Australian Manufacturing: Is it time to bring it home?

Australian Manufacturing - Wind Turbine

The English love their football (soccer) and no more so than Baddiel and Skinner who sang “It’s coming home” for the 1996 Euro’s. But with another wind project either being delayed or scrapped is it really time to consider if the Chief Operating Officer of AGL, Markus Brokhof is right “The manufacturing industry has to come back to Australia.”

The latest announcement from CleanCo last week which stated the company is pulling the pin in their investment in the Karara Wind Farm in the Southern Downs in Queensland, citing delays, not in connections or transmission but in turbine parts and rising costs, only acts to further strengthen Brokhof’s argument. This investment was part of the wider MacIntyre precinct and would or may still be, the largest wind precinct in Australia. However, this could be a blow to Queensland’s target of owning 50% of new renewable generation within the state.

This is just the latest in a string of windfarms to hit delays, the Clarke Creek wind farm has been hit with numerous delays between change in ownership from Goldwind to Andrew Forest’s Squadron energy, through to shutdowns for worker safety as well as project management changes causing equipment to be removed from site. With the offtake from the first stage of the project mostly going to another Government Owned Corporation, Stanwell could this be a further blow to the state’s advanced renewable targets, 80 per cent by 2035, and the existing 50% by 2030.

Another one of Andrew Forests wide array of companies is Windlab, whose own windfarm the Upper Burdekin project has not only lost its inaugural customer Apple, but has had to significantly downsize the output of the site from the proposed 193 Wind turbines to a reduced 136 and is now likely to only have 80 following significant opposition from wildlife conservationists who stated that the project was threatening already endangered species.

To further stoke the flames, AEMO has now come into the forefront of media, stating that not only do we not have enough investment in renewable electricity to compensate for the expected closure dates of coal generation, but the firming technology to support this renewable grid has not been fully funded or addressed, this year’s ESOO will certainly paint a bleak picture for the medium term in Australia. This sentiment is only exacerbated by the Australian former chief scientist and first Victoria State Electricity Commission CEO, Andrew Finkel, who last week quit his role at the SEC stating; not only was the capital investment not in place but investment has dried up and the “country is unlikely to reach its emission reduction targets.” I’m sure not a sentiment which was welcome news for the Andrew’s government whose election campaign was built on the premise the SEC would be both decarbonising the Victorian grid whilst reducing the cost for Victorians.

With the COP 28 due in November and Australia looking like it will miss it’s, late to the party but thanks for coming, 2030 targets, increasing international pressure will be placed upon Australia to ask how we will try and achieve some meaningful reductions? Rik De Buyserie, Engie Australia’s CEO implied to even get close to the 2030 climate targets Australia would need 10,000km of new transmission, 44GW of new renewables and 15GW of firming capacity. With components scarce, increasing costs and logistical issues of port slots to physically ship the parts to Australia, maybe it is time to turn our attention inwards and start upskilling and creating our own industry to de-carbonise ourselves?

Carbon Border Adjustment Mechanism gaining traction in Europe

Edge2020_Carbon Border Adjustment Mechanism

The European Parliament is introducing new climate legislation including a Carbon Border Adjustment Mechanism, in a bid to reduce greenhouse gas emissions.

The new package aims to reduce emission by at least 55% by 2030 and will include a series of measures which will have big impacts to many large industry customers who now will have millions of tonnes of carbon at risk.

The proposal will include phasing out of the free European Emission Trading Scheme (ETS) allowances after 2026, including maritime shipping within the ETS and a Carbon Border Adjustment Mechanism. The latter of these the CBAM or Carbon Border Adjustment Mechanism will impose a tariff on goods whose production is carbon intensive and shows the greatest risk of carbon leakage, in Australia the most vocal opponents of this scheme are unsurprisingly the cement, aluminium and steel industries.

As a quick digress the term carbon leakage is referring to the idea that you move the most carbon intensive parts of your production abroad, into countries with less stringent climate policies, and then import them back into Australia.

The idea of the CBAM is this will place a price on the carbon which has been emitted during this production phase. The price being derived from the price of carbon which was paid for the product to be developed and produced within Australia.

Those keen eyed amongst us will remember the Safeguard Legislation, which will come into effect on the 1st July 2023, cited a review would be undertaken to examine the feasibility of a CBAM within Australia, including a consideration for early commencement for those high-exposure sectors such as steel and cement.

