Negotiated Energy Agreements Pilot Project 24 th September 2003 Andrew Parish Project 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 - BAU Towards 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 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?

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 CO 2 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 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 – CO 2 savings Technology17.1%17,300 tonnes Average per firm 1,150 tonnes ~14% = electrical ~17-20% = thermal Pilot total120,000 tonnes Collective16.4%34,000 tonnes Average per firm 3,390 tonnes Individual5.4%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 Collective150 firms Technology500 firms 650 firms 40% 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 CO 2 abatement Annual cost (inc ¼ set up cost) Static cost (per tonne) Average transaction cost €1.10 per tonne CO 2

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 impacts can be acceptable to industry can 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 CO 2 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- energy usage

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