Misinterpretation of REC liability exemption leaves islanded generator high and dry

In brief

A decision by the Administrative Appeals Tribunal affirming an assessment by the Clean Energy Regulator as to the liability of an off-grid generator under the Renewable Energy (Electricity) Act 2000 (Cth) highlights the need for liable entities to carefully consider their reliance on the 'small systems exemption'. Partner John Greig and Senior Associate Andrea Moffatt look at the decision which demonstrates the continued complexity facing those operating in the electricity sector.

Background – the facts

Fortescue Solomon Pty Limited required a supply of electricity for its mine operations in the Pilbara. TEC Pipe Pty Ltd constructed six generating units over three years (two units in 2012, two in 2013 and the final two in 2014 – for reasons that become obvious, the timing is important) which, in aggregate, were capable of generating 152MW. All were connected to the same off-grid network.

The Clean Energy Regulator assessed TEC as being a liable entity with respect to electricity acquired by Fortescue from that network in the 2014 assessment year.

TEC thought it had no liability, believing that its arrangements attracted the benefit of a small systems exemption.

After discussions with TEC, the Regulator reconfirmed its position and issued an assessment. TEC applied to the Administrative Appeals Tribunal for a review of the Regulator's decision.¹

Background – the law

In broad terms, a generator or retailer may be a liable entity for the purposes of the Renewable Energy (Electricity) Act 2000 (Cth).²

The Regulator assessed TEC on the basis that Fortescue (which was not registered under the National Electricity Rules) had acquired electricity from TEC as a generator. ³

For these purposes, entities are entitled to disregard acquisitions from small systems (ie, networks to which less than 100MW of generation capacity is connected).⁴ In determining the capacity of a network one excludes 'standby plant'.⁵ Standby plant means a generator that, for each of the preceding three years:

• produced less than 50GWh; or
• had a load factor of less than 5 per cent.⁶

TEC contended that it was entitled to the exemption in that at no time had any of the six generators generated more than 50GWh in any year prior to the relevant acquisition of electricity in 2014.

In contrast, the Regulator, while not disputing those facts, was of the view that the exemption was not available to TEC.

The issues

In summary, the Tribunal had to make a determination as to three separate issues (in ascending order of both relevance and difficulty), all in relation to the definition of 'standby plant':

• what is a 'year'?
• what years comprise the 'preceding three years'?
• what is the proper understanding of a '… generator that has for each of the … preceding three years … produced less than 50GWh'?

The Tribunal's answers

In noting that 'year' was not defined by the Act, the Tribunal considered that the natural meaning (that being of a calendar year) should be adopted. It also noted that that conclusion coincided with much of the workings of the balance of the Act (for example, in the context that a liable entity is required to lodge an energy acquisition statement for an 'assessment year' on or before 14 February in the next year).⁷

In looking closely at the context of the phrase 'preceding three years', the Tribunal noted (correctly in our view) that that question was being asked in the context of whether a particular relevant acquisition of electricity was in respect of a network which would be exempt by reference to the definition of standby plant. Noting a number of analogous situations, the Tribunal determined that in ascertaining what were the 'preceding three years', the year in which the relevant activity or event in question took place is to be excluded.

Given that the Tribunal was trying to determine what were the 'preceding three years' with respect to an acquisition of electricity in 2014, the Tribunal's conclusion meant that:

• 2014 itself did not comprise one of the preceding three years;
• the preceding three years were, therefore, 2011, 2012 and 2013.

As to the final (and ultimately most important) question, both the applicant and the Regulator argued that the other's interpretation of the relevant phrase ('generator that has … produced less than 50GWh….') presented anomalies which should persuade the Tribunal to reject that interpretation.

The applicant argued that it was simply a matter of determining whether in fact there was any electricity generation in the relevant years. Thus the applicant contended that while there had to be a generator in existence at some time during the preceding three years, thereafter it was merely a factual question as to whether there was generation of less than 50GWh in any relevant year.

In contrast, the Regulator was of the view that the phrase required that the relevant generator had to be in existence for each of the preceding three years, and that in all of those years, less than 50GWh was generated by that generator.

One of the anomalies noted by TEC as to the Regulator's interpretation was that a newly constructed/commissioned generator which would, in the years to come, be likely to attract the exemption, would not attract the exemption until the fourth year of its life (because until then, it would not have the requisite 'preceding three years' of operation necessary to satisfy the definition of standby plant). In contrast, the Regulator thought that the applicant's interpretation was anomalous in that if the contention that a generator which had not been installed for one or more of each of the preceding three years could come within the definition of standby plant was accepted, that would be inconsistent with the imposition of the three-year period because a newly installed generator would automatically qualify as standby plant for its first year of generation, regardless of the amount of electricity it generated in that first year.

The Tribunal, while accepting that there were these (and other anomalies) inherent in the different views of the applicant and the Regulator, held that it was not entitled to impose its own 'solution' so as to overcome these anomalies. Rather, it regarded that as the role of the legislature.

The Tribunal viewed its role was to merely interpret the plain words of the legislation and to make a finding based on that interpretation.

In the end, the Tribunal was of the view that if a test was promulgated as to whether a generator had in fact generated a particular amount in a particular period or not, that connoted that the generator was capable of generating electricity in that period. Hence, the Tribunal found that if any of the generators were not in each of the relevant 'preceding three years' capable of producing electricity, they were not relevantly generators that 'produced less than 50GWh' for the purposes of the standby plant definition.

Outcome of the Tribunal's findings

These findings meant that:

• with respect to acquisitions of electricity in 2014, the 'preceding three years' were 2011, 2012 and 2013;
• as none of the generators had been constructed/commissioned in 2011, none of the generators had 'produced less than 50GWh' in 2011 and hence, for 2014, none of them satisfied the standby plant definition;
• not being standby plant, one had to determine whether, for 2014, the relevant acquisition was from a network which had a capacity in excess of 100MW;
• as the capacity of the six generators in 2014 was 152MW, the relevant acquisition of electricity was from such a network, and hence the applicant had a REC liability with respect to that acquisition of electricity.