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.
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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