Frydenberg’s Carbon Credit Capers: Coalition Signals the End for Australia’s Renewable Energy Target & Wind Power

Frydenberg measures his chances of dodging political disaster.

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A week is an awfully long time in politics and, when the subject is Australia’s calamitous energy policy, it’s a veritable aeon.

When Josh Frydenberg waltzed into the Energy and Environment Portfolio, STT tried to warn the ambitious colt from Kooyong that he had, in fact, just inherited a political poisoned chalice.

Last week, after Frydenberg’s disastrous effort to pitch a carbon credit trading scheme ran headlong into the Liberal’s Conservative wing, the young Minister was left looking like a bumbling dimwit. The press from both ends of the political spectrum went ballistic and the flummoxed Frydenberg jumped on a boat and headed for Antarctica, no doubt seeking a cooler climate than prevailed on talkback radio and in the mainstream press.

We’ll take a look first at an article from the AFR’s Editor, Jennifer Hewett and attempt to explain what Frydenberg was really out to achieve in a moment.

Round two in climate policy pugilism
Australian Financial Review
Jennifer Hewett
7 December 2016

Malcolm Turnbull is keen to insist there’s no change in Coalition policy on pricing carbon under his watch. Just a 2017 review of climate change policy – in line with long-standing, long-promised plans for just such a review.

“This is business as usual,” he said, arguing that it had been planned before he even became Prime Minister.

In other words, there’s nothing to see here, folks. Move along, move along.

The conservative wing of the Coalition won’t be so easily mollified.

Many regard any suggestion of carbon pricing or emissions trading or emissions intensity schemes as the return of the dreaded carbon tax in drag. They will always rush to condemn it for raising the price of electricity, reducing Australian competitiveness and accelerating the closures of Australian businesses.

Even the suggestion that variations may be considered as part of the climate change policy review is like throwing a lit match on to their always-simmering discontent, especially about Malcolm. Backbenchers such as Cory Bernardi can be relied on to make their complaints public.

So while Josh Frydenberg’s terms of reference for next year’s review may seem reasonable, if open-ended, they were always likely to generate a fiery party implosion that could be exploited by Labor. As, of course, it was.

Bill Shorten immediately referred to another battle in the Liberal Party’s civil war over climate change policy and derided the government for being in “meltdown”.

Even allowing for typical opposition hyperbole, there’s no doubt this remains a deeply divisive issue for the party. Turnbull knows this better than most, having lost his previous leadership as a result. But he also knows that he’s about to be tested again by his party and by policy reality.

The catch is there’s no way Australia can meet its Paris Accord commitment to reducing its emissions by 26 per cent to 28 per cent by 2030 under current policies. Yet the national energy debate in Australia is like a container ship navigating a stormy ocean with no route mapped to its destination. Nor is there any clarity on how it’s possible to negotiate the complex trade-offs in energy, environmental and economic policies.

Everyone loves to love more renewable energy, for example, until it is criticised as a threat to manufacturing jobs or electricity bills or energy security. Then the political conversation becomes much more stilted, particularly among Labor politicians. Just ask Daniel Andrews and Jay Weatherill about the impact of more renewables on energy security or jobs in their states or the costs to consumers.

One energy expert says the running joke in the industry is that there are three official goals for Australia’s energy policy – that it be cheap, reliable and de-carbonised. The problem is that it’s possible to achieve only two out of the three. It can be cheap and reliable, but not de-carbonised. Or reliable and de-carbonised but not cheap. Except that no one wants to speak this contradiction out loud.

Certainly relying so much on the renewable energy target – or the even higher renewable energy targets set by the Labor states – has no hope of matching those three goals. The RET is already struggling and failing to attract the necessary financing for investment to meet the official 2020 target of 23.5 per cent renewable energy – let alone whatever target may come after that.

That’s even though the current $86 spot price for renewable energy certificates is getting close to the penalty price imposed on retailers for not generating enough of them – $92.85.

Actually meeting Federal Labor’s attempted leapfrog of 50 per cent renewable energy by 2030 is even less credible as a practical or low cost policy alternative as opposed to a popular political commitment. Labor is also a lot less vocal about the costs to consumers of its proposed emissions trading scheme for electricity generators rather than the feel-good message of more renewables. It prefers to talk vaguely about sending price signals.

True, energy is in a constant state of technology revolution so there’s a lot of optimism about prospects for better battery storage capacity, for example. Most experts believe large-scale affordable battery storage is still a long way off before it can make a major contribution.

Yet the official timetable for reducing emissions is set. At the same time, stability of supply is suddenly back as a major issue after the blackouts in South Australia. But across the country, network infrastructure is degrading and older power stations are closing with no obvious viable replacements in sight.

That’s why Frydenberg wanted to insert as much flexibility as possible into the review – at the risk of alarming some of his colleagues.

So these terms include such notions looking at the “potential role of credible international units in meeting Australia’s emission targets” as well as the “opportunities and challenges of reducing emissions on a sector-by-sector basis”. This is all impenetrable industry jargon to most.

It still translates into asking the review to consider the possibility of carbon pricing in the form of emissions trading or emissions intensity schemes, in part to make use of international carbon credits. It also allows emissions from different industry sectors being treated differently rather than on an economy-wide basis.

