Wind Industry’s “Death By A Thousand Cuts”: RET Review Panel – current RET should go

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The RET Review Panel has delivered the final blow for the Australian wind industry, with recommendations that include killing the RET rort from here on: the Panel recommending that the current 41,000 GWh target be abolished – and that the door be firmly shut on any new wind farm investments.

The Panel’s report is available here.

The Panel’s top recommendation (Option 1) has sent the wind industry into a tailspin:

Option 1 – Closed to new entrants (‘grandfathering’)

In order to reduce the cost of the LRET and its impact on electricity markets, the Panel recommends that the LRET should be closed to new entrants.

a. The LRET is closed to new renewable energy power stations (subject to limited exceptions described below). The Clean Energy Regulator (CER) should set targets annually based on estimated output from accredited power stations.

b. In addition to those renewable energy power stations already accredited under the scheme, eligibility would be extended to:

i. Renewable energy power stations already under construction.

ii. Renewable energy power stations to be constructed where project proponents can demonstrate that there is full financial and contractual commitment to the project (e.g., final investment decision, engineering and procurement contract) within one month of the announcement of this approach.

c. The last year of the operation of the LRET is 2030.

Get ready for a substantial uptick in rent-seeker wailing. The wind industry and its parasites have been dreading the Panel’s recommendations from the moment it was appointed and got to work (see our post here). Although, Infigen’s deluded operatives kept clinging to the hope that the Panel would never find fault with such a “brilliant” scheme. Sorry Miles, it seems your faith was just a little misplaced.

Here’s the Financial Review with a little comment on the Panel’s recommendations and some cries of pain and woe from Pac Hydro and Infigen.

Review calls for slow end to the RET
Mark Ludlow
Australian Financial Review
27 August 2014

The Abbott government should wind up the Renewable Energy Target but protect current investment until 2030 or scale it back to a “real” 20 per cent target, an expert panel has recommended.

The panel, headed by businessman Dick Warburton, handed its review of the target to the federal government on August 15 and it is expected to be released this week.

It is understood the panel conducted modelling on five options – keeping the target in its current state; move to a 30 per cent target by 2030, move to a “real” 20 per cent target, wind back with a grandfather clause or abolish the scheme altogether.

The panel put forward the grandfather clause option as well as the creation of a “real” 20 per cent target – which would scale back the mandated output for renewable energy from 41,000 gigagwatt hours to about 26,000 gigawatt hours – to the government.

There are a number of ways to reach those two ends, according to the report.

The renewable energy industry has warned any moves to scrap the target will jeopardise $15 billion in renewable energy investment.

But the panel argued the grandfather clause would allow existing investments to work their way through the national electricity market until the target was wound up in 2030.

The panel rejected the sovereign risk argument, saying any changes to the target were more akin to standard regulatory risk. It also considered removing the small-scale renewable energy scheme, such as roof-top solar installations, from the target.

Mr Warburton did not comment on the contents of panel’s final report.

But he played down speculation he had been asked by the Abbott government to do more work on terminating the target.

“We actually finished the report by the end of July, like we said we would do, but we wanted to go over it with a fine tooth comb and do some verification of the figures because we know it’s going to be a controversial report and we wanted to make sure it was all right,” Mr Warburton told The Australian Financial Review.

“We just asked for a couple more weeks to make sure it was completely tidied up. That’s the only reason for an extension.”

The panel, which includes economist Brian Fisher, Asciano director Shirley In’t Veld and Australian Energy Market Operator chief executive Matt Zema, conducted more than 100 consultations across the country looking into the scheme which mandates a target of 20 per cent of energy should come from renewable sources.

Industry had been lobbying for the target to be scrapped or significantly amended saying it was pushing up the costs of electricity.

But Pacific Hydro executive general manager Lane Crockett said the Abbott government needed to offer a compensation package if it was planning to reduce or scrap the target.

He said Pacific Hydro would be forced to shelve $2.5 billion in projects.

“What this government appears to be contemplating simply makes no sense at all. If it is truly considering putting the renewable energy industry on the chopping block, then the future of the renewable energy industry in this country is good as dead,” he said.

Infigen Energy said it would default on debt within three months of the target being scrapped if there was no compensation.

The Abbott government is expected to respond to the Warburton review in the next month. Labor has opposed any changes to the target and MP Clive Palmer has also refused to back any changes before the 2016 election.
Australian Financial Review

STT hears that the PM – is fed up with a constant stream of rent-seekers, like Infigen, moaning about the risk to their beloved industry and making bogus claims about “sovereign risk” – and is determined to stop the wind industry in its tracks. The Panel has given Tony Abbot more than enough ammunition, pointing to the benefits to be had from winding back the RET – and closing the door to new entrants – as well as slamming claims about “sovereign risk”: as the Panel points out, what the wind industry faces is simply “regulatory risk” of the kind that “is always present”.

