Chapter 4
The renewable energy target as a complement to emissions trading
The RET and an ETS
4.1
It is commonly argued that an effective emissions trading scheme will
provide emissions mitigation at lower cost than a RET with a binding target. If
the RET is non-binding, then it just results in wasted administrative and
compliance costs:
...reductions in emissions of greenhouse gases should be
achieved at the lowest possible cost. Ai Group therefore supports a broad-based
market approach in the form of a well-designed ETS to drive lowest-cost
emissions abatement across the whole economy. If the proposed CPRS is passed,
with appropriate amendments to assist affected industries during the transition,
there will be no need for the RET at all.[1]
If you were comfortable with all of the parameters of an ETS
and you thought that the targets were right and other dimensions of the scheme
were right, I do not think you could make a case for the renewable energy
target. It would be redundant. Any case for the renewable energy target depends
on your not thinking that the ETS is defined in a way that will do the job. You
do not think the targets are ambitious enough or you think something else is
wrong with it...Is the renewable energy scheme an economically efficient way of
reducing emissions? No, the emissions trading scheme is more efficient.[2]
An MRET operating in conjunction with an ETS would not
encourage any additional abatement, but still impose additional administration
and monitoring costs. To the extent that the MRET is binding (which is its
purpose) it would constrain how emission reductions are achieved — electricity
prices would be higher than otherwise and market coordination about the
appropriate time to introduce low-emissions energy technologies would be
overridden. If it was non-binding, it would simply increase administrative, compliance
and monitoring costs. Moreover, it would also help to foster a perception that governments
are amenable to interfering with the least cost abatement objective of the ETS.
This could encourage other potential beneficiaries to seek special programs
that neither increase abatement nor reduce its cost.[3]
4.2
The bill amends the existing act so that instead of aiming 'to reduce
emissions of greenhouse gases', the goal is now 'to reduce emissions of
greenhouse gases in the electricity sector'. This may be an acknowledgement
that under the CPRS it will be the targets set in the CPRS that determine total
emissions and reducing them in the electricity sector 'frees up' permits for
other sectors to increase their emissions.
4.3
One submitter wanted this interaction made more explicit:
The Committee should recommend that this Bill mandate full
disclosure in RECs transactions such that householders are properly advised
that when they sign across RECs or Solar Credits they are displacing other
renewables already required by law, achieving zero additional renewable energy
and zero reduced emissions for Australia.[4]
4.4
Whether the RET will be binding will depend on how strict is the target
under the CPRS. Treasury told the Committee that if the CPRS target for 2020
emissions is a five per cent reduction from 2000 levels, then renewable energy
accounts for only about 10 per cent of total electricity sources in 2020.[5]
Under this modest CPRS, the RET doubles the usage of renewable energy.
4.5
With a more ambitious target of a 25 per cent reduction in emissions, it
is projected that the CPRS would lead to almost 25 per cent of Australian
electricity generation coming from renewable energy in 2020.[6]
This would exceed the proportion set by the RET, so in this sense the RET might
be regarded as redundant.
4.6
Some witnesses did not believe the case had been made for any RET:
...the proposed expansion of the renewable energy target is
occurring without the evidence of market failure.[7]
4.7
The Clean Energy Council responded:
...we do not have a full carbon price globally which would make
these investments unequivocally beneficial... We are trying to discover what
these technologies can do and at what scale. We know that they can do a lot; it
is just a question of how much, and how much they will cost and how quickly and
how big they can deploy. You can wait for the market to do that but, without
signals, the market may take a generation to actually start answering those
questions. There is a time imperative in the current advice on climate science,[8]
The RET as an industry development measure
4.8
A RET may be justified as a complement to an emissions trading scheme if
there is an industry development objective. The Department of Climate Change
explained it as follows:
The expanded RET scheme is a key transitional measure
accompanying the proposed CPRS. Whereas the CPRS will help bring renewable
technologies into the market over time, the national RET scheme will accelerate
deployment of renewable energy technologies by providing a guaranteed market
for renewable energy. The RET will conclude in 2030, at which time the CPRS is
