Chapter 4: The Large-scale Renewable Energy Target
Table of contents
- 4.1. Background
- 4.2. Form of the target
- 4.3. Implications for maintaining the existing 41 000 gigawatt hour target
- 4.4. Reduce the target
- 4.5. Increase the target
- 4.6. Conclusion
This chapter considers the form and level of the Large-scale Renewable Energy Target (LRET). It examines the implications of maintaining the existing target compared to a higher or lower target.
The Mandatory Renewable Energy Target (MRET) of 9 500 gigawatt hours (GWh) was intended to encourage an additional two per cent renewable energy generation beyond what would otherwise have been in place by 2010. By 2002, electricity demand was growing more rapidly than anticipated, prompting some to call for an increase in the gigawatt hour target to ensure the scheme delivered on the percentage target. This issue was considered in the 2003 Tambling Review of the MRET, which concluded:
The Review Panel [is] convinced … that any future target should continue to be expressed in terms of a fixed GWh level. By their nature, projections of electricity demand contain a degree of uncertainty. The changes in projected electricity demand that have occurred since the MRET was announced demonstrate that a percentage-based target would require the corresponding generation level to be regularly revised. This would adversely impact on market certainty. Risk is a key factor in investment decision making, so that any changes to MRET that would reduce market certainty would also reduce the prospect of attracting the required financial backing for projects. The Review Panel considers that a fixed target is more compatible with market certainty, with MRET's industry development objective, which defines a level of renewable energy generation rather than a percentage of a fluctuating electricity market over which the industry has no control. (MRET Review Panel, 2003, p.119-120)
In 2009, legislation was passed to give effect to the Commonwealth Government's policy commitment that 'the equivalent of at least 20 per cent of Australia's electricity supply will come from renewable sources by 2020' (20 per cent by 2020 commitment) (Commonwealth Government 2009).
The 20 per cent by 2020 commitment was translated into a legislative target of 45 000 GWh of renewable generation in 2020 (through to 2030). In 2010, the Renewable Energy Target (RET) was split. The target was revised to 41 000 GWh in 2020 (through to 2030) for the LRET and the Small-scale Renewable Energy Scheme (SRES) was left uncapped, but notionally allocated at least 4 000 GWh.
The 45 000 GWh value was expected to deliver around 20 per cent renewable energy based on a 2007 forecast of electricity demand in 2020 and the inclusion of renewable generation already operating prior to the introduction of the MRET (see Box 3). At the time, it was estimated that the RET would ensure almost all of the growth in electricity demand would be met by renewable energy.
In June 2012, the Australian Energy Market Operator (AEMO) published its long term electricity demand forecasts in the National Electricity Forecasting Report (NEFR), which represented a substantial downward revision to the level of electricity demand previously published in its 2011 Electricity Statement of Opportunities (ESOO) (see Figure 22).
Several factors appear to be affecting current levels of electricity demand, including:
- lower industrial activity, particularly in manufacturing, than previously forecast;
- a user response to significant increases in retail electricity prices;
- the increase in penetration of household solar photovoltaic;
- the effects of energy efficiency programs and regulation; and
- the relatively mild summer weather over the past two years.
Some of these factors are permanent and structural, while others may be cyclical.
4.2. Form of the target
There has always been potential for conflict between policy statements about how much renewable energy the RET (and the MRET before it) is designed to achieve in terms of a percentage of total energy demand (20 per cent and two per cent respectively), versus the fixed gigawatt hour targets included in the legislation, which define actual liabilities.
Estimating the contribution of renewables in 2020 under the current LRET settings is sensitive to assumptions for key parameters (see Box 3).
Box 3 Estimating the contribution of renewable energy
Estimates of the proportion of electricity supplied by renewable generation in 2020 vary depending on the definitions used and the projections made of future electricity supply and renewable energy generation.
In projecting the proportion of renewable energy by 2020, today, there is a range of assumptions and forecasts that need to be employed. There are four distinct components that affect the proportion of renewable energy. Those components are:
- electricity demand;
- actual generation from renewable sources prior to the inception of the RET (and MRET before it);
- large-scale renewable generation; and
- small-scale renewable generation.
When the initial 20 per cent by 2020 target was translated to a fixed gigawatt hour amount in 2007, the following market expectations were relevant:
- Australia-wide electricity supply of around 300 000 GWh in 2020;
- pre-existing renewable generation of 15 000 GWh per year; and
- Renewable Energy Target of 45 000 GWh per year by 2020.
This translated to a total renewable energy contribution of 60 000 GWh per year, equivalent to 20 per cent of previously forecasted demand, by 2020.
The Authority has estimated the possible share of Australia's future electricity supply in 2020-21 using the following revised assumptions:
- as a measure of 'Australia's electricity supply', the Authority has used an estimate of Australia-wide native demand (a measure of electrical energy supplied by scheduled, semi-scheduled, and significant non-scheduled generation that includes electricity transmission losses but excludes non grid generation) of around 258 500 GWh;
- pre-existing renewables of around 14 300 GWh per year reflecting a downward revision of their long term energy capability;
- renewable energy delivered by the LRET of around 43 000 GWh (due to financial year reporting, this figure is slightly higher than the 2020 calendar year target of 41 000 GWh. However, averaging the 2019-20 and 2020-21 financial years, total LRET generation is around 41 000 GWh in the calendar year 2020); and
- renewable energy delivered by the SRES of around 10 900 GWh (including approximately 3 000 GWh from solar water heaters).
