Politicians & Business Finally Waking Up to the Massive Costs of the LRET

Sleep-deprived

Time to wake up: there’s an economy to save.

****

In this post we highlighted the political distinction between the small scale renewable energy scheme (SRES) – which doles out subsidies for rooftop solar – and the Large-Scale RET (LRET) – upon which the debacle that is the wind industry depends.

While Greg Hunt and Ian “Macca” Macfarlane have been running around talking up ways of saving the RET – and their mates in the wind industry – STT hears that Tony Abbott is as determined as ever to kill the RET outright: no “grandfathering”, no “ifs”, no “buts”.

STT hears that – while Tony Abbott wants to kill both the SRES and LRET – the PM is ready to leave the SRES in place, in order to avoid a political bun-fight with the solar industry that has little upside and plenty of downside.

But the LRET is in a different class. Tony Abbott has made no secret of his desire to can the fans (see our posts here and here and here.) And his Treasurer, Joe Hockey and Finance Minister, Mathias Cormann are singing from the same hymn sheet when it comes to axing the RET and bringing the wind industry to a well-earned demise (see our posts here and here and here). And – to the horror of the wind industry – this hard-hitting trio have emerged as Natural Born RET Killers (see our post here).

Now, after over 13 years of operation, Coalition MPs – including lightweights like young Greg Hunt and Ian “Macca” Macfarlane – have finally dusted off their copies of the Renewable Energy (Electricity) Act 2000 to learn, apparently for the first time, that the LRET contains a mighty sting in the tail.

The “sting” is the mandated shortfall charge of $65 per MWh which – under the current 41,000 GWh target – starts to impact from 2017. There is no way that the annual target set from 2017 (that escalates to 41,000 GWh in 2020, where it stays until 2031) will be met. Wind farm construction is almost at a standstill: “investment” in the construction of wind farms went from $2.69 billion in 2013 to a piddling $40 million this year (see this article).

And, from here on, no retailer is going to sign a Power Purchase Agreement with a wind power outfit; which means hopeful wind farm developers will never get the finance needed to build any new wind farms (see our post here).

In our earlier posts (here and here) we outlined the fact that – under the LRET – retailers are fined $65 per MWh for every MW they fall below the mandated annual targets – follow the links here and here.

With less than 23,000 GWh coming from renewable sources annually at present – and no likelihood of any significant wind power capacity being added between now and 2020 – Australia will fall short of the fixed target by a figure in the order of 18,000 GWh. When the target hits 41,000 GWh in 2020 – the fine will apply to that figure until 2031.

The fines paid by retailers will be collected by the Commonwealth and be directed into general revenue.

The cost of the fine compares with the average wholesale price of between $35-40 per MWh. Therefore, at a minimum, retailers will be paying $100-105 per MWh (the average wholesale price plus the fine). Retailers have already announced that they will simply recover the cost of the fine from their retail customers (see our posts here and here).

Retailers will add a margin to that in the order of 10% (or more) which means Australian power consumers will be paying upwards of $115 per MWh: 3 times the average wholesale price.

The Australian Energy Market Commission, EnergyAustralia and AGL have all united to declare that meeting the 41,000 GWh annual target will be impossible; and that, as a consequence, power punters will simply be lumbered with an enormous new electricity tax.

Given current renewable capacity of 23,000 GWh – under the legislation – the shortfall charge (fine) starts to bite from 2017.

Year Target GWh Shortfall GWh Penalty Cost
2017 27,200 4,200 $273 million
2018 31,800 8,800 $572 million
2019 36,400 13,400 $871 million
2020 41,000 18,000 $1.17 billion
Total $2.886 billion

The mandatory RET continues until 2031; and the $65 per MWh fine with it. That means power consumers will be paying around $1.17 billion every year from 2020 until the RET expires in 2031. In addition to the $2.886 billion in fines added to power bills (up to and including 2020) – between 2021 and 2031 – fines of almost $12 billion will be issued to retailers, recovered from power consumers and the proceeds pocketed by the Commonwealth.

Remember that the policy justification for the insane cost of the mandatory RET is that it would: “encourage the additional generation of electricity from renewable sources”; and “reduce emissions of greenhouse gases in the electricity sector”; and “ensure that renewable energy sources are ecologically sustainable”.

