Comments on this option paper

Hugh Outhred, Iain MacGill and Karel Nolles
University of New South Wales
Sydney Australia

September 2002

This document is a commented version of the original Emissions methodology options paper by George Wilkenfeld and Associates. The authors have also prepared a discussion paper that summarises these comments and raises some more general issues. Both paper s are available at www.ergo.ee.unsw.edu.au.

(To print this paper with the comments select ‘Options..’ in the Printing dialog box and check the ‘Include with document: comments’box)

Emissions Calculation Methodology
for the Revised NSW Greenhouse Gas Emissions
Benchmark Scheme:
Options Paper

Prepared for the Ministry of Energy and Utilities

by

George Wilkenfeld and Associates
 
September 2002

Executive Summary

On 8 May 2002, the Premier and the Minister for Energy announced that the NSW Government will be implementing an enforceable greenhouse benchmarks scheme for electricity retailers and other liable parties.

The scheme will commence on 1 January 2003, with 2003 being the first year of mandatory compliance.  Reporting on the first compliance period will be required by the end of April 2004.

The operation of the scheme will rely on detailed methodologies for the calculation of emissions, benchmarks and other compliance elements.  One of the key methodologies will be an Emissions Methodology, which will need to cover the following:

•	Calculation of energy outputs, emissions and emissions abatements attributable to specific power generators; 
•	Calculation of the NSW pool coefficient;  
•	Approach to projecting a “deemed” NSW pool coefficient; 
•	Apportioning the output of generators in a number of ways (eg above/below “baselines”, or between NSW Greenhouse Abatement Certificates and Commonwealth “Renewable Energy Certificates”). 
•	Calculation of other compliance elements. 

This paper discusses the options for these and recommends preferred options to be incorporated in the Emissions Methodology.  It does not cover all methodological issues related to the scheme – related methodologies and Options Papers are referenced in the text where appropriate. 
Public comment is invited on the issues discussed in this paper.  The preferred means of receiving comments is by email with reference to specific section numbers and question numbers.  Comments should be submitted by 24 September 2002, and should be directed to:

Dr David Hemming
Manager, Greenhouse and Sustainable Development
Ministry of Energy and Utilities

Email: hemmingd@energy.nsw.gov.au

Level 6, Minerals and Energy House
29 – 57 Christie Street
St Leonards      NSW     2065

Facsimile: (02) 9901 8403

Contents

1. Introduction	4
1.1  Purpose of this Options Paper	4
Objectives of the Emissions Methodology	5
1.2 The Compliance Framework	5
NGACs	6
RECs	7
Large User Abatement Certificates	9
2.  Categories of Electricity Generation	10
2.1 Existing and Proposed Categories	10
2.2 Category B: the NSW Pool	12
Baselines and Incentives	14
2.3  Category A Generation	18
Creation and Ownership of NGACs	18
Calculating the Value of NGACs	18
2.4  Other Categories of Generation	19
3.  Other Issues	21
3.1  Projecting Key Variables	21
NSW Electricity Emissions	21
Share of NSW Energy Market	21
NSW Pool Coefficient	22
3.2  Loss Factors	24
3.3  Registration and Reporting	25
Registration of Generators	25
Creation and Registration of NGACs	26
3.4  Other Issues	26
Conflict with Other State Regimes	26

1. Introduction 

1.1  Purpose of this Options Paper 

On 8 May 2002, the Premier and the Minister for Energy announced that the NSW Government will be implementing an enforceable greenhouse benchmarks scheme for electricity retailers and other liable parties.

The benchmark has been set as a 5% reduction in per capita greenhouse gas emissions from 1989/90 levels by 2007.  This equates to a benchmark of 7.27 tonnes of carbon dioxide-equivalent (t CO2-e) per capita in 2007.

The scheme will commence on 1 January 2003, with 2003 being the first year of mandatory compliance.  The State benchmark for 2003 has been set at 8.65 t CO2-e per capita.  Annual targets will follow a linear path to achieve the benchmark of 7.27 t CO2-e per capita in 2007.  The target will be maintained at that level until at least 2012.

The operation of the scheme will rely on detailed methodologies for the calculation of emissions, benchmarks and other compliance elements.  One of the key methodologies will be an Emissions Methodology, which will need to cover the following:

•	Calculation of energy outputs, emissions and emissions abatements attributable to specific power generators; 
•	Calculation of the NSW pool coefficient;  
•	Approach to projecting a “deemed” NSW pool coefficient; 
•	Apportioning the output of generators in a number of ways (eg above/below “baselines”, or between NSW “assigned generation” and Commonwealth “Renewable Energy Certificates [RECs]”). 
•	Calculation of other compliance elements.

This paper discusses the options for these and recommends preferred options to be incorporated in the Emissions Methodology.  It does not cover all methodological issues related to the scheme – related methodologies and Options Papers are referenced in the text where appropriate.

The final Emissions Methodology to be approved in due course by the Minister for Energy may or may not be consistent with the options raised in this paper.  Any parties making commercial arrangements based on assumptions about the final methodology do so at their own risk.

Objectives of the Emissions Methodology 

•	Accuracy: the methodology should provide an accurate indication of the emissions attributable to electricity use in NSW, and to each party’s electricity purchases; 
•	Integrity: the methodology should avoid double-counting of benefits (eg with regard to RECs);
•	Consistency with the National Greenhouse Gas Inventory methodology;
•	Simplicity, clarity and lack of ambiguity;
•	Environmental effectiveness: the methodology should reward measures that actually reduce emissions compared with Business-as-Usual; 
•	Fairness and equity: parties should not be disadvantaged compared with the present methodology (set out in Greenhouse Gas Emissions from Electricity Supplied in NSW: Emissions Workbook, October 2000) and any special concessions should be limited and publicly disclosed;
•	Continuity: where possible, procedures and calculations should be the same as in the present methodology.

