Chapter 3: The role of the Renewable Energy Target
Table of contents
- 3.1. The broader policy context
- 3.2. Role of the Renewable Energy Target
- 3.3. Frequency of Renewable Energy Target reviews
This chapter considers the role of the Renewable Energy Target (RET) in the current policy context, including the introduction of the carbon pricing mechanism and the establishment of the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC). This chapter explores the way these policies interact with the RET and their implications for the future role of the RET. Finally, the appropriate frequency of reviews of the RET is considered.
3.1. The broader policy context
The legislative objects of the RET reflect a view that the renewable energy industry must be expanded and developed to promote greenhouse gas emissions reductions. The 2003 Tambling Review summarised the objectives of the RET as reducing greenhouse gases and promoting renewable industry development (Australian Greenhouse Office 2003). In the Australian context, where concerns over the availability of fossil fuel energy sources are not warranted, the industry development objective also reflects, ultimately, a greenhouse gas mitigation objective (see Section 3.2.3).
In terms of both greenhouse gas emissions reductions and industry development, the policy landscape has changed considerably since the RET scheme began operating in 2001. The most significant of these changes was the Commonwealth Government's Clean Energy Future Plan in 2011, which introduced the carbon pricing mechanism and established ARENA and the CEFC.
This chapter considers the role of the RET in this new policy environment. First, it examines the interactions between the RET, the carbon pricing mechanism, ARENA and the CEFC, and the broader electricity market. It then explores the ongoing case for the RET in the current policy context.
3.1.1. Carbon pricing mechanism
When the RET was first legislated in 2000, there was no national carbon price in place, and the Commonwealth Government had no plans to implement such a scheme. In this context, the RET was expected to play a key role in helping Australia to meet its emissions reduction target under the Kyoto Protocol (Commonwealth, House of Representatives 2000, p.18 030).
A national carbon price has been in place since 1 July 2012 and it is intended to be the primary tool for reducing Australia's greenhouse gas emission levels (see Box 2). However, the future of the carbon price is subject to continued political and public debate (see Section 3.2.1).
The carbon pricing mechanism has a broad coverage of emission sources, allows for carbon units to be traded and is linked to international markets. This means that the market will determine the most cost effective way to reduce emissions, with the cheapest opportunities pursued first whether they are in Australia or overseas.
Box 2 How the carbon pricing mechanism works
The Australian carbon pricing mechanism commenced on 1 July 2012.
Liable entities will report on their emissions and buy and surrender to the Government a carbon unit or international unit for every tonne of greenhouse gas emissions they produce.
For the first three years of its operation (until 1 July 2015), the carbon pricing mechanism has a fixed price starting at $23 per tonne of greenhouse gases emitted and growing at around 2.5 per cent in real terms each year. The amount of carbon units that liable entities need to meet their obligations will be available at the set fixed price.
From 1 July 2015, the carbon pricing mechanism shifts automatically to an emissions trading scheme with a flexible price. The total number of carbon units issued by the Government will be capped. Australian emissions covered by the scheme can only exceed the cap if approved domestic or international carbon offsets are surrendered instead.
The price of carbon units will be determined by the market. Liable entities will compete to buy the number of carbon units they need to meet their obligations. Those that value carbon units most highly, because the cost of reducing their emissions is higher, will be willing to pay the most for them. Others will reduce their emissions if they can do so at a cost that is less than the carbon price.
From the start of the flexible price period, liable entities will also have access to international carbon markets to buy international units that represent emissions reductions that have occurred in another country. This means that liable entities can access emissions reductions in other countries if these can be achieved at a lower cost than emissions reductions in Australia. The Australian scheme will be linked to the European Union's Emissions Trading Scheme from the start of the flexible price period. European Union Allowances will be able to be used for compliance in the Australian scheme.
Liable entities must not surrender more than 50 per cent of their liability using international units including a 12.5 per cent limit on the use of Kyoto units (Certified Emissions Reductions, Emission Reduction Units and Removal Units).
The RET will interact with the internationally-linked carbon pricing mechanism in three important ways.
First, in the presence of a carbon price, the RET is likely to increase the short-term cost of achieving the emissions reduction target. This is because it mandates the type of abatement that has to occur. While the RET will, in general, promote the least cost renewable energy generation, it promotes more expensive abatement than that currently being encouraged by the carbon price alone.
