Chapter 8: Diversity
Table of contents
- 8.1. Diversity of access and uptake
- 8.2. Desirability of greater diversity
- 8.3. Assessment of options to promote greater diversity within the Renewable Energy Target
- 8.4. Conclusion
This chapter considers the current mix of renewable energy generation and diversity of renewable energy access to the Renewable Energy Target (RET).
It explores whether there is a case to amend the RET to promote a more diverse range of renewable energy technologies through the scheme.
8.1. Diversity of access and uptake
As discussed in Section 7.1, access to the RET scheme is provided to a wide range of renewable sources and additional sources can be added by regulations. Given that a strong level of ‘diversity of access’ already exists in terms of legal access, the Authority has focussed on reviewing the diversity of technologies deployed.
The RET is a market based scheme with a technology neutral approach that encourages the deployment of the lowest cost technologies. From an economic efficiency perspective, this approach encourages competition between technologies and minimises costs to consumers.
While the scheme includes a range of renewable generation technologies, the ability of each potential technology to participate in the wholesale market and generate certificates depends on its market readiness and competitiveness. The Large-scale Renewable Energy Target, by design, does not preference higher cost technologies over lower cost alternatives. Beyond Zero Emissions highlighted this in its submission to the issues paper:
The RET aims to deploy renewable technologies at lowest cost through a market mechanism. By definition, the lowest cost technologies will be deployed, in direct contrast to the need to develop a suite of technologies. Due to this market focused, least-cost design, the RET cannot address the barrier of cost difference between technologies. (Beyond Zero Emissions, sub.104, p.15)
Under the Small-scale Renewable Energy Scheme, however, Solar Credits have been used to promote the deployment of particular small-scale technologies (see Chapter 5).
8.1.1 Current mix of renewable generation capacity
New generation under the RET has primarily come from large-scale wind, which accounted for around 18 per cent of total installed renewable generation capacity in 2012 (see Chapter 2, Figure 1).
There has also been a significant increase in the uptake of small-scale solar photovoltaic (PV) systems and solar water heaters under the Small-scale Renewable Energy Scheme, with solar PV systems providing approximately 2 gigawatts of generation capacity or around 11 per cent of installed renewable capacity in 2012, according to the Clean Energy Regulator. Further, the proportional contribution of hydro to total renewable generation has reduced from over 80 per cent in 2000-01 to around 34 per cent in 2012.
When the Mandatory Renewable Energy Target commenced operation in 2001, it was projected that biomass (particularly bagasse, the waste from sugar cane milling) would account for most of Australia’s additional renewable electricity generation by 2010 (Commonwealth, 2000). However, this did not eventuate because the cost of wind generation fell faster than expected to become the most competitive technology, and almost all new generation required to meet the targets has come from wind and small-scale solar technologies.
Wind for the time being remains the lowest cost technology. However… a range of other technologies including solar PV and concentrating solar thermal are experiencing dramatic reductions in cost. (Acciona, sub.85, p.4)
Given the decline in costs for wind and solar PV is projected to continue, they appear likely to remain the lowest cost technologies and therefore dominate new investment to 2020 – but there are no guarantees this will be the case.
8.2. Desirability of greater diversity
Participants have suggested that the RET design should be changed to promote a more diverse range of renewable energy technologies and have suggested some options to this end (see Section 8.3).
The main arguments for greater diversity are to support:
- the development of a particular renewable industry sector;
- the development of higher cost technologies that may become lower cost in the long-term; or
- the achievement of a higher renewable energy target once the capacity for existing renewable has been exhausted.
- It is not clear that amendments to the RET are likely to be the most appropriate policy response if greater diversity of renewable technologies is necessary or desired. The Authority notes that measures to promote diversity within the RET alter the scheme from a technology neutral approach that favours the lowest cost technologies to one that favours particular technologies that may not meet the RET’s policy objectives or do so at a higher cost.
- In its submission, the Clean Energy Council argued that changes to the RET to promote diversity risks harming investor confidence in the scheme and could jeopardise the industry’s ability to deliver on the target. It noted that:
… a production based incentive such as the RET is often of little value to technologies that face a range of challenges and funding hurdles before they reach production stage of their development. (Clean Energy Council, sub.12, p.25)
- In addition, the Major Energy Users Inc submitted:
If a new technology is developed that provides a lower cost option than the current technologies, then this should be allowed, but not receive greater incentives. (Major Energy Users Inc., sub.103, pp.28-29)
- The Grattan Institute (2012) examined measures within climate change policies to promote diversity of
low-emissions technologies and noted that approaches to low-emissions technology development, including green certificate schemes such as the RET, do not naturally promote technology diversity.
