Chubb report

Chubb report carbon offset

The long-awaited Chubb report was published on Monday 9th January 2023. Its purpose to “ensure Australian Carbon Credit Units (ACCUs) and the carbon crediting framework maintain a strong and credible reputation supported by participants, purchasers and the broader community.1”

The government has agreed (in principle) to enact all the proposed recommendations.

But let’s start at the beginning. The Chubb review came about following claims that the scheme was not robust, being managed badly and not fit for standards, especially on the international stage.

Following the King report in 2020 this view was exacerbated by the Clean Energy Regulator (CER) taking on an even larger role in this opaque market, holding the keys to the design of ACCU methodologies, registration and regulation of those projects, a data source for the “independent” ERAC (the Emissions Reduction Assurance Committee – the independent committee overseeing the ACCU market) and buying ACCUs on behalf of the Australian Government. Some may say it was a keys to the castle type deal.

Therefore, transparency and independence were unsurprisingly the key focus for the Chubb review. Both from the regulatory and data access standpoints, obviously maintaining privacy where required. With upcoming changes in the Safeguard Mechanism expected to come into force in the new financial year and increasing interest in ACCUs from the Hydrogen industry (to ensure certification meets international standards such as CertifHy) the robustness of the scheme must be unimpeachable.

I think the most interesting part of the review is the u-turn from the previous Morrison government’s stance, which mandated in 2021 that their own Climate Active standard would have required members to increase their “carbon neutrality” through a minimum of 20% or 30% ACCUs dependant on size. This reversal, to no such mandate, is showing the business community at least that an international certification is enough for this government. Not the strong climate stance that is being pitched from the floors of Canberra.

As with many of these papers I am finding little accountability and more future safeguarding. Especially around human-induced regen (noting that ends this year), carbon capture and storage and landfill waste gas, with no individual projects reviewed, the current standard of certification cannot be confirmed, yet it is likely to be significantly tightened if the advised transparency is enforced.

Overall, I can’t help feeling this was not more than a necessary boondoggle, yes some interest groups have had some wins, but it was necessary to achieve its end – it is going to undo a significant number of the controversial King review and Morrison Government changes.

Reversal however will come at a price, there will likely be a significant amount of funding put in place to reduce the both “real and perceived,” burden on both the CER and especially the Emissions Reduction Assurance Committee (ERAC). The latter of whom will be dis-banded and renamed the Carbon Abatement Integrity Committee (CAIC), moved out from the CER with full data access restored and with a remit which, if enacted within 6 months, could see them as an Independent Statutory Authority, a level the ERAC currently hold but are handcuffed from enacting upon.

Personally, I think any changes which bring transparency to this market, its accreditations and oversight can only be positive. There is still the government tender for an ACCU exchange to be developed which would further assist this transparency, but I also fear it has stopped short of really making the Carbon Market in Australia un-penetrable.

With Climate Active still supporting accreditations from Certified Emissions Reductions (CERs), Verified Carbon Units (VCUs) amongst others and an increasing number of lesser regulated Carbon Neutral certificated (iRECs etc) being used for Carbon Neutral Claims, I think this review could have used its opportunity to ensure the Australian Carbon Neutrality Certification would be seen as a world leader. Instead, I fear it is trying not to shake an already leaking boat, with pressure for ACCUs likely to increase with Safeguard changes and the HIR methodology ending in 2023, as well as the new “REGO” scheme being touted as “voluntary surrender only” with no regard for the impact to the LGCs market. Another knee jerk could have put too much price pressure on a market which is not only opaque but likely to come under significant demand, and that is before the increased scrutiny once data is widely available.

No, the Chubb review has done its job, it has unwound a lot of the misgivings people had. It should increase transparency, a feat which has been loudly called for in this market since its inception 11 years ago and not ruffled too many feathers in the process. I guess I just hoped for more.

