Senator Chris Back: Time to Kill the Mandatory RET

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WA Liberal Senator, Chris Back launched a stinging attack on the wind industry during a speech in the Federal Senate, yesterday. Responding to a cacophony of wind industry rent seeker bleating, Chris has smashed headlong into three of the wind industry’s greatest myths.

The first is that any alteration to the mandatory Renewable Energy Target amounts to “sovereign risk”, for which substantial “compensation” is payable by the Commonwealth to wind farm “investors” who’ll end up losing their shirts.

Now, there’s no doubt that “sovereign risk” rightly springs to mind where a well-braided General in charge of a military junta declares that – henceforth – BP’s oil assets will be treated as property of the (read “his”) State (or tinpot dictatorship, as the case may be), say.

In the last week, the wind industry has been wailing louder than ever about “sovereign risk” and the need to be “compensated” for any change to the mandatory RET; as if Renewable Energy Certificates were some God-given-right. Chris slams that one straight over the long-boundary, based on Parliamentary advice which, funnily enough, reflects what STT has already said on the issue (see our posts here and here).

The next myth is that, despite all the evidence, wind power is driving down retail power prices, with the help of the mandatory RET.

Never mind that South Australia (Australia’s wind power “capital”) – already paying the highest power prices in the world – has just been whacked with a 6% increase in retail power prices. Never mind that Australia enjoyed the lowest power costs in the world less than a decade ago and now pays among the highest (see our post here).

STT made the observation that the wind industry’s “strategy” of claiming that wind power can be delivered at prices equal to or less than conventional generation sources was not just brave it’s “crazy brave”. The obvious retort is that: “if wind power is truly competitive with coal and gas, then it won’t need a mandatory RET or Renewable Energy Certificates anymore” (see our posts here and here and here).

Well, Chris Back has given the obvious retort, congratulating the wind industry on its new-found ability to compete with the big boys and welcoming them to a world where they’ll be free to compete without the unwieldy strictures of the mandatory RET.

The other great wind power myth that copped bucketing by Chris is the wind industry’s wild and unsubstantiated claims concerning CO2 emissions reductions in the electricity sector. Chris made it plain that there is absolutely no evidence to suggest that wind power has reduced CO2 emissions in the electricity sector, stating that the subsidies provided to wind power have been “all but totally ineffective” in greenhouse gas abatement.

Here’s a video of Chris’s speech; Hansard (transcript) follows.

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THE SENATE
PROOF
ADJOURNMENT
SPEECH
Wednesday, 9 July 2014

Senator BACK (Western Australia) (12:45) (pdf available here):

First, I congratulate you on your role as Deputy President. My contribution today continues the discussion that we have had in the last few minutes, and that is the question of the renewable energy target review and whether or not there is a sovereign risk associated with it. I say this because of claims made by representatives of the wind industry, including Infigen Energy’s Mr Miles George, who has been claiming to one and all and anyone who will listen to him that a sovereign risk may arise with the potential scaling back of the renewable energy target. I want to address that today.

It is interesting that a review of the origins of the RET scheme provides a very clear view that the renewable energy industry’s position is self-serving, aiming to reinforce their own self-interest. As we all know, if you are at the races – through you, Mr Deputy President, to Senator Bullock – and there is a horse called Self-Interest running, make sure you have got your money on it, because you will know it is trying. It is interesting that the wind industry is trumpeting two issues in the media. One is that wind power is dropping the wholesale price of electricity and the second is that the RET will cause the retail price of electricity to fall. If wind is causing the wholesale price of electricity to fall, then it follows that the industry no longer requires subsidy through the RET scheme as renewable energy is therefore cost competitive in the market. The RET is causing prices to rise significantly and it relates to the power purchase agreement, an agreement in which prices are locked in at some $120 per megawatt hour compared with the average wholesale price of $30 to $40 – a factor of some four times. The price set by the PPA, therefore, is paid by retailers irrespective of the wholesale price. The price is passed on, as we know, to retail consumers.

So let us go back to basics. The RET is a government intervention designed to mandate the proportion of electricity generated from selected sources. It was designed to support a policy of at least 20 per cent of Australia’s energy supply coming from renewables by 2020 and, as such, the policy taxes electricity users and, in some cases, non-renewable generators, in order to subsidise selected renewable producers. From it emerges the renewable energy certificate market, where the RECs are issued to power station generators classified as renewable under the act. In that way, RECs have become a form of energy currency as electricity retailers must purchase RECs to cover their liability under the act. These entities, generally electricity retailers, pass the cost of acquiring mandatory certificates on to energy consumers in the form of higher energy tariffs. This effectively becomes a tax on energy consumers.

