Has the RET helped hobble Australian manufacturing?

Who: “[The renewable energy target (RET)] has already put up power prices for industry to such an extent that manufacturers are shutting down and moving overseas.” Senator Ron Boswell.

The claim: Rising electricity prices due to the RET are an important contributing factor in the decline of manufacturing in Australia.

The facts: According to the ABS electricity makes up 1.32% of manufacturing’s sales revenue. According to the Australian Energy Market Commission the RET has increased retail electricity prices by 3.5% (the RET’s impact on industry electricity prices is not publically available).

Therefore if we use the retail price impact as an indicative estimate of the industry price impact, then the impact of the RET as a percentage of manufacturing’s sales revenue is an increase of 0.046%.

In 2013, the government issued manufacturing firms partial exemption certificates (PECs) for a total of 32 tWh of electricity. The effect of PECs is to exempt some electricity that eligible manufacturing firms use from the price increase caused by the RET. This amount of electricity makes up about 12% of total electricity production in Australia.

The long run average of the Australian dollar between when it was floated in 1983 to the beginning of the mining boom meant one Australian dollar bought 70 US cents. More recently the Australian dollar has been at parity with the US dollar with the mining boom having been an important factor in pushing up the Australian dollar. Although the Australian dollar has fallen in the past 6 months it is still around 30% higher than its long run average. This means that exporters including manufacturing exporters face a 30% reduction in price in Australian dollar terms because of the high dollar.

The finding: The RET has had a relatively tiny impact on the costs of manufacturing. A far larger cause of the decline in Australian manufacturing has been the high Australian dollar.

Discussion of evidence: The RET’s effect on manufacturers’ costs has been relatively tiny making up just 0.046% of revenue. This compares to a hit of around 30% because of the high Australian dollar. The average daily change in the exchange rate is more than 10 times greater than the impact of the RET.

The figure of 0.046% of manufacturing revenue over estimates the impact on manufacturing since it does not include the 32 tWh of electricity that has been exempted from the RET. The PECs would have had the effect of further reducing the already small impact of the RET on electricity prices.

This article was originally published on the Australia Institute’s Facts Fight Back blog. Reproduced with permission