The Productivity Commission's Carbon Emission's Policies in Key Economies concluded that broad based carbon prices are likely to deliver abatement at a lower cost than industry-specific policies such as the RET:
Emissions trading schemes were found to be relatively cost effective, while policies encouraging small-scale renewable generation and biofuels have generated little abatement for substantially higher cost. (p.xiv)
It is generally recognised that the most direct and, consequently, most efficient way of implementing the 'relative price' change required to discourage consumption of high-emission products in favour of low-emission ones, is through a global, broadly-based carbon tax or quota scheme (emissions trading scheme). (2011, p.49)
Emissions trading schemes are found to have been the most cost-effective instruments identified. (2011, p.79)
The Authority's modelling estimates that the additional reductions in greenhouse gas emissions driven by the RET cost, on average, around $40 per tonne.
Second, there is an interaction between certificate prices under the RET and the carbon price. Under the current design of the carbon pricing mechanism, the carbon price will affect certificate prices under the RET, but the RET will not affect the carbon price. Until 1 July 2015, the level of the carbon price is fixed in legislation. Thereafter, the carbon pricing mechanism allows the use of international offsets, including European Union Allowances. This link means that Australia is likely to be a price taker in international carbon markets: the carbon price in Australia will be determined by the price in linked markets (in the first instance, by the price of European Union Allowances).
The level of the carbon price does, however, affect the price of certificates under the RET. RET certificate prices represent the 'top up' on wholesale electricity prices required to make renewable energy commercially viable. All other things being equal, in Australia, higher carbon prices are likely to lead to higher wholesale prices, which therefore implies lower RET certificate prices.
Third, the RET will affect the pattern of emissions abatement in Australia. While Australia has an emissions trading scheme in place that is linked to international carbon markets, the effect of the RET on emissions will be to:
- reduce emissions and demand for emissions units in the electricity sector (therefore increasing domestic abatement); and
- not result in any changes to abatement activities of other sectors (which would respond to the unchanged international carbon price).
The overall impact would be to reduce the number of international units that Australia would need to purchase to meet its emissions reduction goals. That is, the RET is likely to increase the proportion of domestic abatement Australia undertakes to meet its targets, and reduce its reliance on imported emissions units.
3.1.2. The Australian Renewable Energy Agency and Clean Energy Finance Corporation
In relation to the industry development goal of the RET, two new institutions (ARENA and the CEFC) have been created, adding new dimensions to the overall renewable energy industry development policy.
ARENA's role is to provide grant funding of around $3.2 billion to support innovations that improve the competitiveness of renewable energy technologies and increase the supply of renewable energy in Australia. While ARENA's mandate is broad, it is expected to assist with the 'technology-push' phase of the innovation chain and will support research and development into promising and emerging renewable energy technologies (see Figure 20).
The objective of the CEFC is to overcome capital market barriers that hinder the financing, commercialisation and deployment of renewable energy, energy efficiency and low emissions technologies and the transformation of existing manufacturing businesses to re-focus on meeting demand for inputs for these sectors (see www.cleanenergyfuture.gov.au). It will invest in projects or firms on a commercial basis, seeking to catalyse private sector financing not previously available to clean energy technologies and therefore contribute to the growth of the clean energy industry. The CEFC has a goal of allocating 50 per cent or more of its total of $10 billion in funding to renewable energy investment, and the remainder to low-emissions and energy efficiency investment. The CEFC is intended to be commercially oriented and make a positive return on its investments. Given this focus on deployment and commercialisation, the CEFC assists with the 'market-pull' component of the innovation chain and is therefore designed to complement the work of ARENA (see Figure 20). Furthermore, according to the CEFC Expert Review Panel it:
…will finance Australia's clean energy sector using financial products and structures to address the barriers currently inhibiting investment.
The Panel considers an appropriate objective to be:
- apply capital through a commercial filter to facilitate increased flows of finance into the clean energy sector thus preparing and positioning the Australian economy and industry for a cleaner energy future. (Commonwealth Treasury 2012, p.ix)
The RET supports the deployment of market-ready renewable energy technologies, where the chief barrier to 'business as usual' deployment is cost. ARENA and the CEFC appear likely to target renewable technologies at an earlier stage in their development – that is, technologies that would not otherwise be deployed under the RET. The Authority believes that ARENA and the CEFC are likely to influence the range of technologies that could ultimately be supported by the RET.
