With fear, loathing and recriminations playing out in Canberra about South Australia’s electricity debacle and the skyrocketing power prices mass blackouts and routine load shedding its obsession with wind power has delivered, Sabine Schnittger and Brian Fisher of BAEconomics have thrown the spotlight back on the Federal government’s family, job, growth and business killer: the Large-Scale Renewable Energy Target.
As STT has repeatedly pointed out, the LRET operates as a $3 billion a year tax on all Australian electricity consumers, designed to be funnelled to wind power outfits as a subsidy: the largest single industry subsidy scheme ever in the history of the Commonwealth.
We’ll start with this wrap up from The Australian.
Bill to prop up green power hits $3 billion a year
6 February 2017
The true cost of subsidising renewable energy generation is estimated to have almost doubled since 2011.
Taxpayer subsidies to meet state and federal renewable energy targets have reached $3 billion a year and include spiralling hidden subsidies paid for by business and household electricity customers which go unreported in government balance sheets.
The true cost of subsidising renewable energy generation is estimated to have almost doubled since 2011 and is forecast to continue rising as Labor states set even more ambitious targets.
The first study to investigate the complex range of renewable energy subsidies across the country has found that at least $2.95bn was spent by the state, territory and federal governments last financial year, primarily on wind farms and the cost hangover of excessive and now largely obsolete solar roof top schemes.
At least 75 per cent of all subsidies was being collected from electricity consumers in the form of higher prices passed on by energy retailers due to the requirement on generators to source a mandated percentage of wholesale power from renewables. This, the report said, meant much of the subsidies remained hidden as they did not appear in government budgets or accounts, with the remainder being borne directly by the taxpayer.
With parliament due to return tomorrow for the first sitting week of the year, the findings of the report are likely to sharpen the Turnbull government’s attacks on Labor leader Bill Shorten’s policy of a 50 per cent renewable energy target, with the report warning that such targets would require ever increasing subsidies.
The report from BAEconomics was commissioned by the Minerals Council of Australia and conducted by Brian Fisher, a former executive director of the Australian Bureau of Agriculture and Resource Economics under the Hawke, Keating and Howard governments and adviser to the UN’s Intergovernmental Panel on Climate Change. The report warns that state government feed-in tariff schemes to subsidise roof top solar are still costing other electricity consumers up to $1bn a year and would continue for years to come despite most being closed to new entrants due to their spiralling costs.
While the report confirms that the Coalition’s own policy of a 23.5 per cent target by 2020 will also push up the price of subsidies, and therefore power prices, it will strengthen the government’s case to fund the construction of clean coal-fired generation — estimated to be about the same cost as the $3bn paid annually to prop up renewable generation — through mechanisms such as the Clean Energy Finance Corporation or public-private partnerships.
The report said that with the spot price for large-scale generation certificates likely to remain high, it was inevitable that electricity prices would have to rise significantly to meet the higher targets being pursued by mainly Labor state governments.
“The renewable energy target, with its large-scale and small-scale components, is by far the costliest subsidy scheme,” the report says. “In aggregate, Australian electricity customers paid more than $2.1bn to subsidise large-scale power station developers and small customers with rooftop solar installations. Looking forward, and given that the RET will progressively increase until 2020 and given high prices of renewable generation credits, these subsidies are likely to increase.”
Commonwealth subsidies for large-scale renewable generators, predominantly wind farms, amounted to $1.42bn during the 2015-16 financial year.
Federal grants and subsidies for rooftop solar panels totalled $726 million while the state government feed-in tariff schemes for rooftop solar cost $707m for the same period. These subsidies had direct benefits for consumers who took up the schemes before they were closed but the burden would continue, the report claimed, for the majority of electricity consumers though the higher prices for the indirect subsidies.
Direct funding for renewable energy projects through programs such as ARENA also totalled almost $100m. The total figure did not include that spent by the Clean Energy Finance Corporation.
Energy Minister Josh Frydenberg yesterday said the Coalition had been upfront about the cost to its 23.5 per cent target, which would add $60 a year to the average household bill, but the opposition had so far refused to reveal the cost of its aspirational target.