1.2 The Compliance Framework

The State benchmark will need to be allocated to individual liable parties according to their share of the NSW electrical energy services market.  Liable parties will now include end users who purchase electricity directly from the pool, and generators making direct sales to customers, as well as retailers.  Large retail electricity users (those with electricity consumption above a threshold value) can elect to be directly liable to the benchmark regime.  Projects of State significance (as nominated by the Minister) will also be able to elect to manage their own benchmarks.  Where users elect to manage their own benchmarks, their electricity consumption will be netted out from the sales of the retailer supplying them.  In general this will only be of interest to those large users that have special (non-energy) on-site opportunities for greenhouse gas reduction, and so could create Large User Abatement Certificates (see below).   

A penalty (expressed in $/t CO2-e) will be imposed on retailers and other liable parties to the extent of the excess of their attributable greenhouse gas emissions above their allocated greenhouse gas emissions benchmark in each year, although the penalty may be deferred if the excess is within a specified margin (a shortfall allowance).  The calculation of the excess is described by the following equation:

Excess (t CO2-e) = Attributable Emissions (t CO2-e) – Benchmark Emissions Allocated (t CO2-e) 

The calculation of the Benchmark Emissions Allocated hinges on the treatment of Electricity Sales Foregone (SF), and options for various treatments are canvassed in a separate publication, Electricity Sales Foregone Methodology under the Revised NSW Retail Licence Greenhouse Conditions: Options Paper.  This paper will be released shortly.

The present paper deals with the details of the calculation of Attributable Emissions, which is described by the following equation:

Attributable Emissions (t CO2-e) = (MWh purchased at bulk supply points x pool coefficient (t CO2-e/MWh)) – NGACs (t CO2-e abated) – (RECS surrendered (MWh) x pool coefficient) – Large User Abatement Certificates if applicable (t CO2-e).

NGACs

The NGAC (NSW Greenhouse Abatement Certificate) is the proposed new instrument that will be tradeable among liable parties (and perhaps other parties such as brokers).  It is proposed NGACs will be denominated in tonnes CO2-e abated, and that they can be created through the following activities:

•	the generation of electricity in power stations with lower emissions intensity than the deemed NSW pool coefficient, or through emissions reduction measures undertaken in power stations; 
•	the sequestration of carbon in forests; and
•	measures which reduce the consumption of grid-supplied electricity (that is sales foregone). 

The Emissions Methodology will cover the rules for the calculation of the NSW pool coefficient and for NGACs, which are defined in relation to the pool coefficient.  This may incorporate some of the elements in the current workbook Greenhouse Gas Emissions from Electricity Supplied in NSW: Emissions Workbook, October 2000.

The rules for calculation of NGACs from sequestration will be covered in a separate carbon sequestration workbook.  This may incorporate some of the elements in the draft Greenhouse Gas Emissions from Electricity Supplied in NSW: Framework for the use of carbon sequestration to offset emissions, December 2001.

The rules for calculation of NGACs from energy efficiency and fuel switching will be covered in a separate electricity sales foregone workbook.  This may incorporate some of the elements in the current workbook Greenhouse Gas Emissions from Electricity Supplied in NSW: Framework for Calculation of Electricity Sales Foregone, February 1999. 

It is proposed that liable parties will only be able to surrender registered NGACs towards their liability. The process of registration will ensure a degree of quality control and supplier traceability.  One proposal is that the registry be managed by the Independent Pricing and Regulatory Tribunal (IPART).  It is further proposed that NGACs will have to be created and registered within 6 months of the end of the year in which the abatement occurred.  However, NGACs would not expire until they were surrendered to IPART, that is, they can be banked for future use with no restrictions, assuming that they have been validly created.

RECs

The Commonwealth Renewable Energy (Electricity) Act 2000 (RE(E) Act) requires liable parties to obtain a specified percentage of their electricity purchases from generators using renewable energy.  Generators meeting the criteria are registered by the Office of the Renewable Energy Regulator (ORER).  The percentage increases each year, in line with the Commonwealth’s Mandatory Renewable Energy Target (MRET), which aims to achieve a target quantity (in GWh) of additional generation from new and existing renewable energy sources by 2010.  The percentage is announced by ORER every February.  In calendar 2001, the first year of operation, the renewable power percentage was 0.24%. This means that a liable party which purchased 100,000 MWh in 2001 had to obtain RECs to a face value of 240 MWh from registered renewable energy generators.  The percentage for 2002 is 0.62%.  It is estimated that the percentage in calendar 2003 will be about 1.0%. 

Each liable party must demonstrate to ORER that it has obtained exclusive rights to a nominated amount of renewable energy, by surrendering the required number of RECs.  The denomination of each REC is 1 MWh of renewable energy.  It is the ORER’s responsibility to ensure that:

•	The generator creating the REC meets the criteria in the regulations to the Act;
•	RECs are created and registered in accordance with the regulations to the Act;
•	The number of RECs created by a generator in a given period does not exceed its physical output; 
•	The number of RECs surrendered in fact meets the obligation of each liable party; 
•	Fines for non-compliance are paid (and refunded in subsequent years if shortfalls are made good). 

The NSW Government has decided that parties liable under the NSW benchmark regime will be able to count some of the RECs which they surrender to comply with the Commonwealth RE(E) Act towards compliance with their NSW benchmark.  However, the Government intends to limit this amount to the number of RECs that the party surrenders in relation to its NSW sales in that year, as defined by the following formula:

Maximum number of RECs that can be brought to account against NSW liability (in MWh) = total MWh purchased (to meet sales) in NSW by liable party against which compliance is assessed in that year x Renewable Energy Percentage announced by ORER for that year.

For example, if a liable party purchases 1,000,000 MWh from bulk supply points in NSW and 5,000,000 MWh in Victoria, and the Renewable Energy Percentage in that year were 1.0%, then it would have to surrender 6,000,000 x 1/100 = 60,000 RECs to ORER.  The maximum number it could bring to bear towards its NSW benchmark obligation would be 1,000,000 x 1/100 = 10,000 RECs. 