This translates to a total renewable energy contribution (including deemed generation displacement by solar water heaters) of around 68 200 GWh, equivalent to around 26 per cent of forecast native demand, by 2020-21.
A key point is that several of the key inputs to any estimation of the future share of renewable energy – forecasts for electricity demand, pre-existing renewable generation and small-scale renewable generation – are subject to uncertainty and are liable to change over time.
Participants including Rio Tinto and EnergyAustralia (formerly TRUenergy) believe the policy intent of the RET was to deliver 20 per cent of electricity demand in 2020. For example, EnergyAustralia stated:
Retaining the current targets for the RET and allowing the SRES to continue uncapped is likely to result in an effective 26% RET by 2020, overshooting the original policy intent of 20% renewables. (TRUenergy, sub.102, p.3)
Conversely, participants such as Meridian Energy Australia, Alstom Limited and Vestas believe the intent was the fixed gigawatt target. For example, Vestas states:
The choice of a headline percentage-based target is to a significant extent arbitrary, and the choice of a fixed gigawatt hour target to match the percentage goal is necessarily based on point estimates of future consumption. The fixed gigawatt hour target itself, however, then becomes a stable basis for investment decisions. (Vestas Australian Wind Technology Pty Ltd, sub.57, pp.6-7)
The Authority considers that a fixed target is preferable to a floating target. The Authority concurs with the Tambling Review's reasoning and conclusion, that electricity demand projections are uncertain and trying to match gigawatt hour targets to a particular percentage of demand would require continuous change leading to significant uncertainty (see Section 4.1). In particular, the period over which the RET has operated in its various forms has shown the inaccuracy of initial estimates of relevant parameters and demonstrated that there will need to be constant readjustment of any floating target. The Authority's view, therefore, is that the form of the LRET should continue to be expressed in terms of a fixed gigawatt hour level.
- R.2. The form of the Large-scale Renewable Energy Target should continue to be expressed in legislation in terms of a fixed gigawatt hour level.
4.3. Implications for maintaining the existing 41 000 gigawatt hour target
Several submissions to the review commented on whether the existing LRET can be met and the implications for maintaining the existing target. These issues are considered in the following section.
4.3.1. Can the current target be met?
Industry participants have estimated that by 2020 between around 7 000 megawatts (MW) and 10 000 MW of new renewable energy is required to meet the existing LRET. Participants have expressed conflicting views about whether the existing target can be met.
Participants, including EnergyAustralia, the Energy Supply Association of Australia, Macquarie Generation and Origin Energy expressed a concern that the LRET will not be met, because insufficient renewable capacity can be built in time. Concerns centred around the industry's ability to build capacity at roughly double the rate of past Australian expansion, the ability to obtain planning approvals in time (especially given strong local opposition to wind farms in some areas), and the ability to negotiate connection agreements in time. For example, Macquarie Generation stated:
Achieving the 41 TWh target by 2020 would require a significant increase in the rate of windfarm commissioning over the next 8 years. This is likely to be difficult for a number of reasons:
- the projects with the best wind speeds and proximity to the grid will have already been commissioned;
- windfarm developers face significant planning and approval hurdles and there is growing opposition from some local community groups to new windfarm proposals; [and]
- this also requires a much faster rate of negotiation of network connection agreements and construction of transmission extension assets. (Macquarie Generation, sub.209, p.8)
The potential effect of state planning regimes on the LRET was noted in the Australian Energy Market Commission's (AEMC 2011) review of the impact of the RET on energy markets. The modelling did not take into account the changes to the Victorian planning requirements, however, the AEMC concluded that so long as a carbon price was in place, the target was likely to be met by 2020.
Under both carbon emissions price scenarios, the LRET was found to just be met by 2020'… It should be noted that the modelled result do not include the impact of recently announced changes to Victorian planning requirements for wind turbines'… requirements may increase the resource costs of meeting the LRET as less economic sites may need to be used, and may reduce the level of future renewable generation in Victoria and affect the achievement of the LRET. (AEMC, 2011, p.6)
In addition, large-scale renewable projects take a number of years to plan and build, and therefore the timing of investment decisions and project commissioning is critical to meeting the target. Samsung C&T Corporation stated:
Any further delays or deviations away from the already aggressive construction schedule needed to meet the current trajectory will almost certainly result in its [the target] not being met due to constraints in resources needed to deliver projects. (Samsung C&T Corporation, sub.11, p.3)
A number of other participants considered that the target can be met, including RATCH-Australia Corporation (RAC), Wind Prospects, AGL Energy and the Clean Energy Council. For example, RAC has stated:
The electricity industry has been able to meet the requirements of the RET to date and RAC expects that the industry will be able to meet requirements to 2020. (RATCH-Australia Corporation, sub.134, p.2)
The Clean Energy Council noted:
In terms of future investment, there is a significant pipeline and drivers for increased deployment that can all ensure the 20 per cent target is ultimately achieved. (Clean Energy Council, sub.12, p.9)
AGL Energy stated:
To be clear, AGL believes that achievement of the RET is possible, provided sensible and economically efficient pricing decisions are made by jurisdictional pricing regulators. (AGL Energy Limited, sub.181, p.1)
The need for significant additional transmission infrastructure to underpin the RET has been raised by some participants as both a potential cause for delays and a 'hidden cost' of the RET. For example, Alinta Energy noted:
As an aside, it has also been suggested that, regardless of the reduction in demand, the ability to build the amount of transmission investment required to connect 45,000 GWh of renewables by 2020 is not feasible. (Alinta Energy, sub.89, p.4)
Analysis by AEMO does not support the notion that major new upgrades of transmission capacity are required because of the RET. This finding is consistent with the analysis conducting by SKM MMA on behalf of the Authority. AEMO's 2012 National Transmission Networks and Distribution Planning report (2012, p.iii) noted that modelling for transmission investment found that:
There is generally sufficient capability in the main transmission network for new generation to connect at locations which allow for growth avoiding the need for significant new transmission investment.
