Negotiated Energy Agreements Pilot Project

2. Negotiated Energy AgreementsPilot Project Report Launch 24th September 2003 Andrew Parish Project Coordinator

3. Structure • Context & background • Pilot project outcomes & projections • Putting agreement in place

4. 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

5. 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

6. What are Negotiated Energy Agreements? 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” 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 - BAU Towards best international practice - BIP

7. 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

8. What was involved in the Pilot Study? Volunteer to participate Establish current situation Compare to Best Practice Negotiate new position

9. 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

10. 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

11. 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

12. Technology €7,000 (2.3%) of annual energy cost Collective €16,000 (1.5%) of annual energy cost Results – audit costs Individual €90,000 (0.14%) of annual energy cost

13. 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 Results – average investments Specific action paybacks from 3 months to 5 years * ex CHP

14. Results – CO2 savings Technology 17.1% 17,300 tonnes Average per firm 1,150 tonnes Collective 16.4% 34,000 tonnes Average per firm 3,390 tonnes Individual 5.4% 69,000 tonnes Pilot total 120,000 tonnes ~14% = electrical ~17-20% = thermal

15. Technology - €8.30 per tonne Collective - €12.20 per tonne Results – abatement costs Negative abatement costs indicate economically viable investments

16. Looking forward • Potential for mix of three agreement types • Potential application Collective 150 firms Technology500 firms 650 firms 40% of industrial energy use • Potential abatement for whole sector 640,000 tonnes

17. 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 €1.10per tonne CO2

18. 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

19. Looking forward – Results Negotiated Agreements:- are a viable instrument for climate change policy in Ireland provide significant carbon dioxide impacts can be acceptable to industry can protect competitiveness

20. Putting agreements in place Experience and expectations

21. The steps • Recruit • Establish the baseline • Consider what’s possible • Consider what’s reasonable • Set it down and agree it • Look to monitoring etc

22. Recruitment • Pilot recruitment • Individual agreements • Collective agreements • Technology agreements

23. Establish the baseline • Investigate current practice • Energy technologies and management • Detailed energy audits

24. 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

25. Consider what’s possible • Gap between current and best practice • What is best practice? • The long list

26. Consider what’s reasonable • Criteria for shortening the long list • Technical issues • Economic issues

27. On economic issues • The parameters • Showing real change • Meeting everyone’s needs

28. Set it down and agree it • Negotiation • The agreement

29. Lessons on negotiation • Trust, credibility, history • Information • Mandate • Work

30. Monitoring & compliance • Robustness vs efficiency • Self reporting basis • Verification • Sanctions

31. Outcomes • Agreement in all cases • Low cost, reliable CO2 • Estimated abatement: 640 kt • Double the impact of tax alone • Motivation, compliance, information

32. Final thoughts • Considerable learning • A plausible model • The core values of an agreement approach

33. Discussion

34. Distribution-number of firms

35. Distribution-energy usage

36. Action-based approach Best Intl Practice Company B Actions Company A