Where a large user has elected to manage its own benchmark, the RECs surrendered by the retailer on behalf of the large user would not be counted towards the retailer’s benchmark compliance.  Generally, large users will not be a liable party under the Commonwealth’s MRET scheme, and large users will rarely surrender RECs in their own right.  However, large users will generally have paid for the RECs surrendered by their retailer in relation to their electricity consumption, except in cases where contracts do not contain any pass through provisions for such changes in law.

The actual RECs would be surrendered to ORER, not the NSW regulator, and the process of “bringing to account” in NSW would involve some form of documentation that the number of RECs being claimed towards NSW compliance has been surrendered in the same calendar year.  The most convenient way may be for the liable party to supply a list of surrendered RECs (each with unique serial number) to the NSW regulator.  

It is also the NSW Government’s intention that RECs and NGACs cannot be created from the same unit of generated energy.

The proposed limit would in effect restrict the proportion of all RECS that can be used towards NSW compliance to the NSW share of the national electricity market: currently about 35%.  The NSW Government has decided that there will be no discrimination between RECs which may be brought to account towards NSW benchmark obligations, to the extent of the MRET obligation for NSW sales in any year.

The National Green Power Accreditation Steering Group (NGPASG) has decided that RECs produced from generators supplying energy that backs “new” Green Power sales must be surrendered to it, rather than to ORER, in order to ensure that new investment in renewable generation funded by Green Power subscribers is in addition to the investment required to meet statutory obligations. 

Consistent with the approach being taken in regard to MRET, the NSW Government has decided that RECs surrendered to meet Green Power compliance obligations will not be able to be used towards NSW greenhouse benchmark obligations.

For the RECs that are submitted for NSW benchmark compliance, it will be necessary to convert their value from MWh to tonnes CO2-e abated.  Some RECs will be from zero-emissions sources such as wind, hydro and solar, but some will be from non-zero sources (eg bagasse and biogas, the combustion of which leads to some CH4 and N2O emissions under the NGGI methodology, even though the CO2 emissions are discounted because the fuel is renewable).  The RE(E) Act Regulations do not reduce the value of RECs for these small non-CO2 emissions.  Also, some RECs are from sources such as landfill gas which provide significantly greater abatement than zero emission sources because they convert emissions of methane to carbon dioxide and thereby avoid the emission of methane which has a global warming potential some 21 times higher than CO2. 

The simplest approach will be to treat every REC as if it represents one MWh of zero-emissions energy.  Therefore its abatement value for NSW purposes will be the same as the pool coefficient (expressed in t CO2-e/MWh) in the year of generation. 

Issues on which comment is sought

1.	Should all RECs be treated as if they were from zero-emission sources, or should credit be given for the additional abatement that some renewable sources give rise to ?
[Preferred position: zero-emission] 

Large User Abatement Certificates

Wholesale customers, and large users who opt for a benchmark, will be by definition very large electricity consumers.  They will have a strong incentive to reduce their benchmark liability by containing their electricity consumption, through measures such as increasing the efficiency of electricity use and substituting other forms of energy for electricity where possible – ie by taking the same kinds of action that would lead to electricity sales foregone (SF). 

Nevertheless, large users may have opportunities to reduce non-energy greenhouse gas emissions associated with their electricity-consuming processes: for example, the emission of perfluorocarbons (PFCs) in aluminium smelting.  These have a very high global warming potential, so it would be valuable to reduce their emissions. 

This is the purpose of the Large User Abatement Certificates (LUACs).  LUACs would be:

•	available only to wholesale electricity customers and large users opting for their own benchmark (not to customers covered by the benchmark obligation of their retailer , who qualify for SF measures);
•	negotiated individually with each electricity user, taking into account their special pattern of emissions and opportunities to reduce emissions;
•	denominated in tonnes CO2-e abated;
•	usable only for compliance by the liable party in question, and not tradeable or convertible into NGACs.  
Obviously, LUACs would have potential significant monetary value, and would not be accessible to all liable parties.  Equity considerations would require that they be negotiated within publicly known guidelines (such as those listed above) and that the benefit claimed under LUACs each year be publicly disclosed – if not for each party, then in total. 

A draft methodology proposing the criteria regarding creation of LUACs will be released for public consultation in due course.
2.  Categories of Electricity Generation

2.1 Existing and Proposed Categories

The current NSW Methodology divides the output of the electricity generators eligible to provide energy to the NSW electricity market into six Categories A to F and by location: within NSW or outside NSW.  The 12 classifications are summarised in
Table 1.  Some of the categories of generation segment the output of the same power stations: eg Category B/C1/C2, and Category D/E.  

For the revised methodology, it is proposed to simplify the categorisation in the following ways:

•	Remove the distinction between generation within NSW and generation outside NSW.  This means that “pro-rating factors” will no longer be applied to the output of generators creating NGACs according to their location.  However, power stations eligible to create NGACs must be electrically connected to the South-East Australian Grid.

•	Abolish Category F, Green Power.  This distinction was created for the purposes of exempting Green Power from interstate pro-rating, so if pro-rating ceases there is no further rationale for Category F. 

•	Move to an explicit “baseline” approach to segmenting the output of power stations, rather than using categories.  Baselines may be “production baselines” referring only to electricity sent out, or “technical baselines” defining the impact of a measure that produces greenhouse benefits, without necessarily affecting electricity production. 

