Renewable energy groups mobilise as ERM's RET shortfall looms as major test | RenewEconomy

Renewable energy groups mobilise as ERM’s RET shortfall looms as major test

Peak renewables bodies are looking to mount a campaign to highlight the troubling implications of ERM Energy’s decision to pay shortfall penalties rather than support new renewable energy projects.



Peak renewables bodies are looking to mount a campaign to highlight the troubling implications of ERM Energy’s decision to pay shortfall penalties rather than purchase and surrender the certificates for which it is liable under the Renewable Energy Target (RET).

While ERM maintains it is meeting its formal obligations, critics counter that it is acting against the spirit and intent of the legislation and fear that other electricity retailers may follow suit.

ERM’s decision, announced on Tuesday, to pay a $123 million penalty rather than surrender its required number of large scale renewable (LGC) certificates is looming as a major challenge to the Renewable Energy Target and enabling legislation.

ERM predicts that RET compliance levels from electricity retailers may fall from the current and previous levels of 99%, to something like 80% this year, indicating that other retailers are looking to follow suit and pay penalties rather than acquire LGCs.

In short, it is looking increasingly apparent that due to unintended consequences of RET legislation, money meant to go towards renewable energy projects will instead go directly into government coffers, in the form of penalty payments.

“This is a litmus test, it’s a setup,” says the Australian Solar Council’s John Grimes. “I talked in detail at the time of the efforts of the Abbott Government to abolish to the RET that this issue was the ‘Cuckoo egg’ in the nest and the trigger for the government to re-litigate and abolish the RET entirely.”

Grimes says that as a likely shortage of large scale renewable projects and then LGCs – the result of the Abbott government’s “disruption” of the RET and sector – has directly lead to the decision by ERM and others to make penalty payments.

“The [federal] government can then say that this is an expensive scheme, that it costs money but doesn’t deliver renewable energy,” says Grimes.

The ASC says that it plans to “shine a spotlight on the commercial entities looking to skirt their obligations under the RET legislation.”

Grimes notes that as ERM serves commercial customers, it does not have a large residential customer base that could potentially make a switch of retailer on the basis of this week’s decision. The company is the fourth biggest retailer and the second biggest provider of electricity to the business sector.

The ASC has named the ANZ Bank as a major ERM Energy client and is looking to build a larger list of customers on which to put pressure.

The Clean Energy Council also notes that big customers of ERM Power include the New South Wales and Queensland Governments.

“These governments and other customers should be asking why ERM has made a decision not to meet their obligations or support renewable energy projects which will deliver major economic benefits to regional parts of Queensland and New South Wales,” said the CEC’s Kane Thornton, in a statement.

Clean Energy Regulator chairwoman Chloe Munro said it viewed the “intentional failure” to surrender certificates “as a failure to comply with the spirit of the law and an undermining of the objectives of the scheme.” She said the money would be better spent as an investment in a growing industry rather than a financial penalty that has no return.

ERM claimed that it is not trying to undermine the RET, and insists it is in “full compliance” with the legislation. A spokesman for ERM said that the company was disappointed at some of the reactions to yesterday’s announcement, saying that the company could potentially make up for LGC shortfalls over a three-year period.

In a written statement, the company continued: “The scheme is designed with flexibility in mind. For the small-scale component of the RET, the Clean Energy Regulator can create and issue renewable certificates (via their clearing house) in advance of any renewable installation activities occurring (this has been the case for a number of months).

“The deficit held by the clearing house can be extinguished when installations occur in the future. Similar flexibility is afforded for large scale certificates, where entities can pay a shortfall charge today, and recover those payments by remitting LGCs up to three years in the future.”

ERM response to questions as to why it has not, to date, signed PPAs with renewable developers, is to say that there is often a “misfit” between customer demands for two and three-year supply contracts and the five-to-ten year off-take agreements required of the wind and solar developers.

It says that the flexibility built into the system, under which it has opted to make the penalty payment for its 2016 obligations, helps bridge this gap.

ERM says it has developed six low-emission gas-fired power plants, but insists it is looking to develop battery storage, and potentially wind and solar projects for its larger commercial customers. It provided no further details of those projects.

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  1. horsewhisperer 4 years ago

    “While ERM maintains it is meeting its formal obligations, critics counter that it is acting against the spirit and intent of the legislation and fear that other electricity retailers may follow suit.”

    Yeah, it’s the vibe of the thing.

    Pretty sure no-one who worked on that legislation would have expected a business to pay more for certificates than they would for the penalty. Why even have a penalty?

    • Chris Fraser 4 years ago

      Exactly. The fines could go to CEFC to use as renewable investments. For disincentive, the fine for each missing LGC could be twice the clearing house price for a power purchase LGC. Prices set weekly.

      • Andrew Thaler 4 years ago

        thats a fair idea.. won’t happen under the liberals though they hate the CEFC

  2. Ivan Yerkinov 4 years ago

    In my country, companies skirting the law wouldn’t be given so much leniency.

    • Oliver Scheidegger 4 years ago

      Correct, and in your country the companies skirting the law and getting away with it simply paid off the right people, haha

  3. solarguy 4 years ago

    What is the penalty price ERM has to pay in contrast to LGC’s?