References: 1: https://www.dcceew.gov.au/climate-change/emissions-reduction/independent-review-accus

Kate Turner is Edge2020’s senior manager markets, analytics and sustainability. Through a passion that renewable energy solutions are key to any climate change solution, Kate supports our clients to manage their portfolios and any associated risk within traditional markets as well as complex renewable energy portfolios. Kate is hands on in procurement development and implementation for our clients and leads our market regulatory and advisory sustainability services. If your business is interested in wholesale or retail renewable PPAs we’d love to help you. Contact us on: 1800 334 336 or email: info@edge2020.com.au

Does another new environmental scheme create more uncertainty?

Australia's renewable energy schemes

In December the Department of Climate Change, Energy, the Environment and Water released two papers. One on Renewable Electricity certification and one on the Guarantee of Origin Scheme.

These are mainly aimed at the hydrogen industry but the first could have a significant impact on the electricity sector if the proposals are implemented as per the position paper.

The Renewable Electricity Certification paper asks for feedback on the need for a new mechanism for electricity to be certified, currently to be used only for voluntary surrender purposes. It proposes it will act alongside LGC creation (Large-scale generation certificates) with the developer able to decide if they produce an LGC or a REGO (Renewable Energy Guarantee of Origin certificate) on any given period, in any given day.

The REGO can be used for all uses, bar RET liability i.e., voluntary surrender.

The main difference of the REGO to the LGC elements being proposed in the paper are:

  • It proposes to allow the use of below-baseline generation to create a REGO.
  • It will also allow STCs systems to create a REGO once the maximum deeming periods from date of installation has been met. If the minimum threshold isn’t met they can aggregate multiple small scale systems to create a certificate.
  • Further it suggests almost a double counting whereby a battery could purchase REGOs to “store” green electricity then re-sell as green electricity with a new REGO.
  • For exporting renewable energy i.e. Sun Cable whereby the REGO can be created even though the electricity is exported overseas, this is not allowed under the RET scheme for LGCs. How we can claim that against a domestic usage is yet to be seen!
  • There is a proposal any vintage can be surrendered at any time for this year’s claim
  • It is also worth noting a REGO would require a time stamp under the proposals – meaning hourly matching could be undertaken. However, a note for is you are in an aggregated system for the REGO the last hour to make the 1MWh REGO would be the one counted.

It is proposed this will allow claims post the sunsetting of the RET in 2030 but does not go as far as to state it will replace the RET – however this must be implied that it is the intention of the scheme.

If this is to go ahead there are a few concerns:

  • Will it crash the price of the LGCs?
    • Could the market be flooded with “equal value” REGO certificates and bar RET liability the LGC market move?
  • Alternatively – What happens to the LGC market if everyone signs up to REGOs – would it mean LGCs could potentially go up in price as people are only creating REGOs and the LGC RET liability can’t be met
  • Will it increase volatility with an arbitrage being available between the two schemes?
  • Does this really level the playing field for Hydrogen in the way they think it will? I am not sure we meet all criteria in the market leading hydrogen certification markets with this proposal
Consultations close 3rd Feb but this is one to watch. It may be being pushed through a side door but it could blow open the LGC market as we near the end of the RET scheme. Have your say here: https://consult.dcceew.gov.au/aus-guarantee-of-origin-scheme-consultation   

 

COP27

In comparison to the COP26 (Conference of the Parties 26) which occurred with great media attention and pageantry, partly due to the delay due to Covid-19 and partly due to the significance of the promises being made by countries. COP27 kicked off yesterday, 6th November, the 12-day event has received little to none of the media fanfare that was seen in the conference last year.

Our staunchly anti-target ex-Prime-Minister Scott Morrison even attended COP26 (sponsored by Santos!) but to show the stark comparison, our new Prime-Minister Anthony Albanese, who is a big supporter of Climate Targets and moving towards renewables, has opted not to attend the COP27 in Egypt, instead sending Chris Bowen and Jenny McAllister (our Minister and Assistant Minister for Energy) in his place. As we were not announcing any new targets and therefore the importance to attend wasn’t as strong.