Table 1  Categorisation of Electricity Generation, Current NSW Methodology 
Location 	Electricity from “Existing” Plant: commissioned before 1 July 1997 	Electricity from “New” Plant: commissioned on/after 1 July 1997	Existing or new plant	
	A. Deemed to be assigned	B. Assignable part of energy output	C1. Non-assignable
C2. Unassigned
	D. Assigned energy output	E. Unassigned energy output	F. Energy assigned via GreenPower	
In NSW	No baseline applies	Baseline calculation set out in Emissions Methodology	No baseline applies	No baseline applies	No baseline applies	Baseline in Green Power methodology applies	
Outside NSW	Capped at 1996/97 output	Baseline calculation set out in Emissions Methodology	No baseline applies	No baseline applies	No baseline applies	Baseline in Green Power methodology applies	

It is proposed to reduce the main Categories of power stations to four only, with renewable and fossil fuel sub-categories.

Category A: The output (or output capped to the contracted level, if that is the current restriction) is deemed to a nominated retailer by virtue of historical power purchase agreements. In some cases however the assignee will now be deemed to receive the benefit of generation only up to a baseline, and any additional output will be assignable by the power station owner.  For renewable energy Category A power stations with an MRET production baseline, it is proposed that generation above the baseline can create NGACs or RECs but not both for the same MWh.  For fossil fuel Category A power stations subject to a maximum contracted output [under a PPA for example], it is proposed that generation above that output will be able to create NGACs.  For fossil fuel power stations not subject to a cap, all energy output will continue to be deemed to the retailer.  The list of Category A power stations and their retailers has been determined already under the current methodology.  The number of Category A power stations cannot increase – it could however reduce over time if existing power purchase agreements are terminated.   

Category B:  Power stations supplying energy direct to the NSW Pool.  The entire output of each power station up to a baseline (if any) is factored into the NSW pool coefficient.  For renewable energy Category B power stations with an MRET production baseline, generation above the baseline will be used to create RECs.  Fossil fuel Category B power stations may apply for a technical baseline for certain measures, and so create NGACs for performance improvements over the baseline. 

Category C:  All other “existing” power stations, defined as those which commenced commercial operation before 30 June 1997 (1 January 1997 for renewable energy generators, to line up with MRET rules).  For renewable energy Category C power stations, all output above the MRET production baseline is assignable.  For fossil fuel Category C power stations, all output above the average for the financial years 1996/97 to 2000/01 (proposed) is eligible to create NGACs (only typical operating years to be taken into account – eg excluding rebuilds or other extended off-line periods).   

Category D: All other “new” power stations, defined as those which commenced commercial operation after 30 June 1997 (Proposed 1 January 1997 for renewable energy generators, to line up with MRET rules).  All output is eligible to create NGACs, and zero baselines apply.   

These proposed rules are summarised in Table 2.  “Assignment” of energy from fossil fuel power stations can only take place via NGACs.  Assignment of energy from renewable energy power stations may take place via either RECs or NGACs, as is discussed in the following sections. 

Table 2  Proposed Categorisation of Electricity Generation, Revised Methodology 
	Category A
Deemed	Category B
NSW Pool	Category C
Other existing	Category D
Other New	
Fossil fuel	All output (or up to 96/97 baseline if applicable) deemed to retailer.  Output above baseline assignable	Greenhouse abatement benefits above technical baseline assignable	Output above production baseline  (average of 1996/97 to 2000/01) assignable 	All output assignable 	
Renewable Energy	Output up to MRET baseline deemed to retailer;  output above MRET baseline assignable 	Output up to MRET baseline deemed to NSW pool;  output above MRET baseline assignable	Output above MRET baseline assignable 	All output assignable 	

2.2 Category B: the NSW Pool 

The model of the NSW electricity system used in the current methodology is based on the historical NSW electricity system boundaries, which predate the National Electricity Market region boundaries.  The 1990 starting point for the NSW emissions benchmark was calculated on the basis of the NSW pool, so the basic definition of the NSW pool needs to be retained.  

The NSW pool will continue to comprise the Category C generation in the present methodology (renamed as Category B in Table 2).  However, the pool coefficient calculation will be simplified because “benchmark surpluses” will no longer need to be returned.  Such surpluses arise automatically under certain conditions under the current methodology, but this will no longer be the case under the proposed methodology.  If a liable party holds more NGACs than it needs in a given year, it can sell them or retain them for future use. 

The structure of the NSW pool is illustrated in Figure 1.  The list of power stations whose output and emissions (if any) are factored into the pool will be unchanged:

•	The fossil fuel power stations are Bayswater, Eraring, Liddell, Mt Piper, Munmorah, Redbank, Vales Point and Wallerawang; 
•	The Eraring Hydro power stations are Brown Mountain, Burrinjuck, Hume, Keepit, Shoalhaven and Warragamba;
•	The Snowy Hydro power stations, including Blowering.  

The output of the hydro power stations will be adjusted for pumped storage from fossil fuel generation, as in the present methodology. 

The emissions impact of net inflows from Queensland and/or Vic/SA will be taken into account by multiplying the net inflow (MWh) by the pool coefficient of the appropriate grid (t CO2-e/MWh), as in the present methodology. 

At present the energy inflows are calculated using a multi-stage process that nets out assigned energy generated in Qld and Vic/SA (see Section 4.1.2 of the Emissions Methodology).  This netting out has had negligible impact on the NSW pool coefficient.  Given that NGACs and RECs may be surrendered for compliance in a later year than the year of generation, and scaling factors for out of State generation are to be abandoned, it is proposed to discontinue the netting out assigned generation from the interconnector energy flows.

Figure 1  Diagram of NSW Pool

Baselines and Incentives

The rationale for establishing a “baseline” for a power station is to establish an incentive to manage the power station in a way which brings about greenhouse benefits, while avoiding windfall returns for actions that were taken or committed to prior to the incentive regime and so could not have been influenced by it.   

For a fossil fuel power station, the types of measures which might lead to a greenhouse benefit are: 

•	Increasing the overall efficiency of the power station without necessarily changing the fuel mix, so that more electricity is sent out for the same emissions (or less emissions for the same electricity); 
•	Changing the fossil fuel mix, eg by partly substituting natural gas (or waste coal mine gas) for coal; or
•	Partly substituting a renewable fuel, eg wood waste, for fossil fuels .   