Figure 20 Position of government policies along the innovation chain
3.1.3. Electricity market reform
Today the RET operates in a very different electricity market and policy environment to when it was first introduced. The energy market reforms that began in the 1990s created a national framework for governance, network regulation, planning, pricing demand-side participation and non-economic regulation. These developments have helped shape the outcomes of the RET to date.
Energy market reforms are, however, incomplete. A number of market review activities by energy market bodies in the National Electricity Market (NEM) and non-NEM jurisdictions are underway, along with a range of market and jurisdiction specific reviews. Key areas of focus include:
- improving electricity network efficiency and performance;
- enhancing wholesale markets;
- improving demand-side participation;
- promoting retail competition; and
- strengthening regulatory arrangements and governance.
Regulatory frameworks for electricity, along with other policy issues such as planning regulations, can have a material bearing on the RET. For example, wholesale market rules can affect the way renewable energy competes with other forms of generation, while network regulation can influence the cost and availability of access for renewable generation connecting to the grid.
In its recent review of electricity network regulatory frameworks the Productivity Commission found inefficiencies in the electricity industry and flaws in the regulatory environment. It called for:
… a more fundamental, nationally-focused, package of reforms that addresses the major, interlinked regulatory barriers to the efficiency of electricity networks, including:
- a poor focus on consumers, despite their interests being the overarching objective of the regulatory regime
- inadequate demand management
- costly ways of achieving, and sometimes excessive, reliability requirements
- state regulatory arrangements and network business ownership
- the resourcing and capacity of, and structural arrangement for, the regulator
- the regulatory rules, and ability of the regulator to apply them. (Productivity Commission 2012, p.2)
Of particular relevance to the RET, the Productivity Commission also examined the issue of a fair and reasonable value for distributed generation, following similar studies by the Independent Pricing and Regulatory Tribunal of NSW (IPART) (IPART 2012) and the Victorian Competition and Efficiency Commission (VCEC) (VCEC 2012). Consistent with the Council of Australian Governments' national feed-in tariff principles, these studies have concluded that the energy (output) value of electricity exported to the grid by a distributed generator should reflect the market wholesale price at the time of energy production, and the (net) value to network businesses at peak periods. In regard to the network value, the VCEC found that regulatory reforms would be required to identify the (net) network value of distributed generation (VCEC 2012, p.xxi).
As outlined in Chapter 1, the Authority has not made recommendations on broader energy market settings. However, given that these issues can affect the efficiency and effectiveness of the RET, the Authority supports the Council of Australian Governments' efforts to develop and implement nationally consistent economy-wide energy market reforms in a manner that, among other things, maximises policy integration and alignment. The Authority considers that renewable energy should be treated neutrally in future reforms (compared with, say, energy efficiency activities in the home) and that renewable policy should not be adjusted to address broader regulatory failings.
3.2. Role of the Renewable Energy Target
In light of the broader policy context, it is necessary to consider what role the RET should play.
A number of review participants considered that the RET was no longer justified in the presence of the carbon price. For example, IPART concluded that:
… in our view, the introduction of the carbon price and a move towards an emissions trading scheme (ETS) removes the need for the RET (and ultimately electricity customers) to continue to subsidise investment in the renewable sector. The RET is not complementary to the carbon price and does not cost effectively address any other significant market failure. (IPART, sub.81, p.1)
Literature on the effectiveness of energy technology policy and on the economics of innovation strongly supports the need for both 'technology-push' and 'market-pull' policies, although the emphasis will generally shift from push to pull as technologies mature (International Energy Agency 2012, p.118). As both the RET and the carbon pricing mechanism act as market-pull policies, there needs to be a justification for the additional demand for renewables created by the RET over and above that encouraged by the carbon price. Even in the presence of a carbon price, the RET may continue to be important if it helps to:
- mitigate the risk that uncertainty surrounding the carbon price (both in Australia and elsewhere) suppresses investment in low-emissions technologies (Section 3.2.1);
- mitigate the risk that the carbon price is lower than optimal to achieve long-run mitigation goals leading to suboptimal investment in low-emission technologies (Section 3.2.1);
- reduce the cost of climate change mitigation over time, by promoting 'learning-by-doing' cost savings (Section 3.2.2); and/or
- mitigate other risks or create other benefits (such as energy security, public health, increased retail competition or enhancing employment) (Section 3.2.3).