expected to be the primary driver of renewable energy deployment...As the carbon
price increases, you would not need a renewable energy target to make the
renewable energy cost competitive because the pure carbon price itself from the
CPRS makes it competitive. That is why the RET is explicitly a transitional
measure...[9]
4.9
This is how many witnesses and submitters see the RET:
The idea of a renewable energy target is an industry
development measure to drive and accelerate deployment and development of these
technologies ahead of any carbon price...[10]
...the purpose of a renewable energy target is...to provide for
industry development.[11]
...we view the RET as a transitionary measure which is one part
of a package of policies that will stimulate investment in renewable
technologies.[12]
While the objective of the CPRS is to bring down Australia’s
emissions, the purpose of the RET is to build the energy industries Australia
requires to deliver this sustainably.[13]
4.10
The Minister has explained the rationale for the RET in the following
terms:
The policy point of the renewable energy target is to bring
on investment into renewable technologies earlier than would otherwise have
been. It is the case that there are a number of technologies that have not yet
been commercially deployed. There are technologies which are already being
utilised. This is a substantial ramp-up in the target, in part to provide a
market incentive for the private sector to invest in renewable energies.[14]
4.11
The argument for industry development is that renewable energy is an
industry of the future and Australia is lagging behind. Greenpeace suggest:
There is not a single wind turbine anywhere in Europe that
was built as a result of their emissions trading scheme—not one. They were
built as a result of the renewable energy targets and feed-in tariffs and other
direct regulatory policies.[15]
4.12
Another perspective is that the RET seeks to accelerate the take-up of
renewable power rather than prop it up artificially indefinitely. Professor
Wills offers this comparison:
...the IT industry in the 1980s started without government
intervention. It started because there was a perceived demand for the
technology, and businesses paid at the very expensive end of the technology
curve in the eighties for IT equipment that over the last 25 years has become
very affordable and very mainstream. I have no doubt that the renewable energy
industry, if left alone, would do the same thing over the next 25 to 30 years.
But the challenge for us here, today, in 2009, is that we want technologies
that will reduce emissions today and not in 20 or 30 years time. So the problem
for us is that we actually have to pay the premium price for a service that
cannot really be delivered in any other way at this point—that is, emissions-free
energy.[16]
Encouraging diversity of renewable energies
4.13
A concern with the RET is that it may not encourage development of a
diverse range of renewable energies, but lead to a concentration on whichever
is viewed as currently the cheapest, probably wind:
The Bill needs to provide support for new and emerging
technologies which may be less competitive against the mature lowest-cost
offering today but which offer longer term potential in the market. This point
was made in the Stern Report and expressed as “While markets will tend to
deliver the least‑cost short-term option, it is possible they may ignore
technologies that could ultimately deliver huge cost savings in the long term”.
“Policy should be aimed at bringing a portfolio of low-emission technology options
to commercial viability.”[17]
...the value of the RECs to the business case of projects built
in the first few years of the scheme may result in projects offering an early
and extended return getting off the ground against projects ready for
development in the middle of the scheme with higher up front development costs
ultimately producing cheaper or, overall, a more cost effective energy over the
lifetime of the project.[18]
4.14
In particular, the geothermal industry is concerned that the RET will
encourage the more mature renewable energy industry, such as wind, and be
phased out before it can assist emerging renewable energies:
...the incentives offered under the scheme might not be
available by the time geothermal generation projects and other emerging
renewable energy technology projects were ready to come onstream... the RET
scheme will in fact defer the development of geothermal energy projects in
Australia, as the incentives it provides will encourage the development of the
existing technologies at a level that will effectively lock out geothermal
energy projects.[19]
4.15
This criticism may be overstated. The Department of Climate Change
pointed out:
...the modelling indicates a reasonable diversity of renewable
energy at 2020 including a substantial amount of geothermal.[20]
Banding
4.16
A desire to ensure diversity of renewable energy sources has led to some
calls for requiring minimum contributions from particular renewable sources,