For a renewable energy power station, the types of measures which might lead to a greenhouse benefit are: 

•	Increasing the efficiency of conversion of the renewable energy flow to electricity (eg by increasing the efficiency of turbines in a wind farm); or
•	Increasing the renewable energy flow (eg by diverting more water through a hydro-generator). 

In either case, the energy output from the renewable generator will be increased.  

The Commonwealth Renewable Energy (Electricity) Regulations 2001 supporting MRET state that:

“For a power station that generates electricity for the first time after 1 January 1997, the 1997 eligible renewable power baseline is nil; 

For a power station that generated electricity before 1 January 1997, the 1997 eligible renewable power baseline is the average of the annual electricity generated from eligible renewable energy sources in 1994, 1995 and 1996 (the reference period) worked out in accordance with Subdivision 2.3.1.”
  
Generators can argue for a different baseline if those years were untypical in some way. 

All Snowy and Eraring Hydro power stations are registered with ORER, and so have MRET baselines (although these are not public).  For the NSW methodology, it is proposed that generation up to the MRET baseline level will be factored into the NSW pool, but any generation above the baseline is used to create RECs or NGACs. Indeed, it will be presumed that it has been assigned via RECs, unless the operators declare to the NSW Regulator that NGACs have been created instead.  

Now that MRET has created an incentive for Snowy and Eraring hydro to generate above their baseline, the condition in the NSW methodology that would allow them to claim a benefit for generation efficiency improvements need not be retained.  The value of such improvements can be captured by increased output, although if the increase is not sufficient to exceed the MRET baseline, no additional RECs would be created.  If the feature were retained, the benefit could only be realised via NGACs, since the MRET methodology does not recognise it. 

For the fossil fuel power stations supplying the pool, the current methodology allows assignable benefits to be created in two distinct ways:

a)	Through measures involving use of low- or negative-emissions fuel (see section 2.3.1 of the Emissions Workbook); 
b)	Through measures which lead to a reduction in the emissions-intensity of electricity sent out, without the introduction of a new fuel (see section 2.3.2 of the Emissions Workbook). 
 
Incentive (a) has actually been used to assign the benefit of co-firing with biomass fuels, and it is proposed that it be retained.  However, MRET now allows RECs to be created from the same actions at the same power stations.  To avoid the possibility of double-counting, it will be presumed that greenhouse benefit of renewable fuel co-firing in NSW pool power stations has or will be used to create RECs, unless the operators declare to the NSW Regulator that NGACs have been created instead.  Either way, the greenhouse benefit must be subtracted from the overall impact of the power station on the NSW pool coefficient, so that the benefit is not double counted. 

Incentive (b) has not so far been invoked by any power station operator but it too now has a Commonwealth parallel.   

In 2000, the Commonwealth developed a separate program for fossil-fuel power generators called Generator Efficiency Standards (GES).  The objective of the GES program is to achieve movement towards best practice in the efficiency of electricity generation using fossil fuels, and to deliver reductions in the greenhouse gas intensity of energy supply.

The Commonwealth has made legally binding agreements with generation businesses
affected by the measure to achieve movement towards best practice power generation
in Australia.  Standards will apply to new electricity generation, significant
refurbishments and to existing generation.  For existing power stations, businesses sign a 5 year Deed of Agreement with the Commonwealth to:

•	if at best practice – improve within the best practice performance band; or
•	if below best practice - achieve movement towards best practice performance for each individual plant.

The standards are expressed not in terms of thermal efficiency but greenhouse gas intensity (t CO2-e/MWh sent out).  This enables participants to meet their agreed targets via a wide range of measures, including fuel switching or blending as well as thermal or mechanical efficiency improvement.  However, the effects of normal variation in the CO2-intensity of the fuel (as can occur with coal, simply through sourcing from different mines) are netted our when checking the power station’s performance.    

All the operators of the fossil fuel power stations supplying energy to the NSW pool are participants in GES.  In effect, participants undertake to maintain the performance of their power stations within a “best practice” band delimited by higher and lower curves of t CO2-e/MWh sent out – the values and the shape of the curves are calculated individually for each power station and agreed with GES. 

It has been suggested that the GES methodology gives a more accurate indication of changes in generation efficiency than NSW incentive (b) above, because it accounts for variables such as output factor and degradation over time.  It has also been suggested that power station operators who do better than their GES undertakings by achieving a t CO2-e/MWh sent out value lower than the lower bound of the best practice band, should be able to create NGACs accordingly.  This could work in the following way:

Say the GES best practice band showed a lower value of 0.93 t CO2-e/MWh sent out at the output factor achieved by the power station in the given year (say 70%), but the power station achieved 0.91 t CO2-e/MWh (after standardising for coal differences: say the average coal analysis in that year indicated an emission factor of 92.0 Gg CO2/PJ, whereas the GES values were based on 90.0 Gg CO2/PJ).  The power station sent out 6,000,000 MWh.

The power station bettered its GES value by (0.93-0.91 = 0.02) t CO2-e/MWh sent out, so it creates an abatement of 0.02 x 6,000,000 = 120,000 t CO2-e compared with business-as-usual (ie if it had met its GES “best practice” target but not exceeded it). The actual emissions, calculated using the actual coal emissions factor, would still be factored into the pool. 

This approach is logically justifiable so long as the intensity is lower than it would have been for those operating conditions and age profile, due to the actions of the power station operator.  

If this approach were adopted, it would replace the efficiency-related incentives for fossil fuel generators in the current Methodology.  Only power stations with a GES baseline would be able to create NGACs from efficiency improvements, and the value of the NGACs would be calculated with reference to the GES baseline. 