“The battlelines have been drawn. Labor with its 50 per cent RET, forced closure of coal plants, 45 per cent emissions reduction target and an emissions intensity scheme will smash household budgets, send investment offshore, destroy jobs and undermine energy security. All in the name of ideology,” Mr Frydenberg told The Australian.
“In contrast, the Coalition has a technology-neutral approach where lower emissions coal and gas together with new developments in storage will play a big role for years to come.”
Opposition environment spokesman Mark Butler denied Mr Frydenberg’s claims that Labor was now seeking to backtrack on its 50 per cent target, claiming it would remain opposition policy.
“If we were elected last year we would have put in place a process with business and with the electricity industry about the best possible design of a mechanism to get to 50 per cent,” he said. “I’ve got an open mind about that, the Energy Market Commission and the Climate Change Authority tell us the best way to do that is through an emissions intensity scheme which is also part of Labor’s policy. Other groups have different views about the best policy mechanism.”
The report blames the legacy feed-in tariff schemes introduced by state governments to subsidise household rooftop solar for a large part of the burden.
“(Feed-in tariff) schemes introduced by state and territory governments some years ago also represent a major cost to jurisdictional electricity customers who paid more than $700m in subsidies to the (then) participants of these schemes,” it says. “A number of these schemes will continue to subsidise participating customers for many years to come. The amount of these subsidies is not transparent. Almost three quarters of aggregate subsidies originate from government mandates that are paid for by electricity customers and collected by third parties. The key implication of how the LRET and the SRES are designed is that while the subsidies paid through these schemes originate from a government mandate, they are generally collected from electricity consumers by third parties (electricity retailers).
“These subsidies therefore do not appear in government accounts and their magnitude is not transparent.”
The LRET is deliberately opaque: the legislation was put together by the criminals, shysters and chancers that ran Babcock & Brown (these days known as ‘Infigen’), which was a ‘plug-and-play’ policy based on that used by Enron to rort California’s power market in the late 90s and early 2000s (see our post here).
Had the proponents been upfront with the Australian public and just told them that they were writing themselves a blank cheque which would make the hundreds of millions of dollars in subsidies thrown at the motor manufacturing industry look like veritable peanuts, they would have had a much harder ‘sell’.
No, much easier to throw an invisibility cloak over the greatest wealth transfer in Australian history and then hope that nobody would pull the covers back.
Which is what BAEconomics have just managed to do.
Before we get to their report, we cannot leave yet another Josh Frydenberg furphy go without comment. Josh gushes about Coalition policy when he claims that:
“In contrast, the Coalition has a technology-neutral approach where lower emissions coal and gas together with new developments in storage will play a big role for years to come.”
As the Minister for Energy and Environment, Josh might take the time and trouble to read the definitions in the legislation he is waffling on about. Section 17 of the Renewable Energy (Electricity) Act 2001 is hardly ‘technology-neutral’:
What is an eligible renewable energy source?
(1) The following energy sources are eligible renewable energy sources: (a) hydro; (b) wave; (c) tide; (d) ocean; (e) wind; (f) solar; (g) geothermal-aquifer; (h) hot dry rock; (i) energy crops; (j) wood waste; (k) agricultural waste; (l) waste from processing of agricultural products; (m) food waste; (n) food processing waste; (o) bagasse; (p) black liquor; (q) biomass-based components of municipal solid waste; (r) landfill gas; (s) sewage gas and biomass-based components of sewage; (t) any other energy source prescribed by the regulations.
(2) Despite subsection (1), the following energy sources are not eligible renewable energy sources: (a) fossil fuels; (b) materials or waste products derived from fossil fuels.
Given the guff that constantly pours out of Josh, we can safely assume that he would have serious trouble deciphering the legal mumbo-jumbo above.
So, we will save him the time and trouble: coal and gas (unless it burps out of a swamp or is scavenged from a dump or sewer) is specifically excluded as an eligible renewable energy source.
Oh, and Josh, you won’t find any mention of nuclear power, either. Which seems a little odd, given that it is the only stand-alone base-load generation source which does not emit CO2 emissions during operation?