3.2.1. Carbon pricing policy credibility
In an ideal world, efficient global carbon markets would reflect faith in credible commitments to long term emissions reduction targets by countries around the world, and would represent the true cost of achieving this long-term global ambition. These circumstances currently do not apply – considerable uncertainty prevails on the longevity of carbon pricing arrangements in Australia, and in relation to ultimate levels of global environmental ambition.
Uncertainty around carbon pricing policy may lead to less than optimal levels of innovation and investment. It can also increase the cost of any investment that does occur.
In Australia, climate change policy is currently the subject of intense political and public debate. A recent survey on the carbon price undertaken by the Centre for Climate Economics and Policy at the Australian National University found that 40 per cent of respondents think the carbon price will be repealed by 2016, however half of these respondents think it will be re-instated by 2020 (Jotzo 2012). The dominant finding from the survey was a pervasive uncertainty about the future of the carbon pricing mechanism in Australia.
The level of the international carbon price can also be affected by perceptions of the credibility of governments' commitments to long-term emissions reduction goals. For example, modelling conducted for the 2008 Garnaut Review estimated that the carbon prices required to create a 50 per cent chance of limiting global warming to 2 degrees Celcius started at over $40 in 2013, increasing steadily at a rate of four per cent each year. Current international carbon prices are well below this level.
In its submission to the Garnaut Review, the Productivity Commission made the following comments on the role of supplementary policies such as the RET when the credibility of future carbon prices is uncertain:
Whether a gap between the forward emissions price path envisaged by policy makers and the price path private agents factor into decision making might warrant a greater role for supplementary policies in the early years of an [emissions trading scheme] depends in part on the reason for the discrepancy.
If private agents think that major technological breakthroughs that will greatly lower the cost of achieving emission reductions are imminent, the gap may simply reflect the market having access to better information and no enhanced role for supplementary policies is warranted.
If, on the other hand, the departure is due to low credibility because of a view that future governments are likely to water down or dismantle the [emissions trading scheme], a case for an extra role for supplementary policies during the transitional phase can be argued. (Productivity Commission 2008, p.11)
As also noted by the Productivity Commission, to perfectly address the uncertainty of the carbon price with supplementary policies would require governments to know the optimal investment path and to know how firms would have responded to a more certain emissions price path (Productivity Commission 2008, p.31).
It is impossible for governments to ever know the optimal investment path to achieve any particular outcome. Given Australia's abundant renewable energy resources, however, it is difficult to imagine that a growing renewable energy sector will not play a part in a carbon constrained future.
In his submission to this review, Professor Garnaut argued:
With uncertainty about the future of carbon pricing, the Renewable Energy Target has to play a more central role in the reduction of emissions in the Australian electricity sector. The acceptance of the Renewable Energy Target by both sides of partisan politics in Australia means that it can now provide a more secure basis than politically contested carbon pricing for emissions-reducing investments in the electricity sector. (Professor Ross Garnaut, sub.167, p.2)
The Authority considers that the RET can be justified as a transitional measure in the presence of the current carbon pricing arrangements, ahead of a carbon price trajectory capable of delivering on Australia's long-term environmental goals.
Another potential consequence of uncertainty over future carbon pricing arrangements is to increase the risk of 'lock-in' of new emissions-intensive infrastructure. Most power generation plants have a long lifetime. The expected lifetime of a coal-fired generator is 40 years (International Energy Agency, 2010, p.43). The International Energy Agency (IEA) has assessed the global costs of locking in high emissions energy infrastructure due to delayed investment in abatement. Under the IEA's 450 Scenario (stabilising greenhouse gases at 450 parts per million), for every $1 of avoided investment between 2011 and 2020, either through reduced low-carbon investment or adoption of cheaper fossil fuel investment options, an additional $4.30 would need to be spent between 2021 and 2035 on additional abatement to compensate for higher emissions earlier in the period, as more low carbon plant and equipment need to be installed (IEA 2011a, p.40).
