The verdict is in: The RET works – and lowers power prices, too

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RET critics must be reeling: CCA review finds that the RET works, is lowering wholesale power prices, and will result in 54Mt of avoided emissions.

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This week I have spent an inordinate amount of time reading reports and analysis from the Climate Change Authority, their analysts SKM MMA, and the The Senate Select Committee on Electricity Prices.

Underlying the CCA review was the concern that the SRES cost (in particular) had been very difficult to predict and was impacting on electricity prices. Up until recently, SRES and other green schemes had been “the whipping boy” of electricity price rises. This is neither true nor warranted, but the CCA was responding to political and lobbying pressure to get the analysis done and make some suggestions.

That, it turns out, has been a really good thing for our industry.

The RET and the SRES are very complex beasts and small changes in operational mechanisms can have significant knock on effects across the PV, SHW and electricity industry, let alone political fall out, if things don’t work. That’s the first fact.

Modelling the changes is highly complex because you have short-term and long-term effects – which can be good or bad – and in some cases they cancel them self out over time. It really depends what your goal is; and in the case of this review there are multiple goals, so the results really are a mixed bag depending on your perspective.

But in principle, changing it (again; remember it’s already been substantially changed) will make it more complicated, create uncertainty, probably create a spike in demand and then a slump; and it will affect electricity prices to some degree.

The issue of electricity prices brings me to the second fact; for me the jaw dropping blow-to-the-side-of-the-head that SKMs report reveals is crucial, perhaps even game changing, if it is taken on board.

SKM MMA’s modelling consisted of a very comprehensive and complex set of scenarios. They modelled the business-as-usual, but also what happens if you merge the SRES and RET, what happens if you axe them altogether, and what happens if you axe them AND the carbon price, among other scenarios.

Here is fact two for you – and I quote: “In all (the RET) cases, the average change in retail prices is small and the NPV change in household bills is less than or equal to 1 per cent, compared to “Reference Case 1.”

In summary, even with the most devastating changes to all the programs, you will save consumers about 1 per cent on their bills.

SKM-MMA’s report also found that “The existing RET drives more renewable development which in the short-term lowers wholesale prices and reduces the impact on household bills.”

Despite its issues, the RET works, it’s lowering wholesale prices, it contributes a mere 2.1 per cent to the retail price (and is declining) and will result in (conservatively) 54Mt of avoided GHG emissions.

Critics of the RET and the carbon tax must be reeling from this.

Given these facts (which by the way we still reckon are conservative), the only conceivable rationale for stopping any of these programs is either political or if you happen to make money from non renewable generation – or stand to lose money from non renewables.

Warwick Johnston  from Sunwiz Consulting and I were engaged by the Australian Solar Council to delve into three core issues raised in this review by CCA.

10 year pay-back metric

The first was their proposal to link the value of STCs to a nominal payback period of 10 years; with the aim being to create a dynamic mechanism that achieves a nominal payback rather than a specific STC value.

Simply put, we were able to demonstrate that:

a) 10-year paybacks are substantially less than what the majority of the community expects, according to recent and past surveys.

b) That it would effectively create an ROI of about 5 per cent (according to work by The REC Agents Association) which is below what any reasonable person or company would deem acceptable and

c) that actually quantifying what paybacks were at a system by system level would be both ludicrously impractical and, would provide a wide range of results depending on a myriad of factors. Averaging would create gross distortions and inequities.

Adjusting the multiplier to less than 1

The second theory from the CCA was to adjust the multiplier to less than 1; thereby slowing the market down and theoretically lessening the impact on electricity prices.

We have already established that the impact is minuscule, so the goal is not achieved through this mechanism. But for the sake of the exercise we modelled the change in uptake, paybacks and economics by dropping the multiplier. As one would logically expect, the effect is almost indiscernible, except that it will almost certainly create surges and droops in demand, and perhaps delay uptake a bit.

Delaying uptake does not decrease wholesale prices – in fact, we have already established that increasing PV uptake does – so this doesn’t relieve pressure either.

Importantly, it’s worth remembering here that in some states (NSW for example) the regulator has allowed the retailers to charge retail customer $40 for STCs – when they can buy them at far less so the other important issue is that even SKMs 2.1% is potentially inflated; if they were passing through the real cost, the percentage would be lower.

Dropping deeming limits from 100kW to 10kW

There  is apparently some concern that the Commercial market is about to explode in a flurry of MW sized rooftops (hey, is there something I’m missing??) but all the data I’m seeing suggests that as much as we would love this, we ain’t there yet.

In fact, Warwick and I estimate that this year the market will be 4-7 per cent Commercial in the 10-100kW size range.  So in a nutshell, we did the numbers and as predicted, the impact of shifting this limit down is imperceptible in the next few years because of the relatively small proportion of the market that is Commercial.

We could be wrong, but fundamentally we still concur that the market will tend to stay where economics are best and barriers least; and that means residential and very VVSC (Very Very Small Commercial) for now.

Beyond this we did a lot of other work that helps us pull together quick facts and conduct new analysis using our old favourite, the Super Model (we affectionately call it the Jennifer Hawkins).

I must admit I am much buoyed by the findings of our analysis, this review and the fundamental confirmation that the RET is not a material contributor to electricity prices, nor is axing it the solution.

Jennifer will undoubtedly come in useful again in the coming weeks when the Energy White Paper is released, which could raise some new issues for us to deal with. I think we are looking good but of course there are some powerful forces at play and some pretty significant politics. It takes many battles to win a war.

Lastly, I’d like to personally thank the Australian Solar Council, SMA and Canadian Solar for funding our work on this issue, and of course the countless other associations and individuals who are furiously beavering away on their own responses.

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