On the scenario outlined above, the Federal government will collect close to $15 billion from power consumers by way of the shortfall charge levied on retailers. However, there will be: NO additional renewable energy; NO “break-through” on-demand renewable energy technologies; and NO reduction in CO2 emissions. An outrageous outcome, confirmed by Australian Energy Market Commission, EnergyAustralia and AGL (see our post here).

Here’s the Australian Financial Review reporting on how the obscene cost and pointlessness of the LRET has just dawned on some of our political betters and business leaders.

Election power price surge fear forcing new clean energy plan
Australian Financial Review
Joanna Heath
8 September 2014

The fear of spiralling electricity prices around the time of the next federal election is driving the government to consider a deal with Labor on the Renewable Energy Target to avoid deadlock in the Senate.

A potential “third way” for the RET that would lower the 41,000-gigawatt-hour target but fix prices of renewable energy certificates is being actively considered as a way to match falling electricity demand but provide certainty to the industry, and provide a palatable option for Labor.

In an opinion piece published in The Australian Financial Review today Business Council of Australia chief executive Jennifer Westacott warns of “an effective $93 tax” that would be triggered under legislation if there were a political impasse on the RET.

“Under this circumstance community sympathy for the RET is likely to quickly dissipate and the pressure will come on the government to do more than just amend the existing scheme,” Ms Westacott writes.

“If people are really concerned about renewable energy then they should be encouraging an agreement across political parties so as to guarantee a moderate amount of future investment, while reducing the cost burden on consumers.”

Without the support of Labor, the government must rely on the Palmer United Party to pass any changes to the RET through the Senate, something leader Clive Palmer has vowed it will not do.

According to Bloomberg New Energy Finance modelling, if this political impasse were not resolved by 2015, so-called “penalty” prices within the RET would be triggered which the government fears would drive up retail power prices in about eighteen months’ time.

Industry minister Ian Macfarlane is understood to be using this pre-election nightmare scenario to build support for finding a compromise position that could be taken to Labor.

One coalition party source said the penalty scenario was “a nasty train wreck waiting to happen” which will focus minds on finding a solution.

“There is potentially some room to come to an arrangement,” the source said.

Senior Labor sources said the party’s default position was not to allow any changes to the RET, but a sensible approach from the government could open doors.

“We need to see quite what their bona fides are before we were to sit down with them,” a source said.

“We’ve always taken the view that a bipartisan policy around renewables is the only way to guarantee strong levels of investment. So if there was a way to restore that . . . it’s a question of how far off the reservation they have wandered.”

New analysis published by Bloomberg on Monday estimates a continued political impasse on the RET would freeze investment until 2016, which would mean renewable energy production would start to fall short of its target around 2018.

In this scenario, renewable energy certificates would surge to a legislated “penalty” price of about $93/MWh, compared to the current price of around $20.

Market anticipation of that scenario could drive up prices far earlier, however, creating political tensions around the next election.

Bloomberg analyst Kobad Bhavnagri described this as the “worst case outcome for consumers”.

“To prevent this outcome, the political uncertainty will need to be resolved by 2015, or early 2016 at the latest,” Mr Bhavnagri writes.

No approaches have yet been made by the government to Labor over a potential compromise, with the coalition party room expected to meet first to decide on a position.

Lowering the target but fixing certificate prices is an option that it is hoped would address industry concerns by providing some investor certainty.

But accepting it would mean ignoring the two key recommendations of the Warburton review to either close the large-scale RET to new entrants or scale the target back to 50 per cent of new demand every year. It would also require several influential members of cabinet – including the Prime Minister and Treasurer – to soften their position on keeping the RET.

The search for a bipartisan deal is not likely to be helped by the renewable energy lobby, who are refusing to budge from their opposition to any change in the target.

“We don’t think there is any rationale whatsoever for changing the policy. While we’re always open to talking at the end of the day we certainly don’t have a proposal on the table worthy of any meaningful discussion,” Clean Energy Council chief executive Kane Thornton said.

Mr Thornton also cast doubt on the viability of the floated “third way” option, arguing fixing certificate prices was a highly interventionist, anti-market approach.

“There are a whole lot more questions than answers.”

The Solar Council is continuing to rev up its campaign against the Warburton review recommendation to scrap the small-scale renewable energy target.

Its “Save Solar” campaign in marginal coalition electorates is gaining some traction, according to government insiders, and political impetus to attack solar is waning.