If, however, Australia continues to see slow growth in electricity demand over the coming years, the risk of locking in new emissions-intensive plant appears low – on current projections, no significant new generation capacity appears to be required for many years to come.
3.2.2. Minimising the cost of climate change mitigation over time
Globally, increased rates of deployment of renewable energy are associated with falling costs referred to as the 'learning by doing' effect. At an international level, increasing rates of deployment are likely to more rapidly bring renewable technologies down the cost curve, which could help reduce the longer term costs of emissions reductions.
Technology learning rates are generally defined as the cost reduction obtained for a doubling of capacity. For example, globally, solar photovoltaic (PV) modules have shown a learning rate of 22 per cent over the period 1976 to 2003 (see Figure 21) (Melbourne Energy Institute 2011, p.10).
Figure 21 Historic experience curve for photovoltaic with 22 per cent learning rate globally
As outlined in Chapter 2, the module cost of solar PV and the domestic costs associated with installing and mounting small-scale PV systems has significantly declined between 2009 and 2011, which may indicate that the trend in the above chart is continuing, or potentially accelerating. In addition, in their projections of technology costs, the IEA and the European Photovoltaic Industry Association expect that, with continued investment in solar PV, the historic global learning rate will continue into the future. Furthermore, from a 2010 baseline, the IEA expects the capital cost for utility scale PV facilities could drop by 40 per cent by 2015, and 50 per cent by 2020 (IEA 2010, p.56).
Wind generation has also experienced cost reductions as capacity has increased.
The European Wind Energy Association assumes a learning rate of ten per cent over the period 2010 to 2015 (European Wind Energy Association 2009, p.59). While a more mature technology than solar PV, in 2010, the IEA expected the future learning rate for wind generation to be at about seven per cent (IEA 2010). The 2009 IEA Roadmap for wind generation expects investment costs to decrease for onshore wind by 23 per cent by 2050 and for offshore wind by 38 per cent by 2050 (IEA 2009, p.4).
Australia has benefited from global reductions in renewable technology costs, and is likely to continue to do so in the future. A key issue is whether there are additional cost reductions to be gained from increased deployment in Australia – that is, whether there are important local learning-by-doing cost savings that the RET could foster.
In response to its discussion paper, the Authority received evidence suggesting that there is some scope for local cost reductions in terms of developing an experienced workforce, improving logistics, and streamlining the process of obtaining (and granting) regulatory approvals. The solar industry also provided evidence that there were savings in terms of improved buying power that came from increased local scale (SolarBusinessServices, sub. 227).
Most of these local learning-by-doing cost savings appeared to be exhausted fairly early in the deployment process in Australia. For example, the Authority received no compelling evidence to suggest that increased deployment of wind farms in Australia would lead to further cost reductions – any future cost reductions are likely to arise from falling international technology costs, which are only marginally influenced by Australian deployment rates.
While the RET is likely to assist with domestic learning-by-doing cost reductions in the initial installations of any particular technology, in isolation, these benefits are insufficient to justify the RET.
3.2.3. Benefits unrelated to climate change
Other arguments that have been made in Australia and elsewhere for increasing the deployment of renewable energy include:
- promoting energy security;
- avoiding some of the health and broader environmental costs associated with the production and use of fossil fuels;
- promoting retail competition; and
- creating employment.
Energy security is frequently put forward in other countries as a reason for investing in renewable energy generation as it reduces reliance on finite, and often imported, fuels (United Kingdom Department of Energy and Climate Change 2011, pp.43-44). Australia, however, has an abundance of fuel resources and does not generally import fuel for electricity generation. Australian reserves are large enough to supply us for many decades into the future and underpin our energy security (Commonwealth Government Department of Resources, Energy and Tourism 2012, p.12). In the Australian context, therefore, the RET does not play a role in promoting energy security through reduced reliance on imported fuels.
