The Demand Manager - News Focus, Edition 1 November 2007

Is the GHG Laden Sky Falling Down?

Many would have recently seen headlines stating that the NSW Greenhouse Gas Abatement Scheme was nearing collapse as the price of carbon credits (NGACs) had fallen through the floor.

When prices fell from a high of $14 in early 2007 to languish below $6 in October, The Demand Manager set out to explore what was really happening.

Depending on who you listen to, the blame for the fall in the price of carbon has been placed variously on the Federal Government for not committing to keep the NSW Scheme in their proposed National Emissions Trading Scheme; the NSW Government for proposing to privatise the NSW electricity industry; the electricity retailers for not buying enough NGACs or the Scheme Administrator, IPART, for allowing too many NGACs to be created.

As with any market, there are usually many factors which effect price but any rudimentary analysis would assess the basics - supply and demand. Using the Scheme’s 2006 Annual Compliance Report, we can gain a very accurate picture of the demand-supply balance.

The basic facts show that around 7.4 million more NGACs were created than were required to meet the Scheme’s target in 2007. Previous years also had an oversupply and because NGACs can be banked between years, the oversupply became even greater.

This oversupply is, most likely, what caught electricity retailers, market participants, Government and analysts unawares. So, where did this oversupply of NGACs come from?

One of the most surprising outcomes from the Scheme’s 2006 Annual Compliance Report is the growth in NGAC creation from so-called Default Abatement Factor (DAF) projects. These projects create NGACs from common household savings measures such as compact fluorescent light bulbs (CFLs) and AAA-rated showerheads under a default calculation methodology. Installing an 8,000 hour rated compact fluorescent, for instance, can earn you half an NGAC.

The figures show that NGAC creation from energy efficiency measures grew about 600% from 2005 to 2006. This accounted for 8.5 million NGACs in 2006. 99% of these NGACs came from the compact fluorescent and showerhead projects run by businesses like Easy Being Green and Fieldforce.

Many in the industry speculate that the explosive growth in these DAF projects has seen a glut of NGACs in the market place leading to the dramatic price drop. Ironically, the drop in NGAC price has been blamed by many businesses winding back or terminating their DAF-based business models. Easy Being Green, for instance, laid off 240 workers in October citing the price drop and blaming the Federal and State Governments for creating uncertainty.

While the NGAC price drop has spelt demise for many DAF projects, the longer term question remains – could these projects re-emerge if the price is right? Two factors will determine if this is the case.

Firstly, in October 2006, the Scheme Administrator amended the confidence factor for those projects that simply handed out CFLs and showerheads free-of-charge. Previously, it was assumed 80% of the equipment handed out was installed. This was revised down to 40% after some sample surveys indicated 80% was too optimistic. This rule change effectively meant
DAF purveyors had to change their business model from a ‘hand-out’ to a ‘direct-install’ basis to ensure NGAC revenue. However at least one major player was still handing out packs at the March 2007 Royal Easter Show which raises questions over the project’s viability.

Direct-installing CFLs and showerheads is obviously a lot more time consuming and difficult than setting up stalls in heavily trafficked pedestrian zones.

Secondly, in mid-2006, the Scheme Administrator undertook some modeling trying to gauge the saturation point for the most common DAF technologies – CFLs and AAA-rated showerheads. At the time, it was projected that some 18 million light bulbs and 2 million showerheads would have been distributed by the end of 2006.

Based on household survey information and the eligibility rules of the Scheme, the modeling results indicated that the natural point where CFLs and showerheads had saturated the market was well on track to be achieved in early 2007.

The Scheme Administrator’s formal survey, coupled with anecdotal evidence, would suggest that there was an over-creation of NGACs in the period leading up to the downward revision in the Confidence Factor from 80% to 40%.

This then raises an interesting problem for the Scheme Administrator (who administer the rules), the NSW Minister for Energy (who sets the rules) and for purveyors of the DAF projects. Do they admit that earlier handout projects over-stated the savings but then continue to allow these DAF projects to create NGACs, or do they stand by their modeling that the saturation point for these technologies has been reached and declare that this is one low-hanging fruit that has been picked bare.

The answer to this question could well decide where the price of NGACs goes from here.