Abbott’s RET curse: PM can cripple renewables – by doing nothing

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If Tony Abbott wants to cripple Australia’s renewable energy industry, as many suspect, he can do so without doing anything at all. That’s because the removal of the carbon price could make long-term financing unfeasible, even if the renewables target is unchanged.

One of the tragedies of Australia’s large scale renewable energy industry is that it has an excellent policy in place. But such is the level of uncertainty about the future of that policy, the industry cannot move forward.

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If Tony Abbott wants to cripple the Australian renewable energy industry – as many people believe – he can achieve his aims without doing anything at all.

One of the tragedies of Australia’s large scale renewable energy industry is that it has an excellent policy in place. But such is the level of uncertainty about the future of that policy, the industry cannot move forward.

This uncertainty, as we have written before, is the most powerful weapon against renewables at the disposal of the fossil fuel incumbents and their protectors in the Abbott conservative government. (See our report on Christine Milne’s speech against the Abbott “puppeteers” here).

As Bloomberg New Energy Finance reported last week, this has already had a devastating impact on the industry. No new projects have been financed since the end of 2012, and just $44 million was spent in the first half of this year. The industry has effectively ground to a halt (see graph below).

bnef finance sThat, however, reflects the impact on the industry that the Abbott policy environment has already had. What’s of greater concern to the future of thousands of jobs and billions of dollars of investment is the impact that decisions – or non decisions – will have on future investment.

BNEF’s Kobad Bhavnagri noted in a presentation at the Clean Energy Week conference in Sydney that few projects will be financed or commissioned while there is uncertainty about the fate of the renewable energy target.

That is pretty much agreed across the industry, and understood by most politicians. Even if the cross-benchers – the Palmer United Party – managed to prevent Abbott from cutting the RET, as Abbott’s RET Review panel is widely expected to recommend, that protection lasts only to 2016.

That is probably not enough time to remove the uncertainty that will cripple the ability to sign power purchase agreements and obtain finance.

Clive Palmer may have changed the narrative around renewables, and given the Abbott government pause to reflect, but he has not yet provided a clear path to investment. At best, it is a stay of execution.

“There will not be clarity on what the policy will be until the next election,” Bhavnagri says. “Financiers and developers will spend money, but only on projects that can operate on the least worst scenario.”

But there is a greater problem that the industry has it has not yet grasped, Bhavnagri says, and that is the impact of the removal of the carbon price. He calls it “Abbott’s RET Curse.”

He says even if the 41,000GWh target was retained, and long term certainty provided, the removal of the carbon price will make it difficult to obtain financing for wind and solar farms from financial institutions.

That’s because the carbon price and the RET were designed to work together. If the carbon price is removed, then there is a massive shortfall in revenue when the certificates issued under the RET expire in 2030 – as this graph below suggests.

That cliff fall in revenue in the graph to the right could limit the extent of financing to 10 years at most. That will make it difficult for many of these projects to get away.

“Without the carbon price, it is going to be hard to finance,” Bhavnagri says. “Without some modification to the RET (extending the life of certificates out further), we will face a problem where financing for projects is hard to close.”

Right now, there seems to be no appetite within the RET panel to make such changes.

bnef carbon

Bhavnagri says the clean energy industry is likely to face continual uncertainty. A federal policy malaise could hamper large-scale investment until at least the next election.

“If the government’s position is to change the RET, investments are unlikely to be forthcoming. Investors are likely to delay decisions until it is clear which party will hold government in the next parliament, and what their position on the RET is (protecting against the risk of future changes).

“At best, investments are only likely to be made up to the worst-case level of the target in order to manage policy risk. Even though the current target will continue rising, project commitments can be delayed as the market contains enough banked LGCs to last until 2017.”

 

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16 Comments
  1. dhw 5 years ago

    I get the concept of the lack of carbon pricing increasing the ‘gap’ between wind and wholesale after 2030, but can someone explain the vertical axis on these charts please? Is it suggesting that wind LCOE will actually increase over time like that? I would have expected it to stay below $100 and even head south from there in coming years, while wholesale will probably increase with fuel prices.

  2. juxx0r 5 years ago

    The title on the first chart is AUD bn, but surely it’s millions?

