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Renewable energy w-REC-ked in Australia. Politics leaves industry short.

January 6, 2010

Who would attempt to invest in renewable energy in Australia?  Only the hardiest, bravest and, some would say, most foolhardy.

 The Australian Government kick-started investment activity successfully with the original Mandatory Renewable Energy Target (MRET) through the Renewable Energy (Electricity) Act (2000) legislation in April 2001, which placed a legal obligation on wholesale electricity purchasers to proportionately contribute 9500 GWh of renewable energy per year by 2010.  This target was relatively rapidly reached, with industry recognising the need to expand the target in order to maintain investment levels.

The Mandatory Renewable Energy Target Review Panel issued it’s report Renewable Opportunities, A Review of the Operation of the Renewable Energy (Electricity) Act 2000, to the Minister for the Environment and Heritage on 30 September 2003. The report was tabled in Parliament on 16 January 2004.  It recognised the industrial and environmental contributions of renewable energy enabled by MRET, and recommended a gradual expansion of the target as:

Under current settings, MRET will not achieve its industry development policy objectives. The anticipated stalling of investment from 2007 will prevent the orderly development of a renewable energy manufacturing industry, which requires steady growth in demand, not a boom and bust. Such an outcome would also lock Australia out of technological developments that could otherwise reduce the cost of renewable energy generation over the next decade.

The Australian Labour Party (ALP) recognised the need to further promote renewable energy, and included MRET expansion as a key component of their electoral climate policy promise.

The ALP has not delivered.

There is an opportunity for the Liberals to generate an easy win and demonstrate practical content to their climate policy.

 This opportunity is to push renewable energy market reform (which is in a disastrous situation, again).  With the collapse of the REC price over the last six months, investment is again rapidly stalling.  The market needs unequivocal governmental intervention – which is rapidly achievable.

 Even AGL has made its displeasure unusually clear about the failure of the Government’s renewable energy programme.  The threat to pull investment is not empty.

 Bluntly, the renewable energy target is a disaster. 

 With the clear electoral promise provided by Rudd to expand the target seemingly in the bag after the ALP electoral win, companies geared up investment.  It then took two whole years to introduce the legislation, which could have been achieved the week after the election through a one-line amendment to the original Act.  The last-minute inclusion of Electric Heat Pumps (EHP) along with solar hot water heaters (SWH) – which do not contribute renewable electricity – was bound to substantially reduce projected and expected future REC prices, based on evidence of the operation of the original MRET.  Indeed, the collapse in Renewable Energy Certificate (REC) prices has occurred as forseen. 

 Now, most renewable energy projects are no longer viable and companies are already starting to re-evaluate their commitment to the Australian market.

 We can expect a clean-out of companies, and further consolidation within the sector as the incumbent energy companies with deep pockets scoop up companies and assets with less ability or appetite to contend with uncertainty and delay. 

There are enough opportunities overseas that many will surely not have the patience to again suffer at the hands of Australian policy equivocation.  For example, China’s target is for renewable energy sources to make up 15 per cent of its power generation by 2020.

 The Australian energy market requires everything possible to avoid further consolidation and concentration – and many in industry and academia support this view. 

 Liberal shadow climate change Minister Greg Hunt has already made some supportive statements recently for renewable energy as a means to reduce greenhouse gas emissions.  This is not unreasonable: the MRET review in 2003 identified the cost of abatement to be $32/tCO2e.  That cost is reasonable from a marginal abatement cost perspective (though very likely still not as good as an ETS).

 Mr Hunt and his Liberal colleagues should now vociferously press and work with the Government to intervene forcibly and rapidly to fix the situation.  That would be a clear win to the Liberals in the eyes of the electorate, presenting a political party with clear ideas as to how to generate climate and industry outcomes.  REC supply needs to be addressed from both SHW and EHP.  SWH already benefit from a direct $1600 government subsidy per unit.  It’s a double-subsidy whammy, while the REC price implodes.

On a slightly different tack regarding Liberal Party climate policy, I’ve also read (in amongst sensible propositions) some complete nonsense within Mr Hunt’s proposals for post-Copenhagen around incentive mechanisms for a post-Copenhagen framework:

 Second, adopt an incentives-based mechanism as a common pilot platform for international action.  The US is already proposing incentives for protecting and enhancing the great rainforests of the world.

This US approach of purchasing abatement rather than taxing economic activity is both market-based and incentive driven. It could offer the world a test mechanism which does not threaten trade competitiveness but offers practical action.

 Mr Hunt does not seem to acknowledge that a regulated, free market in abatement permits is the economically efficient structure for investment.  Abatement purchases still need to be financed either by the private sector or by the public sector, each of which implies a ‘big tax’ (as Abbott labels an ETS, which he freely parrots) which he rejects. 

 A plan to purchase abatement in emerging markets by OECD countries MUST imply some form of cost impost on economic activity in order to finance those acquisitions.  It’s straight-forward!  It’s a question of who you want to pay for it – the taxpayer base as a whole through re-allocated of general tax receipts, or those that generate the pollution through an ETS.

It seems that the Liberals would rather fund abatement through a stealth tax. 

Despite having plenty of time to reflect on it over the new year, I am still unable to reconcile how the allegedly pro-market Liberal Party maintains a position that is implicitly supportive of higher general taxation to finance inefficient investment in abatement – internationally through bilateral agreements, and domestically through higher-cost technology investment and direct regulation. 

With the opposition position so muddled, it is not surprising that there can be no national consensus over climate policy – thus leaving industry in the grip of investment uncertainty for some time to come, I fear.

At least both parties seem to agree on the need for an effective Renewable Energy Target.  Time to do something about it – quickly – before investment is irredeemably stalled.

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2 Comments leave one →
  1. rogerthesurf permalink
    February 7, 2010 6:17 pm

    With reference to global warming, which unfortunately so long as governments are considering Cap and Trade and CO2 taxes, is still with us.

    There might be global warming or cooling but the important issue is whether we, as a human race, can do anything about it.

    There are a host of porkies and not very much truth barraging us everyday so its difficult to know what to believe.

    I think I have simplified the issue in an entertaining way on my blog which includes some issues connected with climategate and “embarrassing” evidence.

    In the pipeline is an analysis of the economic effects of the proposed emission reductions. Watch this space or should I say Blog

    http://www.rogerfromnewzealand.wordpress.com

    Please feel welcome to visit and leave a comment.

    Cheers

    Roger

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  1. Australia’s Renewable Energy Market is a Pig’s Breakfast « Commercial Climate

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