However it would still be necessary to retain separate incentives in the NSW methodology for measures which reduce the emissions-intensity of fossil fuel use, with or without efficiency improvement.  It would also be necessary to clarify the procedure for allocation of benefits in the event that measures result in both fuel intensity reduction and efficiency improvement. 

If these intensity baselines were established for each power station, and operators rewarded with the creation of NGACs for exceeding them, it is arguable that they should then also be liable on a $/tonne basis if they fall short by exceeding the upper bound of their GES best practice band – in the same way that electricity retailers and other parties will be liable for falling short of their benchmarks. 

Issues on which comment is sought:

2.	Should the efficiency incentive for renewable energy generators in the current methodology be retained?
[Preferred option – no] 
3.	Should the methodology in the Commonwealth Generator Efficiency Standards be substituted for the efficiency incentives for fossil fuel generators in the current methodology? 
[Preferred option – yes]
4.	If so, should power station operators be held liable for underperformance, as well as rewarded for over-performance? 

2.3  Category A Generation

Creation and Ownership of NGACs

Power stations classified as Category A in the current methodology will continue to be Category A under the revised methodology.  The principle of Category A generation is that the retailer to which the power station’s output is deemed has the right to create and dispose of the NGACs – for all output in some cases, and for output up to a certain level in other cases. 

•	For Category A fossil fuel power stations, the deemed retailer has the right to create NGACs for all output up to the contracted level of output (in for example a pre-existing power purchase agreement).  However, the owner of the power station will have the right to create NGACs for any output above that level.  This introduces an incentive to increase generation from these low-intensity power stations;
•	For Category A renewable energy power stations (including landfill), the deemed retailer has the right to create NGACs for all output up to the MRET baseline.  However, the owner of the power station will have the right to create NGACs or RECs (but not both) for any output above that level.  This introduces an incentive to increase generation from these zero- and negative-intensity power stations.
   
In the last of these instances, it will be assumed that the owner has chosen to create RECs for any above-baseline generation, unless the owner registers the power station with the NSW regulator and supplies sufficient information to substantiate that the total amount of energy used to create NGACs and RECs in each year is no greater than the physical output less the baseline.  To simplify the verification of this, it may be desirable to require owners to choose to create only RECs or only NGACs from eligible generation in any calendar year.  The NSW regulator can then detect breaches (or at least trigger inquiries) by finding even a single REC registered by the power station in question for generation in a year for which it has opted for NGACs, rather than having to detect and sum all RECs with that year of generation. 

However, if landfill gas generators opt for RECs, they will potentially forego the high negative value of fugitive emissions avoided that the NSW methodology offers.  [This issue was raised previously]

Calculating the Value of NGACs

It is proposed that the abatement value of NGACs produced by Category A (and other) power stations will be determined under the following general formula: 

NGACs (tonnes CO2-e abated) = Eligible MWh sent out x loss adjustment factor x (pool coefficient – specific coefficient for that generator).

The loss adjustment factor will be necessary to align the connection level of the power station producing the NGAC with the pool output, which is at the transmission system level.  Loss adjustment factors are discussed later, and the following discussion assumes that the power station producing the NGAC is connected at the transmission level, so the factor is neutral. 

For example, if in a given calendar year the pool coefficient were 0.90 t CO2-e/MWh, the emissions intensity of a natural gas-fired Category A power station were 0.55 t CO2-e/MWh and it sent out 40 GWh, the value of NGACs that could be created would be 40,000 x (0.90-0.55)  = 14,000 t CO2-e of abatement.   

A landfill gas generator has a negative intensity, so one with a similar output to the above example might be able to create 40,000 x (0.90 – (-3.80)) = 188,000 t CO2-e of abatement under the NSW methodology.  If the same generator opted to create RECs instead, the abatement value of those RECs against NSW benchmark obligations would be only 40,000 x (0.90 – 0) = 36,000 t CO2-e abated. The generator’s owner would have a commercial incentive to create NGACs rather than RECs in those years when the ratio of abatement values (5.2:1) exceeded the ratio of the market value of RECs to the market value of NGACs. 

The current methodology requires emissions reports to be submitted for all fuel generators for which assignment is being claimed (Report A in the current Emissions Workbook).  As many fuel/technology combinations have fairly consistent emissions intensities, it may be possible to simplify the process by allowing the use of default emission factors.  However, owners of generators with lower emissions factors than the defaults should be free to submit actual data if they wish, to support the creation of more NGACs for the same output.   
  
Alternatively, the use of default factors may be restricted to generators below a specified level of output (defined either in MW or in MWh/yr). 

Also, it may be necessary to require actual emissions reports for power stations using more than one fuel in significant proportions (eg for greater than 10% of the energy input) or of significantly different greenhouse intensities, because changes in fuel mix from year to year can have a major impact on the greenhouse performance.  A typical example is the use of natural gas with supplementary firing with landfill gas or waste coal mine gas.     

2.4  Other Categories of Generation 

The method of determining the values of abatement from Category C and D power stations in any year is essentially the same as for Category A.  The steps are:

•	Calculate the quantity (in MWh) of eligible electricity generation (above baseline for Category C, all generation for Category D);
•	Calculate the difference (in t CO2-e/MWh) between the NSW pool coefficient in the year of generation, and the specific emissions intensity for the power station (using actual or default data);
•	Calculate the loss adjustment factor;
•	Multiply the three factors above to determine the abatement value for NGACs (in t CO2-e).  

Alternatively, the owners of renewable energy power stations may opt to create RECs instead. 

Issues on which comment is sought (for Categories A, C and D):

5.	In instances where power station owners are eligible to create RECs or NGACs, should they be able to create both within a given calendar year (up to the limit of physical generation less any applicable baseline) or should they be required to opt for only one or the other in any given year? 
[Preferred option –can create both in a given year subject to the limitation that not for the same MWh]
6.	Should the use of default emissions factors be allowed for any power stations?
[Preferred option – yes]
7.	If so, should there be some power station types, sizes or situations where the use of defaults is not permitted?

