Grattan Institute proposal just adds to the uncertainty

The attempt by the Grattan Institute to seek out a new way forward for renewable energy by proposing the Renewable Energy Target (RET) be scrapped and replaced with a reverse auction system has three key weaknesses.

Firstly it comes at a time when investors in this industry are pleading for policy certainty and an extended period of market stability. Adding another idea to the debate at this point in time, irrespective of merit, is therefore quite unhelpful.

The main issue the renewable energy industry has faced over the last decade is the constant interventions in the RET creating a cycle of boom and bust. For many people involved in this industry it feels like we have been stuck on an amusement park rollercoaster that refuses to stop.

So while it may not have been the intention of the Grattan Institute, this report has done nothing to ease the extreme motion sickness the industry is currently suffering through and is likely to add to, rather than ease, the reluctance of investors to back renewable energy in the short term.

Compounding this, it is almost certain to be used in some way by those opposed to deployment of renewable energy to call for the scrapping of renewable energy support altogether.

It would be quite naive of the Grattan Institute to have thought that this new intervention would not be used in such a way.

The RET is a good policy that just needs a period of unencumbered operation to clean out the oversupply of renewable energy certificates created by previous interventions. Once a sensible balance of supply and demand is achieved, a point that is not far away, we will see the legislation deliver the least cost renewable energy projects to meet the 41,000 GWh target by 2020.

Complimenting this will be the various direct funding programs of the CEFC and ARENA that can be used to fast track other emerging technologies that are on the fringes of competitiveness. It is in the design of these programs that we believe the Grattan Institute proposal has merit and value.

Secondly, and despite the potential value previously identified, in our experience an auction system may not actually deliver the clean energy targets it promises and in any case tends to favour large incumbent players at the expense of Independent Power Producers (IPP’s) and new entrants.

Pacific Hydro has some experience with auction systems in Brazil and from what we can see it has some significant drawbacks, particularly in an Australian context. While the Brazilian auction process has attracted numerous bids and has seen capacity allocated there has been a tendency for organisations to underbid in order to win a Government backed PPA then subsequently finding themselves unable to build the project for a range of technical and commercial reasons. This undelivered capacity has been the biggest issue with reverse auctions which have also been tried in the UK and China.

To offset this risk, governments have tried to make the bidding conditions more onerous so that non-delivery is more punitive, similar to the Grattan proposal. This will limit the bidders to bigger utilities who cluster multiple projects or establish mega projects (500MW wind farms for example), leading to less competition as IPP’s get shut out.

The Grattan Institute proposal that finance arrangements must be secured before a Government PPA is granted will also tend to exclude IPP’s and those seeking non-recourse finance.

Interestingly, Pacific Hydro has recently entered into an arrangement with the largest mining company in Brazil, Vale, to develop 2 wind farms that are outside of the auction system.

Thirdly, at 300MW per annum, the Grattan proposal would see significantly less renewable energy deployed than under the current LRET and would essentially put the brakes on any material industry development.

This level of deployment would not deliver sufficient scale to establish a robust manufacturing sector. Wind tower fabrication for example would struggle as the Grattan Institute proposal would only support one significant facility while we already have 3 under LRET in Victoria, South Australia & Tasmania. There is the prospect of more to come as long as the projects under the LRET are provided with regulatory certainty.

If we were starting this discussion with a clean slate, a reverse auction system could be considered as an effective way to deploy renewable energy. However, on balance we still believe that the LRET, will prove to be superior due to its transparency of price and economic efficiency.

Whatever way you look at it, the appropriate time for brainstorming policy options passed years ago. Now it’s time to deliver the clean energy target and reap the benefits.

Lane Crockett is General Manager Australia at Pacific Hydro