The Future of Australia’s Renewable Energy Target

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David Perry, Research and Program Manager Australia, The Climate Group, takes an in-depth look at Australia’s reconfirmed Renewable Energy Target.

Last month the Australian Government re-affirmed its support for the Renewable Energy Target (RET) at its current level of 41,000GWh in 2020. Despite being now considered the poor cousin to the carbon price (introduced in July), the RET has been immensely successful at getting serious amounts of renewable energy onto the grid, and at a very modest cost to consumers.

Its great strength over the much more contentious carbon price has been a modicum of stability. Up until recently it enjoyed clear bipartisan support, and provides some direct assurance that energy prices will remain sufficient to support the infrastructure investment that will be required for a Clean Revolution. Its market structure means that renewable generators are in competition with one another to provide clean energy at the lowest cost, in contrast with fixed feed-in tariffs.

But for all its success, the RET has been chaotic.

It initially supported rooftop PV, solar/heat pump hot water and utility-scale renewables (principally onshore wind) under a single banner, despite the vastly different scales of investment involved. In 2011, a “solar multiplier” was dreamt up to maintain rooftop PV installations following the sudden cessation of a separate scheme, treating solar as if it generated up to five time more electricity than it was actually capable of. This caused RET certificate prices to tumble, and utility-scale wind projects to struggle. The multiplier has now been wound up, but the damage is still reverberating.

At the latest biennial review of the policy, the RET faced the prospect of yet more tinkering, this time the overall target being in question. While the RET is technically set at 41,000GWh per year, it was sold to the public as a more readily understood 20% by 2020 target. This is hard to define in practice, as we don’t know what demand will be in 2020. Nonetheless, a forecast was made at the scheme’s inception, and that’s how we wound up with the current target.

However, from 2010 onwards, something quite unexpected has occurred in the Australian electricity market.

Up until then, growth in demand, ostensibly coupled to growth in GDP and population, was universally expected to continue. But demand has in fact gone down since 2010, and is now about 10% below where it was forecast to be. The market operator still expects growth to continue after this year, but all bets are now off. Everyone seems horribly shocked to learn that this energy efficiency thing (coupled with prodigious growth in rooftop PV) might actually work.

Actual (red) versus projected electricity demand (orange). Forecasts have now been revised downwards (yellow). Source: AEMO

As a result of this positive turn, the RET may end up delivering enough renewable energy to supply closer to 25% of demand rather than 20%. One might naively expect this to be a good thing. After all, the state of South Australia has already exceeded this target, and has reaped significant benefits as a result (including lower emissions and electricity prices). But unfortunately some forces within the Australian energy industry, particularly those that have underinvested in renewable energy, saw this as an opportunity to wind back ambition and protect the status quo.

COSTS OF THE RET SCHEME

Their argument revolves around reducing costs to consumers (crocodile tears, some say). They argue that if the target is realigned to 20% of demand (a “floating” target), then less infrastructure will need to be built, and electricity prices will go down. Alas, things are not so simple. Such tinkering would make investors very nervous, and even a slight increase in financing costs to reflect this added risk could completely negate any benefits.

A second consideration is the so-called merit order effect. Because wind has an almost zero marginal cost, it can outbid any other generator, and displace the most expensive (usually gas peakers). This in turn depresses the overall pool price, offsetting the cost of the RET.

Thankfully the Climate Change Authority saw through some of the more cheeky arguments, erring towards stability — maintaining the target at 41,000GWh and spacing reviews out to four years instead of two in an attempt to calm the constant sense of upheaval. Modeling undertaken for the Climate Change Authority showed the impact of the RET on household electricity bills would be less than 1%; a minuscule price for the scale of investment that has been unlocked.

FUTURE OF THE RET

But with a federal election in September, it may all be moot yet again. The coalition is expected to seize government, and while they state support for the RET, they have been coy about precisely what that target should be.

Most recently, Greg Hunt, Shadow Minister for Climate Change, stated that a coalition government would perform yet another review of the RET, and left open the option of recalibrating the target according to future electricity demand.

Alas, uncertainty continues to reign. An effective capital strike has been reported by renewable energy developers, with investors weary of supporting new projects that will take several years to reach the construction phase, all the while at risk of losing favor with the federal government.

In this context, one should not underestimate the capacity of early movers, including states, regions, local communities and corporates to drive renewable energy deployment in their own right.

South Australia and the Australian Capital Territory (with a target of 90% renewables by 2020) aptly demonstrate that ambition from all quarters can overcome investor apprehension and compensate for the foibles and vulnerabilities of single ‘do-everything’ policies.

Source: The Climate Group

For more information on: The Climate Group