Senator Matt Canavan: mandatory RET is an Enormous Wind Industry Protection Racket

Joe Hockey, Mathias Cormann & Tony Abbott: Natural Born RET Killers.

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With news that Tony Abbott, Joe Hockey and Mathias Cormann have teamed up to axe the mandatory RET (see our post here), the wind industry and its parasites have been reduced to a pitiful spectacle: drifting between pleading and begging for mercy, on the one hand, and foaming rage, on the other.

These desperados are like a band of teenage brats facing a little “parenting” for the first time in their lives: how dare anyone pull the plug on $50 billion worth of REC Tax/Subsidy that would have given me a delightful Point Piper view of Sydney Harbour, and kept me and my mates in Mercs and Beamers for life?!?!

And like spoilt infants facing a little discipline, these boys are looking for any hint that they might avoid punishment. Overblown reports put out by the ABC and Fairfax press that the Coalition isn’t really intent on scrapping the mandatory RET outright have been seized on by the wind industry and its parasites like shipwreck survivors clinging to floating wreckage.

But this is one occasion where the stricken will be denied any salvation.

STT hears that what was reported in the Australian Financial Review (and covered in this post) is just the beginning of the wind industry’s woes.

STT hears that Tony Abbott harbours a deep antipathy to the wind industry, which is only matched by his distaste for corporate welfare; we’ve covered a little of it in our posts here and here and here.  The PM is determined to bring the wind industry to an end; the only question is precisely how that objective is to be achieved. While the shortest route home is to simply scrap the Renewable Energy (Electricity) Act 2000, there are plenty of other ways of skinning the subsidy cat.

STT hears that the (current) preferred option is to leave the legislation in tact, but to gut it in such a way that the wind industry will be starved of subsidies by choking off the current and, more importantly, expected value of RECs.

The plan goes a little like this.

The Coalition has a policy aimed at achieving least-cost CO2 abatement, called “Direct Action” (a run down on the policy is available here). The policy has its critics on other scores, but it may well end up being the wind industry’s Armageddon.

Under the Direct Action policy, CO2 abatement is to be achieved at the lowest possible cost using “Australian Carbon Credit Units” (CCUs).

CCUs would be issued on audited proof of the abatement of 1 tonne of CO2. That could be by way of “carbon farming”: planting trees or restoring vegetation cover to over-grazed pastoral range-lands, say.

RECs, on the other hand, are issued on proof of renewable power dispatched to the grid: 1 REC for each and every MWh delivered. The deal has proceeded on the (wild) assumption that 1 MWh of wind power dispatched to the grid results in 1 tonne of CO2 emissions reduction in the electricity sector.

Under the PM’s brewing plan to kill the wind industry, RECs would be made redundant and, instead, wind power generators would be entitled to apply for CCUs. RECs and CCUs would be consolidated, with the former being phased out, and eventually replaced by the latter.

Now, here’s the clever part.

A CCU will only be issued on audited proof that the applicant has, in fact, reduced or abated 1 tonne of CO2 emissions. That will see wind power outfits struggle to jump the first hurdle: despite some “smoke and mirrors” modelling, the wind industry has never produced a shred of evidence to back its CO2 abatement claims.

The auditing of CCU applications will be done by way of certification and verification by a registered valuer. In the event that wind power outfits can satisfy the auditor and pocket a CCU, they then face the prospect of a far less generous subsidy stream.

(As an aside, one earlier variation of the plan was that the recipient of the CCU would not be able to cash it in, but would, rather, surrender the CCU to the Australian Tax Office and enjoy a reduction in their taxable income to the (pre-determined) value of the CCU: after auditing, the applicant would present their CCUs to a Certified Practicing Accountant to be submitted to the ATO with the applicant’s tax returns.)

The point of Direct Action and the CCU is to bring about the cheapest possible CO2 abatement, by whatever means. This means that the market for CCUs will be open to all comers and competitive in a way which the market for RECs isn’t.

The REC price is underpinned by the mandated shortfall charge of $65 per MWh: the effect of which comes into play from 2017, as the annual RET figure begins to climb from 27,200 GWh to the 41,000 GWh target, effective from 2020 to 2031. It’s that relationship that has wind power outfits salivating at the prospect of RECs being worth at least $65 and, by 2017, exceeding $100.