sometimes referred to as 'banding', 'tranches' or 'carve-outs':
...amending the legislation to create specific carve-outs for
emerging technology...would essentially ensure that a sufficient proportion of
the RET would be reserved for emerging renewable technologies when they are
expected to be developed.[21]
4.17
Professor Andrew Blakers calls for a specific tranche of 15,000 GWh for
solar energy (photovoltaics and solar thermal energy) which he argues has the
most long‑run potential:
Solar energy will eventually dominate clean energy markets –
its immense advantages are clear. However, another decade will be required to
get the cost of solar energy down to the 12c/kWh mark where it will
successfully compete at large scale with wind.[22]
4.18
It has been pointed out that the scheme proposed in the United Kingdom
encourages a diversity of sources:
...the United Kingdom‘s banded scheme, which proposes awarding
the equivalent of a quarter of a Renewable Energy Certificate per megawatt hour
of electricity to established technologies such as landfill gas, one
Certificate for wind and two for an emerging technology like solar thermal.[23]
4.19
A variant of this approach has been suggested by the Australian
Geothermal Energy Association:
...it is quite a good proposal that merging technologies have
to generate 0.75 per cent of a megawatt hour to get a REC and that existing
technologies have to generate 1.25 megawatts to get their REC, and that way you
end up with basically the same cost across the scheme.[24]
4.20
Another approach to the same end is the use of 'boosters':
For instance a “Solar Booster” would provide additional value
above both the market energy cost and the REC market value for energy produced
by certified and contracted solar technology. A Booster would be a fixed,
designated payment per Megawatt-hour provided as an ‘after market’ payment. The
Government would have the control and ability to establish Boosters tailored to
the specific needs of a new emerging technology...[25]
4.21
These approaches have been rejected by many submitters, notably
including those involved with wind energy, as 'picking winners' rather than
relying on market forces:[26]
The carve outs have been used internationally in a number of
schemes, for instance in the UK, and they have not really worked very well.[27]
...we cannot support technology carve outs as proposed by some
organisations for emerging technologies. Our view is that the commercialisation
path for those technologies, geothermal, solar thermal etcetera should be
advanced through appropriate and targeted policy mechanisms so that in time
they can operate under a renewable energy target framework or indeed a CPRS in
the longer term.[28]
...introducing banding into the RET will reduce the efficient
operation of the market by bringing forward more expensive technologies, adding
to the overall cost of the measure; and risk constraining the development of
industries that are close to commercially viable.[29]
...there will be stakeholders who want to micro-manage the
energy market in an attempt to gain some advantage for the most fashionable and
exciting form of power generation, even though it might be many years away from
being ready for commercial-scale deployment. Their proposal...is a recipe for
endless government involvement in a market that performs best without it.[30]
Impact of banking
4.22
The banking of RECs (described in paragraph 2.9) may also hamper the
development of a range of technologies by encouraging overproduction early on
using the currently cheapest technology rather than technologies which may
become cheaper in later years:
...this banking distorts the market. It allows you to sit on
RECs that you have created and acquit them later...there is a huge incentive to
start doing that from 2010, when you get RECs, therefore, from your first
project, for 20 years of the scheme.[31]
Unlimited banking creates an incentive to stockpile Renewable
Energy Certificates by investing in wind power and more mature renewable energy
sources potentially at the expense of solar thermal.[32]
Feed-in tariffs
4.23
Another way of allowing differentiated tariffs for different
technologies is to have a gross feed-in tariff (FIT).
4.24
A 'feed-in tariff' refers to a premium rate paid for electricity fed
back into the electricity grid from a renewable electricity generation source.
The most commonly discussed source is a solar panel on the roof of a home which
may generate more power than is consumed within the home. However, FITs can
also be applied to large scale commercial projects. A net feed in
tariff, also known as export metering, pays the provider only for surplus
energy they produce; whereas a gross feed-in tariff pays for each kilowatt
hour produced by a grid connected system, whether it is consumed by the
producer or fed into the grid.
4.25
State governments currently have or have planned such tariffs (Table 4.1).
Table 4.1: Feed-in
tariff schemes (as at June 2009)
Source: Greg Buckman, Submission
21, p 12.
