01-03-10 Renewable Energy Target Debacle - Pick A Loser

No doubt there will be winners from the revisions announced to the Renewable Energy Target (RET) on 25th February 2010. But the real effort is picking the biggest loser.

But first, the changes...

RET amendments come not a moment too soon

In the most recent edition of CarbonEdge, we suggested that a simple solution to the collapsing RET price was setting a floor price. We still think that has merit, but in its announcements, the Government has taken a different path. In essence, the RET will be split into two schemes from 1st January 2011.

Something had to change because the RET price had collapsed (see the article on page 6 of the current edition of CarbonEdge) over the last few months. This was due to the congruence of a small number of circumstances. The lack of policy certainty on the CPRS and in particular, the massive distortive effect of the domestic schemes that provide Renewable Energy Certificates (RECs) to households at a far greater rate than industrial schemes. In short, over supply and under demand.

The impact of this was announcements from several major renewable energy developers that they were putting their projects on hold. Some of that was gaming the system and merely trying to put pressure on the Government to act. The risk was the collapse of projects the momentum towards the 2020 renewable energy target

The new Large-scale RET (LRET) will cover industrial scale projects like wind farms, commercial solar, geothermal, biomass and so on. It is expected to deliver almost all of the 2020 renewable energy target, estimated according to Climate Change Minister Penny Wong as around 41 million gigawatt hours.

On the other side is the new Small-scale Renewable Energy Scheme (SRES) which will cover the domestic solar schemes, will make up what it can of the total renewable energy target, providing a fixed price of AUD40 per megawatt hour with the payments delivered up front.

In announcing the changes, the Government gave barely a nod to the problem of the over-cooked domestic schemes and their too generous handouts that caused the RET price crash, saying, "This will free these projects from uncertainties that may have been caused by strong demand for small-scale renewable technologies."

Interestingly, the Government now expects that the new arrangements will lead to the 2020 renewable energy target being exceeded. We'll find out in a decade or so. In the meantime, industry consultation is expected to commence in a few weeks and the legislation should go into the Federal Parliament in the winter sittings. CarbonEdge will keep subscribers up to date as the consultations evolve.

Pick your biggest loser

The list of losers from this latest change in Government policy is quite long, but CarbonEdge wants to say at the outset, we don't have much sympathy for any of them. Here's the list as we see it:

  • Some mainly middle class households will receive less handouts than before and get a more reasonable return for the energy they generate - remember that under the scheme as it exists now, most household solar schemes deliver about 4 times the Renewable Energy Certificates as for industrial schemes per unit of energy generated
  • Domestic solar power supply companies will have less work because the incentives, substantial though they remain, will be reduced, providing a dampener on this most artificial demand
  • Minister Peter Garrett whose responsibilities have been reduced because of the whole range of energy efficiency programs that were poorly designed and have without exception had to be amended in some form or another
  • The Federal Government which agreed to separate the RET legislation from the CPRS legislation in late 2009 when it was clear the CPRS legislation would not pass the Senate
  • The Federal Opposition who insisted that the RET legislation be decoupled from the CPRS legislation to provide 'certainty to business

As CarbonEdge has commented previously, the 2009 separation of the RET legislation from the CPRS bill was a political fit and a policy mess. With a price on carbon imposed by the CPRS, the demand for renewable energy certificates would have had a large and consistent base to secure the price, regardless of the number of free RECs landing on the market as part of the domestic rebate programs.

Together the CPRS and RET legislation represented appropriate - if complex - complimentary policy. Separately, the RET was always at risk.

Subscribers can pick their own favourite loser.

New certainty for renewables investors... but still no price on carbon

While legislation has not yet reached the Parliament, it will pass the Senate because business and industry will ensure it does. For the large scale renewable energy investors, the certainties allow for the price they will receive for their Renewable Energy Credits to be modelled and factored into investment models. That should remove a variable and allow a number of projects to proceed.

Meantime, everyone else, including the users of energy, just keep waiting for some certainty on the other side of the ledger to be settled. The price on carbon is needed for energy users to factor long term costs into their investment models. But certainty on this front still seems some way off. So perhaps that makes Australian industry the really big losers at the moment.

 

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