Armed with the Panel’s report, the Coalition have gone on the offensive, pointing out that the mandatory RET is an insanely expensive method of abating CO2 emissions: its key objective; and only justification for the massive subsidies being filched from power consumers and directed to wind power outfits. Leading the charge is Angus Taylor, who lays out the Coalition’s plan to bring the RET rort to an end in this interview:

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Nice work, Angus!

STT is, however, at a loss to explain why it is that the wind industry and its parasites are so worried about the fate of the mandatory RET?

For the last few months, the Clean Energy Council and its clients have been banging on about wind power being competitive with conventional generation sources, so much so, they’ve gone on to claim that wind power has lowered retail power prices; never mind that retail power prices in Australia – now amongst the highest in the world – are heading north faster than ever.

Well, as we’ve warned them before, the wind industry should be careful as to what it wishes for because – with the RET on the way out – it’ll get its first chance ever to REALLY compete with conventional generators (see our post here and here). But, from the hysterical hectoring coming from the Clean Energy Council, the wind industry and its other parasites about saving the RET, we think actions belie words. Or, as the Americans put it: “money talks and bullshit walks”.

STT just loves Pac Hydro’s claim about having “$2.5 billion in projects” at risk.

Pac Hydro’s last (and we mean final) wind farm project is the extension of the Cape Bridgewater disaster in Victoria. The money for that project all came from the Clean Energy Finance Corporation (CEFC) because it couldn’t raise funds from commercial lenders.

The CEFC is a Green-Labor renewables slush fund that lends money on unsecured terms to wind power outfits, with the loans underwritten by Australian taxpayers (see our posts here and here).

Pac Hydro hasn’t secured Power Purchase Agreements for any one of its planned projects, without which it will never get bank finance. And the CEFC has been directed not to lend a penny more for wind farms by the Treasurer and Finance Minister (see our post here). So talk from Pac Hydro about “investing” $billions in wind farms is little more than typical wind industry “huff and puff”.

Irrespective of whether Tony Abbott gets changes to the mandatory RET through the Senate, the wind industry is doomed.

The wind industry depends on the existence of Power Purchase Agreements with retailers. Retailers enter PPAs as a method of purchasing RECs (in order to satisfy the mandated target and avoid the shortfall charge) (see our post here).

The incentive for retailers to enter a PPA is tied to the trading price of RECs (versus the cost of the shortfall charge).

As PPAs typically run for 15 years (and up to 25 years) the retailer entering a PPA is making a long-run bet on the REC price. The futures market for RECs reflects the confidence retailers (and other traders) have in the prospective value of RECs. Irrational exuberance has already caught a number of outfits that were banking on the REC price being above $50 by now (it’s currently around $30). One unlucky punter, Hydro Tasmania has already lost millions betting on the RECs futures market (see our post here).

Retail power companies saw the writing on the wall as the Green-Labor Alliance disintegrated at the end of 2012, presaging the Coalition’s election victory in September 2013 – and Tony Abbott’s announcement in the lead up to the election that the RET would be reviewed. STT hasn’t heard of a retailer entering a PPA with a wind power outfit since November 2012. The result has been an almost complete collapse in new wind farm construction this year: “investment” in the construction of wind farms went from $2.69 billion in 2013 to a piddling $40 million this year (see this article).

With the axe hanging over the mandatory RET, no retailer (absent some mental defect) is going to enter a PPA now.

A long-term PPA represents nothing but RISK for retailers from here on: the value of a PPA to a retailer depends entirely on the target fixed by the mandatory RET; and the value of RECs. Scale back the mandatory RET and the price of RECs will plummet; currently there are millions of RECs in the system that will easily satisfy a reduced target. In which event, there will be a massive oversupply of RECs and the price will head towards zero.

Faced with that increasingly likely scenario, retailers will not enter any further PPAs, which bring with them the very real prospect of the retailer being left with millions of worthless RECs.

In the absence of a PPA, wind power outfits will never get finance for new projects.

Banks were willing to lend to Infigen, Pac Hydro & Co while they were signing PPAs, because that agreement provides a guaranteed stream of cash in future (it incorporates the net present value of a future stream of electricity sales and, much more importantly, REC income).

The PPA itself was, therefore, viewed by commercial lenders as a reasonable form of security for credit extended to a developer holding a PPA.

But, without a PPA, Infigen, Pac Hydro et al have nothing of meaningful value to offer the banks. That cold, hard commercial fact of life means that the wind industry in Australia will go the way of the dodo.

Oh dear, how sad, never mind.