Renewable Energy Target Review

07 Dec 2012Archived News Climate Change Matters

The Climate Change Authority is currently undertaking a review of the Commonwealth’s Renewable Energy Target Scheme (RET), and has released its discussion paper.  Recent changes to the overall energy markets, such as the introduction of a carbon tax and escalating energy costs, have placed an added focus on the RET.

Overall, it has become apparent that the Authority is very reluctant to pursue wholesale change to the Scheme. The Authority seems to be ‘weighted down’ by the need to maintain regulatory certainty. This scheme underwrites billions of dollars in long term investments, such as wind farms and any substantial change may jeopardise the value of these investments.

This article considers the emerging issues and their relevance to business, and the potential options available to minimise costs.

Context, the RET and the potential for change

The RET was introduced under the Howard Government back in 2000.  Since its inception it has undergone a number of changes.  The principal policy objective of the Scheme is to promote demand for renewable energy generation.  It does this by requiring liable parties under the Scheme (electricity retailers) to surrender a predefined number of renewable energy certificates, to meet a legislated renewable energy target.  Ultimately, the value of these certificates provides the necessary subsidy to renewable energy developers to enable them to compete with traditional lower cost coal baseload generation.

The RET operates as two schemes – the Large-scale Renewable Energy Target (LRET) and the Small-scale Renewable Energy Scheme (SRES).  Both schemes aim to promote different classes of renewable generation.  The LRET is designed to develop high capacity plant, such as wind farms, while SRES is targeted to support the roll out of smaller generation units, such as domestic PV installation.

The target is to derive 20% of Australia’s energy consumption from eligible renewable energy sources, by 2020.

The Panel’s recommendations on some of the more relevant issues likely to impact business

The Large-scale Renewable Energy Target (LRET) to remain a fixed target rather than a percentage of energy consumption

This is a key element of the RET.  The RET has always sought to set a target for renewable energy as a percentage of energy consumption.  To provide certainty to the industry, the legislation fixes these targets (in GWh rather than a flat percentage) out to 2020.  With the reduction in projected energy consumption, the divergence in these two parameters has recently become apparent and the 20% target has grown.  Based upon projections it is more likely to be closer to 25%  of the smaller usage.

The conclusion is, “The preliminary view of the Authority is that the existing large-scale renewable target of 41 000 GWh and interim targets should be maintained in their current form.” 

The authority is willing to impose higher compliance costs in order to preserve investor confidence.  This highlights the difficulty of some of these long-term policy initiatives that are created out of regulations – they lose an element of ‘adaptability’ in their response to changes to the dynamics of the market in which they operate.   

The future of the Small-scale Renewable Energy Scheme (SRES)

It is this component of the Scheme that has perhaps attracted the most criticism.  In recent times the targets under this scheme have risen substantially.  For example, the estimated target for 2013 has recently been revised upwards from 7.94% to18.76 %. 

A combination of factors have contributed to this growth, which is mainly due to the take-up of domestic PV.  In the past, these have included generous state feed-in-tariffs, falling PV installation costs and the application of a ‘multiplier’ under the SRES – where multiple certificates accrue to the installer.  Aside from the falling PV installation costs, the other incentives are being reduced.  This has lead to the conclusion that the costs under the SRES have peaked.  As a further measure to limit cost spikes, the Authority is recommending the option of discounting the multiplier to under one, as a future policy lever. 

As an interim measure, a recent announcement highlighting the pressure to ‘rein in’ the growth of PV installation, outside of this review, has seen the reduction of the existing multiplier, to one. The implementation of this measure will be bought forward six months from its original date to 1 January 2013.

Large electricity consumers should be able to opt in to assume direct liability for Renewable Energy Target obligations

This is potentially a valuable proposition for large users.  It will allow energy users, who meet the threshold tests (yet to be developed) to settle their RET obligations directly with the regulator, that is, to purchase and surrender their own certificates. 

The present architecture of the scheme is that retailers incur the liability to meet the target and pass-through their costs.  By opening the scheme up to more direct participants, rather than solely to retailers, it is believed more liquidity will be added to the market possibly leading to lower compliance costs. 

More relevantly, it is envisaged that large users will be able to source their RECs at a lower cost.  The proposal still requires extensive development work, understanding which entities will qualify, administrative processes to assign the RET liability away from retailers and processes for the surrender of units by the opted-in entity.

The Authority intends to consult further with participants on a workable model for opt-in arrangements.

Emissions intensive trade exposed businesses (EITE)

Under the RET, businesses deemed to be engaged in EITE activities may secure partial exemptions.   An EITE’s electricity retailer, which receives the exemptions, will use them to reduce the liability for the EITE organisation.  A concern is that this process can create a risk: an EITE organisation may receive a value lower than the amount of the compliance costs that are passed through to them by their retailer. To mitigate this risk the Authority is seeking to make the exemption certificates tradeable and available to any liable entity. 

Presently, the costs of these EITE exemptions are borne by all other non-EITE electricity consumers.  This has attracted some criticism leading to a recommendation that the level of the emissions-intensive trade-exposed exemption be considered by the Productivity Commission as part of a broader review it will be undertaking in 2014-15 on the carbon pricing mechanism, “Jobs and Competitiveness Program”.

What could these preliminary recommendations mean for your business?

The final report will be presented to the Minister towards the end of December 2012, and then tabled in Parliament - so these preliminary findings of the Panel are not certain.

However, it is apparent that the costs of this scheme are unlikely to change from an extensive overhaul of the policy settings.  Business may need to examine ways of minimising the impact of these costs.  The targets under this Scheme rise until 2020.  One option may be to take a more active role in the purchasing of certificates, rather than relying on the retailers to simply pass through their costs, as proposed in the “opt-in” proposal.  In fact, the Paper makes the following observation,

“In some circumstances, electricity suppliers (retailers) may have a reduced incentive to seek out opportunities for least-cost compliance with RET obligations as they are able to pass-through RET costs to consumers.”  

Further, the LRET, as it now stands, creates an annual obligation: liable parties have at least a year to manage and prepare for compliance.  LRET certificates can be banked, where a traded market exists, offering reasonable liquidity.  All this lends itself to a potential for large users to directly participate in sourcing their own RET certificates.  Development of the opt-in model outlined in the Review paper will facilitate such a proposal. 

Businesses currently receiving partial exemptions because they are deemed to be in a trade-exposed emission-intensive industry should be monitoring potential changes to this aspect of the Scheme.  They need to understand any changes affecting the fungibility (ability to exchange) of the exemption certificates, and possible changes to the level of Commonwealth support.  

Energetics is able to offer expert advice on both the impact of these changes on your business and more importantly identify opportunities that may arise from responding to changes to the RET. 

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