Yet we aren’t the only ones shying away, Joe Biden is going to forego his annual nap at the COP conference and is instead sending four Cabinet Officials – sighting the mid-term election as reasoning (as if we don’t all expect a massive flop in those and the GOP to take back the house!). Rishi Sunak, the newest UK Prime-Minister, was not going to attend, yet after significant pressure did a dramatic U-Turn at the end of last week and will be there in Egypt this week. It is no surprise that Vladimir Putin won’t be in attendance, yet the biggest surprise came from China, with Xi Jinping also pulling out and sending a negotiator to participate, the equivalent of sending a toy poodle as they will block everything and agree to nothing.

Yet this conference should certainly have more clout. It is thirty (30) years since the UN Framework on Climate Change was adopted and the first meeting in Berlin took place, and seven years since the massive commitments made in the Paris Agreement.

But does the lack of attention and attendance show that the support is waning? Maybe not long term, but with many countries in dire economic circumstances, Germany and others in Europe throwing out their climate targets around Coal generation, in favour of keeping the lights on, and prices as low as possible in an ever climbing and squeezed market and massive debt and austerity to come from an overspend during COVID, required to ensure their economies didn’t collapse. Standing up and agreeing to tighter emissions targets and the cost implications of this would not play well at the polls, and although a politician may have great ambition for Climate Change they have more ambition for Political safety and longevity.

Last year, at the COP26, world leaders agreed to “revisit and strengthen” their national climate targets annually, if possible, with what seemed like a consensus to produce significant commitments to target Climate Change. They agreed to look at and strengthen their targets every 12 months (previously five years as per the original Paris Agreement) and this was done to try and hold global warming below 1.5 degrees Celsius.

Yet heading into this COP27 only 21 countries have submitted updated climate commitments for their country, with 172 making no change. Of the 21, only Australia has made significant and credible commitments, yet many (everyone!) would argue this was to catch up to the rest of the world and is nowhere near what would be defined as ground-breaking.

Let’s be clear, regardless of politics, regardless of debt and war without significant change, within a decade we will go above the 1.5 degrees Celsius target and above 2.4 degrees by the end of the century. A recession can be reversed, it is awful and hard, but it can be, a war can be stopped, but once this warming has occurred there is no way back, and it will be those on the edges who suffer first and most. An incremental change is not good enough anymore and playing ostrich to ensure your political survival for four more years will not help future generations and ensure the world is thriving.

Yet with world leaders being beyond non-committal, the UN sending out strong statements but with no action and little education on what this means, we are not changing anywhere near fast enough and at some point the cost of it will be on our front door.

I would urge you to follow the public debates and live streams https://unfccc.int/cop27#events or look at the U.Ns campaign to see what “individual Actions” you can do to help reduce everyone’s carbon footprint here https://www.un.org/en/actnow/

I assure you this is not just a big emitters problem, changes by us all could help, and to be clear I do not mean by gluing yourself to a Van Gogh or Vermeer or covering Ferrari showrooms in orange paint.  Gorilla activism is not the answer, their actions are disruptive and not effective in changing the minds of those outside of their own cause. But, all of us taking our positions to the checkout each week will force a change, in the way only free markets can be affected, and that can only benefit everyone now and in the future. I assure you our politicians will not do it for us and this COP27 is just the latest proof of this, unless it is a silver bullet they will not act, therefore we must.

Green hydrogen

Green hydrogen

In the brightest day and the blackest night, no opportunity shall escape my sight.

Ok, bar the bad Green Lantern pun, Green Hydrogen is the superpower on everyone’s lips at the moment. From the USA releasing its draft National Clean Hydrogen Strategy and Roadmap a few weeks ago, to the announced changes in the Hydrogen regulation in Europe, even Queensland has jumped on the press release bandwagon, announcing it as a cornerstone within its new Jobs and Energy Plan.

But what is this superpower? How can it help and what does it really do?

Well let’s start at the beginning, what is Green Hydrogen, why is it different to Grey or Blue Hydrogen and why is that important?