Now with the EU making the leap and the likely follow on from the UK, Japan and Canada, amongst others, including the US via its own Polluter Import Fees Australia, we will surely have to comply to ensure both our own goods are being protected as well as meeting the requirements of the global expectations.

However, what is the cost of compliance. Whilst the legislation is quite straight forward the compliance cost will increase. Cradle to gate / grave accounting is complex and with auditors being stretched between, NGERs, Safeguard and now this, finding a resource to complete the calculations and data collection will be one thing, but looking to have these accounts audited will be another. With the CER having only 75 registered auditors on their books will the cost of this be wider than the government are imagining?

Intergovernmental Panel on Climate Change Warning

Edge20202 Drought Landscape

The Intergovernmental Panel on Climate Change (IPCC) released its 6th Assessment Report (AR6) last week, on 20th March. This has been an eight-year assessment and involved over 250 climate scientists.

It was as bleak as can be expected and shows the catastrophic impact of increasing greenhouse gasses. The report discusses how we have already reached a 1.1 degrees Celsius increase in global warming and how this is affecting summer arctic ice coverage, ocean acidification and concentrations of Carbon Dioxide.

The focus isn’t just on the current impacts as it reveals the irreversible affects that can occur at as low as a 1.5-degree overshoot, including species extinction and loss of life.

The report is a must read and will be discussed over the next few weeks by many. Interestingly one of the first out of the gate was the UN, whose secretary general has urged nations to abandon the 2050 net-zero target for new stronger 2040 packs. Antonio Guterres is calling for developed nations to phase out coal by 2030 and block new oil or gas extraction. This may, in his opinion, hold us at the 1.5-degree warming cap.

The true test will be in COP28 in the UAE in November and December 2023. However, with the attendance of chair, H.E. Dr Sultan Al Jaber, being the CEO of the 12th largest oil business will likely see a softening of approaches happening there!

What the AR6 does tell us is that we are close to the point of no return. The impacts of climate change are visible and require immediate action. We must react, or it will be irreversible.

Edge2020 have an eye on the energy market, enabling us to support price benefits as well as customer supply and demand agreements. Our clients rely on our experts to ensure they are informed, equipped, and ideally positioned to make the right decisions at the right time. If you could benefit from an expert eye on your energy portfolio, we’d love to meet you. Contact us on: 1800 334 336 or email: info@edge2020.com.au

The Safeguard Mechanism – the big stick came out

Carbon emissions safeguard mechanism

The Safeguard Mechanism is the legislation which came in in 2016, it was designed to reduce the emissions of the industrial sectors within Australia with targets, or baselines, capping the amount of emissions each facility can emit. The flaw was that the large industries could continue to re-set these baselines to ensure that as production increased, so did the baseline, and as such the emissions would also be increased without penalty. In the Financial year 2020 – 2021, these 215 large emitters made up 28% of Australia’s Carbon Footprint.

During the election campaign the Albanese government stood on a pledge to tighten the legislation around these 215 facilities to ensure that they were contributing to the now legislated target of a 43% reduction in emissions by 2030 (v’s 2005) and net zero by 2050.

Well yesterday, 10th January 2023, the government after extensive round tables, consultation papers and responses released their “draft” position paper. I use the word draft in quotes as the timeframe for change to this draft is less than likely. Responses are due by the end of February and it going in front of ministers in April to be enshrined with a 1st July 2023 start date. I think we can safely say the government have set their cap on their desired outcome.

So, what has been decreed. Well in brief, bar the reduction in baselines, 4.9% annually until 2030 and a review following that, and a cap and trade scheme to allow under baseline emitters to benefit from a new (non-financial!) ACCU called a Safeguard Mechanism Credit (SMC), the big changes and costs, will come to those emitters who will be eventually pushed onto non-site specific variables and forced to use “industry benchmarks”. They can apply for exemptions until 2030 but even these will be under tightened scrutiny and cherry picking your years of production will no longer be allowed. This will be a blow to some who rely on their baselines to reduce costs in those high production and high emitting years. These emitters will also no longer be able to sit on high reported, calculated or fixed baselines and will loose their site-specific variables by the end of this decade in an already reducing baseline decline rate.

To cap this cost, the government are proposing a ceiling for the ACCU market. They propose this to be set at $75/tCO2-e initially and increasing by CPI +2% annually after the first financial year, FY24. With spot ACCUs currently trading around $34.50 (source https://accus.com.au/) this is quite a ceiling indeed.