In coming weeks the Solar Council will launch advertisements on commercial television in Victoria and Queensland with the tagline “don’t vote for anyone who will cut the renewable energy target”.

Solar Council chief executive John Grimes said his organisation was not interested in compromise.

“The government is rattled, backbenchers are nervous, they understand solar is enormously popular in the electorates. I think our pointed marginal seat campaigns have been working,” Mr Grimes said.

“[The advertisements are] a big escalation in the campaign. We are furious about the way the government has handled the entire thing.”

According to the Bloomberg modelling, however, solar would be less badly affected in the long term by an abolition of the small-scale RET than larger projects would be under changes proposed to the large-scale RET.

“Our residential and commercial market modelling suggests that the total amount of behind-the-metre solar capacity installed by 2030 will vary only slightly in response to policy decisions stemming from the current review,” the report reads.
Australian Financial Review

You’ve just got to love the Clean Energy Council and the irony dripping from Kane Thornton’s statement that: “fixing certificate prices was a highly interventionist, anti-market approach”.

It seems irony is a subtlety lost on the wind industry and its highly paid spruikers; neither of which would exist in the absence of the mandatory RET: which the more economically literate might point out is easily the most “highly interventionist, anti-market approach” developed since Jo Stalin decided to help himself to the Kulaks’ grain and “collectivize” their farms.

Apparently, setting up legislation that threatens to whack retailers with $billions in penalties for not purchasing wind power in order to make them enter PPAs with wind power outfits, so as to purchase $billions worth of RECs and avoid the penalty, is not “interventionist” or “anti-market”?

And we pause to notice the CEC’s uncompromising, all-or-nothing approach to changing the 41,000 GWh target set by the LRET. With Tony Abbott sharpening his axe, we think it a little like keeping the band playing as the Titantic started to founder: a noble gesture, despite the inevitable outcome.

The gripes from John Grimes will soon die down as Tony Abbott makes plain the Coalition’s plan to leave the SRES alone; thereby avoiding a fight over the solar panels that mums and dads are dying to own; and Grime’s clients are itching to install.

But expect the wind industry’s whining to continue unabated, as its merry band of rent seekers watch their lives flash before their eyes.

Here’s the opinion piece by Jennifer Westacott referred to above.

Take the third path on renewable energy target
Australian Financial Review
Jennifer Westacott
8 September 2014

Reaching the original RE target now presents considerable political risks. So why not cut it to a true 20 per cent?

When circumstances and the evidence changes, policies too need to change. This is the case with the Renewable Energy Target (RET) scheme.

The RET was meant to ensure 20 per cent of our energy supply comes from renewable sources, but because it was not designed to be adjusted if demand for energy falls – as it has – it now accounts for almost 30 per cent of energy supplies.

The best outcome for the community, business and the renewable energy industry would be bipartisan support for a form of a true 20 per cent RET that doesn’t risk falling short of its megawatt target at a huge cost to consumers.

The risk is that while reaching the existing megawatt target might be technically possible, it is unlikely to be commercially possible.

The commercial risks in the electricity and renewable energy certificate market are just too great to pull through large-scale renewable energy (predominately wind) investments in the coming years.

First, the price of renewable energy certificates is suppressed to a point which is too low to finance new wind projects due to an oversupply of certificates that are expected to hang in the market until 2017.

Second, because of the decline in energy demand, the wholesale price of electricity is suppressed which isn’t conducive to attracting further investment in any form of energy generation.

Third, because of the lack of bipartisan support on the design of the RET, it makes it very difficult for any investor to allay the commercial risks of regulatory change.

Even after 2017, once the oversupply of certificates is eventually soaked up by the market, it leaves only three years to build a massive amount of wind energy, some 8000 megawatts (MW) in three years.

This compares to 3800 MW of wind energy that the RET, in its various guises, has pulled through over the past 13 years.

To deliver wind on this scale and this quickly would require shorter community consultation on proposed wind farms than has historically occurred and would likely lead to added cost pressures as projects compete for limited resources.

Add all these risks together and it presents a grim investment environment – a market frozen until there is political consensus on the policy of the RET.

Certificate oversupply problem

What is becoming clear is that unless all parties to this debate are willing to compromise, investment in wind will be stymied, creating the risk of higher electricity prices for consumers. This is because, without new wind investment, the price of certificates will spike.