The Bureau of Resource and Energy Economics (BREE) publishes a list of major electricity generation projects in Australia, ranging from 'committed' projects through to projects in the planning phase. Table 1 shows that over 6 000 MW of wind projects have received at least approval; around a further 10 800 MW are in the planning phase.
|Development stage||Approximate capacity|
|Under construction||700 MW|
|Government, planning and/or development approval received||5 100 MW|
|Planning (for example, feasibility studies and approvals) underway||10 800 MW|
The BREE list of major generation projects also includes approximately 2 300 MW of proposed hydro, biomass, geothermal, ocean and solar projects in various stages of development.
The BREE project list is broadly similar to a number of other sources.
AEMO data shows around 13 400 MW of publically announced wind energy projects in the National Electricity Market, which does not include Western Australia and the Northern Territory. GE reiterated the availability of projects to meet the target:
GE believes the AEMO report identifies a significant range of possible projects well in excess of the 8GW to 10GW of wind anticipated to deliver the 2020 LRET of 41,000GWh. (GE, sub.203, p.4)
Further, WindLab Systems has provided its own estimate of the project pipeline for wind projects and stated:
… 'Approved' wind is not far off being able to supply the whole target and projects actively seeking approval (Permitting) well exceed the target. (WindLab Systems Pty Limited, sub.63, p.4)
As discussed in Chapter 6, a situation in which the target cannot be met and liable parties pay the shortfall charge is neither a desirable nor sustainable outcome. However, the Authority does not consider there to be sufficient evidence that the target cannot be met to warrant changing the target on those grounds. The need for transmission network upgrades, an ability to negotiate new network connections in time, and the logistical challenges of industry expansion do not appear to be compelling impediments.
Regulatory impediments could potentially pose a harder constraint. However, a number of active wind farm developers have stated that even with the more stringent planning approval processes in some states now in place, more than enough projects would still go ahead to meet the target.
In modelling commissioned by the Authority, SKM MMA has taken the current planning arrangements into account, and estimates that the target can be met. This is consistent with the finding of AEMO's National Transmission Networks and Distribution Planning report (2012).
In the reference case 1 scenario, modelled by SKM MMA with the current LRET, it is projected that the target could be met without breaching the shortfall charge, which effectively acts as a price cap for the scheme. A change in electricity demand and/or the carbon price will influence the ability to meet the current LRET(Figure 23).
In the low demand scenario the target is met, however the certificate price nears the tax effective shortfall charge. The modelling indicates, however, that with azero carbon price the shortfall charge is breached between 2019-20 and 2022-23.
Given the concerns expressed by a number of participants in relation to planning arrangements, the Authority considers there may be value in the Standing Council on Energy and Resources examining the implications of current planning regimes for national energy markets.
Finally, the presence of the Clean Energy Finance Corporation (CEFC) increases the likelihood that the existing target can be met. The CEFC is in a position to facilitate the flow of funds into the renewable energy industry, and encourage projects that otherwise may not have gone ahead.
In summary, the Authority does not consider that there are currently any policy or physical impediments to the existing LRET being met.
4.3.2. Authority modelling of the existing 41 000 gigawatt hour target
Electricity market modelling was undertaken to compare the existing 41 000 GWh target (reference case 1 scenario) to a scenario with no RET from 1 January 2013 (no RET scenario). The no RET scenario provides a baseline from which to examine the effects of the existing target. In summary, the main effects of the existing RET (LRET and the SRES) over the period 2012 2013 to 2020-21, are estimated by the modelling to be:
- an additional 8 800 MW of new renewable energy capacity;
- a decrease in emissions in the stationary energy sector of around 100 million tonnes of carbon dioxide equivalent (Mt CO2-e) or six per cent;
- additional resource costs incurred in the electricity sector of around $5 billion in net present value terms or 6.5 per cent of the total resource costs of $77.5 billion under reference case 1 incurred in the generation sector (in terms of both capital and operating costs); and
- an increase in retail electricity prices of between one and four per cent, representing an increase of between $12 and $64 to a household's annual electricity bill.
Detailed context, key assumptions and results for these scenarios can be found in Appendix D and SKM MMA's modelling report, available on the Authority's website.
4.4. Reduce the target
Some participants have proposed changing the level of the target:
- reduce the target in line with lower electricity demand; or
- increase the target, mainly to cater for the effects of additional renewable energy projects that might be financed with the assistance of the CEFC.
Modelling undertaken for the Authority compared the existing LRET target (reference case 1 scenario) with a scenario in which the target is decreased to 26 400 GWh (updated 20% target scenario). Box 4 summarises the key outcomes.
Box 4 Key outcomes for the modelled updated 20% target scenario
The estimated effects of maintaining the RET scheme (including the LRET and the SRES) as it currently stands (reference case 1 scenario) compared to a scenario in which the LRET is decreased (updated 20% target scenario with a LRET of 26 400 GWh) over the period 2012-13 to 2020-21, are:
- around 4 500 MW of additional new renewable energy capacity;
- a decrease in emissions from the stationary energy sector of around 47 million tonnes (Mt CO2-e) or around three per cent;
- additional resource costs of around $2.5 billion in net present value terms or three per cent of resource costs of $77.5 billion under reference case 1 incurred in the electricity industry; and
- no material change in estimated average household bills over the period.
