Why federal government should be thankful for state renewable policies | RenewEconomy

Why federal government should be thankful for state renewable policies

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Australia’s effort will be chaotic and more expensive than it needs be, but the federal government may be thankful for state renewable energy targets. (With Podcasts).

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Why you should read this note

  1. If the State and Federal renewable targets are achieved this would take Australia to 40% renewables.
  2. Even if achieved that would only lead to 10% reduction in carbon emissions
  3. To achieve the National RET still requires a further 3-4 Gw of new project announcements, even assuming all the ARENA projects are built. At the moment we see AGL’s new investment fund (PAF) as providing up to 1 Gw, Origin’s Stockyard Hill and other projects maybe another 0.5Gw, and Infigen has stated it will get one projet to financial close this year. So maybe the Federal target will be achieved.
  4. Australia’s international commitment is to show in 2018 its plans for keeping global warming to 2C and make an effort for 1.5C. Any rational analysis will show that:
    1. This requires lots of decarbonisation and
    2. The plan for this will need to be developed in 2017.
  5. But we see little evidence of Federal work to develop those plans. It’s fair to say that the Minister for Energy hasn’t been in the job long, but there is lots of help available if he wants it. The best bet is that Australia is likely to lag at a Federal level. Because there are so few plans for other emissions sectors in Australia an ever higher burden is likely to fall on an electricity sector which has too many regulators, too many masters leading to frustration and sub optimal outcomes.

Forecasts

We forecast higher electricity prices, higher than they need to be,  and the ongoing piecemeal development of consumer led distributed energy. We forecast networks to increasingly develop mini grid technology (see our podcast with Ausnet’s Alastair Parker below) and more large scale transmission.

We expect Federal policy development in 2017 to remain vague but some effort will probably be made to have vehicle emission standards and to tighten the baselines for the top emitters. But that tightening will be later rather than sooner.

State targets provide the way forward but not the ideal way.

In time the Federal Govt will thank the State Govts of Vic, and Qld for their renewable commitments. Over the next five years they will likely produce more renewable electricity and more cheaply than the Federal RET target. Given a choice most renewable project financiers will take a 20 year contract backed by the State Govt over a 10 year contract with a private sector participant every time. Project equity financiers will happily take a 300 bps equity haircut for security. Debt providers will lend more at lower rates.

If the Vic, Qld and Federal targets are all achieved Australia will be at 40% renewable penetration. And not much the Federal Govt can do about it with out State Cooperation.

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Figure 1: Impact of State and Federal renewable schemes

Even at 40% renewable electricity, Australia’s carbon emissions fall just 10%

Fig 1 shows that even if achieved the new renewable build from here is 43 TWh from States and 13 Twh Federal or 56 TWh. Assuming fossil fuel intensity of 1 MWh= 1 t CO2 the new renewables would reduce emissions by ~56 mt or around 10% of total emissions. That’s by 2030.

Victoria moving fast, QLD is the big one but not much info

The Victorian Govt’s program seems to be advancing  at pace but in Qld things are progressing more slowly with an interim report from the Qld renewable energy panel  headed by ex Macquarie banker Colin Mugglestone, due at some future stage. Since Malcolm Turnbull has correctly pointed out that Qld doesn’t have much renewable energy, the QLD build will be much larger. Those State renewable builds will require lots of planning, lots of coordination, lots of network design.

QLD won’t want all PV, so in ITK’s view it should be possible to supply QLD from out of State, in the same way as the ACT scheme allowed.  Similarly Victoria likely won’t want all wind.

For preference a new Federal oversight body

It would clearly be “better” if some Federal body was to assume the functions of the AEMO, the AER, and the AEMC and coordinate the vast amount of work that needs to be done to make a high renewable penetration electricity system effective, efficient and reliable. The Productivity Commission, which seems to carry about as much authority at the Climate Change Authority has previously noted there are just too many bodies with differing agendas running Australian electricity. Still such a body would need to be trusted and the Federal Govt has clearly and specifically indicated in widely reported comments that its not committed. Without commitment there can be no trust.

It’s not just the renewable investment, but the smart grid, the transmission planning, the integration of storage, the integration of EVs that all need to be coordinated. Existing bodies can each do part of this task but none is charged with developing the overall plan for providing electricity with high renewable penetration and modern distributed generation through grids with high redundancy.

The Federal Body could also subsume the Climate Authority’s policy functions. It could also subsume the CEFC and even ARENA so that everyone was working to a common purpose and goal

Come on guys, it’s not that hard. There is plenty of technical and financial expertise. Australians in general clearly support renewable energy. 1/3 of all households want to install a battery before its even properly economic.

Progress towards the RET

There is clear evidence that, from here forward, the RET is an expensive way to procure renewable energy. Miles George noted in our forthcoming podcast that Infigen requires an additional 300 bps equity premium to allow for the extra risk that short term RET contracts carry for suppliers. Debt suppliers also require additional premiums, and are very reluctant to supply debt at all when contracts are less than 10 years. This raises the costs to consumers. Arguably this is the most damaging part of the recent commentary. Comments that imply anything less than full support raise the price of supply. Consumers lose.

Figure 2 RET target and REC inventory outlook. Source: Adapted from Infigen data by ITK, allows for 2016 announcements and ARENA large scale PV funding
Figure 2 RET target and REC inventory outlook. Source: Adapted from Infigen data by ITK, allows for 2016 announcements and ARENA large scale PV funding

Where is the rest of the policy suite?

