UK experience on renewable energy policy a cautionary tale

Reflecting on the increasingly sharp debate about the role of renewable energy in Australia, it’s often overlooked that this was the country that led the world in the introduction of a market-based mechanism to drive investment in renewables.

In my previous role as Chief Executive of the UK’s Business Council for Sustainable Energy, I saw first-hand how policy makers in Canberra and London exchanged ideas about the best way to drive investment in wind, solar and other renewables.

The UK had piggy-backed its first support for renewables on a Non Fossil Fuel Obligation that was largely designed to meet the costs of decommissioning the UK’s ageing nuclear power stations. But as the UK fully liberalised its power market, it became clear that this was not going to deliver the required investment in clean energy. So the UK looked to Australia, which had a ready-made solution in its Renewable Energy Target (RET). That became the model for the UK’s Renewable Obligation.

Some 12 years later, it is fascinating to consider how the UK and Australian policies have diverged and what the lessons now are for Australia – especially in light of the current review of the RET by the Federal Government’s Climate Change Authority.

For the UK, it is a story of how a single policy measure was tinkered with so often it was ultimately discredited and is now being replaced. But for Australia, it is a story of just how transformative a good piece of cross-party-supported public policy can be if it’s left alone to do its work.

In the UK, the Renewable Obligation was, like the RET, designed to enable the market to hunt out the lowest-cost technologies that would deliver a specified target. The trouble was that other renewable technologies that were not the lowest-cost (along with the nuclear industry) began to also demand support.

In addition, as the clean energy industry started to develop offshore wind sites, an understanding developed that the projected costs of the Obligation would be greater than expected. As a result, developers including Shell and UK gas company Centrica urged the Government to be more generous. By the time this played out, the UK had gone from one all-embracing market-based mechanism to a mechanism with 22 separate technology bands, with some being adjusted every year.

It’s not surprising that investors responded with increasing scepticism to the continuing rhetoric about the market deciding on the lowest-cost solutions.

Fast-forward to today, with the UK Parliament poised to consider legislation from the Conservative-led coalition that aims to create a new means of support for capital-intensive low carbon plant such as offshore wind and new nuclear.  It will do this through a series of direct interventions in the market, underpinned by effectively a levy on consumers, plus a new mechanism to boost cleaner energy generation if incentives such as the new carbon price floor don’t produce enough investment to deliver the generation required to keep the lights on.

In effect, all this means the UK has come full circle – from the free market position of letting the market find the lowest-cost solutions to the government intervening quite directly. Not surprisingly, a number of academic and other commentators are now calling this ‘the end of the UK model of liberalisation’.

So, as the RET review builds momentum, what does all this mean for public policy here in Australia? Essentially the UK experience says: When you have created a market mechanism such as the RET, let it do its job and resist the temptation to tinker. Once you start acceding to demands to favour this or that technology, or adjusting the basis of a target to meet short-term commercial expediency, be very careful what you wish for.

David Green is CEO of the Clean Energy Council .