New renewable energy legislation for Australia and China (and important Chinese CDM notice affecting service agreements)

Partner
T +61 2 9296 2178

Sydney
David O'Donnell
Rowan Russell

Beijing
John Shi (史卫)

08 March 2006

New renewable energy legislation for Australia and China (and important Chinese CDM notice affecting service agreements)

Recent moves by Chinese regulators are likely to significantly impact on those service providers, developers, and investors who are active in, or looking to invest in low emission and renewable energy projects in China. The first, a Notice issued in February, may have serious implications for the validity of payment and revenue sharing mechanisms in service agreements between Chinese sponsors and international CDM service providers. The other two regulations, provide further detail for developers and investors as to how the Chinese Renewable Energy Law, introduced late last year, will operate in practice.

In contrast, a Bill to tinker with the Australian Mandatory Renewable Energy Target regime, now close to maturity, was introduced by the Australian Government earlier this month. Proposed amendments to the regime should improve transparency of the regime, improve the bankability of new renewable energy projects by allowing for limited “pre-approval” of power stations and expand the range of alternative energies eligible for accreditation. However, for current generators, the Bill is likely to mean a stricter approach to non-compliance from a regulator with strengthened powers.

Important Notice regulating consultancy services and assessment for Chinese Clean Development Mechanism projects

On 15 February 2006, the Office of the National Coordination Committee on Climate Change issued an important Notice regulating consultancy services and assessment for Clean Development Mechanism projects. One key matter dealt with in the Notice is the application of Article 24 of the Measures on Operation and Management of CDM Projects in China. Article 24 of the Measures provides that “the revenues from the transfer of CERs shall be shared by the Chinese Government and the project owner”. The Notice provides that where any intermediary or consultancy has signed a service agreement which involves the distribution of Certified Emission Reductions or Certified Emission Reduction revenues in breach of Article 24 of the Measures, that service agreement must be terminated within two months of the date of the Notice. While there are no specific penalties indicated under the Notice, a failure to comply will result in the blacklisting of the consultant or intermediary and a rectification order.

The Notice has potentially serious implications on the validity of payment and revenue sharing mechanisms contained in service agreements entered into between Chinese project owners and both international and domestic Clean Development Mechanism service providers. Service providers, developers and other intermediaries active in Chinese Clean Development Mechanism projects should carefully assess their position and seek specialist legal advice where there is any doubt on the effect of the Notice on their agreements.

New Chinese renewable energy regulations and guidance catalogue

The National Development and Reform Commission of China has just released two new renewable energy regulations under China's Renewable Energy Law: the Provisional Measures for Renewable Energy Electricity Generation Price and Cost Distribution Administration and the Administration Rules relating to Renewable Energy Electricity Generation.

These regulations collectively:

set up the pricing and cost distribution regimes for the Chinese renewable energy sector and are effective from 1 January 2006
provide for a renewable energy project approval regime at the national and provincial levels
set out each distributor's responsibilities about connecting renewable energy sourced electricity to the distribution network, and
address each generator's responsibilities in relation to investing in renewable energy projects and meeting the national renewable energy generation target.

In December 2005, the Commission also released the Guidance Catalogue for Development in the Renewable Energy Sector, a technical guide for those researching and investing in the Chinese renewable energy sector. Investors who comply with the guidelines may be entitled to preferential treatment in respect of taxation, pricing, marketing, exports and imports etc.

Our recent review provides a detailed analysis of China’s Renewable Energy Law and its interaction with the Measures on Administration and Operation of Clean Development Mechanism Projects. This review identifies some practical matters which should be carefully considered if you are involved or interested in renewable and clean development mechanism projects in China.

MRET Amendments: more regulations and perhaps some opportunities …

Earlier this month the Australian Government introduced the Renewable Energy (Electricity) Amendment Bill 2006. The Bill amends the Mandatory Renewable Energy Target (MRET) regime established by the Renewable Energy (Electricity) Act 2000 and adopts some of the changes recommended by the Tambling MRET Review, tabled in Parliament in January 2004.

However, the amended Bill does not extend the MRET commitment beyond the intended 9500 GWh target or the commitment end date beyond 2020. This is consistent with the Government’s earlier response to the review.

The principal amendments fall into four main categories.

Provisional accreditation

Bankability issues often arise for renewable energy projects as a result of the accreditation process under the MRET regime, as a power station must be operational before it can be accredited. Therefore project sponsors are likely to welcome the introduction of a ‘provisional accreditation process’ in this Bill.

For a power station to receive final accreditation under the Act, the Office of Renewable Energy Regulator must be satisfied that:

the system is to be a power station for the purposes of the Act; and
the power station is eligible for accreditation.

Under the proposed provisional application process, a registered person will be able to get “pre-approval” for the first part of this test. Provided the system components do not materially change between pre-approval and the final application, pre-approval by the Regulator will satisfy the first aspect of accreditation . Pre-approval will not be possible for the second part of accreditation.

The Bill also introduces a six week time limit for the Office of Renewable Energy Regulator to make a determination under each of the provisional application and final application. However, if the Regulator fails to make a decision the application will be rejected.

Transparency of the MRET regime

To allow participants in the Mandatory Renewable Energy Target regime to accurately assess the current supply of renewable energy certificates and the number of Certificates available for use, the Bill:

sets a time limit on creating Certificates, (the end of the year following the year in which generation took place); and
allows renewable energy certificates to be voluntarily surrendered (such as under the Green Power scheme and for philanthropic purposes).

Increased Ministerial discretion to vary eligibility criteria

The Bill will give the Minister the power to expand the sources of renewable energy captured under the Act, the kinds of people who are entitled to generate Certificates, and to vary what constitutes a power station under the Act. This aspect of the Bill is likely to have the greatest impact on solar and biomass energy. However, until the regulations are released we can only speculate as to what opportunities this will create for those forms of renewable energy generation. According to the Explanatory Memorandum, one Bill’s aims is to make certain “energy crops” eligible for MRET accreditation, whether or not the crop is grown for the “primary purpose” of generating energy.

Increased power of the Office of Renewable Energy Regulator

The Bill expands the Regulator’s power, providing:

greater investigative powers to enable effective monitoring of compliance with the regime;
strengthened sanctions for non-compliance, including suspension where the Regulator has a reasonable belief of non-compliance or where there has been “gaming” of the system (where an entity manipulates power station outputs to increase the number of renewable energy certificates that can be created without increasing renewable energy generation); and
an ability to review and amend returns and energy acquisition statements within four years and to amend a power station’s 1997 eligible renewable energy baseline.

What this means for your business

While none of the proposed amendments are particularly surprising given the Government’s response to the Tambling MRET Review, they may have implications for your business.

Provisional accreditation should aid new projects seeking financing.
Increased transparency will enable more efficient forecasting of additional RECs and power station capacity required in the future.
The proposed variations to the definition of “eligible renewable energy source” and the Minister’s ability to further expand that definition through regulation, could provide incentives for the further development of alternative energy projects. However it may also create uncertainty about the additional capacity of production facilities that are required in the future. This issue will need to be reviewed when the relevant regulations are released.
The Regulator’s additional powers may result in it taking a more proactive role in monitoring compliance and increase the level of action taken in response to non-compliance. Given it’s broad discretion, it is important to maintain open lines of communication with the Regulator when issues arise.