RET repeal would be win for incumbents, pain for everyone else

As the Abbott government’s controversial RET Review gets underway, new research has underlined how a focus on the short-term interests of energy network incumbents could cause long-term damage to Australia’s electricity market, squeezing out renewable energy generation and boosting power bills by $1.4 billion a year beyond 2020.

The report – produced by energy market analysts ROAM Consulting under commission from the Clean Energy Council – comes to a similar conclusion to the recent Schneider Electric report: that extending or expanding Australia’s renewable energy target would lead to lower electricity prices, lower carbon emissions and increased competition.

Removal of the RET – a scenario many incumbent generators and industry lobby groups are pushing for, and which RET Review panel chief Dick Warburton refused to rule out when interviewed by the AFR – would, however, have the opposite effect; restricting renewables development, increasing reliance on fossil fuelled generation and eventually pushing power prices higher.

“In the shorter-term, to 2017-18, repealing the RET would save consumers $11 to $22 each year on an annual bill of over $1,700,” says the report. “This represents a decrease of between 0.6% and 1.3% relative to the BAU scenario.”

From 2018-19 onwards, however, the annual bill with no RET is higher than BAU due to a higher wholesale cost of electricity in the No RET case.

In these years and beyond, says the report, any consumer savings gained by not having to pay for renewables incentives are outweighed by the “increased cost of more expensive electricity on the wholesale market when renewables are not present to suppress prices.”

As ROAM notes, the trend for low-bidding renewables to reduce wholesale electricity prices is a consistent one, subject to the changes likely to occur when incumbents lose their stranglehold of the market.

“New generation can decrease market power and hence the ability of incumbent generation portfolios to seek ‘rents’ in periods of tight supply-demand balance,” says the report.

The report points to a recent study from the University of Melbourne which suggested rooftop PV could be responsible for a reduction of $2-4/MWh in average electricity prices per 1,000MW installed across the NEM.

“Historically, wind generation can be seen to have had an even larger impact on volume weighted average pool prices,” the report says, noting the South Australias example, where historical prices have been significantly lower when wind generation is high, as documented by AEMO in several reports on the state’s electricity market.

Without the RET, however, investment in renewables would be “significantly reduced” (see chart below), says ROAM, creating a shortfall in new generation capacity that would be met mostly by new, increasingly expensive gas-fired generation.

Under this scenario, ROAM estimates Australian households would pay more than half a billion dollars a year extra for electricity in 2020, and up to $1.4 billion more each year beyond. That’s around $50 extra per year per household by 2020, and up to $140 per year more beyond then.

“This study shows that the Renewable Energy Target is holding electricity prices lower over the long term by minimising the use of increasingly costly gas for electricity generation,” said CEC chief executive David Green.

“Recent price rises in Queensland and New South Wales reinforce estimates that gas will increase dramatically in price this decade, as Australia enters the international gas market.”

The report notes that the “current hiatus” in the nation’s renewables development – caused by uncertainty over the outcome of the RET Review – is happening at a critical time, in terms of meeting our 2020 target. (Based on BREE forecasts, ROAM estimates that the current government legislated LRET of 41,000 GWh in 2020 would result in 22.6 per cent market share for renewable energy.)

“Wind and large-scale solar projects typically need a PPA for 10-15 years to achieve financial close, and since the LGC liability is legislated to end in 2030, the required window will begin closing very soon in 2015,” says the report.

This, combined with doubt over the carbon price in 2030, says ROAM, “creates a potential large drop in competitiveness of renewable generators in that year creating additional risk for financiers granting loans extending past 2030 and putting downward pressure on PPAs being negotiated for a period extending beyond 2030.”

Likewise, says the report, any reduction or delay in the 41,000GWh target would significantly impact the development of utility scale solar plants in Australia and reduce their potential contribution to the RET by 2020.

“In addition to the $20 billion of investment already generated, the Renewable Energy Target will drive a further $14.5 billion of investment in large-scale renewable energy out to 2020, as well as many billions more in household renewable energy such as (rooftop) solar power,” said the CEC in a media statement accompanying the report’s release on Wednesday. “If the policy is removed, most of this simply won’t happen.”

The CEC said the study also showed that removing the RET would not only lead to higher power bills, it would also put $14.5 billion of investment in the Australian economy at risk – as well as 18,400 jobs that would be created by the policy.

“The Renewable Energy Target will help to protect consumers from the power price pain of rising gas prices, while delivering billions of dollars in investment and thousands of jobs for regional areas of the country,” said Green.

The industry is fearful that the target could be diluted, or deferred, to sate the claims of the incumbent generators. However, Warburton said this week that he had not ruled out recommending a complete dismantling of the target, one of the scenarios it has been asked to model. This would be disastrous to the industry, and would wipe out billions of investments already built.