Detailed context, key assumptions and results for this scenario can be found in Appendix D and SKM MMA's modelling report, available on the Authority's website.
4.4.1. Assessment of the benefits of reducing the target
In general, those in favour of a reduction in the target argued that there has been a 'material change' in economic conditions, the electricity market and the climate change policy environment compared with the anticipated settings when the initial LRET was established. Several participants have argued that the current LRET target should be reduced to:
- ensure that the scheme does not deliver more than 20 per cent of Australia's electricity generation by 2020, given the lower electricity demand forecasts that have been previously assumed; and
- reduce the cost burden of the RET.
Box 5 summarises alternative options for reducing the existing target that have been put forward by review participants.
Reduced electricity demand
Participants including Visy and the National Generators Forum noted the lower electricity demand forecasts as a rationale for decreasing the target. For example, Visy noted:
It is imperative that the target should be relative to total electricity consumption, to properly reflect the electricity market's dynamics and to attenuate otherwise unmitigated price increases. (Visy, sub.224, p.1)
The Business Council of Australia stated:
We believe that the current level of the target is materially out of line with the stated objective of the policy mechanism. What is required is a return to the 20 per cent target based on current AEMO demand forecasts not the forecasts that applied at the commencement of the RET. (Business Council of Australia, sub.130, p.6)
There has also been concern that reduced demand will lead to renewable generation displacing existing generation. For example, the Australian Coal Association stated:
Part of the burden of this increased generation cost is borne by baseload generators given the crowding out effect that the RET is having on their ability to despatch electricity competitively into the grid. (Australian Coal Association, sub.178, p.4)
Box 5 Options for reducing the LRET
Review participants have put forward four main options for reducing the existing target:
- A once-off adjustment to the target, supported by participants including Origin Energy (sub.69, p.7) and the Business Council of Australia (sub.130, p.7).
- Incremental changes such as EnergyAustralia's (sub.102, p.8) suggested approach of establishing three years of fixed targets followed by a range of possible targets dependent on future demand forecasts.
- Annual adjustments to the target, to meet 20 per cent, reflecting projections of electricity demand in that year, supported by participants such as Ergon Energy (sub.88, p.6).
- Maintaining the current targets but including baseline generation (pre-1997 renewable generation) that is currently excluded from the LRET, supported by participants such as Eraring Energy (sub.146, p.1).
A common issue for the options is the considerable uncertainty surrounding the future path of electricity demand. Of the options, a once-off reduction is likely to have the least-worst impact in respect of policy uncertainty associated with a target that changes with movements in demand. Nonetheless, even a once off change increases the risk that further changes could be contemplated in the future.
Electricity price impacts
Another key reason put forward by participants, such as the Major Energy Users Inc. and Stanwell Corporation Limited, in support of a reduced target was that the RET imposes additional cost pressure, on electricity consumers. For example, Stanwell Corporation Limited stated:
The substantial increase in renewable energy generation required to achieve the current target will have a material impact on electricity prices for consumers, through increases in both generation and network costs. (Stanwell Corporation Limited, sub.139, p.4)
Electricity prices are difficult to forecast, especially over long periods. Any estimate is dependent on key assumptions such as future carbon, fuel and technology prices. Generators' bidding behaviour will also affect prices, and bidding incentives can change over time as degrees of market power shift and portfolio compositions evolve. For these reasons, any modelled estimate of electricity prices, particularly for periods far into the future, should be treated with appropriate caution. The Authority's approach has been to be transparent in relation to the modelling it has commissioned, publishing the assumptions, consultant's report and detailed output data, to encourage public scrutiny and debate.
Modelling undertaken for the Authority suggests that over the period 2012-13 to 2030 31, there is no material difference in the average retail price per megawatt hour (MWh) under the updated 20% target scenario compared to the reference case1 scenario.
The modelling shows an interaction between the wholesale price of electricity and RET certificate costs. The RET causes additional, subsidised capacity, into a market with slow growth, which tends to suppress wholesale prices. The modelling estimates that the cost of certificates was largely offset by this reduction in wholesale prices.
The impact of low wholesale prices was raised in the Australian Energy Market Commission's submission:
Prices in the wholesale electricity spot market have been at historically low levels in recent years due to a relatively high level of generation, given recent falls in demand levels. Modelling undertaken for the AEMC suggested that the Large Scale Renewable Energy Target (LRET) distorts the balance of supply and demand in the wholesale electricty market. This occurs as the additional revenue renewable generators have access to through the sale of certificates serves to increase the level of renewable generation beyound the quantity that would have been otherwise developed. This leads to lower prices in the wholesale electricty market than there would have otherwise been which results in lower revenues and profitability for all generators. This may affect incentives to invest in new generation and impact the longer term reliability of the electricity supply. (Australian Energy Market Commission, sub.64, pp.1-2)
Some participants have questioned the Authority's modelling results and raised concerns that if the forecast lower wholesale prices eventuated, and were sustained, they would result in existing generators (rather than consumers) bearing the majority of the cost burden of the RET through low wholesale prices, higher risk premiums on existing debt as it matures and reduced asset values. For example, Macquarie Generation noted:
…existing generators bear 98% of the burden of the additional $6 billion cost of building the additional 15 TWh and consumers bear just 2%... However, SKM MMA results are highly dependent on the modelling assumptions, particularly in relation to how generators react. If generators retire/mothball units or bid more aggressively than the modelling assumes then the merit order effect will be less, wholesale prices will be higher and consumers will bear a greater share of the RET costs. (Macquarie Generation, sub.209, p.3)
The Authority agrees that wholesale price outcomes are uncertain, and that changes in bidding behaviour or earlier retirements of existing plant may result in higher wholesale prices than those estimated.