That list was put together by the wind industry in cahoots with the solar industry, with sops to sugarcane growers in Queensland and northern New South Wales (hence the inclusion of ‘bagasse’) and the forestry industry (hence the inclusion of ‘wood waste’).
As we have said before, STT has a hard time working out whether Josh Frydenberg is simply thick, obtuse or is knee deep in the greatest rort of all time?
Now let’s turn to the BAEconomics report for a welcome return to facts, logic and reason – the thrust of the report as it relates to the LRET and SRES is as follows.
Primer on renewable energy subsidies in Australia
Sabine Schnittger and Brian S. Fisher
This paper provides an overview of the range of subsidies for renewable electricity that were applied in Australia in 2015-16. The subsidies identified here are financial transfers – from electricity customers or taxpayers to producers of renewable electricity – and are the result of government policies. The amount of these subsidies is not transparent. Almost three quarters of aggregate subsidies originate from government mandates that are paid for by electricity customers and collected by third parties. These subsidies therefore do not appear in government accounts, and can only be approximated.
Table A shows a ‘best estimate’ of subsidies for renewable electricity in 2015-16, who benefitted from these subsidies and who paid them:
In aggregate, the subsidies paid to producers of renewable electricity amounted to almost $3 billion in 2015-16. Given that we have not attempted to provide a comprehensive inventory, the true number is likely to be higher.
The Renewable Energy Target (RET) with its large-scale and small-scale components is by far the costliest subsidy scheme. In aggregate, Australian electricity customers paid more than $2.1 billion to subsidise large-scale power station developers and small customers with rooftop solar installations. Looking forward, and given that the RET will progressively increase until 2020 and given high prices of renewable generation credits, these subsidies are likely to increase.
The legacy feed-in-tariff (FiT) schemes introduced by state and territory governments some years ago also represent a major cost to jurisdictional electricity customers who paid more than $700 million in subsidies to the (then) participants of these schemes. A number of these schemes will continue to subsidise participating customers for many years to come.
While the corresponding subsidies are currently relatively modest, the ACT, Queensland and Victorian governments have each committed to introducing a similar renewable energy mandate as the RET, whereby a specified share of electricity consumed in a jurisdiction must come from renewable energy sources. As was the case for the FiT schemes, jurisdictional governments are then subsidising new large-scale renewable generation by committing to long-term electricity purchasing agreements. Given the high cost of generating electricity from renewable sources, electricity customers in these jurisdictions will bear a significant subsidy burden for many years to come.
Renewable energy projects are finally subsidised directly by the Australian Government and by state and territory governments and therefore taxpayers. The Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC) offer direct grants and concessionary financing, respectively, including large-scale renewable projects receiving funding by the jurisdictions. In the case of the CEFC, the amount of subsidies cannot be identified.
2 Renewable energy mandates
Renewable energy mandates such as the RET require that a share of wholesale electricity be generated from renewable energy sources, such as wind or solar. Electricity generated from renewable sources is generally more costly than electricity generated from ‘conventional’ sources, and is generally not commercially viable. All renewable energy mandates therefore establish subsidy mechanisms that provide payments to the owners of the renewable generation capacity. The sums involved are generally not transparent and must be compiled or estimated from various sources.
2.1 Renewable energy target
The RET is by far the largest and the most costly renewable energy subsidy scheme created in Australia to date. In its current form, the RET has two components:
the Large-scale Renewable Energy Target (the LRET), which requires increasing annual amounts of electricity to be produced from large-scale renewable generation sources, up to the target of 33,000 gigawatt hours (GWh) by 2020; and
the Small-scale Renewable Energy Scheme (the SRES), which supports the installation of small-scale scale technologies, such as rooftop solar systems, by small customers.
These two components of the RET operate by placing a requirement on large customers and retailers (on behalf of small customers) that a percentage of the electricity sold and consumed in any given year must come from renewable energy sources. The subsidies paid to the owners of renewable power stations and customers with small-scale installations are recovered from electricity consumers in the form of a surcharge on electricity prices.