4.26
A number of witnesses and submissions called for a national gross
feed-in tariff.[33]
... BP Solar certainly has been advocating and lobbying hard
for the adoption of a gross feed in tariff across all of Australia’s jurisdictions
with the inclusion of the commercial and industrial sectors...Gross feed in
tariffs have now been adopted in more than 45 countries and over 18 states and
provinces around the world...Feed in tariffs have been proven as the cheapest and
the fastest way of deploying solar PV into the marketplace and we would
certainly want to see a gross national feed in tariff in place before the solar
credit scheme winds up by the year 2015.[34]
Finally, with almost 30 years of experience directly within
the Solar PV industry, RFI believe that the implementation of a Gross National
Feed-in Tariff (FIT) is the natural and required market stimulation model to
provide certainty, value and benefits to all parties within the renewable
energy sector. This is a proven and well known model internationally and one
which has been described in detail to government and proven to provide the
positive benefits of renewable energy over the short to medium term. The Gross
FIT has turned several European countries into world leaders in the field of
Renewable Energy and we believe the time has come for Australia to adopt this
initiative as a significant tool in the drive for greater adoption of renewable
energy in our country.[35]
A common factor amongst the world’s strongest renewable energy
markets is the use of “Feed-in Tariffs” for driving the uptake of renewable
energy.[36]
4.27
Some submissions want business to be able to participate:
In stark contrast to Australia, solar power is being
successfully promoted in many countries to business through gross feed-in
tariff mechanisms. Feed‑in tariffs in virtually every country are open to
businesses to participate and profit from investing in solar power production.[37]
4.28
The Clean Energy Council preferred a RET over a feed-in tariff using
arguments reminiscent of those for preferring an emissions trading scheme over
a carbon tax:
A feed-in tariff...sets the price and then the volume is set by
the market, whereas a renewable energy target sets the volume and then lets the
market set the price.[38]
4.29
The Department of Climate Change noted:
A Renewable Energy Target (RET) and feed-in tariff are
alternative policy mechanisms for promoting renewable energy uptake often
designed to meet similar objectives. A RET sets the quantity of renewable
energy and allows for a range of cost effective technologies to be deployed. A
RET does not specify the precise rate of support required for each technology.
In contrast, a feed in tariff provides a certain amount of support for
specified technologies which is set in advance for a future period of time.
Given the uncertainty and complexity in setting prices for each technology,
feed in tariffs could lead to more or less of certain technologies being
deployed if the price set does not accurately reflect the amount of support required
by that technology.[39]
4.30
Concerns have been expressed about equity aspects of feed-in tariffs
aimed at households:
It is deeply inequitable, because the people who can afford
it tend to be people with some reasonable amount of money. Here [in the ACT] it
is a gross tariff of 50c a kilowatt hour, which is pretty good. It is about
four times what we sell our retail tariff for normal energy. That cost, of
course, has to be borne by the whole of the community, including the poorer
people of the community who spend 15 per cent of their budget on energy as
against the better off people who spend five per cent of their budget on
energy. There is an equity issue there and, also, it is very expensive.[40]
4.31
There was also claims that it provides less incentive for innovation:
...if you are too generous with the feed-in tariff, you build
fat into the technology and the technology becomes lazy and does not strive to
continually improve its performance and, if you underset the rate of the
feed-in tariff, then you do not get any project development.[41]
4.32
One submitter suggested that only households buying 100 per cent green
power should be eligible to be paid a high price under a feed-in tariff.[42]
4.33
COAG decided in November 2008 not to implement a national feed-in
tariff.
Sunset clauses
4.34
Another means of encouraging diversity is to restrict the period for
which projects can earn RECs:
...sunset clauses so that projects can only earn renewable
energy certificates for a period of years. That will also help us address
issues of promising but still emerging renewable technologies such as hot rock,
which might be coming into play later than some of the early technologies.[43]
Other measures supporting diversity
of renewable energy
4.35
In the 2009-10 Budget, the Government announced the $4.5 billion Clean
Energy Initiative. This includes;
-
Australian Solar Institute to support research into solar
technologies ($0.1 billion);
-
Solar Flagships programme to create an additional 1,000 megawatts
of solar generation capacity ($1.5 billion);
-
Australian Centre for Renewable Energy to promote the
development, commercialisation and deployment of renewable technologies ($0.5
billion);
-
Renewables Australia to support technological research and
bringing it to market ($0.5 billion); and
-
National Solar Schools programme ($0.5 billion).[44]
4.36
Some of these programmes complement the RET to develop renewable
technologies that may not be viable in the short term but have long term
promise:
...the renewable energy target effectively deploys the lowest
cost renewable energy currently available at the time it is rolled out. The
government expenditure based programs are targeted at areas that would be
likely to be more expensive than the current ones picked up on the renewable
energy target, but you would expect there would be more novel or innovation
benefits from assisting those technologies so that you have a broader suite of
renewable energy technologies.[45]
Committee view
4.37
The Committee would like to see a range of renewable technologies develop.