The Authority therefore considers that price outcomes can best be estimated in terms of a range: at one end, prices could include a significant suppression of wholesale prices (as estimated), and at the other end, it could be assumed that retail prices would rise by the full certificate costs, with no offsetting suppression of wholesale prices. For any given electricity demand and carbon price scenario considered, the Authority considers the latter methodology to deliver an upper bound on likely price impacts, because:
- it seems unlikely that there could be no impact at all, in any period, on wholesale prices as a result of introducing new, subsidised, low marginal cost renewable generation into the market; and
- if wholesale prices were indeed higher for sustained periods, LGC prices would be expected to be lower than those included in these estimates.
The Authority investigated the impact on retail prices with and without the impact of lower wholesale prices. Table 2 shows the effect of maintaining the current target (reference case 1 scenario) compared to moving to an updated 20% target scenario, is estimated to be between almost $0 and $2 per (MWh on average for the period 2012-13 to 2020-21 and between almost $0 and $4 per MWh on average in 2012-13 and 2030-31.
Table 2 The possible range of retail prices (dependent on the change in wholesale price)
|Retail price with wholesale price suppression||Retail price without wholesale price suppression|
|2012-13 to 2020-21 (average)||$228 per MWh||$235 per MWh|
|2012-13 to 2030-31 (average)||$265 per MWh||$273 per MWh|
|Retail price with wholesale price suppression||Retail price without wholesale price suppression|
|$228 per MWh||$233 per MWh|
|$265 per MWh||$269 per MWh|
Source: SKM MMA and Climate Change Authority, 2012.
Note: For retail price without wholesale price suppression, the RET per MWh certificate cost was added to the retail price in the no RET scenario.
As a percentage of average retail electricity prices, as modelled for the Authority, moving to a lower target is estimated to reduce the contribution of the RET (including LRET and SRES certificates and administration costs) from around 3.8 per cent to around 2.4 per cent over the period (see Figure 24).
By applying retail price outcomes to average annual household and small to medium enterprises (assuming seven MWh of electricity consumption per year and 140 MWh per year, respectively), the modelling forecasts that moving to a lower target will not have a material effect on electricity bills. In the case where no wholesale price suppression is assumed, the difference is more pronounced but is projected to remain relatively small.
Over the period 2012-13 to 2030-31 the average annual household bill is estimated to be $0.40 higher with wholesale price suppression in the updated 20% scenario compared to the reference case 1 scenario or $27 lower without wholesale price suppression. This represents an increase in the bill of around 0.02 per cent and a decrease of around 1.4 per cent respectively.
In relation to small to medium enterprises, over the period 2012-13 to 2030-31, the average annual bill is estimated to be around $13 lower with wholesale price suppression in the updated 20% scenario compared to the reference case 1 scenario and $540 lower without wholesale price suppression. This represents a decrease in the average annual bill of up to a 1.7 per cent.
Ultimately, the actual contribution of the RET to individual household and business electricity bills will be affected by a range of factors including the actual mix and cost of renewable energy built, wholesale prices, individual consumer usage patterns and the level of retail competition/price regulation.
Some participants proposed that the Authority's modelling did not appropriately account for additional charges such as financial contracts to reflect the intermittency of wind, additional open cycle gas turbine requirements and transmission costs. For example, Origin Energy noted:
The wholesale cost of energy that is incorporated into retail prices reflects retailer's cost of hedging rather than the spot price. Due to their non-firm nature, wind farms are unable to write swap contracts against their capacity, and hence retailers are still required to source contracts written against firm thermal power stations … Additionally the cost to retailers of firming up intermittent wind generation in their hedge book do not appear to be taken into account. (Origin Energy, sub.213, p.3)
Energy Users Association of Australia noted:
For completeness we would like to record that we consider many aspects of this modelling highly implausible. This includes:
- that the RET will not affect the need for additional fast response open cycle gas generation. This seems completely unrealistic considering the introduction of more than 18,000 MW of additional variable renewable generation;
- that significant transmission augmentation will not be required. Again this seems remarkable considering the geographically remote location of most renewable capacity. (EUAA, sub.226, p.5)
In addition, participants such as EnergyAustralia raised market design concerns:
An obvious tension arises between the two market designs as the RET's proportion grows, because reliable generation capacity is not explicitly rewarded in an energy-only market and is heavily penalised by a mandated market for renewables. (EnergyAustralia, sub.196, p.3)
With the exception of energy market design, which is outside the scope of the review, SKM MMA's modelling report responds to these issues.
- Hedging costs: The retail margin estimated by SKM MMA includes the cost of purchasing electricity hedge contracts and this cost is assumed to be the same across the scenarios modelled. The potential cost variation between scenarios, however, has not been explicitly modelled.
- Transmission costs: The modelling accounts for the cost of network connections and augmentations for electricity generators as part of the overall project cost. Consistent with other studies, including AEMO's National Transmission Networks and Distribution Planning (2012), it is assumed that the South Australia-Victoria (Heywood) transmission interconnector will be upgraded to a capacity of approximately 650 MW. Other than this upgrade, which is assumed in all scenarios (including the no RET scenario), no other major inter-regional transmission augmentations are required.