The proposal is also tightening the benefits which can be gained by the Emission Reduction Fund Projects, with no new projects to be sanctioned and no renewal of current projects. Even those in existence will only have a two-year grandfathered period before the abatement cannot be utilised within the accounts.

Interestingly though the parts I found most intriguing were the future papers we can expect. The Chubb review was, I can now assume, purposely vague on international credits and I believe this is due to the implication from the safeguard paper that we can expect a further review, likely to come out this year, which will look at the usage of “high quality international offsets” within the ANREU. These could then be rolled into many types of legislation for Carbon Neutral claims as per Climate Active current accreditation, including Safeguard legislation.

The other interesting area is around carbon leakage with an investigation to be undertaken if Australia should follow the EU and implement a Carbon Border Adjustment Mechanism (CBAM). It would basically create a plug to stop carbon leakage between countries. i.e. if you moved production to a country which was less ambitious in its carbon policies you would still have to pay the “leakage” of that carbon, or to import that substance, if it was not manufactured within a country with similar carbon ambitions, you pay the carbon cost to use it in Australia.

Overall, there is a lot to un-pick in this paper but following extensive consultations I think (bar the ACCU ceiling price) little will shock industry. It is a “hybrid” approach to get the government on track without losing industry along the way. There will be some winners, especially those on industry set baselines, initially able to bank SMCs, but overall the government have balanced a carbon abatement requirement without hampering industry too much. There will always be nay sayers who want more, say this isn’t enough and want to move quicker, but we cannot forget the economic climate we are in at the moment and the turmoil yet to unfold. I say hear ye hear ye to the DCCEEW, this one balances the tightrope of industry and climate ambitions well.

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

The Safeguard Mechanism – not so safe anymore

Once again, the Labor government has shown its teeth when it comes to climate. Last week rebuffing the Energy Security Board’s action for a Capacity Mechanism, which would inevitably only benefit large coal and gas generators, and today bringing out a consultation paper to reform the Safeguard Mechanism.

This hasn’t come as a surprise as it was a cornerstone of their election campaign, but to have done it so quickly may surprise some, and to have a start date for these reforms at the start of the next financial year, 1st July 2023, will surprise many.

To re-cap, the Safeguard Mechanism is the legislation which came in in 2016, it was designed to reduce the emissions of the industrial sectors within Australia with targets or baselines capping the amount of emissions each facility can emit. The flaw was that the large industries could continue to re-set these baselines so as to ensure that as production increased, so did the baseline and as such the emissions would also be increased without penalty. In the Financial year 2020 – 2021, these large emitters made up 28% of Australia’s Carbon Footprint

What is currently being proposed is a type of basic cap and trade model with stricter reduction targets, to help the government achieve their net 43% reductions by 2030 and net zero by 2050. This equates to reductions for these large emitters of an initial 3-6% and increasing post 2030.

The consultations also ask for feedback on whether the concept of using industry average benchmarks should be used to set all baselines. This will be strongly argued against by industry, especially since the published default values are significantly lower than most emitting facilities. However, it may enforce the desired reductions, this I am sure will be a major discussion topic in the weeks ahead.

Other parts of the paper discuss increasing the transparency of the Australian Carbon Credit Units (ACCU) market and the Carbon Offsets used to abate the excess Scope 1 emissions. This would support the tender sent out late last year to establish a trading platform for the Carbon Credits, which would de-mystify the pricing and availability of this currently opaque market. This is a measure, I am sure, will be welcomed across the industry, especially by those projects with excess certificates.

However, what will not be welcomed from the green flank in government, and their supporters, is the possible future inclusion of international Carbon Offsetting certificates. With many of these trading at significant discounts to the Australian government accredited ACCUs, the value of these domestic projects could be significantly eroded if international credits can be applied to excess emissions.

The drafts of the responses will be being formed by C&I regulation teams over the coming weeks, with the aim to try and protect their position and emissions as much as possible. I am sure they will be arguing for facility specific, production adjusted targets with the cheapest offsets possible for over emissions. However, how successful their lobbying will be is yet to be seen. This new government is not afraid to turn the status quo on its head and with ambitious climate targets, and with international eyes watching, I am not sure that industry will receive the desired outcome from this reform. With the consultation closing at the end of September this will certainly be one to watch before the end of the year.