2.1.1 LRET and SRES
The LRET mandates increasing annual fixed GWh targets of electricity that must be generated from large-scale renewable resources. In 2016, the LRET was set at 21,431 GWh. The target will rise to 33,000 GWh by 2020. The responsible regulator – the Clean Energy Regulator (CER) – estimates an annual ‘renewable power percentage’ (RPP) that equates to the share of electricity consumption across Australia that must come from large-scale renewable sources.
In 2016, the RPP (corresponding to the LRET of 21,431 GWh) was set at 12.75 per cent. Electricity retailers (and large customers) must then ensure that 12.75 per cent of electricity sold to customers comes from renewable sources. Retailers and large customers are able to meet their renewable energy obligation by purchasing ‘large-scale generation certificates’ (LGCs) from renewable electricity generators, and surrendering these to CER. One LGC corresponds to one megawatthour (MWh) of renewable electricity. In this way, large-scale renewable generators receive a subsidy for each MWh of electricity they generate.
The SRES functions along the same lines as the LRET, but unlike the LRET, the SRES is not capped. The SRES target is instead adjusted each year to approximate the number of smallscale renewable electricity installations that are expected to be put in place by households. CER accordingly determines the small-scale technology percentage (STP), set at 9.68 per cent in 2016. Electricity retailers and large customers are then required to purchase a corresponding number of small-scale technology certificates’ (STCs), and surrendering these to CER.
Households and small businesses with renewable installations receive a corresponding subsidy for each MWh of electricity they are deemed to generate. This subsidy is also recovered from electricity customers as a whole via higher electricity prices.
2.1.2 Subsidy costs of the RET
The key implication of how the LRET and the SRES are designed is that while the subsidies paid through these schemes originate from a government mandate, they are generally collected from electricity consumers by third parties (electricity retailers). These subsidies therefore do not appear in government accounts and their magnitude is not transparent.
Estimates of total subsidies must instead be inferred from LGC and STC prices published by proprietary trading platforms and the limited information provided by CER. In the 2016 calendar year, for instance:
LGCs traded below $75/MWh for a short time, rose above $80/MWh from April onwards, and traded between $85/MWh and $90/MWh from July until the end of the year. Assuming an average LGC price of $85/MWh over 2016, and given that retailers would need to surrender 21.43 million LGCs to ensure that 21,431 GWh of electricity would be generated from large-scale renewable energy sources, the LRET obligation would imply direct subsidies to the large-scale renewable generation sector of more than $1.8 billion in 2016.
STC prices traded close to $40/MWh throughout the year. Given that almost 17 million STCs were required to meet the SRES target, the direct subsidies paid to households amounted to almost $670 million in 2016.
Figure 2-1. Estimated subsidies paid under the LRET and SRES components of the RET
Notes: Estimates have been derived by multiplying the annual MWh obligation under the LRET and SRES with estimates of average (weighted-average for some years) LGC and STC spot prices.
Source: See Appendix A.
Figure 2-1 shows the estimated subsidies paid to developers of renewable power stations and households under the LRET and SRES components of the RET since 2011. These estimates are based on average LGC spot price outcomes in these years, including weighted-average spot prices reported by CER for some years. It is possible that some retailers would have locked in lower LGC prices by entering into earlier power purchasing agreements with renewable generators and then passed these savings on to customers, in which case the LRET subsidy burden may be lower in some years. However, in the absence of published information about the overall annual subsidy cost of the LRET and the SRES, it is not possible to derive more precise estimates.
In the future, the expectation is that the amount of annual subsidies paid under the LRET is projected to increase. In part, this is a reflection of the increase in the annual target, from around 26,000 GWh in 2017 to 33,000 GWh in 2020. Many commentators are also expecting LGC spot prices to remain at high levels for the foreseeable future, given a reported shortage of renewable energy investment (Energetics 2016; Bhavnagri 2016; Kumar 2016, EY 2016).
BAEconomics go on to deal with State based targets and FiTs, direct support from government ‘green’ slush funds controlled by ARENA and the CEFC, which together have left Australians reeling under rocketing power prices and South Australians with a grid on the very brink of total collapse. The report is available here: Primer on renewable energy subsidies in Australia
Despite Josh Frydenberg’s valiant attempts to save it, the LRET is doomed: BAEconomics have just given Australian power consumers $billions of very good reasons why it must go now!