The Commonwealth Government Department of Resources, Energy and Tourism's National Energy Security Assessment (2011) reports on energy costs as a component of energy security:
In the Australian context, energy security is defined as the adequate, reliable and competitive supply of energy to support the functioning of the economy and social development, where: … competitiveness is the provision of energy at an affordable price that does not adversely affect the competitiveness of the economy and that supports continued investment in the energy sector. (p.2)
In the short term, renewable energy adds to the cost to society of electricity supply. Most renewable energy technologies, however, have very low running costs. Renewable energy sources, such as solar and wind, are not subject to fluctuations in world fossil fuel prices, and will also not vary with world carbon prices – once built, their ongoing running costs are likely to be much more predictable than fossil fuel power stations. Therefore, it could be argued that increasing the share of renewable energy reduces the risk of uncertain and potentially high energy costs in the future. This view is shared by the IEA:
Fossil energy technologies require an input fuel and are thus fully exposed to price volatility of fuels and price uncertainty. Because they do not need a fuel, renewables (hydro, solar, wind) are not exposed to these aspects. (IEA 2011, p.12)
Stable operating costs that are not subject to fluctuations in fuel costs and carbon prices may be of some benefit, but could not be used as a primary rationale for the RET. The market has developed a range of products to hedge against uncertainties relating to both fuel and carbon prices. Furthermore, as a net exporter of energy, Australia is likely to benefit overall from higher fossil fuel prices.
Public health benefits
Another source of benefits from renewable energy that does not relate to climate change relates to public health and broader environmental benefits.
The IEA has recognised that the deployment of renewables can lead to positive benefits for human health through displacing electricity generated by fossil fuels and thereby decreasing harmful pollutants such as sulphur and nitrogen oxides (IEA 2011). The benefits of reducing harmful by-product pollution from fossil fuel generation were noted by the Climate and Health Alliance:
Reducing the burning of fossil fuels for electricity and transport can reduce the incidence of heart and lung diseases, including lung cancer, as well as neurologic disorders. (Climate and Health Alliance (Attachment), sub.18, p.5)
The Australian Academy of Technological Sciences and Engineering estimate that the total health damage cost of coal-fired electricity generation is about $13 per megawatt hour, equivalent to an aggregated national health burden of around $2.6 billion per annum (The Australian Academy of Technological Sciences and Engineering 2009, p.ii).
As noted in the RET review issues paper, the National Health and Medical Research Council is investigating the effect of wind farms on human health. The Council is commissioning a systematic review of the scientific literature to examine the possible effects of wind farms on human health, including audible and inaudible noise. See http://www.nhmrc.gov.au/your-health/wind-farms-and-human-health for further information.
The Authority has not attempted to quantify the health costs and benefits associated with renewable technologies compared with fossil fuel generation. It is the Authority's view that the RET is unlikely to be the most appropriate mechanism for reducing the negative health effects from fossil fuel generation, and that such issues are more likely to be better addressed directly through regulations or planning restrictions, taking into account local conditions (including limits on coal sulphur content or emissions of particulates).
Electricity retail competition
Meridian Energy Australia suggested that an additional benefit of the RET is to promote new long-term retail competition. It argues that sustainable retailers need to be vertically integrated, and that:
Without LRET, opportunities for generation asset investment which can be accessed by new entrant participants would be lacking. The absence of such opportunities would inhibit the ability of new entrants to participate on a sustained basis in Australia's retail market. (Meridian Energy Australia, sub.159, p.2)
The Authority has not assessed the extent of this possible effect. While promoting retail competition is desirable, any effect that the RET has on supporting new entrants could be viewed as an unintended positive outcome, rather than a primary rationale for the scheme.
The IEA has recognised that an objective of renewable energy policy can be to enhance employment (2011). As shown in Chapter 2, there has been an increase in the number of people employed in the renewable energy sector since the commencement of the Mandatory Renewable Energy Target. Furthermore, analysis by SKM MMA and the University of Technology, Sydney for the Climate Institute estimated that there is significant potential for additional employment creation in the renewable energy sector, particularly in regional areas, with up to 34 000 new jobs created by 2030. This estimate is based on the existing RET settings and a significantly higher carbon price consistent with a 25 per cent emissions reduction target below 2000 levels by 2020. The report concludes that the RET:
… drives most of the investment in clean energy prior to 2020. (The Climate Institute 2010, p.3)
A large portion of employment creation, however, is associated with the construction and installation of renewable electricity generation capacity. Ongoing employment tends to be for the operation and maintenance of electricity generators. The Climate Institute projects 7 600 ongoing positions, which is much smaller than the total 34 000 new jobs estimate (2010, p.5). Furthermore, the study does not assess job transfers or losses across the broader economy. The Authority has not assessed whether the RET will create net employment benefits and does not consider that job creation is an adequate rationale for the RET.