Green Hydrogen is produced by electrolysis, by splitting water into its base elements of Hydrogen and Oxygen. The reason it is Green is this process is done using renewable energy. The most preferred approach is to have this PPA (green energy) onsite and therefore Behind the Meter, however it is equally classified, at the moment, from other sources, with both the PPA and electrolyser being grid connected. Noting that there are additional costs if this is not co-located BTM generation as Network costs come into play.

The differential between this and Grey and Blue Hydrogen isn’t the process, but the fuel used to power the electrolysis. Grey Hydrogen comes from Natural Gas and Blue is from Gas but that is coupled with Carbon Capture and Storage (a technology which has been the silver bullet since I was at Uni and despite millions being pumped into the technology remains uneconomic and therefore unused).

Why is this important – well to truly move towards a clean energy future, and for Hydrogen to play a large part in that, the technology used to create the hydrogen must be green, otherwise the end product (the hydrogen) is just an energy transition of the non-renewable source which was used to create it. This is why the Europeans (CertifHy) amongst others, will only allow Green Hydrogen certification from real PPA sources, not greenwashed with carbon credits, and certainly not from any other forms of electricity.

So how can the green hydrogen transform our supply? Well ignoring other uses of the fuel and export at the moment, transportation being a key area which could benefit as their fuel is hard to abate without a viable alternative as well as Ammonia and Methanol production. There is the obvious use if the fuel can be used for power supply.

This is moving closer with the planned Tallawarra B 200MW dual fuel power station (natural gas and green Hydrogen) due online in the summer of 2023/ 24. If this technology can be proven, this will be a huge source of clean energy which can be used for grid stability and baseload generation, it could also remove any bumps from the transition away from coal.

To give a sense of scale though 1KG of hydrogen is equivalent to about 33.3KWh of electricity. Last year the NEM supplied around 204TWh of electricity, so we would require around 6.2million tonnes (or 6.2billion KG) of Hydrogen to power the NEM.

Now the part to blow your noodle, to produce that 1Kg of Hydrogen we need to put into the electrolyser around 50KWh of electricity (taking a 67% efficiency rate for an Alkaline or PEM electrolyser, noting Solid Oxide electrolysers can have higher efficiencies.) Using this 67% efficiency rate we need to put in 310TWh of electricity to be able to produce the 240TWh required for the NEM. This is without factoring that Hydrogen which can be used for transportation and that which will be exported (with Japan underpinning many domestic projects how much will be available in Australia initially? But I said I wouldn’t be diverted to this today!).

This means the Hydrogen power industry alone has the capability to more than double the capacity requirements of the NEM. However, this requirement and thirst for power could be its real secret superpower.

Network constraints are the words every solar and wind operator hates, the renewable energy is being produced but either cannot be transported to the load centres or cannot be used in the local distribution zone and as such is wasted. Although the Hydrogen industry may not be able to use all this excess volume, especially in the near term, it certainly can absorb a large amount of it. Thus, reducing curtailment and increasing the renewable penetration to the grid.

But that isn’t its only superpower to assist with the balance of the grid, cast your mind back to this winter with curtailment being requested from every corner of the NEM. Rather than being the off-taker, the electrolysers can provide demand side management. They will naturally be programmed to react to the price and renewable energy generation signals anyway to be efficient. Therefore, turning up and down at these strained periods without needing market intervention will be a benefit we have not previously been able to tap into.

Hydrogen certainly looks to be the silver bullet this industry has been craving, and no one wants to be left behind when this train leaves the station. However, with so much in theory and nothing as yet proven to scale, we all hope that it doesn’t turn out to be the Aquaman of the superhero world.

