Will we ever move on the Renewable Energy Target? Both sides of the debate will fight to the death — and there will only be one winner.
“Arm wrestle” doesn’t do justice to the struggle over the Renewable Energy Target, unless you picture an eye-popping, vein-bulging, gut-wrenching arm-wrestle with everyone shouting and both sides near to collapse.
There are tens of billions of dollars and perhaps hundreds of millions of tonnes of CO2 abatement at stake. Without a carbon price, Australia’s commitment to reduce greenhouse gas emission by 5% by then is getting harder and harder to keep, and the possibility of deeper cuts in line with increasing international effort is receding altogether.
On the one side is the upstart clean energy industry, which wants the estimated $15 billion of new investment that will — finally — come in a rush if the existing “20% reduction by 2020” RET is retained with certainty. Cheering them on are consumers, who, all the modelling shows, will get cheaper electricity from increasing penetration of wind and solar. When he attacks renewable energy for raising prices, as he did this week, the Prime Minister is being deliberately misleading.
On the other side, sadly, and cheered on by sections of the federal government, are our big three, overwhelmingly coal- and gas-fired, vertically integrated incumbents — Origin Energy, AGL, Energy Australia — whose business model is under threat from renewables, and which stand to make as much as $13 billion from the higher prices and diminished competition they would reap over the next decade if the RET were repealed.
Until last Wednesday, that repeal seemed a distinct possibility, only strengthened by the appointment of avowed climate sceptic Dick Warburton to review the RET. And maverick MP Clive Palmer’s big announcement alongside Al Gore — that he would save the RET until the next federal election, in 2016 - was not so much a win for the renewables industry as a massive comeback that brought both arms upright. We’re deadlocked again, as we have been for years.
We can’t build new coal-fired plants because banks won’t lend while uncertainty remains — and it will remain, no matter what the PM says or does — over climate policy. Gas is increasingly uncompetitive because we’ve decided to export massive amounts of coal seam gas from Queensland, doubling and trebling prices to international levels on the east coast.
We can’t build major new renewables until the future of the RET is resolved and a bank of surplus renewable energy certificates — legacy of the generous upfront incentives given to domestic solar, before the renewable energy scheme was split into large- and small-scale in 2010 — is used up.
As the graph below shows, we’re not there yet. The bars show how much renewable energy we’re generating from pre-existing renewable sources like Snowy-Hydro, existing renewables (large and small) and renewables under construction. The dotted line shows the surplus of certificates which has been falling since 2012, when the bars fell below the red line, representing the amount of renewable energy required under the RET, rising to 41000 gigawatt-hours by 2020. The renewable energy certificate surplus won’t be used up until 2018.
When that happens, the generators that are liable under the RET will either need to source extra renewable energy or pay a penalty. (That is not a foregone conclusion, by the way: generators may well choose to pay a penalty for a few years rather than underpin construction of new, long-life renewable energy capacity if uncertainty remains over the long-term policy framework.)
The most competitive source of new, large-scale renewable energy is wind. There are plenty of wind projects with planning approval, ready to go. They take two years to build. If they want to wait as long as possible, the generators could do nothing until 2016. Coincidentally, that is an election year.
If there were lasting certainty about the RET, the rollout of new wind would start right away. Origin calculates perhaps 2600 new, 3-megawatt wind turbines with a combined nameplate capacity of 8000MW would need to be built before 2020. The benefits would be huge: lower electricity prices by $56 a year by the next day, according to consultants ACIL Allen; investment of $15 billion; 18,400 jobs; cumulative abatement of up to 102 million tonnes of CO2 (which is a very big chunk of the 370 million tonnes we need to cut to meet our national emissions reduction target).
The bigger problem? What renewables and consumers win, the incumbent generators lose. As is now widely recognised, electricity demand is falling, for all the reasons brilliantly exposed by Jess Hill for ABC Radio National’s Background Briefing program. Emissions reduction aside, there is no need for new generation capacity. The RET was set when electricity demand was expected to hit 300,000 GWh. Forecasts are now down to 280,000GWh and lower. If we deliver all that new wind capacity into a flat market, something will have to give.
Coal-fired power stations — especially, counter-intuitively, black coal — are already closing, with Energy Australia’s Wallerawang only the latest to be mothballed. (and there is speculation about the fate of the ageing Liddell power plant AGL has just been approved to buy as part of Macquarie Generation). The Australian Energy Market Operator forecasts that keeping the RET is “likely to lead to the early retirement or mothballing of more existing generation plant than would otherwise be the case”. What plants will go? In its submission to the RET review, The Climate Institute points out the dilemma of the first-mover disadvantage and calls for an orderly exit mechanism: “a number of ageing, high-polluting electricity assets are no longer needed in the market, and their continued presence impairs the profitability of every other asset”.
Respected consultant Hugh Bannister of Intelligent Energy Systems has modelled the winners and losers from repeal of the RET over the next decade. The results (pictured in the graph below) are crystal clear: the interests of renewable energy providers and consumers are directly opposed to the interests of the incumbent thermal (coal- and gas-fired) generators. Adding up the figures over the decade, repeal of the RET would cost electricity users an extra $554 million in higher electricity bills (short-term gains are eroded longer term), and renewable energy providers miss out on sales worth $7 billion. On the other hand, thermal generators stand to make $13 billion, as there is more reliance on expensive gas and, longer term, a small amount of new gas plant is built, with the rest of us bearing the extra abatement cost. Climate Spectator has estimated the total windfall could be as much as $30 billion.
Complicating this easy picture, the incumbent thermal generators have major investments in renewable energy, and if forced to meet the RET will have the whip-hand when it comes to deciding which projects get up, determining whose power they will buy. Still Origin Energy, AGL and Energy Australia are overwhelmingly motivated by a rational desire to maximise returns on the bulk of their assets, which is in coal and gas, and want the RET reduced.
So in this market, in this decade, it boils down to this: incumbent generators v renewables. There can only be one winner. Both sides are shaking.