The CCU, however, is meant to be tradeable and interchangeable with carbon credits on international markets; such as those traded in Europe. Under Direct Action, certain CO2 emitters will be able to meet their obligations to surrender CCUs by purchasing European carbon credits at the going rate: the trading price of which has ranged between A$7-10.

The price for CCUs is, therefore, expected to top out at around $10.

And it’s on the issue of being able to trade CCU’s on the international market that the Coalition have been talking seriously to big Clive Palmer and, in this respect, may end up adopting parts of the PUP’s much reported plan for an ETS – starting with internationally tradeable CCUs. Of course, Palmer’s stated position is that the price for ETS credits must be set at ZERO, until such time as all of Australia’s major trading partners (like Europe, China, Japan, Canada and the US etc) sign up to an international ETS (see our post here).

For wind power outfits to survive, let alone build any new capacity, they need RECs to be trading at around $40, at a minimum. Anything less than $30, and wind power generators will never cover their operating costs, which run between $25-30 per MWh (see our post here).

Under Direct Action (assuming audited proof that 1 tonne of CO2 emissions has been abated) wind power generators would be issued with 1 CCU (instead of 1 REC).

By replacing RECs (currently trading around $30) with CCUs likely to trade around $8, the wind industry would disappear in a heartbeat. Although, we note that wind industry barrackers, the Climate Institute predicts that wind power outfits will soon be able to survive on subsidies of around $10 per MWh (see further below) – in which case, the wind industry will lap up CCUs at $8-10 and rub along just fine: but we doubt it … What’s that they say about being careful about what you wish for?

STT hears that over the last few months crack energy market economist, Danny Price has been working on the plan to rework the RET to bring it into line with the Direct Action policy; starting with the plan to replace the REC system with CCUs (see our post here).

So, if you hear the members of the Coalition talking about retaining the mandatory RET, don’t be too concerned. STT hears that Tony Abbott is absolutely committed to killing the wind industry; and how it’s done is a matter of substance, not form.

In the meantime, a growing number of Coalition members are going on the offensive; calling for the mandatory RET to be scrapped outright.

Senator Matt Canavan: joins the queue lining up to scrap the RET.

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Another to join the queue is Queensland Nationals Senator, Matt Canavan (a former Director of the Productivity Commission) who penned this brilliant piece for The Australian.

Dodgy sums on renewables don’t add up
The Australian
Matt Canavan
19 August 2014

THE advocates of renewable energy would have you believe that they have discovered the economic equivalent of the fountain of youth. According to them, we can adopt more expensive ways of doing things, yet that will lead to cheaper prices.

That renewable energy is more expensive than fossil fuels should not be in dispute. If renewables were cheaper, they would not need the billions of dollars in subsidies they receive every year courtesy of taxpayers.

The most recent example of magic pudding economic modelling was released by the Climate Institute yesterday and purports to show that subsidising renewable energy will in fact reduce energy prices. The report concedes, at least in its graphs, that abolishing the renewable energy target will reduce power prices.

The Climate Institute claims that after a few years of falling prices, they will increase. This primarily occurs because the modelling assumes that renewable energy will get cheaper through learning by doing. Thanks to this miraculously rapid learning, it is assumed that subsidies to renewables will drop from more than $70 per megawatt hour in 2020 to just over $10 by 2030. The modelling refers to “international studies” to support this assumption without referencing any. So much for peer review.

Windmills have been around for centuries and despite massive investment from countries such as Denmark, they are still not economically viable without subsidies. But if the RET is about to solve the problem of affordable energy, why stop there?

For instance, Australia has long had a problem producing cheap and competitive cars but we have the solution. All we need is a domestic automobile target. The DAT will mandate that, say, 20 per cent of our cars should be produced domestically. Domestic manufacturers will receive domestic automobile certificates for every car they produce. Importers of cars will have to buy these DACs. We know this will work because it is a market-based solution. Just like the RET, it should magically reduce the price of cars for Australian consumers.

In reality, such a scheme would be nothing but a fancy form of tariff. Those who argued for tariffs argued that Australian industry needed protection when it was young, but one day it would grow up and would become cheaper and more competitive. Advocates of renewables use a version of this discredited infant industry argument today.

The models used to support this just confirm the old joke: ask an economist what two plus two equals and he will respond: “How much would you like it to equal?”

Some who can’t bear to defend wealthy companies asking for taxpayer handouts say the RET is cheap. It is true that credible economic modelling shows the RET probably costs consumers about $50 a year. Is that cheap?