- Reliability: SKM MMA analysed whether there were any reliability or network issues related to the degree of renewable development and the results indicated that the available renewable energy could be dispatched for the assessed scenarios. Furthermore, unserved energy did not exceed the 0.002 per cent reliability criteria in any cases.
Neither SKM MMA nor AEMO's National Transmission Networks and Distribution Planning report (2012) found that large amounts of new open-cycle gasturbine capacity was required due to the RET.
Costs to society
The Authority's modelling explored the RET's costs to society by examining the impacts on the cost of resources (capital, fuel and labour) deployed in electricity generation. Resource costs reflect the new renewable and gas-fired capacity installed over the modelling period to meet the LRET obligations and the thermal generation required. Some participants have focused on certificate costs as a measure of the overall cost of the RET. However, certificate costs do not represent the costs to society, rather they represent the additional revenue required to make renewable investments economically viable.
The resource cost savings from an updated 20% target scenario are estimated to be:
- around $2.5 billion in net present value terms over the period 2012-13 to 2020-21; and
- around $4.5 billion in net present value terms over the period 2012-13 to 2030-31.
4.4.2. Assessment of the costs of reducing the target
The costs associated with reducing the target relate to higher greenhouse gas emissions, reduced investor confidence, increased uncertainty over climate change policy, and additional health and environmental costs.
Additional renewable generation and emission abatement in the stationary energy sector
The objects of the Renewable Energy (Electricity) Act 2000 (Cth) include encouraging additional renewable generation and reducing greenhouse gas emissions in the stationary energy sector.
Under an updated 20% target scenario, it is estimated there would be 111 422 GWh less renewable generation over the period from 2012-13 to 2030-31 (Figure 25).
Figure 25 Change in generation production mix – updated 20% target compared with reference case 1 (GWh)
Source: SKM MMA and Climate Change Authority, 2012.
Note: A positive number indicates the value is higher in the updated 20% target scenario than in the reference case 1 scenario.
The difference in renewable capacity is pronounced in 2021-22 when the targets in each scenario are most different (around 14 000 GWh less than under the reference case 1 scenario). Moreover, by reducing the target to the updated 20% target scenario, the modelling estimates that this will result in a total of 119 Mt of additional emissions created in the electricity sector between 2012-13 and 2030-31, or an additional 47 Mt in the period to 2020-21. Compared to reference case 1 this equates to an increase of around 3.3 per cent in emissions over the period 2012-13 to 2030-31 or 2.8 per cent in the period to 2020-21. This is due to the higher levels of fossil fuel generation in the updated 20% target scenario.
Based on the modelled outcomes the additional abatement under the reference case 1 scenario, compared to the updated 20% target scenario, is forecast to result in an average cost of abatement of $38 per tonne of CO2-e over the period to 2030-31 and $53 per tonne of CO2-e to 2020-21 (detail of the cost of abatement methodology can be found in Appendix D).
If the Commonwealth Government were to make a one-off change to the target in the face of changed electricity demand, it would be difficult for the Government to argue convincingly that no further changes should be contemplated in the future. This was acknowledged by participants such as the Ai Group:
On the other hand, lowering the existing targets would raise serious questions. Would it be a one-off adjustment, or part of an ongoing process? How could confidence be established that an adjustment was for once and all, and what would happen if electricity demand projections declined further – or rebounded?
Certainly, ongoing adjustments to the 2020 targets would mean intense uncertainty. The nature of investment decisions in long-lived, capital intensive assets means that such uncertainty would be severe for new investment, likely raising financing costs or leading to more frequent imposition of the shortfall charge. It would also mean heightened risks and lower returns for businesses that have invested on the basis of existing laws. (Ai Group, sub.46, p.8)
If there is a risk that future annual gigawatt hour targets could be adjusted in response to changes such as movements in energy demand, investors would likely to be reluctant to invest in plants that could potentially be stranded.
Assuming a decrease in demand, as renewable power stations are built, risks would increase with each subsequent investment that there will be a future reduction in the LRET and the market will be over subscribed. Similarly, retailers would be unlikely to lock in future power purchase agreements that included the purchase of renewable certificates if there was a risk that those future certificates would not be required – not only by that liable party, but the market as a whole.
Along with the impact on commitment to future investments, a policy change would affect investments in the electricity market that have been made in the context of the current RET policy.
A number of participants including the Climate Markets and Investment Association and Pacific Hydro have argued against any change to the level of the LRET on the basis that it could increase the perception of future investment risk making renewable energy projects less attractive to investors. Others, such as the Energy Supply Association of Australia, argued for a lower target but acknowledged that reduced investor confidence could increase risk premiums:
The ESAA acknowledges that policy uncertainty can increase risk premiums, and that this increase can lead to significantly increased costs in such a capital-intensive industry. Whether this will outweigh the benefits from a lower target is unclear, as reflected in the differences in views amongst our members. (Energy Supply Association of Australia, sub.199, p.2)
Participants such as EnergyAustralia and Origin Energy have criticised the qualitative nature of the Authority's assessment of uncertainty. Concerns have also been raised that, given that reduced energy demand is depressing wholesale prices, increased certainty for investors in renewable generation comes at the cost of greater uncertainty for existing generators.
