the 'auction' of EAPs to assist with technological advancement as a form of 'feed-in' tariff (as is used in Germany and is a direct government subsidy).
His response was somewhat surprising. The UK is acknowledged as a world leader in Renewable Energy: even so, it has not been able to rely on the UK/EU ETS to fund change. This has been in part due to the novelty of the trading but also the variation in the carbon price. The EU ETS carbon price oscillated sharply from €29.20 (April 06) to just €0.11 cents (July 07). The UK Government has sought to stimulate technological development, in part, through the ROC and the LEC. Indeed, change has been slower than anticipated, which has resulted in the restructuring of the ROC. Following consultation, the ROC will be structured more aggressively by allocating ROCs to different technology bands (i.e. Emerging Technologies to receive 2 ROCs, Post Demonstration Technologies 1.5 ROCs, Demonstration Technologies 1 ROC and Established Technologies 0.25 ROCs). This banding will come into force in April 2009. The financial incentives for technological change is of immediate importance. If the UK has been unable to rely solely on the UK/EU ETS for technological development how will the CPRS realistically incentivise technological development In addition, the CPRS places a enormous responsibility on the government to fund the correct technology that will deliver the required change rather than relying on the expertise of the private sector. Presently, Australian Venture Capitalists and Banks are not looking to include these financial incentives as part of their funding and security package: unlike the UK/EU. This will change when the market becomes more mature. What is needed is for companies to understand these financial incentives and how they impact of their current/future funding and project risks. For example, do their current contracts deal with changes in law properly or do they apportion risk for changes in legislation in the draconian pass through method. Business should seek experienced practitioners with transaction experience in Renewable Energy who have hands on experience with structuring, drafting and negotiating these mechanisms: otherwise, they will probably not be adequately protected.
Time will tell whether the CPRS will have sufficient clout and buy-in to enable the carbon price to incentivise operators to develop new technologies. It is imperative that the technological drive for change is a mechanism that is robust and will incentivise new technological providers from Australia and abroad to develop and implement life long changes that could bring solutions to what is a most immediate and present danger. Who knows: the Federal Government may seek to implement a 'social cost of carbon' which is being consulted on in Europe which could introduce a separate price of carbon (not market based) which would make effective change now seem even more prudent.
If you have any questions in relation to this article please contact Dermot Duncan Special Counsel head of climate change group Swaab Attorneys.
1 The UK ETS came into force in 2002.
2 The EU ETS began operating in 2005.
3 The core difference between a PPP Project and PFI Project is that the UK Government grants PFI Credits (i.e. a funding injection for the capital cost) and a PPP Project is not eligible for this financial assistance.
4 The Australian Federal Government recently consulted on a similar mechanism under the proposed Renewable Energy Target (RET) (which is to replace the Mandatory Renewable Energy Target (MRET).
5 The Australian Federal Government has not released any information to my knowledge on a similar mechanism for Australia.
Swaab was recently named winner 'Best Law Firm in Australia (Revenue < $20m)' and 'Attribute Award for Exceptional Service (Australia Wide)' and at the 2008 BRW- Client Choice Awards.
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