Year in review – 2023 Climate change and sustainability developments

In this publication, we look at the major developments relating to climate change and sustainability in the 2023 calendar year.

What you need to do:

Stakeholders should note the market updates below, and consider any impacts on their compliance obligations and climate change and sustainability commitments.

2024 is already shaping up to be another year with climate change and sustainability at the forefront of politics, policy and the boardroom. In this Year in Review, we consider how organisations can prepare and respond to the key developments across climate change and sustainability from 2023, including:

• 28th UN Conference of the Parties of the United Nations Framework Convention on Climate Change (COP28);
• the Capacity Investment Scheme (CIS);
• Australian Competition and Consumer Commission (ACCC) Greenwashing Guidance;
• Australian government Sustainable Finance Strategy;
• Australian Energy Market Operator's (AEMO) draft of the 2024 Integrated System Plan (ISP);
• Demand response and "two-sided market" developments; and
• Cost of living crisis and what it means for Net Zero.

COP28 and the Global Stocktake Text (GST)

COP28 took place from 30 November to 12 December in Dubai, UAE. COP28 closed 13 December with the GST as its key outcome.

Stock of the GST

The 4 main developments coming out of COP28 and the GST that are most relevant to stakeholders are:

• country accountability and contribution to a number of listed global efforts;
• developed countries' role to lead in mobilising climate finance;
• the need for just transitions of workforces (while accounting for national circumstances);
• implementation of integrated, multi-sectoral solutions to biodiversity loss; and
• the importance of implementation (where business can play an impactful role).

Country accountability

The first GST recognises the need for reductions in greenhouse gas (GHG) emissions in line with 1.5°C pathways. The Parties were called on to contribute to a number of listed global efforts, including:

• Tripling renewable energy capacity and doubling efficiency measures by 2030;
• Accelerating efforts to phase-down unabated coal power;
• Accelerating efforts towards zero and low-emissions technologies; and
• Phasing out inefficient fossil fuel subsidies that do not address energy poverty or just transitions.

Mobilising climate finance

The GST called on developed countries to lead in mobilising climate finance – including: adaption finance, grant-based, highly concessional finance and efforts to meet the developed nations' pledge of $100 billion of climate finance per year until 2050 in order to assist vulnerable nations.

The GST also emphasised the role of commercial banks, institutional investors and other financial actors in improving the assessment and management of climate-related financial risks and access to finance.

Relevance of the GST to clients

The UN-convened Independent High-Level Expert Group on Climate Finance (IHLEG) announced at COP28 the that a 15x increase in private climate finance is required by 2030. This is consistent with the IHLEG's Second Report on Climate Finance.

What you need to do

Aside from financing, businesses can:

• develop the diverse and innovative financial mechanisms that were called for in the GST;
• facilitate the planning, innovation and investment required for the just transitions; and
• adopt the technology and best practice that exists - and influencing other stakeholders to do the same.

We encourage our clients and key stakeholders to keep up to date with and consider the:

• revised climate pledges (Nationally Determined Contributions) to be published by all COP parties in 2025; and
• updates regarding COP29 and COP30 which were agreed to be in Azerbaijan and Brazil, respectively.

The CIS and what it means for Net Zero

The Capacity Investment Scheme (CIS) provides a national framework to support 32 GW of new capacity nationally, including 23 GW of renewable capacity and 9 GW of clean dispatchable capacity. The CIS seeks to enhance the future reliability of Australia's electricity market and mitigate the risk of price shocks by providing certainty for financiers and investors.

The CIS is comprised of:

• a national tender held approximately every six months from April/May 2024 until 2027 to support 14 GW of capacity; and
• Renewable Energy Transformation Agreements with State and Territory governments to support 18 GW of capacity.

The CIS is intended to work in unison with and enhance other national and State/Territory schemes.

How the CIS works

Successful proponents as part of a CIS tender will be awarded a CIS agreement (CISA).

The CISA assists new projects by providing support where revenue falls below an agreed 'floor', subject to an annual cap. In return, projects will be required to pay the Commonwealth a percentage of revenues above an agreed 'ceiling', subject to an annual cap.

In short, the CISA aims to:

• Provide investor certainty by offering long-term underwriting through the competitive tender process;
• Limit impact on wholesale electricity market functions by imposing limited performance and no operational requirements; and
• Provide flexible contracting by permitting projects to also participate in the wholesale contracts market.

Key features of CIS implementation

The key features of CIS implementation, include:

• Transparency: Long term forecasting of generation and storage required in each Australian jurisdiction.
• Reliability: Competitive tenders to achieve capacity targets.
• Stimulating investment: Financial underwriting by providing a long-term revenue safety net, with upside profits to be shared with the Commonwealth.
• Affordability: The Commonwealth will bear the costs of the CIS (risk is not passed to consumers).

Projects can:

• contract less than 100% of its capacity: provides proponents with greater flexibility to participate in the wholesale contracts market or the spot price market for the uncontracted capacity, whilst retaining access to CIS support.
• participate in the wholesale contracts market: permitting offtake agreements with third parties enables projects to take advantage of potential upside and/or new markets as the energy transition continues.