Electricity is less than 40% of Australia’s carbon emissions, and even if that was sorted there are zero policies with any credibility covering the remainder of emissions.

Australia’s carbon emissions are shown in the chart below:

Figure 4 Australia's carbon emissions. Source: Dept of Environment
Figure 4 Australia’s carbon emissions. Source: Dept of Environment

Australia is a carbon intensive country, carbon emissions are deeply embedded. A policy that only picks on one sector, electricity, is unlikely to be either fair or achieve the overall goal. Politically achievable is one reality, scientifically  realistic is another.

No vehicle efficiency standards, no equivalent of the RET for electric vehicles. No policies in the energy intensive minerals sector etc. And yet…….

The Federal Govt is supposed to produce reports demonstrating how it will progress towards that goal to the COP21 parties in 2018.

The Climate Change Authority’s report provided a nod to the politically acceptable and did acknowledge that more will be required but I think the consensus view is that given the talent the Authority had at its disposal, its report was very uninspiring and lacked ambition. Danny Price, for instance, a Board Member of the CCA, is one of the foremost experts in electricity in Australia and more than capable of designing the complete set of policies required if he were minded to.

Australia’s international commitments

As Miles George, CEO of Infigen put it in this podcast, Australia has 3 increasingly difficult international “obligations”

 

These targets are:

  1. Reduce emissions by 26-28% on 2005 levels by 2030.
  2. Polices “must” be put in place to keep warming “well below 2C”
  3. Agreed to make an “effort” to keep warming to 1.5 C

Australia is required to report on its plans for these targets in 2018 and from this perspective plans and policies would need to be drawn up in 2017.

At the moment the major policy that Australia has to meet those goals is the Renewable Energy Target. In addition there are various efficiency standards, although these seem to have been de-emphasized of late, and the largely inconsequential Direct Action and “safeguard” policy. We don’t think there is much theoretical or practical support for either of Direct Action or “safeguards”

Meeting these  international obligations requires much more

The current methodology for assessing the adequacy of policy globally is by reference to the “carbon budget”. The carbon budget is the estimate scientists provide of the cumulative total carbon emissions allowed for a given amount of temperature change. For the sake of simplicity the rule of thumb is that about 800 Gt (giga tonne) of carbon cumulative emissions is the most to have reasonable chance of staying under 2C.

Depending on when you start measuring, global cumulative emissions to date are about 550 Gt and annual global emissions are 9.8 Gt give or take. At that rate the 2C threshold will be crossed by the mid 2030s, never mind 1.5c.

We repeat a table from an earlier reneweconomy note that discussed this.

Screen Shot 2016-10-04 at 10.43.32 AM

The clear implication from these numbers is that if the world, and Australia take their commitments seriously pretty much a full decarbonisation needs to be achieved by around the mid 2030s.

None of this is new but it provides the context for assessing whether Australia’s 23% RET is enough to achieve “our share”.

“Energy security” the new domestic buzzword

The Federal Government has articulated a view that energy security comes first. As recently expressed by the Prime Minister but not through any formal document this means that State based renewables targets are too ambitious presumably because they will lead to a lack of energy security.

The ACT’s success is the platform on which these plans are based. Noone admires the ACT’s example more than the author but the reality is that the ACT market is tiny and there is unlimited transmission support from NSW. NSW the largest consumer of electricity does not have an official renewable energy target separate from the National target.

The minister for energy and resources has convened what is defacto coag meeting to be held with a fortnight to discuss this topic.

To our knowledge there has not been any specific statement of why 40% or 50% renewables targets will lead to a reduction in energy security. However there are two possible grounds for concern.

  • Renewable energy is broadly not produced as required but is produced as available;
  • Renewable energy broadly produces less electrical “inertia” than thermal electricity.

To get one thing out of the way both of the above points are correct but there is plenty of literature that says that theoretically they are manageable issues. We say theoretically because there are few jurisdictions that have both NEM style power demand, don’t have import or export capabilities, and have “high” renewables penetration.

Good examples of the planning required can be found for instance at ERCOT.

Not even mentioning targets but including Hydro within the renewables regime we can see that selected regions and grids already have renewables penetrations similar to Australia’s current Federal target.

However few grids have 40% to 50% renewables yet. Countries do, but their import/export transmission means that looking at countries such as Denmark in isolation is NOT the way to think about it. We need to think GRIDS. Europe is a grid, ERCOT in Texas is a grid.

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Figure 3: Renewable penetration of electricity selected regions. Source: Various

David Leitch is principal of ITK. He was  formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.

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2 Comments
  1. Paul Turnbull 4 years ago

    I like the framework. The electricity industry is easy politics compared to farming and forestry where other significant greenhouse gas emissions occur. In farming replacing sheep and cows with trees and reducing fertilizer emissions are the key changes required. Technology is not the issue having the spine to face the problem, work out an agreeable solution and then getting it done is the key. Well done David on facing the problem, and providing a framework for a solution…getting more done is the next step.

  2. Jonathan Prendergast 4 years ago

    State based targets certainly seem like a better outcome, so we don’t have such a high proportion happening at 1 state. As we meet higher penetrations of wind and solar, new solutions will develop, so it would be preferable for this higher penetration to occur relatively equally across the states, or in the ones with more dispatch-able demand like hydro.

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