Edge2020 provides energy management and advisory services to buyers and sellers of physical and financial energy products. We specialise in electricity, gas, renewable, environmental, and carbon products. Edge2020 can help ensure you achieve your business sustainability goals by supporting you with strategies that focus on minimising consumption and responsible purchasing of renewable energy. Reach out to our passionate team for support to improve your sustainability outcomes – email: info@edge2020.com.au 

 

International oil price fluctuations and the electricity market reacts

Organization of the Petroleum Exporting Countries (OPEC+), the intergovernmental organisation of 23 oil exporting nations mainly in the Middle East and Africa (with the original core 13 holding most power) is the body which is responsible for around 40% of the world’s oil production. In early October this group agreed to slash the output of crude oil by 2 million barrels a day. To put this in perspective Saudi Arabia produces on average 10 million barrels per day of the current, already reduced, 42 million barrels coming from the OPEC+ nations and this 2-million-barrel reduction translates to about 2% of the global oil supply. It is also worth noting in 2016 when OPEC became OPEC+ Russia joined the organisation and has held a strong voice ever since.

This reduction in production, shows a sign of deepening rifts between the Middle East and the US, and the cynic in me says may be more than slightly linked to the upcoming US mid-term elections where the democrats are already looking weaker than their GOP counterparts – not that those countries have ever influenced an American election in the past *Cough Trump Cough*.  But regardless of motives these new production limits will come into place in November and the impending reduction in production has repercussions which flowed through the broader Australian and global energy markets including oil, coal and gas.

Australian electricity prices are strongly correlated with the international crude oil price, particularly in QLD and NSW, the impact of Brent crude futures hitting a high of $US93.39 on Monday caused a rally on the Australian electricity market, with the Q123 QLD price rising 20%, as the effect of this increase translated to the domestic electricity market. Brent Crude being the international oil benchmark price.

However, OPEC+ are not the only drivers of the oil price, especially WTI and Brent prices. The US dollar, on the back of a fear of a global recession has been strengthening which has dampened the demand for their oil on the international stage. (Consider the FX implications of a strong dollar, if you are buying from Europe the same amount of crude oil now costs more as the number of Euros to achieve the same dollar amount has increased). So, a reduction in demand of America Oil due to FX and reduction in export from OPEC+ can only move the needle up in price regardless of source.

We also cannot ignore the ongoing COVID implications in Asia, especially China. Their glut of demand has not returned to anywhere near the pre-pandemic levels and as such that demand is not translating into a price war to ensure delivery of the commodity. Conversely to above this is actually holding prices lower and reducing the impact of the OPEC+ reduction.

But there is no ignoring the elephant in the room, the impact of Russia’s invasion of the Ukraine, which has led to global increases in commodity costs, has also acted as a buffer to the oil price despite the recession fears. As many countries imposed their own moral code and refused to buy Russian oil, other sources could benefit from the increase in demand. By the end of September this year Russian oil was trading at $20/barrel cheaper than its Brent counterpart. Some less scrupulous countries such as India and China, sought to benefit from this price differential and ignored the sanctions coming from the West and are now taking at least half of Russia’s oil exports. Further, Russia has now overtaken Saudi Arabia to be the biggest exporter of oil into China. Therefore, could the cut in reduction be as simple as the rest of OPEC+ looking to balance the loss in demand from the East by passing inflated prices to the West?

But back to Australia, we are obviously a commodity rich nation, however with our internal thirst for electricity and therefore generation linked heavily to the export price of that commodity, we are subject to these international fluctuations also. As the price of the oil increases, the global demand from that commodity shifts to other sources. Our gas and coal price domestically are therefore linked heavily to the price that exporters can achieve if they send our home-grown coal and gas abroad. So as the demand shifts from oil, to gas or coal so does the price. Hence the correlation described above with Brent rising and that coming into our domestic market.

Then for fun lets add in our own pressures, we are expecting another La Nina this year, last year’s summer La Nina brought low solar output coupled with flooding, wet coal stockpiles and just-in-time delivery delays due to the tracks being flooded and trains not able to deliver.

We also have an economy which is having increasing inflationary pressures. These inflation increases will flow onto the interest rates (including the interbank rates) and therefore commodity prices. How? Well, a retail return is based on 2 main drivers, network and wholesale costs, the latter we have covered above. But in isolation network costs will also increase, due to the inflation increasing the nominal value of the asset and therefore the increasing value of the debt as the interest rates increase also.