The Authority recognises that the RET is not a 'first best' approach to reducing greenhouse gas emissions, and that if a carbon price remains in place and gradually rises over time, the RET would phase itself out, as certificate prices drop to zero.
The Authority also recognises that the carbon price has only just been introduced in Australia and continues to be the subject of intense political and public debate. The RET is bolstering incentives for renewable investment in an environment of general uncertainty in relation to the future of a carbon price. In the current policy environment, the RET can be seen as being complementary to the carbon price, as a transitional measure, while a carbon price is being established, its future becomes more certain, and price levels adjust to reflect Australia's long-term emissions reduction goals. Therefore the review concentrates on whether any improvements can be made to the design of the RET, rather than challenging the RET's existence.
Furthermore, the Authority is aware that it is not starting with a blank canvas: the RET has operated now for many years. Companies have already made significant investments on the basis of that legislation and are planning on investing substantially more.
Transitioning to a clean energy future will require considerable investment over decades. A stable and predictable policy environment is crucial to fostering the confidence required for such investment. Consistent feedback from participants has highlighted the high level of policy uncertainty in the climate change policy environment and the negative affect this has on investment. Furthermore, the importance of maintaining a stable policy environment has been emphasised by many participants including the Ai Group:
… many businesses have commented on the importance of providing a stable policy environment for future investment in energy generation, whether renewable or otherwise. The RET has been through several major changes in recent years, and any further adjustments need caution if they are not to reduce the credibility and reliability of energy policy as a whole. (Ai Group, sub.46, p.5)
Changes to policy can have considerable costs if the changes negatively influence the perception of regulatory risk. A strong and clear case needs to be made for any policy changes, including changes to the RET, with the benefits of such changes weighed against all likely costs, including the additional risk premium on investment and the effects of lower innovation and lock-in of high-emissions infrastructure due to perceived regulatory risk.
Professor Garnaut recognised the importance of providing regulatory stability in his submission:
It remains my view that if there were certainty about the retention of economy-wide carbon pricing at economically and environmentally rational prices, it would be advisable to retain the Renewable Energy Target and to allow it gradually to be made redundant by a rising carbon price. In this set of circumstances, for reasons of business certainty, it would be wise to retain the Renewable Energy Target with the legislated parameters. Many business decisions have been made on the basis of current legislation and changes in the law increase uncertainty about the stability of future policies. Uncertainty raises the supply price of investment and the costs of electricity to users. Change in the law should not be contemplated without compelling policy reasons. (Professor Ross Garnaut, sub.167, p.2)
The Authority recognises the costs and uncertainty associated with regulatory risk and the need to establish a clear and strong case for changes to policy. Given this, there needs to be a strong policy rationale to recommend a change and the expected benefits of any recommended change need to exceed the expected costs.
3.3. Frequency of Renewable Energy Target reviews
Currently the REE Act requires that the Authority conducts reviews of the RET every two years.
A large number of submissions from a diverse range of participants, including liable entities, peak industry bodies and large energy users raised concern with the current frequency and scope of reviews, arguing that it adversely affects investor confidence. Participants supporting less frequent reviews were Pacific Hydro, the Australian Industry Greenhouse Network, the Business Council of Australia and the Clean Energy Council, among others.
Following the publication of the discussion paper, in which the Authority expressed a preliminary view that the timeframe for reviews should be increased from two to four years, a number of participants expressed support for retaining the current two year timeframe. For example:
Alinta Energy stated:
Alinta Energy does not endorse the Authority's preliminary view that scheduled reviews take place every four years instead of the previously determined two years. Further, the Authority has failed to consider the validity of two-yearly reviews and that given the nature of the RET regular reviews provide consumers with an assurance the policy will be appropriately managed. (Alinta Energy, sub.183, p.2)
GDF Suez considers:
In the interests of regulatory stability, less frequent reviews would normally be supported. However, given our reservations about many of the key design aspects of the RET we support having the next review in 2014 rather than 2016. (GDF Suez, sub.20, p.6)
In general we support less frequent policy review periods and if a 'real 20% by 2020' target was adopted then a review in 2016 would be appropriate. We note that providing four years of policy certainty (until 2016) is broadly consistent with EnergyAustralia's preferred approach to achieving a 'real 20% by 2020' which is based on providing at least 3 forward years of fixed gigawatt hour targets at any point in the RET's operation.
