September 12, 2014
Australia

Renewables power play

Sid Maher, National Affairs Editor | The Australian | September 12, 2014 | www.theaustralian.com.au

The carbon tax has been consigned (for now) to history but the review of the renewable energy target by a panel led by businessman Dick Warburton looms as the latest battlefront in the climate wars.

While Industry Minister Ian Macfarlane declared this week the government would not scrap the RET, the Warburton review has paved the way for the scheme to be scaled back.

The government now faces a Senate hostile to any changes and warnings from electricity industry experts that a political deadlock could cost consumers $600 million a year.

Labor is backing the scheme in its present form, arguing any changes represent a broken election promise. Clive Palmer has made it clear he will not support changes until after the next election in 2016.

Macfarlane and Environment Minister Greg Hunt this week sued for peace with Labor. But the opposition is biding its time, arguing it will not be party to killing the scheme.

The RET had its genesis in the late 1990s under John Howard with the introduction of the mandatory renewable energy target. It stipulated 2 per cent of additional renewable energy, relative to 1997 generation levels, should be in the mix by 2010.

The 2 per cent figure was converted to 9500 gigawatt hours by 2010 after representations from the electricity industry, which argued a set figure provided more certainty. Kevin Rudd expanded the target in 2009 to 20 per cent by 2020, expressed as 41,000GWh from large-scale renewable energy generation and 4000GWh from small-scale generators.

Small-scale systems were split off in 2010 as the take-up of solar panels exploded because of generous feed-in tariffs.

The scheme works by forcing electricity retailers or large energy users to buy renewable energy certificates, which effectively act as a subsidy – paid by electricity consumers – to cover the difference between the wholesale price of electricity and the renewable plant’s cost, to make it economically viable. In the case of small-scale schemes the certificates are bundled up over 15 years and usually bought by the installer to cut the cost of the system.

The RET target was based on 2007 forecasts, which predicted an annual increase in electricity demand of 2.5 per cent.

But a historic fall in electricity demand – unheard of in 2009 – has meant demand actually fell 4 per cent between 2009 and 2012, while 6000 megawatts of new renewable generation was added to the system across a decade. The result has been a fall in wholesale prices in the National Electricity Market, which experts warn could undermine its integrity.

Modelling for the Warburton report said the current RET target for large-scale generators, of 41,000GWh, would represent about 26 per cent of the electricity mix instead of 20 per cent under current demand levels. Small-scale solar panels add another 6400GWh.

The review found the small-scale sector had received a cross-subsidy of about $4 billion since the RET was expanded in 2010, and that the entire renewables sector would receive a cross-subsidy of $22bn from 2015 to 2030.

The review also found the RET would reduce productivity in the electricity sector as more capital was unnecessarily deployed for no increase in output.

The Warburton review recommended closing the RET to new entrants, to power stations already under construction, or to those who could demonstrate contractual commitments.

The second option, considered most likely to be adopted, was to link any increase in the target to electricity demand growth, with renewables being given a half-share of any growth. The review said based on current demand this would give renewables a 20 per cent share of the generation mix by 2020.

It also recommended abolishing the small-scale renewables scheme for solar rooftop panels or bringing forward the phase-out of the scheme, which is due to begin next year.

Electricity industry experts argue the RET’s future must be part of a wider debate about the structure of the market and how to deal with the glut of power that is undermining the system.

The renewables sector argues coal-fired power stations should make way for renewable generation, but traditional business interests say growth in the renewables industry needs to be scaled back because it increases costs and operates courtesy of a subsidy from other energy users.

Proponents for no change to the current policy argue the scheme has cut emissions, there are two million rooftop solar panels or solar hot-water systems installed thanks to the RET, and renewable energy in the system from wind farms has risen dramatically.

They warn scaling back the scheme will cost billions, destroy thousands of jobs and set back Australia’s climate-change abatement efforts.

But the Coalition faces equally vocal calls from business groups, and big energy users such as the aluminium industry, for major changes to the RET. They argue the RET is forcing power into an already oversupplied market, the amount of renewables required under the scheme won’t be built because it is not commercially viable, and the emissions abatement under the scheme, at up to $68 a tonne, is too costly compared with other options. It also adds 4 per cent a year to household bills and 10 per cent to commercial bills.

In the face of calls for change, the unanimous view of the Business Council of Australia, the Australian Industry Group and the Australian Chamber of Commerce and Industry is that only bipartisanship can produce success.

ACCI chief executive Kate Carnell argues the RET is an expensive approach to carbon abatement. While there are jobs in the renewables sector, they are coming at the expense of more traditional sectors. This is because the scheme requires power users to pay a subsidy to support renewables.

Energy Supply Association of Australia chief executive Matthew Warren says the key strength of renewables policy in Australia has been its continued bipartisan support, and any serious attempt to fix the current problems and deliver more renewable energy into the market in the next decade needs major parties to own the solution.

He says there are worrying signs that the RET “is simply uninvestable’’ and arguing over the size of the target is unlikely to fix underlying problems.

“The RET is effectively trying to force new generation into an already chronically oversupplied market. If we want to deliver a transformation of Australia’s energy supply, the RET on its own is unlikely to cut it. We need to address deeper structural issues in the design of our energy markets,” Warren says.

Energy market commentator and former ESAA managing director Keith Orchison warns that emotion and ideology have taken over in the RET debate.

Orchinson says a Senate deadlock that keeps the policy in its current state risks penalising consumers.

“Failure will see the RET penalty provisions kick in, perhaps as early as 2018 or 2019, and large-scale renewable energy target certificates will shift to the legislated, tax-adjusted shortfall charge – probably about $93 per megawatt hour (instead of the current average of about $40).

“Some say this will represent an extra $600m a year burden for retailers – that will get passed straight through to customers,’’ Orchison says.

A research paper by AGL head of economics Tim Nelson, manager of carbon and renewable policy Cameron Reid and University of New England senior research fellow Judith McNeill says policymakers “assumed that new supply would be absorbed by increased electricity demand, while the opposite has in fact occurred’’.

This has been compounded by a reluctance for coal-fired power generators to exit the system, creating “intractable investment conditions’’.

Nelson, Reid and McNeill find that despite many brown and black coal-fired power stations being beyond their design life, operators face costs of between $100m and $300m to remediate their sites.

“First-mover disadvantage’’ also acts as a disincentive because the exit of one power station reduces overall capacity in the system to the benefit of all its competitors. Policy uncertainty also acts as a disincentive to exit and operators are “sweating’’ ageing coal plants.

If the plants are mothballed, capacity remains in the system and this keeps down wholesale electricity prices. But continued low wholesale prices will discourage necessary maintenance and “on extremely hot days unexpected plant outages may increase in frequency’’.

While increased outages reduce reliability, low wholesale prices depress the economics of not only the coal-fired power stations but the renewables, or require the renewable energy certificate price to be higher to make the plants economic.

Nelson, Reid and McNeill argue for “direct action” funds to be used to pay generators to close or remediate their sites, an idea also backed this week by Climate Change Authority chairman Bernie Fraser but rejected by Macfarlane.

Clean Energy Council acting chief executive Kane Thornton argues neither the federal government nor the Warburton review has made any convincing argument for reducing the RET.

He says other options the government has discussed to date – like a “real” 20 per cent – would decimate the industry.

He also dismisses suggestions the renewables industry can’t build 41,000 GWh of generation to meet the target. But current policy uncertainty must end.

“While the ongoing freeze on investment caused by the current review makes achieving the target increasingly challenging, the renewable energy industry has a long track record of delivering targets ahead of time and at lower cost than many people anticipated,” he says.

Thornton argues the Warburton review shows there is too much coal-fired power generation in Australia, not too much renewable energy.

The solar industry also argues changes to the RET will damage it. Australian Solar Council chief executive John Grimes says changes could cost 8000 jobs immediately and 12,500 by the middle of next year.

He argues that scrapping the RET subsidy will increase the cost of solar panels by 40 per cent to 60 per cent. The Solar Council is running a marginal-seats campaign and next week will launch television advertisements in north Queensland and regional Victoria.

Speaking at a Committee for Economic Development of Australia conference this week, Macfarlane flatly rejected speculation that the government was planning to scrap the RET. “No one is advocating the end of renewable energy in Australia,’’ he said.

Regardless of what decisions were made about the RET, “nothing will change for those who have installed rooftop solar, and large-scale investments such as wind farms or hydro power stations will be protected’’.

The electricity capacity overhang was “the equivalent of nine big power stations of excess capacity in generation in Australia’’. Macfarlane said.

“So we need to be sure that the RET is delivered in a way that fits in with this new market dynamic, and is not adding undue cost to households and making industries uncompetitive.’’

The RET has already cost consumers $9.4bn in direct costs. If the present target is retained, it will cost another $22bn in direct costs.

Grattan Institute energy program director Tony Wood says the fixed target for the RET is a “slow train wreck that took time to get up steam’’. The Coalition and Labor must find a way to do a deal on the way forward.