Renewables at risk from dinosaur governments, utilities

The same day that the panel reviewing Australia’s Renewable Energy Target handed its report to the Abbott government, calling for the effective closure of support schemes for large and small-scale solar, the International Energy Agency has released a report warning of a 5-year clean energy market downturn, and calling on governments and utilities to rise to the challenge of increasing renewables deployment.

Launched on Thursday, the 2014 edition of the IEA’s annual Medium Term Renewable Energy Market report said that while strong growth in 2013 meant renewables now produced as much electricity worldwide as gas, and more than twice that from nuclear, the sector now faced serious headwinds from policy uncertainty and muddled market signals.

The IEA has predicted that, if left unchecked, these headwinds would cause growth in the sector to slow over the next five years, putting renewables at serious risk of falling short of the generation levels needed to meet global climate change objectives.

“Renewables are a necessary part of energy security. Yet, just when they are becoming cost-competitive options in an increasing number of cases, policy and regulatory uncertainty is rising in some key markets,” IEA executive director Maria van der Hoeven said in the report.

Van der Hoeven said this uncertainty stemmed from concerns about the costs of deploying renewables, but that this equation was changing fast.

“Governments must distinguish more clearly between the past, present and future, as costs are falling over time,” she said. “Many renewables no longer need high incentive levels. Rather, given their capital-intensive nature, renewables require a market context that assures a reasonable and predictable return for investors.

“The costs of renewable generation depend on the cost of capital, which is determined by risk perceptions. Policy uncertainty is one risk that investors cannot well manage.”

And van der Hoeven had a message for energy utilities, too: “Utilities in a stable market, for instance like in the European market, have to change,” she told reporters at a Q&A session at the report’s launch.

“Because there will be new kids on the block, more PV, more wind offshore and onshore and that means that given the variable character of these new sources, utilities have to find new ways to balance the grid.

“Of course that means more infrastructure, to fit new infrastructure and also seeing that interconnection is there, smarter grids and storage facilities. All these things together are possible to cope with the problem, or the challenge rather, of intermittent renewables.

“It needs creative thinking and its part of the new market design.”

But it’s the message to policy makers – delivered, in this case, by the world’s foremost energy policy adviser – that sounds so strikingly similar to that being delivered by the Australian renewables industry, in response to the deflatingly predictable findings of the RET Review panel.

As we reported yesterday, industry leaders and analysts are warning of potential bankruptcies and massive job losses if either of the two scenarios outlined by the RET Review panel was implemented. While Bloomberg New Energy Finance warned this week that such moves could “kill” the renewable energy industry in Australia for up to a decade.

The RET Review panel, however, said while it recognised a repeal of the RET might result in adverse financial implications for existing investors, it preferred to ignore the term “sovereign risk” and describe it instead as “regulatory risk” – a risk that was always present.

According to the IEA report, power generation from renewable sources such as wind, solar and hydro grew strongly in 2013, reaching almost 22 per cent of global generation, and was on par with electricity from gas, whose generation remained relatively stable.

Global renewable generation is seen rising by 45 per cent and making up nearly 26 per cent of global electricity generation by 2020.

The report has also included a renewable power investment in its annual outlook for the first time, which predicts that through to 2020, investment in new renewable power capacity will average over $US230 billion annually – down from the around $US250 billion invested in 2013.

The decline, it says, is due to expectations that both unit investment costs for some technologies will fall and that global capacity growth will slow. With decreasing costs, competitive opportunities are expanding for some renewables under some country-specific conditions and policy frameworks.

Brazil, for example, with its good resources and financing conditions, has seen onshore wind continue to outbid new-build natural gas plants in auctions. In northern Chile, high wholesale electricity prices and high irradiation levels have opened a new unsubsidised solar market.

Non-OECD markets, spurred by diversification needs in many countries and increasing air quality concerns in China, in particular, comprise almost 70 per cent of the growth, where renewables are seen as the largest new source of generation through 2020.

Still, renewables are only meeting 35 per cent of fast-growing electricity needs in developing countries, illustrating the still-large role of fossil fuels and the potential for further renewables growth.

In the OECD, meanwhile, renewables account for 80 per cent of new power generation, but with more limited upside due to sluggish demand and growing policy risks in key markets.

In Australia, many believe this limited upside will all but disappear if the recommendations of the RET Review panel are implemented.

Tony Abbott – who personally appointed the panel, putting climate denier Dick Warburton in charge – is reported to be in favour of the most drastic action, which is effective closure of the scheme to new entrants.