    • Shtoney 5 years ago

      Interesting, in 2013 ~$2,500bn was investing in renewables in Australia, roughly $1000bn more than our GDP…

  3. barso 5 years ago

    It is AUD /MWh of energy produced, and not in millions. Why it goes up, I’m not sure. Unless they haven’t provided for a discount factor.

    • Warwick 5 years ago

      Probably because it’s in nominal rather than real prices…

  4. Miles Harding 5 years ago

    We should remember that Abbott will be deposed of in three years, or less, (to be replaced by Hockey?? urrrk!) so the future will not likely be this!

    • Zvyozdochka 5 years ago

      Just a little over 2 years Miles. Gone.

  5. Henry WA 5 years ago

    LCOE of onshore wind in the USA is widely reported at or below $60.00 per MWH ($0.06 cents per KWH) and is expected to continue to reduce over the next 15 years. New Contracts are being sold on a fixed price without built in inflation. Why the significantly increasing LCOE of wind in Australia, even in the first chart? Also in the second chart, I can understand that the wholesale cost of electricity may be significantly cheaper without a carbon tax, but why does the LCOE of wind become even more expensive? Is this purely a reflection of the risk and therefore the cost of capital? Overall it is very hard to understand these 2 charts, perhaps the built-in assumptions of these charts can be further clarified.

    • wideEyedPupil 5 years ago

      Presumably the LCOE curve uptilt is inflation and small build capacity from uncertainty? Obviously it’s been falling worldwide for a few decades and has not plateaued yet.

  6. Zvyozdochka 5 years ago

    It will be vitally important for the ALP with the Greens to state clearly and repeatedly that they will re-introduce a price/ETS on carbon and expand the RET.

    • wideEyedPupil 5 years ago

      Or by-pass the market mechanisms so beloved of the neo-liberal dominated economics profession and just make a “war economy” type ruling (or what in other command control states a couple of five year plans) that this much renewable energy and utility scale storage will be built every year until we hit 95-100%. Then we can think about exporting renewable liquid carbon fuels to Asia using solar power and become an energy superpower as opposed to a climate change supervillain.

      • Safetyguy66 5 years ago

        “Then we can think about exporting renewable liquid carbon fuels to Asia using solar power and become an energy superpower ” Wow, I have heard some pretty dreamy statements in my time but that’s a ripper. Do we use Unicorns to ride to work at these solar installations? While your “by passing the market” you can legislate for unicorn ownership to be compulsory and shoot anyone who disobeys. Sounds like the kind of policy that would appeal to you.

        • patb2009 5 years ago

          it’s vision but it’s not delusion. Bio-fuels are coming along
          and with sufficient energy input, you can make fuel.

          As for Command Economy, can the AUG order a phase out of coal? Probably. What’s the political cost? No idea

          the reality is renewables are getting cheaper, and soon enough will be inside the cost of fossil energy anyway. The fossil industry is dying fast.

          as for riding to work on unicorns, it should be noted that Unicorns have very oil skin,it’s what makes their manes so flowing. Me, if i were going to ride to work, i’d prefer a Chevy Volt/ Opel Ampera or a nissan leaf. I’ts not as stylish as the unicorn, but, it won’t stain my suit.

  7. RobS 5 years ago

    Sorry but as call BS on those LCOEs, they start too high then they increase? The 2020 LCOE is 50% higher than 2013 and 50% higher than signed PPA for recently commissioned wind farms. This smacks of renewable industry scare mongering.

    • WR 5 years ago

      That might be the standard LCOE curve (financial model) for a renewable (or any) generator. That is, they anticipate that the wholesale price will increase over time as shown by the curve and they have based their financial model on that belief. Its like saying that I expect to re-pay my home loan with steadily increasing repayments because I anticipate that my wage rise each year will be larger than increases in my expenditures, thus leaving me with more money for repayments. So if I model my expected repayments over time, the graph would show a steadily increasing upward curve.

      If my interpretation is correct, then the graph simply shows that the anticipated LCOE that results from their financial model matches very poorly against the modelled values of the wholesale price.

      Keep in mind that all of the above is just a guess.

  8. wideEyedPupil 5 years ago

    No Labels on graph axis — cardinal sin go to jail and do not pass go Bloomberg New Energy Finance. No decent captions either so these are difficult to interpret for the interested non-financially trained types like me another visual-clear-speaking fail Bloomberg.

    It is millions in the first graph because the article says A$44m in 2014 not A$44b

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