There is no easy or definitive methodology which can be relied upon to estimate the uncertainty premium related to the LRET in current circumstances. Nonetheless, while not comparable with the Authority's estimate of the impact on resource cost, participants such as AGL Energy and the Climate Institute have sought to quantify elements of policy uncertainty. AGL Energy conducted a survey to quantify the potential effect of policy uncertainty on the financing of power generation projects and noted 'these costs would likely manifest themselves as higher cost to consumers – up to $119 million (net present value) in the event of a significant amendment to the RET (for example, a reduction in the target)' (AGL Energy, sub.38, p.2). The Climate Institute noted that:
…the reduced costs of policy uncertainty noted above, [are] worth $266 million in 2020. (The Climate Institute, sub.86, p.13)
Participants including RAC and the Australian Sugar Milling Council express concern that investment uncertainty, along with other factors such as the limited liquidity in financial markets, is limiting the ability of planned investments. For example, RAC's submission stated:
Uncertainty about the future level of the RET is leading to caution in investment in renewables. Developers of renewable projects currently face difficulty in achieving financing for projects due to this uncertainty, as offtakers (primarily the electricity retailers) seek to pass on RET review risks to the project owners. In addition, offtakers are reticent to sign offtake agreements due to this uncertainty. (RATCH-Australia Corporation, sub.134, p.3)
Some participants such as Alinta Energy have argued that there will always be uncertainty related to the LRET, stemming from a history of policy change and ongoing scheme reviews, no matter the outcome of the review:
Alinta Energy does not agree that reaffirming Government support for the existing RET will deal with the current uncertainty and supports the targets revision to a real 20 per cent of generation. (Alinta Energy, sub.183, p.2)
Others have stated that the principal threat to meeting the target is continuing uncertainty. For example, in the context of current government energy and climate change policy, the Grattan Institute noted:
The process of RET reviews and the approach of the 2020 target date have contributed to uncertainty and therefore to the question of whether the target can be delivered. If such uncertainty was removed and the Government clearly re-committed to the target then there is no fundamental reason why the target should not be achieved. (Grattan Institute, sub.165, p.2)
In addition to future investment, the value of investment made in the context of established policy settings should be considered. A number of participants noted the value of investment to date. Even participants that supported reducing the target such as Alinta Energy and International Power GDF Suez Australia have acknowledged the need to account for investments that have already been made, although do not see this as a barrier to change. For example, International Power GDF Suez Australia stated:
Over $6 billion has been invested to date in renewable generation, and in making those commitments, investors (both Australian and international) have relied on the Renewable Energy Target (RET) legislation remaining in effect. (International Power GDF-Suez Australia, sub.83, p.2)
Given the implications for investor confidence, participants including the Investor Group on Climate Change and Professor Garnaut conclude that the target should remain unchanged. For example, Professor Garnaut stated:
In [the current] set of circumstances, for reasons of business certainty, it would be wise to retain the Renewable Energy Target with the legislated parameters. (Professor Garnaut, sub.167, p.2)
In addition, some participants have expressed concern that changes to the LRET could reduce investor confidence in climate change policies more broadly. The Investor Group on Climate Change stated:
Investors, particularly in infrastructure assets, seek policy settings that are long term, low risk, have low volatility and evolve predictably. Changes to the design or operation of the RET at this time will weaken the confidence of investors, not only about the future of the RET, but the stability of climate policy in Australia. This is likely to undermine investment plans, current and future, in renewable energy in Australia and would also likely have a negative impact on the returns from existing energy infrastructure investments. (Investor Group on Climate Change, sub.70, p.4)
As discussed in Chapter 3, replacing fossil fuel generation with renewable generation can lead to other benefits in terms of public health and the environment (although the Authority has not attempted to quantify these benefits).
4.5. Increase the target
Participants, largely individual respondents, non-governmental organisations and some renewable energy proponents have expressed the view that the RET should be increased to deploy more renewables into Australia's electricity mix.
Proposals for an increased RET target – of up to 100 per cent renewables – have been put forward by participants including Beyond Zero Emissions, the Australian Youth Climate Coalition, Hepburn Wind and Doctors for the Environment Australia Inc. Arguments for increasing the target included further reducing greenhouse gas emissions, promoting energy diversity, health and environmental benefits and ensuring sustained growth of the renewable energy industry.
The People's RET Review survey undertaken by 100% Renewables and the Australian Conservation Foundation (2012) found that:
93 per cent of respondents want a higher Renewable Energy Target … [and] 98 per cent want to see our renewable energy industry continue to grow with a 2030 target.
A number of submissions proposing an increase to the target have cited the additional investment in renewable energy that would be created by the activities of the CEFC as their rationale. This rationale is considered in more detail below.
4.5.1. Increasing the target for the Clean Energy Finance Corporation
Participants including GetUp, Australian Conservation Foundation, WWF and the Conservation Council of South Australia have argued that the LRET target should be increased to account for the additional LGCs that could be generated by projects under the CEFC. For example, GetUp put forward the view that:
… if the CEFC's projects are viewed as part of the RET there is a risk that the CEFC and RET will work in concert to actually limit investment and stall the growth of renewable energy in Australia. (GetUp, sub.168, p.3)
Concern was also expressed by participants such as RAC and LMS Energy about the uncertainty that may be imposed on the RET market should the target fail to be increased to account for CEFC projects. For example, LMS Energy stated:
If the [CEFC] does finance projects at significantly lower commercial rates, any LGCs created from these projects should be additional to the 41,000 GWh target, otherwise the CEFC financed projects could crowd out privately funded renewable energy projects. (LMS Energy Pty Ltd, sub.79, p.7)
Some participants, however, held a contrary view. For example, Alstom Limited stated:
CEFC financing simply displaces commercial financing, and there is no reason why it should be treated differently in terms of the target. (Alstom Limited, sub.10, p.3)
Infigen Energy also stated:
The CEFC does not begin operations until July, 2013 – just a few months before the next Federal election. As with the Carbon Price, there is some political uncertainty with regards to the future of the CEFC. Should the CEFC continue to operate well into this decade, as Infigen Energy agrees it should, then it is possible that this topic may be worth further consideration in future RET reviews. (Infigen Energy, sub.111, p.6)
4.5.2. Assessment of the costs and benefits of increasing the target
In examining how the LRET should account for CEFC activity, the Authority has considered:
- the differing roles of the RET and the CEFC; and
- the practical challenges in accounting for projects with a yet to be defined scope.
