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A proposal to fix the Australian Renewable Energy Market

January 13, 2010

The Council Of Australian Governments (COAG) is reviewing the functionality of the Renewable Energy Target, as its current structure is clearly not permissive for the development of capital-intensive renewable energy projects.

The issue of RET reform is the subject of a consultation exercise at the Department of Climate Change. There are currently two aspects open for consultation: how to treat Renewable Energy Certificates (RECs) from Solar PV, and the treatment of new waste coal mine gas.  Submissions are due on January 28, 2010.

Almost all operators in the energy market recognise the significant deficiency in the RET market as it now stands.

For example, Pacific Hydro states within their submission to the COAG consultation:

“In the current conditions it is unlikely that any new large-scale renewable energy projects will be built in the next three to four years, aside from those associated with desalination plants.”

This view is widely echoed.

While AGL CEO Michael Fraser agrees, but goes further by calling the RET a ‘fraud’ – due to current support for systems that either do not generate all the electricity for which they are awarded, or do not generate electricity at all – with signficantly detrimental impacts.

It is a widely held view within the industry that there are now no Power Purchase Agreements being reached for large-scale renewable energy projects – due to the REC price collapse and market structure.

There are a number of production-industry-related projects already built or in development on the expectation of a ‘normal’ expanded RET market free of significant subsidy distortions (e.g. sugar mill cogeneration projects – as raised in a previous blog on this site in November) that are substantially exposed to REC spot price collapse and now losing those companies money – and leaving stranded assets.

Active and vociferous support to rectify this policy failure may accelerate a positive outcome, and represent a tangible and comprehensible climate change-related policy benefit.

This failure of the RET is due primarily to two factors:

  1. the ‘ramp-up’ structure of the RET whereby early years consist of lower targets; and
  2. the oversupply of RECs due to the inclusion, and favourable treatment through double-subsidy, of small devices such as Solar Hot Water heaters and Electric Heat Pumps, and solar PhotoVoltaics (PV).

Rebates and other subsidies provided both by Federal and State Governments for SHW, heat pumps, and PV (e.g. NSW 60c/kwh gross feed-in tariff) substantially impact the REC market through dramatically reducing installed cost and enhancing profitability, thereby significantly increasing supply to the REC market.

Thus changes in rebate levels set the marginal cost of ‘generation’ projects in the REC market, not the next most economic renewable energy project. The mix of direct State- and Federal- rebates, when combined with the RET REC support, leads to gross inefficiencies and distorted outcomes.

In particular, recent evidence suggests that a very large new supply of RECs of solar PV systems represents a particular concern for market imbalance going forward.

Detail on Specific Aspects

Solar Hot Water heaters and heat pumps
Solar water heater installations include installations of solar and heat pump hot water systems. These aspects are the subject of a specific consultation item.

Heat pumps are not specifically defined in the legislation but are eligible by way of their inclusion in the Australian Standard 2712 for solar water heaters. Solar water heaters and heat pumps are eligible to create RECs under the RET as they use renewable energy sources and displace the consumption of fossil fuel based electricity. Solar water heaters have been eligible to create RECs under the previous Mandatory Renewable Energy Target (MRET) since 2001. No size limits apply to solar and heat pump water heater installations under the RET. Heat pump water heaters extract heat from the atmosphere, and transfer it to a water storage cylinder. This process uses significantly less electricity than an electric water heater. There has been significant uptake of heat pumps due to their relatively low cost compared to other high-efficiency and renewable hot water systems. There are a number of support measures that have encouraged uptake including the Commonwealth Solar Hot Water Rebate, state and territory rebates, and minimum energy efficiency requirements for new homes. The review is considering whether heat pumps continue to require inclusion under the RET to support market uptake.

Concerns have also been raised regarding the potential for heat pumps to create perverse outcomes on greenhouse gas emissions in some circumstances. For example, this may occur in climate zones where heat pumps operate at sub-optimal efficiency levels and the emissions intensity of the electricity grid is relatively high.

Neither Solar Hot Water nor heat pumps actually generate electricity

Solar PV
One specific consultation item deals with the oversupply from solar PV which is now coming on-stream and influencing (negatively) the REC price. This is a result of a confluence of factors:
1. legacy $8000 rebate-subsidised PV systems now coming on-line
2. REC multiplier for PV systems included within the RET – providing ‘phantom’ RECs for electricity that is NOT produced – and creating very substantial new supply
3. (2) above now compounded by further cross-subsidies – in particular State measures such as the NSW Gross Feed-In-Tarrif (FIT) which provides further subsidy payment of $0.60/kwh for systems

While solar PV systems are clearly a vote-inspiring measure due to their obvious tangibility and visibility, and appeal to the public, their inclusion as currently formulated substantially distorts market efficiency benefits (they are actually one of the most expensive forms of renewable energy generation at this time, and thereby also a completely inefficient/expensive means also of abating greenhouse gas emissions).  Thereby, the subsidies also negate the possibility for other forms of renewable energy to be developed.

The review proposes three options to address the RET deficiency related to solar PV (abbreviated):
1. Annual Solar Credit uptake review and RET target adjustment – an annual review of Solar Credit uptake in the previous year and the target for the year immediately following increased by a commensurate amount. This approach would have the advantage of ensuring the targets are quickly recalibrated to reflect the precise level of additional RECs created by the multiplier in the scheme. On the other hand, frequent adjustment of annual targets could add to uncertainty around the size of the market for renewable energy, particularly if uptake of small-scale generation varies considerably in coming years.

2. Review in 2015 with adjustment of subsequent years’ targets The total number of Solar Credits RECs created under the RET will be known in the latter half of 2015. It would then be possible to increase targets in order to offset that total, but with the allocation being distributed over a period to ensure that no individual year would be disproportionately affected by a major adjustment to its target.

3. Adjust targets in the early years of the scheme and true-up subsequently for actual Solar Credits uptake Increase targets immediately for the period 2010 to 2015 to reflect currently projected Solar Credits uptake. The increase each year would be based on the annual average increase from the RECs created by the multiplier projected over the entire 6 year period. Once the actual level of Solar Credits uptake was known, in 2015, targets for the period 2016 to 2020 would then be adjusted to ‘true-up’ the changes to the targets profile. This would ensure that the overall adjustments to the RECs targets for the period 2010 to 2020 reflected the actual number of additional RECs created through the Solar Credits multiplier mechanism. This approach would maintain certainty around the targets profile in the early years of the RET scheme.

Specific Policy Proposals

Our view is that the renewable energy market requires immediate intervention to support REC prices, due to the distortions engendered by additional subsidies being provided to Solar Hot Water and Solar PhotoVoltaics.

State rebates and other additional State support measures for SWH (and heat pumps) and PV will be extremely difficult, and time-consuming, to address. The RET market requires more immediate – and simple – policy intervention.

As such we suggest:
1) To address SWH and heat-pumps:
     a. Remove heat pumps from the RET
     b. Further reduce direct Federal support (rebates) for Solar Water Heaters
2) To address solar PV over-supply:
    a. Support urgent reform of treatment of PV credits
    b. The retraction of PV from RET or other structural change would endanger investment in PV
    c. Therefore, support expansion of RET to compensate for additional supply as per option (3) above as:
         i. Retro-active or annual adjustment will leave uncertainty in spot markets and continued stalling of investment
        ii. Adjustment will enable continued rapid deployment of PV systems
       iii. The market offers a more efficient mechanism than direct rebates for PV

We encourage our readers to consider the solar PV consultation paper, and contribute views.  Any resulting implemented policy change will substantially decide the shape and extent of renewable energy investment in Australia for years to come.

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