Renewable Energy Targets have been adopted internationally to provide
transitional assistance to renewable energy technologies, where a purely market
based approach would not result in sufficient investment and take up in the
short term. However the committee is not attracted to the idea of 'banding',
which it regards as excessively prescriptive. It welcomes the support for
diverse renewable technologies contained in the programmes under the Clean
Energy Initiative.
4.38
The Committee understands the geothermal industry's concerns about the
impact of unlimited banking of RECs, but also sees the merit in terms of
flexibility of allowing for some banking.
Recommendation 3
4.39 The Committee recommends that the banking of renewable energy
certificates be assessed as a part of the 2014 review.
The Spanish experience
4.40
A paper on the Spanish experience by Dr Alvarez concludes that promoting
renewable energy is 'terribly economically counterproductive', and that:
...since 2000 Spain spent €571,138 to create each “green job”,
including subsidies of more than €1 million per wind industry job....2.2 jobs
destroyed for every “green job” created...Principally, the high cost of
electricity affects costs of production and employment levels in metallurgy,
non-metallic mining and food processing, beverage and tobacco industries.[46]
4.41
There seem to be quite a few important differences between the Spanish
scheme of subsidy payments to nominated renewable industries and the more
flexible RET in Australia. Alvarez points to some design flaws, such as
arbitrary limits on eligible plant size that increased costs and are not part
of the Australian scheme. He also refers to low interest rates sparking a
speculative boom in the economy as a whole, not just in the renewable energy
sector. Also as a member of the eurozone, Spain effectively has a fixed
exchange rate.
4.42
The study has a short-term focus, basing its conclusions on employment
outcomes in a period of global recession. It does not refer to the long-term
employment benefits of Spain having installed energy sources with low marginal
costs. Not is there any reference to the benefits of accelerating investment in
renewables to fight climate change effectively. The company he cites as having
been driven away from Spain by the higher energy prices, Acerinox, opened a new
plant in the US, which is of course now introducing its own measures which will
increase the relative price of power.
4.43
The Alvarez study has been critiqued within Spain by Portillo et al, of
the Reference Centre for Renewable Energies and Employment, who claim it
misrepresents the Spanish system, ignores relevant influences such as past
subsidies for fossil fuels, and omits the beneficial effect wind energy has had
on electricity prices.[47]
4.44
The Spanish Government is scathing about the study, describing it as:
...based on a simplistic, reductionist and short-term
view...[which] contradicts most of the previous studies carried out by different
researches...[48]
4.45
Alvarez's estimates of 'green jobs' created are much lower than other,
credible, estimates.[49]
4.46
The Department of Climate Change drew the Committee's attention to how
the Spanish Government:
...questions the economic methodology employed by the study,
and...the focus on short-term economic outcomes at the expense of the medium to
long-term impacts of lowering the carbon intensity of electricity production.[50]
4.47
The Department's own views are also critical:
From preliminary analysis of the Alvarez report by DCC, the
report uses a simplistic equation to estimate the amount of jobs that would
otherwise have been created if the ‘green job’ was not created. This is
measured through a simplified equation that compares the subsidy to renewables
against the average productivity of a worker.[51]
4.48
The Australian Conservation Foundation has also critiqued the article
and concluded:
The study relies on a flawed methodology, unsourced data and
use of secondary sources that are often not cited. The study is an advocacy
document, written in English, which was primarily directed at influencing the
US political debate.[52]
4.49
There are doubts about the objectivity of the author:
...he has affiliations with a number of climate sceptic
conservative organisations—including the Centre for the New Europe which has
accepted funding from Exxon Mobil—has spoken to the Heartland Institute on many
occasions, heads up a small Spanish free-trade think tank and is a climate
sceptic himself...[53]
4.50
The Institute of Public Affairs cites Alvarez' work, but then makes a
more extreme point than Alvarez himself. Dr Moran says that Spain's promotion
of renewable energy 'has contributed to an economic disaster' and was 'a
significant factor' in Spanish unemployment rising from around the OECD average
to the highest rate – 18 per cent.[54]
4.51
Mr Comley from the Department of Climate Change is sceptical about
drawing a link between use of renewable energy and high unemployment in Spain:
I would find it quite implausible that those sorts of
policies would have any sort of correlation of that type with unemployment. I
suspect in the Spanish case that the ending of a construction boom, associated
with a range of factors within Europe, is likely to be of greater significance.[55]
4.52
It has also been pointed out that the Spanish unemployment rate was 25
per cent before the renewable energy policy was introduced.[56]
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