As discussed in Chapter 3, the Commonwealth Government has formed the CEFC to help bridge the gap between earlier stage innovation and deployment. This role could ultimately affect the mix of technologies that are deployed to meet the RET targets.
The CEFC Expert Review Report commented on the CEFC interaction with the RET and a carbon price (Commonwealth Government, Department of Treasury, 2012, p.ix). The report explained that:
The CEFC is part of a suite of Commonwealth Government initiatives designed to transform the Australian economy for a cleaner energy future. The RET and carbon price will be the primary drivers in this. (Commonwealth Government, Department of Treasury, 2012, p.9)
The intent that the CEFC and the RET should work alongside each other is reiterated by the Commonwealth Government Department of the Treasury in their evidence to the House Economics Committee:
The purpose [of the CEFC] is to overcome the financial barriers. The renewable energy target affects the pricing of renewable energy and what can be achieved, but the individual projects themselves may still have barriers which inhibit investment. The purpose of the CEFC is to address those barriers and not the target itself. (Commonwealth, House of Representatives, 2012, p.4)
Moreover, there are distinct practical challenges in changing the target to account for CEFC investments. In particular, there are significant uncertainties about:
- the level of renewable generation that the CEFC will support given its goal to invest 50 per cent or more of available funds in renewable energy;
- the types of technologies it would support given the definition of renewables includes hybrid technologies and technologies (including enabling technologies) that are related to renewable energy technologies; and
- when those investments will deliver electricity to the market.
The CEFC has not yet commenced operations (it starts in July 2013), and its investment mandate has not been finalised. The uncertainty about exactly what the CEFC is likely to fund could persist for some time.
Nonetheless, based on assumptions of future investments WWF and the Australian Solar Council (2012) have undertaken modelling of the CEFC in addition to the RET. In relation to this modelling the Australian Conservation Foundation stated:
Recent modelling undertaken by WWF and the Australian Solar Council demonstrates that the CEFC has the potential to unlock up to 11,000MW of large-scale solar energy by 2030, creating approximately $54 billion in investments and a total of 28,000 jobs, while having no impact on retail energy prices …
However if the CEFC is not additional to the 20% target, by 2030 Australia will have missed out on 7,800 GWh of renewable energy generation (the equivalent of 1300 wind turbines), $8 billion in private investment and 2000 jobs. (Australian Conservation Foundation, sub.179, p.1)
However, a number of participants such as the Clean Energy Council shared the view that until the CEFC's investment mandate is clear, an increase to the LRET should not be recommended.
The CEFC and future reviews of the RET may consider this matter once the CEFC is fully operational and beginning to make investment decisions. This impact and risk may also be addressed by considering increases in the RET target beyond 2020. Again, this should be done at a later stage. (Clean Energy Council, sub.12, p.13)
Almost all submissions commented on the level and form of the LRET target. Submissions regarding the target fell broadly into three camps:
- maintain the target to provide the regulatory certainty necessary to drive investment in renewable energy generation;
- reduce the target to reflect lower electricity demand forecasts, thereby saving costs; and
- increase the target to drive additional renewable energy deployment and account for the additional large-scale generation certificates that may be created by CEFC projects.
The Authority considered all submissions, commissioned electricity market modelling and has undertaken internal analysis to examine the costs and benefits of making potential changes to the current target.
On balance, the Authority considers that the existing target of 41 000 GWh should not be reduced. In arriving at this judgement, the Authority has given particular weight to stability, predictability and investor confidence for the LRET and climate policy more broadly. Since 2009, a number of significant changes were made to the RET, which have reduced investor confidence. While challenging to quantify, the Authority considers that a material adjustment to the target would exacerbate this situation and affect the likelihood and cost of meeting any given target. Reduced investor confidence is likely to affect existing projects, hamper access to finance and increase the risk premiums associated with finance and generate greater uncertainty about Australian climate change policy more broadly.
The Authority does not consider the target should be increased at this stage, again in order to promote stability and predictability, and recognising the unknown profile of renewable energy projects to be funded by the CEFC. Moreover, the presence of the CEFC provides greater confidence that the existing target can be met – an issue on which several participants have expressed doubts.
The Authority's view therefore is that the target should be maintained at its current level and in its current form. Nevertheless, the rationales for adjusting the target should be considered in the 2016 review, as recommended in Chapter 3, after:
- the existing RET policy has had sufficient time in which to operate as two separate schemes;
- the carbon price trajectory is clearer; and
- the CEFC has been operational for a number of years with an investment mandate that is clear to industry participants.
- R.3. The existing Large-scale Renewable Energy Target of 41 000 GWh and interim targets should be maintained in their current form.
- R.4. The Renewable Energy Target review in 2016 is an appropriate time to consider adjusting the targets beyond 2020 in light of the policy and economic conditions prevailing at that time.