Further any investment required to transition our market to greener fuels will also be increased, as the levelized cost of electricity for these new assets is also increased due to cost of capital and higher interest rates feeding through. As such the ‘Energy transition’ will now cost more.

There is also a regulatory driver, with an impending price cap increase being fast tracked, this will allow system stability to flow through, as gas won’t withdraw at the $300/MWh cap as this looks likely to be increased to $500/MWh. Therefore, does that become the new ceiling of our market?

There is an old idiom that when China sneezes Asia catches a cold, I unfortunately think this now needs to be broadened to when any imbalance occurs the ripples will be felt globally.

The balance is so tight that without some easing of any fundamentals the shocks will continue. AEMO are acknowledging this, but despite acknowledging the issues they are desperately clinging to the hope a capacity market will be the silver bullet to system stability, backed by large synchronous generators, not that they have any benefit from that mechanism. However, I cannot agree, point in fact I point you to the black outs in the UK on August 9th 2019, a market which has had a capacity mechanism for many years yet in a moment of system instability these ‘capacity assets’ could do nothing and they experienced a blackout for 45 minutes and over 1 million people were affected.

What this means for us is without regulation around bidding behaviour based on cost of generation from hedges not advantageous forward prices, we are looking at another summer with uncertainty and volatility based on international fundamentals pulling the Australian market along for the ride.

She Can’t Dance

Back in the 90’s Genesis sang “I can’t dance.” I fear from the past week that there is once again a double standard being applied by the media to our leaders, as it seems this lyric only applies to women in politics. I am of course referring to the absurdity of the double standard being laid at the door of the Finnish Prime minister, Sanna Marin.

With too many examples to list, Boris Johnsons “party-gate”, David Cameron’s “Pig-gate’ and closer to home Don Harwin’s holiday home getaway, there are many examples of men breaking rules, and in some cases laws, with little more than slaps on the wrist and a 2-paragraph article on page 6, showing them up for their misdemeanours.

Yet, here is a woman who came from a broken home and was certainly not raised with the political or actual silver spoon in her mouth, yet she has not only successfully led her country through the COVID-19 pandemic but has navigated her way through a border with a country currently waging war on another. Many would play ostrich to this aggression from a neighbour, yet she has had the conviction to stand up for the same thing that landed the Ukraine in the gaze of Moscow, a NATO membership.

However, as the youngest head of state, she was elected at 34, one who is breaking the barriers of what is expected, attending music festivals and becoming a style icon and a mother, she is also balancing the tightrope of the Victorian era expectations of “how one should behave.” Regardless of how antiquated these opinions are, they have not disappeared, and the descendant, mainly male, voices are not missing an opportunity to shout down this young progressive leader.

Whatever your political leaning, you do not have to agree with her political views to surely agree, there is a significant double standard being waged here.

In a private moment, with supposed friends, she did not break the law, a point she is now taking a drugs test to prove, she did not endanger anyone with her actions, and she did not act in a way which would be seen to embarrass or lessen the position of Finland on the world stage. Yet, the nay-sayers are arguing, from their dusty robes and plaid studies, she is behaving inappropriately for a PM and wouldn’t be able to use sound judgement in the event of a sudden crisis. Yet this attitude from the crusty old relics in the corner does make me reflect on past leaders, no one questioned Churchill, who in an actual war would often be known for having wine with breakfast, whiskey for morning tea and Pol Roger champagne at lunch.

Maybe these nay-sayers should read a little Churchill as (to paraphrase) Yes, she was drunk, but you (and your opinions) are ugly. Tomorrow she will be sober, and you will still be ugly.

Fortunately for Churchill, and unfortunately for Marin, the world of social media is now too accessible. The “being in the know” or “having the skinny” no longer requires you to have been there but being on a friends Instagram account when they post a video of a private party and uploading that to a papers website. This lack of privacy is surely a wider point than a woman, enjoying a legal evening with friends in private?

To circle back to where we started Genesis also sang in their song “Gators getting close, hasn’t got me yet”. Unfortunately for women in the political sphere this is still the reality. Hopefully one day it will change, but for now I say, you can dance Sanna.