What is not well understood is that if the certificate price hits the level of what is called the penalty price, electricity consumers will be paying an effective $93 tax with no additional investment in renewable energy.

Under this circumstance, community sympathy for the RET is likely to quickly dissipate and the pressure will come on the government to do more than just amend the existing scheme.

What needs to be recognised is that unwavering support for the existing target will not lead to greater wind investment unless the current issue of certificate oversupply is dealt with and there is a stable and bipartisan policy and investment environment.

If people are really concerned about renewable energy then they should be encouraging an agreement across political parties so as to guarantee a moderate amount of future investment, while reducing the cost burden on consumers.

The fact remains that the RET is an expensive way of reducing Australia’s greenhouse gas emissions.

According to the government’s own modelling by ACIL Allen Consulting, the cost of reducing emissions under the RET is estimated to be between $35 and $68 per tonne – which is significantly more expensive than the uncompetitively high $23 carbon tax.

Saving the furniture on a second-best policy tool to reduce emissions, such as the existing flawed design of the RET, will not create an environment for bipartisanship on climate change policy – it will just push up prices. Instead we are better to have a well-designed market mechanism that reduces emissions on a least-cost basis that does not add to the oversupply in our electricity markets.

All sides of politics need to recognise the consequences of sticking with the existing RET, and seek out the middle ground on a form of a true 20 per cent RET that minimises the risk of higher costs being lumped on consumers.

Jennifer Westacott is chief executive of the Business Council of Australia.
Australian Financial Review

STT is very keen to see the evidence on which Jennifer bases her “wonderful” claim that wind power reduces CO2 emissions in the electricity sector. No doubt, WA Senator Chris Back would be keen to see it too (see our post here).

Jennifer gets 10/10 for identifying “that if the certificate price hits the level of what is called the penalty price, electricity consumers will be paying an effective $93 tax with no additional investment in renewable energy”. It’s a point STT has made once or twice, but has been lost on our political betters, business leaders and commentators, until now (see above and our posts here and here and here).

Jennifer’s figure of $93 for RECs is based on the shortfall charge of $65 per MWh. As the shortfall charge is not a deductible business expense (it is treated as a fine), the effective pre-tax penalty is therefore $92.86/REC ($65/(1-30%), assuming a 30% marginal tax rate.

However, Jennifer gets an “F” for her “third way” argument, which is a little like Goldilocks breaking into houses to look for porridge at just the right temperature.

Setting up a “true 20%” target begs the question: “20% of what?” With spiralling power prices driving minerals processors to the wall and manufacturers offshore, demand for power will continue to fall (see our posts here and here). The AEMO demand forecasts (on which the current target was set) have been woefully inaccurate, so far. So just when does Jennifer suggest we should lock-in this “true 20%” target? Now, say? Or in 2020, when our vision will be 20/20?

And just what does Jennifer propose as a solution to the “problem” of an oversupply of RECs? Government “intervention” in the REC market, perhaps?

To STT, Jennifer’s magical “third way” simply sounds like more of the “highly interventionist, anti-market approach” (which gave us the RET in the first place) of the kind that Jo Stalin loved and that the CEC now purports to loathe.

The LRET is simply unsustainable – even with magical “third way” approaches. Any policy that is unsustainable will fail under its own steam; or its creators will be forced to scrap it. It’s a matter of when; not if.

abbott, hockey, cormann

Good luck selling a “third way” to these Natural Born RET Killers.

About stopthesethings

We are a group of citizens concerned about the rapid spread of industrial wind power generation installations across Australia.

Comments

  1. Terry Conn says:

    Jennifer Westacott is just another apologist for the wind industry. The bottom line is simply that the RET legislation introduced by Turnbull was a ‘dog’ that under a Labor government morphed into being a ‘rampaging mongrel’ totally out of control that lives on because of weak people like MacFarlane and Hunt not having the ‘guts’ to kill it dead and save our nation. They prefer that their own children and grandchildren die a slow and painful economic death amongst the rotting detritus of 150 -200 metre high monuments to their intellectual and moral weakness. If these clowns could use their positions of power in our federal parliamentary system to ‘lead’ and ‘educate’ consumers about the truth of wind farms and solar power they wouldn’t have to connive and snivel to the noise from greedy rent seekers but would eventually earn respect and gratitude from the ‘citizens’ they are supposed to represent.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: