Middle Ground Needed on the Renewable Energy Target: Article in the AFR

This opinion article by Business Council of Australia Chief Executive Jennifer Westacott was published in The Australian Financial Review on 8 September 2014 under the title ‘Take the Third Path on Renewable Energy Target’.

When circumstances and the evidence changes, policies too need to change. This is the case with the Renewable Energy Target (RET) scheme.

The RET was meant to ensure 20 per cent of our energy supply comes from renewable sources, but because it was not designed to be adjusted if demand for energy falls – as it has – it now accounts for almost 30 per cent of energy supplies.

The best outcome for the community, business and the renewable energy industry would be bipartisan support for a form of a true 20 per cent RET that doesn’t risk falling short of its megawatt target at a huge cost to consumers.

The risk is that while reaching the existing megawatt target might be technically possible, it is unlikely to be commercially possible.

The commercial risks in the electricity and renewable energy certificate market are just too great to pull through large-scale renewable energy (predominately wind) investments in the coming years.

First, the price of renewable energy certificates is suppressed to a point which is too low to finance new wind projects due to an oversupply of certificates that are expected to hang in the market until 2017.

Second, because of the decline in energy demand, the wholesale price of electricity is suppressed which isn’t conducive to attracting further investment in any form of energy generation.

Third, because of the lack of bipartisan support on the design of the RET, it makes it very difficult for any investor to allay the commercial risks of regulatory change.

Even after 2017, once the oversupply of certificates is eventually soaked up by the market, it leaves only three years to build a massive amount of wind energy, some 8000 megawatts (MW) in three years.

This compares to 3800 MW of wind energy that the RET, in its various guises, has pulled through over the past 13 years.

To deliver wind on this scale and this quickly would require shorter community consultation on proposed wind farms than has historically occurred and would likely lead to added cost pressures as projects compete for limited resources.

Add all these risks together and it presents a grim investment environment – a market frozen until there is political consensus on the policy of the RET.

What is becoming clear is that unless all parties to this debate are willing to compromise, investment in wind will be stymied, creating the risk of higher electricity prices for consumers. This is because, without new wind investment, the price of certificates will spike.

What is not well understood is that if the certificate price hits the level of what is called the penalty price, electricity consumers will be paying an effective $93 tax with no additional investment in renewable energy.

Under this circumstance, community sympathy for the RET is likely to quickly dissipate and the pressure will come on the government to do more than just amend the existing scheme.

What needs to be recognised is that unwavering support for the existing target will not lead to greater wind investment unless the current issue of certificate oversupply is dealt with and there is a stable and bipartisan policy and investment environment.

If people are really concerned about renewable energy then they should be encouraging an agreement across political parties so as to guarantee a moderate amount of future investment, while reducing the cost burden on consumers.

The fact remains that the RET is an expensive way of reducing Australia’s greenhouse gas emissions.

According to the government’s own modelling by ACIL Allen Consulting, the cost of reducing emissions under the RET is estimated to be between $35 and $68 per tonne – which is significantly more expensive than the uncompetitively high $23 carbon tax.

Saving the furniture on a second-best policy tool to reduce emissions, such as the existing flawed design of the RET, will not create an environment for bipartisanship on climate change policy – it will just push up prices. Instead we are better to have a well-designed market mechanism that reduces emissions on a least-cost basis that does not add to the oversupply in our electricity markets.

All sides of politics need to recognise the consequences of sticking with the existing RET, and seek out the middle ground on a form of a true 20 per cent RET that minimises the risk of higher costs being lumped on consumers.