Last week, the nation was gripped by the spectacle of a “regressive” fuel tax that would cost the average consumer $20 a year. The same people who pillory the Treasurer for indexing fuel excise argue for a RET more than twice as costly. At least fuel excise will help build roads, whereas the RET doesn’t make electricity more reliable or powerful, it just makes pensioners and the poor go without heating or airconditioning to subsidise the lucky few with the resources to invest in the latest fad: renewables.

The RET is an extremely expensive form of emission reductions, between double and six times the cost of the carbon tax.

And it doesn’t stop there. The big losers from the RET are those industries that use lots of energy, such as aluminium and fertiliser producers. Some economic modelling finds that the RET will lead to 5000 fewer jobs.

There are few supporters left of high car or other tariffs. The biggest protection racket left is renewable energy.

The final argument used to stop protection from being removed is that it introduces sovereign risk and would be unfair to those who have invested in an industry based on government policy. Even some who want to remove renewable subsidies argue that we should grandfather existing investments.

There is merit in this but it cuts both ways. When the 20 per cent RET was introduced five years ago it effectively devalued billions of dollars worth of coal and gas assets. Some estimates say the RET will transfer more than $5 billion from fossil fuel to renewable assets in the next 15 years. Such an expropriation also represents sovereign risk. It is fine to talk about grand­fathering renewables but we should also great-grandfather those who invested in coal, gas or aluminium before there was a prospect of a RET.

As an economically damaging protectionist policy, the RET should be removed. The adjustment should be done over time and the costs should be shared between fossil fuel, energy-intensive and renewable sectors alike.

Matt Canavan is a Nationals senator for Queensland. He was formerly a director of the Productivity Commission.
The Australian

The only quibble we have with Matt’s fine piece of analysis is the implicit concession that reducing or scrapping the mandatory RET amounts to “sovereign risk”.

In this post, WA Senator, Chris Back slammed 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). What the wind industry faces is “regulatory risk” – just like the risk realised by aluminium processors and conventional power generators when Labor increased the mandatory RET to 41,000 GWh in 2010: examples relied on by Matt when dealing with the claimed need for “grandfathering” wind industry investments.

Matt has a pretty fair crack at the “Magic Pudding” economics put up by wind industry cheer squad, the Climate Institute and its nonsensical claims that subsidies to wind power outfits will drop from $70 per MWh in 2020 to around $10 per MWh by 2030. That fiction dissolves with a cursory peek at the legislation that makes up the mandatory RET; and the application of plain old arithmetic to its terms.

By 2020, the RECs issued to wind power outfits (1 REC per MWh dispatched) will be worth at least $65 (equal to the cost of the mandated shortfall charge) – and are expected to trade at around $100 by then – which means the subsidy extracted from power consumers and directed to wind power outfits will be worth at least $65 per MWh and, more likely, $100 per MWh, right up until 2031. Between 2014 and 2031, the REC Tax/Subsidy will add between $39 billion and up to $60 billion to Australian power consumers’ bills (see our post here).

Not only is the Climate Institute’s claim about the cost of subsidies to wind power outfits utter bunkum, its “modelling”, of course, deliberately ignores the impact of the Power Purchase Agreements struck between wind power generators and retailers, which guarantee returns of between $90-120 per MWh (versus the wholesale price for conventional power of $30-40 per MWh). Sticking with its “Magic Pudding” approach to the cost of the mandatory RET, the Climate Institute tosses up the wind industry’s argument that wind power lowers wholesale prices: precisely how it does so on days when the entire wind power output of all wind farms connected to the Eastern Grid struggles to top 20 MW is anybody’s guess (see our post here). But, in any event, power consumers don’t pay the wholesale price (and couldn’t care less about it): it’s the price fixed by PPAs (which run from 15 to 25 years) that determines the price retailers charge their customers and the final cost of wind power; and, therefore, retail prices (see our posts here and here).

The Magic Pudding’s ability to return to his original form – no matter how many times he was eaten – is the stuff of delicious fantasy. However, slice $50 billion from Australian power consumers and our economy is unlikely to mimic the Magic Pudding’s most desirable quality and bounce back without a scratch. The mandatory RET is not only “the biggest protection racket left”, it is the single biggest (and perfectly avoidable) threat to sustainable Australian employment and prosperity there is. The mandatory RET must go now.

The Climate Institute consults its Chief Economist.