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CCA recommends renewable energy target not be changed

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The renewable energy industry in Australia has been given a major boost after the newly formed Climate Change Authority rejected the idea that the renewable energy target should be substantially changed, despite intense pressure from most coal and gas fired generators and electricity network, and lobbying from heavy industry, miners and farmers, and even some pricing regulators.

Indeed, while accepting that the country could be heading to 25 per cent renewables by 2020, demanding on how the demand profile plays out in the coming decade, the CCA says this is probably a good thing, and its preliminary view on the renewable energy target is that the existing fixed target of 41,000 gigawatt hours (GWh) should not be changed. That’s because the benefits of any change at this time (either an increase or decrease) would be outweighed by the costs of increased regulatory uncertainty, and in any case it would have a minimum effect on household prices over the long term.

“The Authority’s preliminary view is that the existing target of 41 000 GWh should not be reduced in line with projected lower electricity demand,” it said in a 150-page discussion paper  released on Friday. Its final decision, presumably after a lot more heavy lobbying from the affected industry sectors, is due to be released in December.  “The projected resource cost savings to society overall that might be achieved by reducing the target would not be large enough to offset the damage to investor confidence that such a change could entail,” it found.

It also said that the small scale renewable energy scheme (SRES) should continue as a separate scheme and remain uncapped. Changing it would be like “unscrambling an egg.” However, any relief from the rooftop solar industry may be tempered by proposed changes to some aspects of the scheme – pushing rooftop installations of more than 10kW into the large scale scheme,  discounting the number of certificates issued for each MWh produced on rooftop systems below 1:1, and defining these rules by a limit of a 10-year return on investment for household solar. In this case, the main industry lobby groups and the aluminium sector appear to have had a win.
Overall, however, the decision is an overwhelming positive for the renewable energy industry in Australia, a defeat for the incumbent generators, state-owned electricity networks and other vested interests, and a victory for common sense. The CCA has cut through the threats and the scare-mongering. As some noted in their submissions, it would have been extraordinary for Australia to contemplate a move to slow down its transition to a clean energy future (although not unprecedented).
This decision, barring any backflip by a newly elected Coalition government (see why an Abbott government might drop bipartisan support for the LRET) should pave the way for some 8,000MW of wind farm developments and up to 3,000MW of large scale solar to be built over the next eight years, with investment of up to $20 billion.
And the CCA has agreed to add certainty to an industry that has suffered from numerous policy changes in the past decade by recommending that the next review not take place until 2016 – when thought could be given about extending the target, depending on the state of demand, costs, and the carbon price. Indeed, there is still fear that the renewables industry will grind to a halt post 2020, unless the carbon price is high enough to fill the gap. Green groups have argued for a higher target to be enshrined now, but the CCA argues that in 2016 – when there is a clear picture of the carbon price, demand levels and technology costs – is a better time to consider that.
As for the present, the CCA noted that diluting the LRET would simply delay the deployment of renewables in the country by another five years at least, and extend the life of coal and fired generators. While the incumbent generators had framed their concerns in terms of retail costs, their real concern was about the future of their own assets, particularly in light of the unexpected fall in demand in the energy market, and the ongoing impact on wholesale energy prices caused by the deployment of more renewables. Some even talked – not for the first time, and certainly not the last – of the collapse of the industry.

But in its first major ruling, the CCA led by former Reserve Bank governer Bernie Fraser has rejected those arguments, saying the benefits of maintaining the renewable energy target, ensuring investor certainty, and lowering emissions, outweighed the negatives. And on the sensitive issue of retail costs, it said the difference in household bills could be as little as $25 a year, or $1/MWh over the period of 2012 to 2030. To put that in perspective, most retail customers pay more than $230/MWh now.

It said modelling it had commissioned estimated that reducing the large scale renewable energy target (LRET) to an ‘updated’ 20 per cent target of 26,400 GWh – as proposed by utilities such as Energy Australia, Origin Energy, and Stanwell Corp – would save around $4.4 billion in resource costs  out of a total resource cost in the generation sector of around $116 billion over the period. But these figures assumed no change in the cost of capital associated with an increase in risk premiums, which would reduce this assumed cost saving. Indeed, AGL Energy and others had argued that an increased cost of capital caused by changes would lead to an increase in energy costs to consumers, rather than a saving.

The CCA also found that the impacts on electricity prices paid by energy users, taking into account both the cost of certificates and the decrease in wholesale electricity prices, would likely to be small, and the net present value of the impact on average household bills between now and 2030 would not be significant. The modelling also estimates that reducing the LRET target to a ‘updated’ 20 per cent target would lead to an additional 94 megatonnes of greenhouse gas emissions being generated by the electricity sector between now and 2030.

In other key findings, the CCA recommends that:

Given the RET’s focus on generation, it says no new displacement technologies should be added to the RET.

The shortfall charge should not be changed, but it may need to be in the next review in 2016 (or earlier) if the carbon price or electricity demand are significantly lower than currently estimated, and there is a risk that energy retailers would be tempted to cop the shortfall penalty rather than investing in new wind or solar farms. The Authority will consider the level of the shortfall charge earlier if circumstances warrant it.

   

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  • steve the sparky

    Three cheers for the CCA

  • The CCA has made the sane decision.

    The scenario of “reducing the LRET target to a ‘updated’ 20 per cent target, leading to an additional 94 megatonnes of greenhouse gas emissions being generated by the electricity sector between now and 2030” has been avoided.

    What a relief!.