- The Authority considers that a change in its design to encourage a more diverse range of renewables would only be in the public interest if:
- there are market failures impeding the uptake of some renewable technologies that are not being addressed by other policies, and these can be efficiently dealt with through changes to the RET (Section 8.2.1); or
- a change to the renewable energy mix and a resulting change to the RET is a cost-effective way to ensure energy independence, reliability and security is maintained (Section 8.2.2).
8.2.1 Market failures
As for other technologies, market failures can potentially reduce private incentives to conduct research and development. Beyond the RET scheme, there is a range of measures at the national, state and territory level to support the development and deployment of renewable energy technologies, such as research and development tax credits, grant funding and financing (see Chapter 3).
The Australian Renewable Energy Agency is specifically designed to support research, development, and demonstration and address the market failures that might result at these earlier stages of the innovation chain. It will provide early-stage grant and financing assistance for projects that strengthen renewable energy and energy efficiency technologies and make them more cost competitive.
The Australian Renewable Energy Agency is providing almost $750 million for 31 renewable technologies and measures in bioenergy, geothermal, wave, solar thermal and solar PV across the various stages of renewable energy technology innovation. (The Australian Renewable Energy Agency total budget is $3.2 billion).
Regarding the deployment of market ready technologies, there may be information failures that increase perceptions of risk among financiers. It may be harder or more costly to secure finance for technologies that are not well understood.
The Clean Energy Finance Corporation has been established to overcome capital market barriers that hinder the financing, commercialisation and deployment of renewable energy, energy efficiency and low emissions technologies. The Clean Energy Finance Corporation is designed to bridge any gap between technology which is ready for deployment, but is not currently able to commercially source the requisite level of finance.
The Australian Conservation Foundation noted the contribution the Clean Energy Finance Corporation will have in promoting diversity of technologies under the RET. In its submission to the issues paper, it stated:
Importantly, the [Clean Energy Finance Corporation] will also drive diversity in Australia’s clean energy generation mix, and therefore complement the RET (which favours wind and domestic solar investment). (Australian Conservation Foundation, sub.7, p.2)
EnergyAustralia commented in its submission to the issues paper:
Greater diversity…should be delivered outside of the RET…through the funding of research and development, providing greater availability of funds to projects which have not been proven commercially viable in Australia. The funding provided to [Australian Renewable Energy Agency] and the [Clean Energy Finance Corporation] should be used to achieve diversity in RET outcomes. (EnergyAustralia, sub.102, p.11)
The Authority considers that any perceived market failure associated with the market readiness of technologies is being addressed by government support and that no change to the RET is required.
8.2.2 Energy dependence, reliability and security
Renewable energy becomes more important for countries with growing dependence on imported energy where energy security may be an issue. As discussed in Chapter 3, a substantial net exporter of energy, Australia does not face any energy security concerns relating to dependence on imports of generation fuels.
It is possible that the intermittency of renewable energy generation could affect the stability, reliability and security of the electricity network in the future. The Commonwealth Government’s Energy White Paper noted:
High levels of intermittent generation (such as wind or solar) may also pose additional operational challenges in balancing supply and demand in the system. While this is considered manageable at current and projected levels, in the longer term there may be a need for additional backup capacity or innovative system management and storage solutions. (Commonwealth, Energy White Paper 2012, p.157)
The Australian Energy Market Operator has in place arrangements for the National Electricity Market, which are subject to ongoing refinement, that require all significant intermittent generation to participate in central dispatch processes to control the output of such generation at times when that output would otherwise violate secure network limits.
In the Western Australian South West Interconnected System, arrangements are also in place to allow the system operator the flexibility to control dispatch of intermittent generation in such a way that power system security will be preserved.
The Authority considers that it is appropriate to deal with energy reliability and security issues through energy market reforms rather than by changing the RET to encourage the deployment of more diverse, and relatively less intermittent, portfolio of renewable energy technologies.
8.3. Assessment of options to promote greater diversity within the Renewable Energy Target
RET review participants have suggested that measures within the RET can be utilised to promote greater diversity, such as the use of multipliers and banding to promote particular technologies.
Options for altering the RET design to promote certain technologies are discussed below, including multipliers, caps and banding.
As outlined in Chapter 5, multipliers have been used in the RET scheme to encourage the installation of small generation units such as small-scale solar panels, wind and hydro systems by multiplying the number of small-scale technology certificates that these systems would usually be able to create under the Small-scale Renewable Energy Scheme.
Multipliers can be applied to certificates from particular technologies to influence their uptake. The use of a multiplier greater than one will preference a technology – as seen with the Solar Credits multiplier under the Small-scale Renewable Energy Scheme.
Time-of-day multipliers have also been used in California to encourage the delivery of renewable energy at times of high demand.
In the small-scale scheme, any multiplier greater than one will impose additional cost on consumers as liable entities will pass-through the cost of certificates. The environmental effectiveness of the scheme is also reduced because the additional certificates created have not been backed by actual generation. The Australian PV Association submitted:
[multipliers have] reduced the effectiveness of the RET by creating large amounts of “Phantom” certificates, with no associated renewable energy generation. It also flooded the renewable energy certificate market, making it difficult for larger projects to be built.