However if the current RET is maintained then the next review ought to occur in 2 years time to assess any further changes to electricity demand, scheme costs and deliverability of the target. (EnergyAustralia, sub.196, p.8)
On balance, the Authority is of the view that the current frequency of reviews is affecting investor confidence. The Authority also considers that the two year review timeline could prove to be impractical. With the two year schedule, it is possible that the Authority would need to start work on its next review before the Commonwealth Government had a chance to respond to, and implement, recommendations from the previous review. Accordingly, the following options to address these concerns have been considered:
- maintain the existing time frame for reviews but narrow the scope of each review;
- extend the time frame for reviews to four years; or
- only review the scheme when and if certain conditions are met.
Under the first option, the Authority would continue to undertake reviews every two years, but narrow the scope of every second review so that it is focused only on administrative issues and eligibility of any new technologies that have emerged. For this option, more fundamental reforms, such as potential changes to targets, are only considered every four years. This approach is supported by the Business Council of Australia:
One way to address this is to identify now the nature of the future reviews making clear what the specific role of the review will be and matters to be considered. The BCA proposes the use of a 'light touch' approach for most reviews and then specified years for matters such as the process for phasing out the RET at the end of the current legislated period (2030). (Business Council of Australia, sub.130, p.7)
This option allows for flexibility to respond to problems that have arisen in administering the scheme at regular intervals while ensuring a degree of policy stability on more fundamental aspects of the policy framework. All things considered, however, it may not provide sufficient predictability for investors.
The second option involves maintaining the current review scope, but undertaking the reviews less frequently, every four years. This allows flexibility to make amendments to reflect changed circumstances, but also provides policy stability and predictability. Furthermore, this option means that reviews of the scheme can be done in a holistic way and ensures that administrative and structural issues are reviewed in parallel. This approach is suggested by several submissions. For example, the Climate Institute noted:
The year 2016 should be the earliest major review and the scope should be narrowed to consideration of post-2020 design issues (e.g. expanding the target post-2020). (The Climate Institute, sub.86, p.4)
Eraring Energy also recommended:
…less frequent reviews of the scheme – perhaps once in 4 years as the current [biennial] review creates more uncertainty leading to unnecessary investment risks. (Eraring Energy, sub.146, p.2)
In addition, this time frame is more in accord with the Commonwealth Government Best Practice Regulation Handbook 2007, which recommends, as a benchmark, that reviews of regulation occur at least every five years.
The third option involves the Authority only undertaking a review if certain conditions are met. This approach has been suggested in a number of submissions, including by AGL Energy:
It is AGL's view that the policy should not be reviewed every two years – to do so is destructive to the efficient operation of the market. Rather than conducting a review every two years, market effectiveness would be better facilitated if the review only commenced once relevant threshold criteria were met. Such criteria would involve some type of LRET market failure which necessitated intervention. (AGL, sub.38, p.5)
Pre-specifying triggers for a review runs two key risks:
- first, market participants might try to 'game' the system, by modifying their behaviour to bring on a review; and
- second, it may be difficult to anticipate all of the changes in circumstances that might warrant a further review.
On balance, the Authority considers that full reviews every four years will provide an appropriate balance between policy flexibility and investor certainty.
Beyond the legislative review timetable, it should be noted that at any stage, reviews, including of the RET, can be requested by the Minister or the Australian Parliament. If warranted, the Authority can also conduct and commission its own independent research and analysis.
In regard to the review scope, the Authority considers that, to encourage investor confidence and predictability, at the time of the next review substantive changes to key components of the scheme such as the form and level of the 2020 target, should only be considered in the event of extenuating circumstances.
The Authority anticipates that its approach to future reviews will remain consistent with the approach established for this review. That is, the Authority will consider the scheme in the policy context at the time of the review and only make changes if a compelling case can be made.
- R.1. The frequency of scheduled scheme reviews should be amended from every two years to every four years, so that the next scheduled review would be in 2016.