3.  Other Issues 

3.1  Projecting Key Variables

Liable parties will be better able to plan their strategy to achieve compliance with their benchmark if they are able to project or forecast the extent of their liability and the value of different types of measures.  Legislation will require IPART to deem values for total NSW sales, the NSW pool coefficient and the NSW population by November of the year before they are to apply.  The Regulation will say how these numbers are calculated.

NSW Electricity Emissions

The target limit of emissions attributable to electricity supply in NSW is the product of projected population and projected per capita emissions benchmark.  The former value is projected by the ABS, and the latter has already been predetermined by Government policy, so the product of the two values can be projected with a very high degree of confidence.

Share of NSW Energy Market 

Each liable party’s share of the NSW electrical energy service market is the ratio of the party’s energy purchases or sales to total NSW energy purchases or sales.  Only the liable party is in a position to project its own sales, but it would be helpful to have agreed projections of the entire NSW electrical energy services market, so that liable parties can assess their likely share of it.  

The Ministry of Energy and Utilities has recently published a set of projections of NSW electrical energy demand to 2011, in NSW Statement of System Opportunities, June 2002.  These are illustrated in Figure 2.  These still leave considerable latitude for liable parties to make their own judgements about growth in total electricity sales: for example, the 2007 “high probable” value is about 3% higher than the “base probable”, and the “low probable” is about 3% lower.  

The confidence level of projections of the extent of each party’s liability will be moderate at best.  Experience with the current NSW methodology indicates that retailers as a group are fairly optimistic in projecting their individual share of NSW electricity sales, but this tendency is self-limiting as far as benchmark compliance is concerned.  Those who find they have over-estimated their market share will be able to sell any excess NGACs to other parties who have underestimated their share, or retain them for future use or sale. 

In order to provide certainty of each liable party’s greenhouse obligations, IPART will deem a value for the total NSW sales towards the end of each calendar year, to be used for the following year. It is also intended that the legislation (or the regulation) will define the means of arriving at this value.  To the extent that they are then able to correctly project their own sales or purchases, liable parties will be able to plan their abatement activities and purchases of NGACs.  

It is proposed that flexibility will be provided by the ability to bank NGACs for use in future years, and a shortfall allowance of 10% of a liable party’s benchmark in any year, with any shortfall to be made up in the following year.  This shortfall allowance will apply to all years, except 2007.

Figure 2  Projections of NSW electrical energy use, 2001-2011

Source: NSW Statement of System Opportunities, MEU June 2002

NSW Pool Coefficient
 
The NSW pool coefficient can be projected with a moderate to high degree of confidence.  The power stations supplying energy to the pool is known (see Figure 1).  The only power stations likely to be added to this list in future are those with greenhouse intensity higher than the pool coefficient, and so unable to create NGACs – all new power stations able to create NGACs will be Category D.  

The pool coefficient will be determined by the characteristics of the existing fossil fuel and hydro power stations. The maximum amount of energy that the hydro power stations can send out to the NSW pool would be limited to their MRET baseline – it may be less in years of unusually low water availability.  The balance of physical energy supply to the NSW pool will then be determined mainly by the following factors:

•	The physical energy sent out from non-NSW pool generators within NSW;

•	The proportion of NSW energy sent out that is imported from Victoria/SA and Queensland, and the greenhouse coefficients of the Victoria/SA and Queensland pools.  
  
For example, if it is assumed that the share of NSW energy sent out from non–pool generators and from imports remains constant, then as NSW electricity sent out increases a growing share of the NSW pool energy must be supplied from fossil fuel plant, since the energy from hydro is capped.  Therefore all else being equal, the pool coefficient will increase.

The NSW pool coefficient can be projected with a reasonable degree of confidence for two to three years ahead, since that is the lead time for large new power stations or the major refurbishment or re-powering of existing power stations.  The methodology would transfer the greenhouse benefits of new low-intensity pool power stations or reduced emissions from existing pool power stations to the NGAC market, so they would not impact on the pool coefficient. 

IPART will publish a “deemed” pool coefficient towards the end of each calendar year to apply for the following year, and provide a non-binding projection for over a period of years into the future.  It is expected that this would be of benefit to liable parties and to suppliers of assigned generation:

•	Liable parties would be able to project their attributable emissions with greater certainty, and so better plan their compliance strategy; 

•	The abatement value of each MWh produced by non-pool power stations could be projected with greater confidence, since the value is determined by the difference between the pool coefficient and the greenhouse intensity of that power station;

•	The abatement value of each REC could be projected with greater confidence. 

There is an issue about availability of data to IPART to enable the pool coefficient to be calculated.  Clearly the pool coefficient will be lagged, by possibly two years.  A possible approach may also be to calculate the pool coefficient as a rolling average pool coefficient.

Issues on which comment is sought:

8.	The pool coefficient will be deemed, but how many years forward should it be deemed?
[Preferred Option – deemed for one year but with a non-binding forecast provided for 3 years ahead]
9.	How should the pool coefficient be calculated?

3.2  Loss Factors 

The starting point for calculations under the current methodology is retail electricity sales.  This is because the only liable parties are electricity retailers, and the benchmark liability of each retailer is calculated in proportion to its share of the NSW retail electricity services market (including SF).  

The quantity of energy purchased from the pool is calculated by applying a Distribution Scaling Factor (DSF) to the energy sold, to account for distribution losses between bulk supply points (in effect the NEMMCO supply points) and the point of customer use.  The weighted DSF for each retailer should be identical to its weighted NEMMCO Distribution Loss Factor (DLF). 