The interesting exercise is that, after some 13 years of operation – and this is what the coalition government is addressing – it has become clear that the objectives of the act have not been reflected in the outcomes. In fact, they have been ineffective in their objective of reducing greenhouse gas emissions in the electricity sector. Indeed, the Centre for International Economics in their 2013 report generously indicated about 10 per cent of total electricity generation is from renewables; and the Clean Energy Council in 2013 made the observation that the slight increase in renewable generation attributable to the RET was actually greatest from hydroelectricity, not the other forms that have been so vocal.

Turning to the RET review which is underway at the moment, some people, including the Greens, are claiming that this has been an attempt to render ineffective the Climate Change Authority’s 2012 review. But, of course, we all know that there is a two-year mandated review. There is nothing unusual about that two-year mandate. Again mentioning Infigen Energy, it is interesting that in their submission to the current review they question whether there needs to be a two-year review at all. So we come to this figure of the 20 per cent target by 2020. Is it a percentage or is it a number of gigawatt hours?

When this discussion first took place it was believed that the figure of 20 per cent due from renewables by 2020 would account for some 41,000 gigawatt hours. But, as we know, in recent times as a result of manufacturing moving offshore and as a result of other changes in the economy, that figure of 41,000 gigawatt hours by 2020 is probably wrong. More recent estimates, including by ACIL Allen Consulting in their 2013 presentation to the Electricity Users Association of Australia’s conference, suggest that that figure would not be around 41,000 gigs but somewhere around 23,000 – a significantly lower figure.

The case to abolish the renewable energy target is driven by its cost to electricity consumers compared with the corresponding reduction, or lack of reduction, in greenhouse gases. We have got to do something before this gallops on to 2031, hurting families, individuals, residences, businesses and governments even more.

I come to the question of sovereign risk, and a key question is: who owns the renewable energy certificates? Are they the property of the Commonwealth? By implementing the act and establishing the RET tax, the Commonwealth created the renewable energy certificates, which are a form of intangible regulatory property for trade by virtue of mandated national consumption levels, upon which all consumers pay an increase in their electricity bills.

If we look at the provisions of the act itself, we can see immediately what the various points of importance are as we look at this question of sovereign risk. At least in theory, firstly, parliament may alter the law at any time, or vary or take away rights and obligations. The parliament has that power within the precepts and concept of the Constitution. Secondly, the act has a phasing clause which provides for periodic review of the RET, which we are undertaking at the moment, and that may result in changes to the scheme. We all know that – it is totally transparent; it has been there from the word go; everyone always knew about it. These are prescribed by section 162 and they will make recommendations consistent with the objectives of the act itself. The RET scheme was never intended to operate as an unchecked subsidy to the renewable electricity providers and it is high time they understood and remembered that. It is most interesting that we would have proponents questioning that a future statutory review of the RET ought to be undertaken every couple of years.

The third point to be made is that, in the 2012 review, the issue of investor confidence was raised as an effort to promote renewable energy investment. Of course, concern with investor confidence is not the same concept as sovereign risk. Indeed, it may be well acknowledged, as it was by the Climate Change Authority in 2012, that investor confidence had to be balanced with other considerations – one of them being the cost to the consumer, families and business. A wide range of views were expressed at that time.

If we look to the review that is underway at the moment, what are the options? The first may be to leave the existing target unchanged at 41,000 gigawatt hours. The second may be to reduce that to what people are saying is the real 20 per cent projected electricity supply demand, and that is the 23,000 gigawatt hours that I have spoken about. This would reduce the potential cost of the scheme, particularly for energy users like us and incumbent generators. The third option might be to increase the target to promote a greater share of renewable energy more quickly and, particularly in light of the CEFC, the Clean Energy Finance Corporation, to make any renewable generation attributable to it and additional to that delivered by the RET, heaven forbid. The fourth might be to repeal it altogether.

In summary, we would have a circumstance in which the reviews will probably result in changes to the rules of the RET scheme. I do not think anybody would be in any doubt about that and, should that occur, it will have an impact on the RET price. The coalition has been sending that signal very clearly for a long time. Nobody needs to be under any doubt or illusion as to where the coalition has stood on this and the contrast with the policies of the Australian Labor Party then in government. The question becomes one of compensation for property acquired by the Commonwealth.