    • Adam Smith 4 years ago

      $65 is the base penalty cost, however after tax treatment, depending on the retailers tax position could be $93 in actual cost. The current spot price is around $90. This was always likely to happen as the spot market shifted upwards driven by the market perception that not enough renewables were being built and PPA’s actually signed in the last 2 years. Frydenberg will most likely say, no worries. There is no real consequence.

      • solarguy 4 years ago

        Thanks Adam. Armed with that information, I can speculate that they could get out of it cheaper by paying the penalty instead. A penalty should always be higher as a deterrent and that money should always go into RE funding, not consolidated revenue. We will hear more about this capper, I’m sure.

        • Bristolboy 4 years ago

          Under the UK’s renewable obligation scheme “penalty” payments are recycled back to those who met the objectives, which are ultimately passed on to the renewable generators.

  4. Leigh Flitter 4 years ago

    Silly stuff. Being “devil’s advocate”: ERM didn’t write the legislation – it is forced to comply with it like any other liable entity. Why should there be open-ended liability for LGC’s if they go through the roof? It could be viewed that the penalty is there to keep a cap on runaway pricing of LGC’s – if the price exceeds it, then ERM (or anyone else) can (legally) say “no thanks, we’ll just pay the penalty.” If the penalty payment recipient puts it against more renewables, then surely that achieves the ‘spirit’ of the legislation?
    BTW, no such luck for poor consumers who bear the brunt of *uncapped* bidding on the wholesale market for electricity!

    • Greg Hudson 4 years ago

      There *IS* a cap for retail bidding. It may be high, but it is there…

    • MG 4 years ago

      If the government took the $123mm penalty payment, and used it to back a reverse auction for new renewable generation, wouldn’t that fill the gap in this process?

  5. john 4 years ago

    The simple solution get rid of the RID in fact get ride of any payments to small producers too.
    Get rid of any help to any type of new energy and lets go further put a penalty on anyone who uses Renewable Energy, that will fix these awful people who think using renewable energy is any type of help because we will charge you for using it.!!!!!!!!
    So under this kind of thinking expect a bill for you having some kind of bad PV on your roof.
    I ask you are we honestly moving into this kind of IDIOTIC society.

  6. Mark Roest 4 years ago

    They could invest in leading-edge battery development, which would then enable them to realize the full economic potential of intermittent renewable energy systems. They could be looking at a small fraction of what appear to be current prices in Australia, especially if they support establishing a factory in Australia, for less than they will pay as a penalty.

  7. Greg Hudson 4 years ago

    “ERM says it has developed six low-emission gas-fired power plants”
    This is reason enough to boycott the company, and the companies that buy from them IMO

  8. UTM 4 years ago

    I assume there is a pass through of this cost through to customers who are paying higher prices for their electricity (or at least this element of it) than they would with an alternative supplier who has had the forethought to obtain certificates at a price less than the penalty amount.

    So, perhaps we should ask the customers locked into a term contract … how are you feeling about paying more for electricity?

    If retailers are being forced to pay the penalty because of the actions of the L/ONP in discouraging renewables development, then this is a shame.

    It would be good if the RET was amended to recycle any penalties payable into a reverse auction for new renewables’ capacity.

  9. frostyoz 4 years ago

    Let’s get a few things straight:

    1. ERM is not breaching any law.
    2. There is no obligation in the RET legislation for a retailer to surrender LGCs.
    3. The obligation in the RET legislation is to pay the shortfall tax of $65, which ERM is planning to do.
    4. Constitutionally, the Federal Government does not have power to mandate that a retailer purchase renewable energy or surrender LGCs. That’s why there is no such obligation.
    5. The Federal Government’s relevant constitutional power is to levy taxes, that is why ERM’s only obligation is to lodge a return and pay the shortfall charge.
    6. The shortfall charge is a tax, not a penalty or fine. It is not a penalty or fine because there is no obligation which has been breached.
    7. If Parliament had wanted retailers to pay $93 rather than $65, it could have set the shortfall charge at $93 deductible. But it didn’t.

    • James Prest 4 years ago

      re point 4 I would beg to differ in that the legislation can rely for its constitutional support in several other section 51 heads of power, namely
      (A) the corporations power s.51(xx), [” foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth”} – the breadth of which was established in the Work Choices decision of the High Court (New South Wales v Commonwealth [2006] HCA 52; 81 ALJR 34; 231 ALR 1); and (B) on the external affairs power s.51(xxix), in implementing the UN FCCC and Protocols especially given that the Renewable Energy (Electricity) Act 2000 (Cth) has statutory objects (s.3) that specifically refer to ” to reduce emissions of greenhouse gases in the electricity sector”. So this casts some doubt on your assertion that the Federal Government (sic), Legislature, “does not have power to mandate” certain actions be required of corporations trading in Australia.

      • frostyoz 4 years ago

        Fact is, whether or not the corporations power might support it now, it was drafted in 2000 and it was structured as a tax bill, and imposed a tax but not any obligation to surrender.

        It relied on the decision in Northern Suburbs Cemetery case as a valid tax.

        There is no obligation to surrender, and payment of the shortfall charge is not a breach.

        The shortfall charge was always regarded as a ‘safety valve’ against the scheme cost rising excessively.

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