The energy sent out to the NSW pool by the pool power stations is higher again than the energy sent to the supply points, because energy is lost in transmission (and pumping water for storage hydro).  The ratio of energy available at bulk supply points to energy sent out to the pool (from pool power stations plus net imports) is the Transmission Scaling Factor (TSF).  This is not the same as the NEMMCO Transmission Loss Factor (TLF), which is the ratio of transmission loss at each supply point to average transmission loss.  For example, if 2.1% of energy sent out to the NSW supply system were lost, then the TSF at a supply point with a NEMMCO marginal TLF of 1.000 would be 100/(100-2.1) x 1.000 = 1.021, whereas the TSF at a supply point with a NEMMCO marginal TLF of 1.030 would be 100/(100-2.1) x 1.030 = 1.052. 

The pool emissions attributable to each retailer are currently calculated as:

Pool emissions (t CO2-e) = Pool coefficient (t CO2-e/MWh) x retail MWh sold x weighted average DSF [or DLF] x weighted average TSF [or TLF x average system loss %]

It is proposed that the starting point for calculations be shifted from the point of retail sales to the point of bulk supply, for the following reasons: 

•	Liable parties will now include wholesale customers, who may have no distribution losses or retail sales, but who have TLFs, and may include large retail customers; 

•	The energy value of RECs produced from registered renewable energy power stations is calculated with reference to the NEMMCO TLFs (no loss factors are applied to RECs produced by solar water heaters or small generators producing up to 25 MWh per annum). 

However, this change would make it necessary to determine each liable party’s share of the wholesale electricity market rather than the retail market.  It would then also be consistent to calculate the GWh produced by power stations creating NGACs with a formula similar to that for which MRET uses to calculate the value of RECs. 

Alternatively, the point of reference could be left at the “sales” level, but then an adjustment would be required so that wholesale buyers are not disadvantaged.  For example, say 8,000 GWh is purchased by wholesale customers, and 45,000 GWh by retailers.  Of the latter, say 5% (2,250 GWh) is lost in distribution and 42,750 GWh sold to retail customers.  If measured at the purchase level, wholesale customers would have 8,000/53,000 = 15.1% of the energy market, and hence 15.1% of the liability. If measured at the final sales level, wholesale customers would have 8,000/50,750 = 15.8% of the market, and hence a significantly higher share of the liability.  The most direct adjustment would be to define total NSW electricity purchases as:

(Retail sales x weighted average DLF in NSW) + Wholesale purchases

It is also recognised that generators supplying energy to the distribution network should not be liable for transmission losses which the don’t incur.  Accordingly a mechanism needs to be included in calculating the number of NGACs created to reflect the value of abatement as near as possible to the end-user.

Issues on which comment is sought:

10.	Should the point of reference be shifted from retail sales to purchases?
[Preferred – Yes]
11.	How should loss adjustment factors be incorporated in calculating the number of NGACs created?
12.	How can wholesale customers and electricity retailers be equitably treated?
13.	Is it possible to rely entirely on NEMMCO loss factors without calculating and publishing additional data, such as the estimated transmission losses in NSW or the weighted average DLF in NSW?
14.	Should State-wide loss factors be applied or should the current system of losses calculated according to franchise areas be continued?

3.3  Registration and Reporting 

Registration of Generators

It is proposed that NGACs can only be created by power stations that are accredited with the NSW Registry.  It is also proposed that the sellers of NGACs will be liable for ensuring that they are valid and correctly calculated and registered in accordance with the methodology, not the buyers of NGACs (the parties with benchmark liabilities).  

The conditions for initial accreditation and retention of accreditation will include:

•	Supplying specified details with the accreditation application, eg the physical characteristics of the power station, the date of commissioning, technology type, type of fuels used, and the NEMMCO meter numbers and loss factors; 

•	Supplying annual returns on the operation of the power station, including total electricity generated and sent out and total fuels used and their emissions factors, in a form specified by the registry and within a certain period of the end of each year; 

•	Acceptance of a NSW Classification code (eg Category A, B, C or D);  

•	Registration of a NSW baseline appropriate to that Category; 

•	If registered with ORER, disclosure of the ORER registration number, baseline and loss factor (or undertaking to provide these within a specified period in the event that ORER registration is obtained subsequently) to the Regulator on a confidential basis;

•	Supplying annual returns with the quantities and serial numbers of NGACs created and registered (if any) and the quantities and serial number of RECs created and registered (if any) in that calendar year;  

•	Acceptance of and reasonable cooperation with random audits authorised by the Regulator;

•	In the event of proven breaches or irregularities, penalties will be payable.

The detailed requirements will be included in the Regulation.  Fees for registration etc will be payable.

Creation and Registration of NGACs 

It is proposed to establish an automated facility for on-line registration of NGACs, similar to the process by which RECs are created and registered on-line. 

It is also proposed to integrate the serial numbering system for NGACs with that for RECs as much as possible. 

Fees will be payable to cover the costs of NGAC registration. 

3.4  Other Issues 

Conflict with Other State Regimes

Considerable effort has been made to ensure that the same greenhouse-effective action is not counted more than once towards compliance with the NSW benchmark regime, or at least to ensure that the extent of any such double counting is constrained (which is the intent of limiting the number of RECs that can be brought to account in NSW).  Effort has also been made to separate the effects of the NSW regime from Commonwealth initiatives such as MRET, GES and Greenhouse Challenge. 

It would be inconsistent to allow the additional greenhouse benefit that will be created for and by participants in the NSW regime to be used also towards compliance by the same parties or other parties with any other State or Territory regime that may be adopted in future. 

It would also be inconsistent to allow greenhouse abatement created through other mandatory State schemes to be double counted for NSW benchmark compliance.  Accordingly, it is proposed that any unit of energy used to create Gas Energy Certificates (GECs) under the Queensland gas scheme not also be able to create NGACs.

Issue on which comment is sought:

15.	In the event that other States adopt similar regimes, how can the use of the same energy output or greenhouse benefit towards compliance in more than one regime be prevented?

The NSW Government has proposed that the mandatory greenhouse benchmark regime could be extended to other jurisdictions, and it is important that impediments to such extensions are not inadvertently included.

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