In brief: The Federal Government and Labor opposition yesterday announced that they had reached a long-awaited agreement to lower the Renewable Energy Target from 41,000GWh to 33,000GWh. Partner Grant Anderson (view CV) and Senior Associate Alex Purtill report.

BACKGROUND

The original RET Scheme

The Renewable Energy Target (RET) is a Commonwealth scheme, originally created in 2000, that is designed to increase the proportion of electricity generated in Australia from renewable sources. Under the scheme, electricity retailers are required to surrender certificates evidencing renewable-sourced electricity generation in order to meet the scheme's annual targets (a failure to surrender the required number of certificates exposes the retailer to a shortfall penalty). The funds paid by the retailers to acquire these certificates have traditionally underwritten investment in renewable energy generation. In 2009 (see Focus: Expanded renewable energy target scheme legislation passed) the scheme was significantly expanded to support the goal of 20 per cent of Australia's 2020 electricity generation coming from large-scale renewable energy generators (those generating in excess of 250MWhpa); at the same time, the scheme was extended through to 2030. Separate targets were also set for electricity generated from small-scale renewable sources such as roof-top PV panels. The following year, the 20 per cent target was converted into a gigawatt hours target of 41,000GWh based on forecast annual electricity demand in 2020 of 205,000GWh. The scheme is currently subject to biennial reviews.

Calls for Review of 2020 RET

Steady annual declines in electricity demand since 2010, surplus generating capacity and falling wholesale electricity prices led the Federal Government to appoint the Warburton committee to make recommendations as to options for the on-going operation of the RET (see Focus: The Warburton Report and Audio: Review of the Renewable Energy Target released). One of the options proposed by the committee was to reduce the RET to a 'true' 20 per cent, equating to 26,000GWh of renewable electricity in 2020. The prospect of a severe cut to the RET, and the protracted political stalemate that followed as a result of majority Senate opposition to such a cut, seriously undermined confidence in renewable energy investment (see Audio: RET Roundtable: Issues for project financing), with the result that there was an effective freeze on investment in new renewable electricity generation projects in Australia.

THE NEW DEAL

Yesterday's announcement of a compromise 2020 RET ends more than 15 months of uncertainty, and hopefully heralds a return to bipartisan support for the RET.

Under the terms of the deal between the Federal Government and the Labor opposition, the 2020 RET for large-scale generation will be reduced to 33,000GWh, almost at the mid-point between the original 41,000GWh target and a 'true' 20 per cent target of 26,000GWh.

In addition, electricity users in emissions-intensive trade-exposed (EITE) industries (that is, users such as aluminium smelters that are unable to pass on costs associated with the RET due to international competition for their output) will be exempted from the requirement to surrender certificates.

This deal was made possible when the Federal Government dropped its previous insistence on retaining biennial reviews of the RET. Instead, the Clean Energy Regulator will now be required to submit an annual statement to Parliament that charts progress towards achievement of the targets and provides an estimate of the impact that the RET has had on electricity prices during the year.

WHAT HAPPENS NEXT?

Legislation effecting amendments to the RET is expected to be tabled in Parliament before the winter recess starting on 25 June 2015. Although the amendments to the RET scheme are likely be tabled as a package, the Labor opposition is expected to move to break the amendments into parts, so that it can vote in favour of certain amendments (including the removal of biennial reviews, the reduction of the 2020 RET and the exemption for EITEs) and against other amendments, principally the government's recently announced proposal to recognise electricity sourced from burning native wood waste as renewable electricity capable of generating renewable energy certificate.