(Australian PV Association, sub.101, p.10)
In its submission, Hepburn Wind proposed that multipliers should be applied to large-scale generation certificates to support community based renewable energy projects to help them compete with larger commercial projects (Hepburn Wind, sub.56, p.5). Hepburn Wind further suggested that community projects could be capped to manage their development.
The Authority considers that multipliers should not be reintroduced to the RET. Multipliers reduce the environmental effectiveness of the RET, encourage a more expensive generation mix, and in the uncapped SRES, add to the costs borne by consumers. If the Commonwealth Government wanted to encourage particular project types, such as community wind farms, it could do so in other, more transparent means (such as grant funding).
Similarly, encouraging generation that supplies energy at peak periods is a matter for energy market design more broadly, and piecemeal approaches in the RET risk creating unanticipated distortions.
A cap could be used to limit the total amount of generation from a particular technology. Once the cap has been reached, support would not be given to any additional generation from that technology and the deployment of other technologies could increase.
There could also be perceived equity issues regarding how a cap might be applied. For example, if it operated on a ‘first-in, first-served’ basis – it would preference first movers. Caps are likely to be difficult to administer, since future output is uncertain.
Further, if a cap was combined with a band between two technologies to discourage one while promoting another, it would present a collective risk that the lower cost technology will be suppressed while the higher cost or emerging technology may not be able to meet the target.
Banding sets a quota of total generation for each technology and is one method to encourage diversity. By assigning particular targets to different technologies, banding allows those technologies the space to evolve without the potential of being crowded out by other technologies that are cheaper in the short term. In practice, the Small-scale Renewable Energy Scheme operates as a band within the RET – in effect it provides a separate incentive for small-scale systems.
In its submission to the issues paper, WWF proposed that the RET should include banding, as it will support the development of renewable energy that becomes low cost energy in the longer term:
Banding or weighting the RET will give less developed/more costly resources a leg up to develop and bring down their cost curves…banding mechanisms [are] also useful for economic efficiency as a means of phasing industries out of the RET as they become competitive in the open electricity market. (WWF, sub.129, p.12)
The Authority considers that reasons for supporting technologies, such as those proposed by the WWF, could be more effectively addressed by policies outside of the RET. This would not create additional administrative burden or risk to the target being achieved.
If banding involves both a minimum and a maximum quota for each banded technology, it faces all of the difficulties associated with caps with additional problems associated with minimum targets.
If minimum targets are not achieved, then the overall target would not be met. Banding affects the economic efficiency of the scheme by potentially forcing more expensive technologies into the mix, increasing the overall costs to energy consumers.
The Clean Energy Council stated in its submission:
Banding requires a level of foresight and prediction into the specific timelines and capabilities of emerging technologies that is near impossible to do accurately … [for example] if the RET were banded to provide a band for a particular technology, it may be that this technology would not be technically capable of delivering that scale of deployment in the timeframe required. This would put achievement of the 20 per cent target at risk. (Clean Energy Council, sub.12, p.25)
The geothermal industry has argued for banding to be applied to geothermal technology to allow it to contribute to the RET without being ‘crowded out’ by predominantly lower cost technologies. In its submission, the Australian Geothermal Energy Association recommended:
… setting aside a reasonable proportion of the incentive offered through the RET scheme to support emerging technologies as they enter the commercialisation phase.
(Australian Geothermal Energy Association, sub.52, p.4)
However, in a report by the Australian Bureau of Agriculture and Resource Economics and
Geoscience Australia (2010) it was noted that:
There are uncertainties in the outlook for geothermal power over the next two decades.
A major uncertainty is the cost of electricity production as the technology has yet to be proven commercially viable. Present estimates show a wide range in the cost of geothermal electricity generation, reflecting the current pre-commercial stage of the industry, as the cost of electricity generation is highly dependent on future technology developments and grid connection issues. The geothermal industry in Australia is progressing, with proof-of-concept having been attained in one project and expected to be achieved in at least two others within one to two years. Several pilot projects are expected to be completed within five years. (ABARE and Geoscience Australia, 2010, p.205)
The RET allows a diverse range of technologies to generate certificates. The current mix of generation capacity reflects technologies that have been deployed at the lowest cost.
Any measure within the RET to promote diversity, such as expanding the use of multipliers, or introducing banding or caps, will increase the cost of the scheme to society overall and to consumers, and, in some cases, may reduce the scheme’s environmental effectiveness. The Authority considers that the current approach should continue and that the current level of diversity of access is appropriate.
Other policy initiatives, particularly the Australian Renewable Energy Agency and the Clean Energy Finance Corporation, are better placed to promote diversity.
- No change should be made to the Renewable Energy Target framework to promote diversity.