Negotiated Energy AgreementsPilot Project

24th September 2003

Andrew ParishProject Coordinator

Report Launch

Structure

• Context & background

• Pilot project outcomes & projections

• Putting agreement in place

Negotiated Agreements

• SEI mandated by Climate Change Strategy• Meet requirements of Objectives 1, 3 and 4

– Sustainable use of energy– Reduce greenhouse gas emissions– Stimulate competitiveness

• Agreements negotiated within an agreed framework

Context-National Climate Change Strategy

• Irelands response to EU Kyoto commitments

• Current overshoot already 31% over target*

• All sectors affected

• Requirement for early action

• Strategy proposes Carbon tax with suitable

supporting measures

• Negotiated agreements identified as a key

instrument *EPA Sep ‘03

Firms agree to definite actions

or definite targets

Reward/Exchange as quid pro quo - Tax rebate / exemption

- Regulation

Agreements which are:-- Legally binding- Defined timetable- Flexible yet demanding- Protect competitivness

Beyond business as usual - BAUTowards best international practice -

BIP

An agreement between an individual firm, or

group of firms and the Government or its agent,

aiming to achieve substantial energy and

emissions reductions “beyond business-as-usual”

What are Negotiated Energy Agreements?

• Endorsement by SEI Board in February 2002.

• Project goals;• test viability of such a

measure;

• estimate likely impacts;

• resource requirements and transaction costs;

• calibrate industry data;

• examine industry readiness.

• 26 firms recruited - collaborative approach

• One of three agreement strands,• Individual Agreement

(Aughinish Alumina),

• Collective Agreement

(10 Pharmachem Companies)

• Technology Agreement

(15 companies in a Thermal Agreement)

Background

Volunteer to participate

Establish current situation

Compare to Best Practice

Negotiate new position

What was involved in the Pilot Study?

Company A

Best Intl Practice

Company B

Actions

Pilot project

• Action-based agreement of 4 year duration

• Identification of actions required to move firms

to Best International Practice

• Detailed energy audits carried out in all 26 firms

• Negotiation to agree economic and technical

criteria

Assumptions

• Tax rate of €17.50 per tonne CO2

• Applied downstream to electricity and fuel

• Exemption / rebate of 80% for compliance

• No phasing in of tax

Outcomes

• Agreements concluded in all 26 firms

• All actions to be implemented <5yr payback (3-

5 yrs Individual)

• baseline 1.5 -2 yrs

• Energy management improvements

• ‘Special Investigations’ - Collective

Results – audit costs

Technology

€7,000

(2.3%)of annual energy cost

Collective

€16,000

(1.5%)of annual energy cost

Individual

€90,000

(0.14%)of annual energy cost

Results – average investments

Technology*

20.6% of annual energy cost

Average payback (bundle)1.2 years

Collective

23.1% of annual energy cost

Average payback (bundle)1.4 years

Specific action paybacks from 3 months to 5 years * ex CHP

Results – CO2 savings

Technology 17.1% 17,300 tonnes Average per firm 1,150 tonnes

~14% = electrical

~17-20% = thermal

Pilot total 120,000 tonnes

Collective 16.4% 34,000 tonnes Average per firm 3,390 tonnes

Individual 5.4% 69,000 tonnes

Results – abatement costs

Technology

- €8.30 per tonne

Collective

- €12.20 per tonne

Negative abatement costs indicate economically viable investments

Looking forward

• Potential for mix of three agreement types

• Potential application Collective 150 firmsTechnology 500 firms

650 firms40% of

industrial energy use

• Potential abatement for whole sector

640,000 tonnes

Technology

240,000

€233,000

€1.20

Collective

400,000

€470,000

€0.97

Transaction costs

Indicator

Projected CO2 abatement

Annual cost(inc ¼ set up cost)

Static cost (per tonne)

Average transaction cost €1.10 per tonne CO2

Agreements in the Policy Mix

• EU Emissions Trading pilot addresses largest firms

• Electricity generators included in EU Emissions Trading Pilot

• Negotiated agreements require incentivisation by a tax - or the threat of a tax- or the reward of a rebate

• Have potential to incentivise electrical end use efficiency

are a viable instrument for climate change policy in Ireland

are a viable instrument for climate change policy in Ireland

Looking forward – Results

provide significant carbon dioxide impactsprovide significant carbon dioxide impacts

can be acceptable to industrycan be acceptable to industry

can protect competitivenesscan protect competitiveness

Negotiated Agreements:-

Putting agreements in place

Experience and expectations

The steps

• Recruit

• Establish the baseline

• Consider what’s possible

• Consider what’s reasonable

• Set it down and agree it

• Look to monitoring etc

Recruitment

• Pilot recruitment

• Individual agreements

• Collective agreements

• Technology agreements

Establish the baseline

• Investigate current practice

• Energy technologies and management

• Detailed energy audits

Some audit learning

• Need strong template

• Need full cost analysis

• Need strong company involvement

• Quality and credibility to firms…

… yet independence and

credibility to regulator

Consider what’s possible

• Gap between current and best practice

• What is best practice?

• The long list

Consider what’s reasonable

• Criteria for shortening the long list

• Technical issues

• Economic issues

On economic issues

• The parameters

• Showing real change

• Meeting everyone’s needs

Set it down and agree it

• Negotiation

• The agreement

Lessons on negotiation

• Trust, credibility, history

• Information

• Mandate

• Work

• Robustness vs efficiency

• Self reporting basis

• Verification

• Sanctions

Monitoring & compliance

Outcomes

• Agreement in all cases

• Low cost, reliable CO2

• Estimated abatement: 640 kt

• Double the impact of tax alone

• Motivation, compliance, information

Final thoughts

• Considerable learning

• A plausible model

• The core values of an agreement approach

Discussion

Distribution-number of firms

Distribution of firms by numbers

18%

78%

0%

1%3%

0%

Firms in Emissions Trading

Next 10 Largest Firms

5 typical f irms from collective pool

Most Likely pool for Sectoral Agreements

Potential Pool For Horizontal Agreements

Firms Too Small for Negotiated Agreements

Distribution-energy usage

Distribution of firms by energy usage

44%

4%1%

22%

24% 5%

Firms in Emissions Trading

Next 10 Largest Firms

5 typical firms from collective pool

Most Likely pool for Sectoral Agreements

Potential Pool For Horizontal Agreements

Firms Too Small for Negotiated Agreements

Company A

Best Intl Practice

Company B

Actions

Action-based approach