Key takeaways

We see the Federal and State government having to increase their focus on building transmission lines to connect all this new renewable capacity to the grid.

However, a limitation to consider is that the CIS does not currently address how transmission will be built to support the new capacity.

If the CIS is successful, Australia will be getting a more reliable and lower-emissions electricity sector at a relatively low carbon cost.

ACCC Greenwashing Guidance

On 12 December 2023, the ACCC released the final guidance for businesses on greenwashing, to improve businesses' environmental claims and protect consumers from greenwashing.

The guidance aims to address concerning conduct identified by the ACCC’s recent greenwashing internet sweep, which found 57% of businesses reviewed were making potentially misleading environmental claims.

Summary of the principles

The guidance identifies eight practical principles which the ACCC encourages businesses to apply when making environmental claims.

By following these principles, businesses are less likely to mislead consumers and contravene the Australian Consumer Law:

• Principle 1: Make accurate and truthful claims
• Principle 2: Have evidence to back up your claims
• Principle 3. Do not hide important information
• Principle 4. Explain any conditions or qualifications on your claims
  
  This principle is connected to Principle 3, these claims include where a product has an environmental benefit, but it only applies in specific contexts, locations or steps are first taken. This must be explained.
• Principle 5: Avoid broad and unqualified claims
• Principle 6: Use clear and easy to understand language
• Principle 7: Visual elements should not give the wrong impression
• Principle 8: Be direct and open about your sustainability transition

See further information on the ACCC's 8 Principles here.

What you need to do

To companies and stakeholders that are familiar with the Australian Consumer Law, this guidance does not flag anything unheard of. Instead, it reiterates the requirements for companies to be:

• clear and accurate with their claims;
• diligent in ensuring that there is sufficiently recent and credible information to support these claims;
• confident in the quality of reviews and how certifications are communicated; and
• honest and clear plans to achieve any ESG goals.

The key significance is that it provides businesses with practical guidance and examples.

We encourage our clients and other stakeholders to review their existing practices against the practical guidance provided in the final report released on 12 December 2023 and keep their eyes out for further guidance.

In early 2024, the ACCC will release further guidance for businesses and consumers on emission and offset claims, as well as the use of trust marks. The ACCC will also develop guidance to help consumers confidently assess and rely on environmental claims.

As we see a continuing focus from the regulators regarding greenwashing, companies should expect increased climate-related litigation into 2024. Companies should take a proactive, risk-based approach in order to anticipate and reduce climate related litigation risk to as low as reasonably practicable.

Australian government Sustainable Finance Strategy

In November 2023, Treasury released the Consultation Paper on Australia's Sustainable Finance Strategy, which will support Australia’s pathway to net zero, by providing a framework that reduces barriers to investment into sustainable activities.

The government sought feedback on this strategy, but this consultation process has since been completed.

Policy Priorities (3 Pillars)

The strategy’s policy priorities are structured in 3 key pillars:

• Pillar 1 (Improve transparency on climate and sustainability)
• Pillar 2 (Financial system capabilities)
• Pillar 3 (Australian Government leadership and engagement)

There are four policy priorities detailed for each of the three pillars:

What you need to do

The Consultation Paper put forward a number of recommendations to assist Australia in reaching its goal of net-zero by 2050. Reforms include an obligation for large Australian companies and financial institutions to:

• From 1 July 2024, disclose information about the impacts of climate on their business, the risks climate change poses to their operations, and how they plan to decarbonise; and
• In line with ISSB standards, comply with increased mandatory disclosure requirements related to net zero transition planning.

Therefore, companies and key stakeholders should keep up to date on the development of:

• the Australian government Sustainable Finance Strategy following consultation; and
• internationally accepted standards (as these will inform how Australia will implement the strategy).

AEMO Draft 2024 ISP – implications for the Net Zero journey

On 15 December 2023, AEMO released a draft of the 2024 ISP which outlines Australia's pathway to reaching net zero.

The latest plan for the NEM is a product of collaboration with 1,300 stakeholders, 60 presentations and reports as well as over 110 submissions from industry, consumer and community representatives and governments.

Key takeaways

The key takeaways of the draft 2024 ISP are as follows:

• Coal power is being beaten by cleaner energy: The ISP projects that 90% (or 21 GW) of coal plants will shut by 2035 and that the last will be shut by 2038 as the grid will be able to at time run entirely on renewable energy.
• Consumers are a key stakeholder: AEMO want consumers to play a larger and more helpful role. AEMO expects:
  - By 2050, 72 GW of rooftop solar on nearly four in five homes, and the largest source of capacity;
  - residential and commercial batteries to surge from 1 GW today to 7 GW by 2030, and 34 GW by 2050.
  - Almost all vehicles will be electric
• Increased cost of transmission and generation: AEMO estimates that the cost of transmission has increased by 30% and that the cost of generation is up as well. AEMO has:
  - reduced its estimate of the net benefits of the vast spend by 37 per cent, from $27.7 billion to $17.45 billion.
  - stressed that in order to cope with coal plant exits, utility scale wind and solar capacity need to triple by 2030 and increase sevenfold by 2050.
• Gas is imperative, but will play a small role: The capacity of gas peaking plants must increase to 16 GW, an increase from 10 GW in the 2022 draft ISP. In 2038 (when coal is gone) gas peakers will generate just 8.8 terawatt hours of energy, about 1/3 of utility-scale battery generation and 1/2 of consumer battery generation. However, the industry will fall away and will be used sparingly.