There are some interesting cases, including Georgiadis v Australian and Overseas Telecommunication Corporation. For those interested, that case seems to reinforce a view that statutory property interests cannot be assumed to be protected by section 51(xxxi) of the Constitution, because modification or extinguishment of such a right may not amount to an acquisition of property. Another case was Commonwealth v Tasmania – the Tasmanian dam case. The Mutual Pools and Staff Pty Ltd v Commonwealth case was interesting. The authority was the proposition that mere extinguishment or deprivation of rights in relation to property will not, in and of itself, amount to acquisition. Extinguishment or deprivation may not result in the question of acquisition.

The problem for the renewable energy industry is that, in the case of renewable energy certificates, it would seem that the Commonwealth might not be ‘acquiring’ property or, indeed, ‘extinguishing’ property. The outcome of a review may result in a decrease in the value of the RECs, as could be anticipated, and probably is by those having a punt, but the RECs would not become worthless. They may be worth less, but not worthless. There is, of course, a significant distinction and there is no argument for compensation on that basis.

So what do we define as sovereign risk? As we know, one common definition is: ‘any risk arising on chances of a government failing to make debt repayments or not honouring a loan agreement’. As a result of the global financial crisis, the International Monetary Fund in 2011 expanded the traditional definition of sovereign risk to, broadly, the probability that a country may not pay its debts, and in their view it has been shown to be too narrow. Developments subsequent to that have exposed very complex interactions between fiscal balances, public and private debt, and the financial sector. However, the IMF held discussions in 2012 around the definition of sovereign risk, suggesting that it might be extended, including the government’s role in the resource sector and the imposition of additional unanticipated or unforeseeable regulations on participants.

We have the circumstance where the outcome of the discussions being conducted does not extend to the understanding that is being trumpeted by the renewable energy sector. The reality for the renewable energy industry is that it may be very difficult for them or, indeed, anybody else to argue the concept that sovereign risk in this case is a relevant basis for compensation. They may not be rendered worthless; they may, in fact, be rendered worth less.

Finally, to add some international context to the position that I am advancing, in Europe the renewables scheme is being modified or, in many instances, scrapped and as yet, as far as I have been able to ascertain, no sovereign risk claims have been put forward by the industry.

So I make this point again in conclusion: the wind industry cannot have it both ways. On the one hand, they say that wind power in this case is decreasing or dropping the wholesale price of electricity and, secondly, that the RET will cause the retail price of electricity to fall. If that is indeed the case then there is no cause for that particular aspect of the renewable energy industry to require further subsidy at all, since that renewable energy is cost-competitive in the market. If, indeed, it is cost-competitive in the market then let it live in the marketplace, but let it not be the reason—through its own self-service and self-interest – to see prices being unnecessarily driven up for domestic consumers, for residences, and for small and large businesses.
Senator Chris Back (Western Australia)

Nice work, Chris!

Here’s The Australian’s take on Chris’s speech.

Senator’s case for killing RET
The Australian
Andrew White
10 July 2014

A government senator has rejected claims of sovereign risk caused by the review of the renewable energy target as “weak”, arguing there is a case to abolish an “insidious impost on every electricity consumer”.

Chris Back, the deputy government whip in the Senate, said the RET was a tax on consumers and conventional energy suppliers to subsidise renewable energy providers but had been “all but totally ineffective” in greenhouse gas abatement. The comments from the West Australian Liberal senator are among the strongest yet from the government ahead of a mandated biennial review of the RET that is due to report at the end of the month and are likely to fan industry fears that the government wants to use it to abolish or weaken the scheme.

The country’s biggest infrastructure operator, IFM Investors, and Spanish renewable energy investor Acciona told The Australian this week that $15 billion of fresh investment in renewable energy — mainly wind farms — was on hold because the industry feared the scheme would be scrapped or weakened. Australia’s foreign investment credentials would also be on the line because changes to the scheme could force writedowns on an estimated $20bn already invested in renewable energy that requires a 20-25 year payback period, the investors said.

But Senator Back said that after 13 years the scheme had increased investment in renewables but had not achieved its objective to reduce greenhouse gases. “The case to abolish the RET is driven by its cost to electricity consumers compared to the corresponding reduction (or lack of reduction) in greenhouse gas emissions achieved through its 13-year lifespan,” Senator Back said.
The Australian

Kill the mandatory RET and the wind industry will die in a heartbeat – it’s on life support now.