Yet another report by Energy Networks Australia and the CSIRO this week suggests a “technology neutral approach” focused on reducing emissions at the least cost is the best approach. Rather than renewable energy targets, it says some form of emissions intensity scheme would be the most effective way of achieving that. But this will still cost.

Try selling all that in sound bites.
Australian Financial Review

Anyone involved in the energy sector, equipped with half a brain, knows that Australia cannot hope to meet the ultimate 2020 Large-Scale Renewable Energy Target of 33,000GWh, for reasons detailed here: REC Price Surge Signals Doom for Australia’s Renewable Target & its Wind Industry

In fact, total renewable energy output will fall short of the ultimate 2020 target by around 16,000 GWh, the result being that all Australian power consumers will be hit with the “shortfall charge”, an effective $93 per MWh penalty applied to all retail power bills, which between 2020 and 2031, when the LRET expires, will add more than $20 billion to already spiralling retail power bills.

The level of uncertainty surrounding the LRET means that only the crazy brave will even consider investing in wind power from here on. Which, in turn, means that there is no way that the cost of the penalty charge will be avoided.

Now, as if that were not politically toxic enough, any effort to add intermittent and chaotic wind power generation to the grid will simply destroy the ability of the grid to function at all. So much has already played out in South Australia, which enjoys routine load shedding and statewide blackouts whenever its 1,576 MW of wind power capacity takes an unscheduled break.

So, Frydenberg sits on the horns of a dilemma: satisfying the current LRET means watching Queensland, New South Wales and Victoria follow South Australia on a path that inevitably leads to grid instability and power supply and pricing chaos; not satisfying the current LRET leads to the imposition of an unjustifiable Federal tax on retail power bills that will cost power consumers more than $20 billion.

Either way, unless Frydenberg and the Coalition can extricate themselves very promptly, the status quo offers nothing but political punishment of the kind delivered by Donald Trump’s Deplorables. In this country, the key beneficiaries of the chaos are likely to be candidates running for Pauline Hanson’s One Nation party, who will take a swag of seats in the next Queensland state election due in March next year, just for starters.

Which brings us to what was really behind Frydenberg’s slip about a carbon credit trading scheme.

Now, at the risk of upsetting true free marketeers (and STT is proudly one of those), true to its name STT has sound reasons for supporting the proposed carbon credit plan (as we detail below). Of course, in a world not run by politicians terrified of the next trend on Twitter, there would be no such thing as “climate policy”, in general or “carbon” trading schemes, in particular. Also for the record, when they refer to “carbon” we take them to mean CO2 gas, an odourless, colourless, naturally occurring beneficial trace gas essential to life on earth. Anyway, this is the logic behind the scheme, which we last reported on in August 2014.

While there are still plenty in the Coalition camp who think that the shortest route home is to simply scrap or cap the LRET, there are plenty of other ways of skinning the subsidy cat.

From our Canberra sources, what Frydenberg was out to do involved leaving the LRET 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, we are told was meant to go like this.

The Coalition already 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 plan being floated by Frydenberg last week, 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 would only be issued on audited proof that the applicant has, in fact, reduced or abated 1 tonne of CO2 emissions. That would 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.

However, generators running efficient Combined Cycle Gas Turbines would be eligible for CCUs, on the basis that, by comparison with ageing coal-fired plant, CCGTs emit around 50% less CO2 per MWh dispatched to the grid. Accordingly, gas-fired CCGTs would receive an effective subsidy in the form of CCUs for the CO2 abatement attributable to a switch from coal to gas; thereby giving an incentive to invest in new and more efficient gas-fired plant.

The auditing of CCU applications would 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 would 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 has already come into play, with the spot price for RECs at $87 fast approaching the expected top of $93 – that figure equates to the full cost of the (non-tax-deductible) shortfall charge.

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 would 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$8-12.

The price for CCUs is, therefore, expected to top out at around $12.

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 with CCUs likely to trade around $12, the wind industry would disappear in a heartbeat.

The plan to replace RECs with CCUs was put together by energy market economist, Danny Price back in 2014; in essence a plan to rework the LRET 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).

And, in substance, it was the same plan that Josh Frydenberg was hinting at last week. The political logic of it, no doubt, has fairly solid attraction to a government terrified of being branded “soft” on so-called “climate policy” by the rabid ‘green’-left; and equally terrified of recreating another South Australian power disaster in any other of the Australian states.

On the high plains of moral posturing and virtue signalling, the Coalition would have been able to have left the current LRET target in tact (at least at face value): allowing retailers to obtain CCUs at a fraction of the cost of RECs and to surrender much cheaper CCUs to avoid the $93 cost of the shortfall charge. On that basis, the Coalition could rightly claim that its carbon credit trading scheme would lead to an effective decrease in power prices over the medium term. Moreover, because there would be no market for RECs, there would be no reason to add any more intermittent wind power capacity to the grid, thereby avoiding catastrophic blackouts of the kind that are dished up on a routine basis in South Australia.

So, there was method in Frydenberg’s moment of madness. However, now that the PM has been forced to publicly pooh-pooh the plan, it is doubtful that it will ever see the light of day again. Which, in the result, means that, apart from capping or scrapping the LRET, there is almost no way the Coalition can avoid what is a looming political disaster. From here on, chaos reigns supreme. Welcome to your wind powered future!

Curses, foiled again …