What you need to do

The ISP:

• outlines industry trends as well as outlines areas for investment in order to reconfigure and decarbonise the grid over the next decade; and
• will shape policy and how industry and governments will work together to support the transition.

Therefore, Clients and key stakeholders should:

• keep up to date on the development of the 2024 ISP; and
• consider making a submission before consultation closes Friday, 16 February 2024.

Demand response and "two-sided market" developments

Electricity markets have been traditionally one-sided, with consumers. This system means that:

• consumers have agreed to pay a certain rate for electricity; and
• do not have to concern themselves with the price fluctuations of the NEM.

A two-sided energy market means that consumers can also play a role in meeting fluctuating energy demands and get rewarded for doing so.

How it works

A Two-sided energy market is facilitated by:

• technology such as solar panels and batteries – which means that consumers do not always have to pay for energy from the grid;
• smart homes which can assist with setting appliances to only run during off-peak times; and
• programs, such as the AGL virtual power plant (VPP), where consumers can become part of a pop-up power plant within the network – which eases the demand on the grid by sending excess power to others in the network.

The AEMC's IESS Rule determination on 2 December 2021 sought to better integrate storage and aggregate systems in the NEM. This can be seen as a significant step towards a technology agnostic two-way market model for the NEM.

AEMO outlined in a 20 April 2020 media release that a core benefit of a two-sided energy market is that it will unlock data on consumer energy demand that is hidden 'behind the meter'.

• Consumers and those who participate in the wholesale market on their behalf will be active in responding to price.
• When prices are high, consumers can conserve their own use and supply electricity to the market and when prices are low, they can increase their use.
• Behaviour and responses to the market will be transparent and this real-time information will become invaluable to keeping the power system operating securely and reliably.

What you need to do

A two-sided market will essentially shift the market rules so they are more streamlined and easier for new types of participants to enter the market.

Therefore, we encourage clients and stakeholders to monitor:

• AEMC's rule changes on Demand Responses (DR) which will be used to trial how to schedule consumers in a two-sided market); and
• Developments in the VPP space.

DR is the voluntary reduction or shift of electricity use by customers, which can help to keep a power grid stable by balancing its supply and demand of electricity.

Cost of Living Crisis – what does this mean for Net Zero

For the past year, Australia has been defined by two crises:

• The cost of loving crisis, which has affected millions of Australian household with increased cost-of-living pressures; and
• The climate crisis, which has led to more frequent hot weather, fewer cold days, rising sea levels and more extreme weather events.

According to the Ipsos Issues Monitor, an ongoing quantitative survey of Australians about core issues facing the country, the 2023 year closed with:

• Cost of Living being the issue of greatest concern to Australians (62% of respondents); and
• voters being more concerned about the cost of living crisis than climate, which sits just outside the top 5 issues despite being the top concern at the start of 2020

However, both crisis are intrinsically linked and solutions should consider both issues to be effective.

Examples to note

It is important to note that action on climate change is action on the cost of living. The following are examples to demonstrate this:

• Grocery prices: Extreme weather events such as flooding and drought can wipe out crops and stop farmers from planting produce. This has led to increased prices for staples (including the infamous $11 lettuce). As governments focus on reducing the cost of living, there is an opportunity to reduce carbon.
• Cheaper energy: More renewable energy also protects households from rising global gap prices and coal supply. In 2022, ACT being powered 100% by renewables meant that those in Canberra saved while households in other States paid between $200-300 more for power.
• Weather events: A Special Report on the Economic Costs of Natural Disasters concluded that even under a low emissions scenario, the cost of natural disasters in Australia is estimated to increase to $73 billion annually by 2060.
• Uninsurable properties: At the individual household level, a Climate Council Report has estimated that extreme events could lead to 1 in 25 properties becoming uninsurable by 2030 due to increased premiums.

What you should do

Governments are recognising the link between the two issues and why the climate change should not have to compete with the cost of living crisis for attention and effort. Clients should also do the same.

Accordingly, clients and key stakeholders should:

• keep up to date with consumer facing technologies (like electric vehicles and solar batteries); and
• consider how projects will aid the cost of living crisis (including through job creation/preservation).

We look forward to working with our commercial, government and First Nations clients to find ways to address ESG matters on projects around Australia.

We encourage you to contact us if you would like to discuss any aspect of this publication.

Authors: Dan Brown, Partner; Elena Lambros, Risk Advisory Partner; Mikaela Wyndham, Risk Advisory Executive; Samirah Delor, Graduate.