The introduction of the Carbon Pricing Mechanism has brought front and centre the issue of the continuing relevance of the Renewable Energy Target (RET) and the role it plays in promoting the development of renewable energy in Australia.  This week the Government's advisor, the Climate Change Authority (Authority), released its first issues paper in relation to its review of the RET.  The Authority's review provides an ideal opportunity to put to rest the uncertainty surrounding the RET and to provide investors and financiers with the necessary confidence for the long term investment required if the renewable energy industry in Australia is to continue to grow.  The outcome of the review will therefore be keenly monitored by all those in the industry.

Leading up to the release of the issues paper, a great deal of focus has been placed upon the scope of the review. Investors in renewable energy have generally been hoping for a narrow interpretation focusing on the administrative application of the RET. In contrast, others have been calling for the review to focussing on revising the RET from the current fixed annual GWh target to be a variable target representing 20% of Australia's actual energy needs in 2020. With the latest forecasts from AEMO showing a decline in forecast electricity demand, this approach would be likely to lead to a reduction in the total GWhs required to be generated by renewable energy projects to meet the RET.  In practice, a reduction in the number of GWhs required to meet the RET would apply downward pressure to the price of renewable energy certificates.

Scope of Review

The Authority has taken a broad interpretation of the scope of its review and determined that the review will cover:

  • the Large-scale RET, including the target trajectory, the target level and its relationship to the Clean Energy Finance Corporation (CEFC);
  • the structure of the Small-scale Renewable Energy Scheme, including how its annual target it set;
  • the liability framework, exemptions and shortfall charge of both the large-scale and small-scale schemes;
  • the eligibility framework for both schemes and the diversity of renewable energy;
  • the impact of the RET on the electricity market in terms of costs, prices and energy security; and
  • the frequency and scope of future review under the REE Act.

Key points for investors

Although the broad scope of the review may be seen by some to be a negative result, it provides the opportunity for the Authority to fix a number of issues with the RET and set a more detailed framework for future reviews to avoid the current uncertainties that are delaying investment decisions.  Particularly relevant for investors or financiers of large scale renewable energy projects the review will consider whether:

  1. the target should be revised to reflect changes to energy forecasts, or whether it should remain as a fixed gigawatt hour target, with the percentage as simply an outcome;
  2. the Large-scale RET should be increased for CEFC funded activities;
  3. the RET design be changes to promote great diversity of types of renewable energy projects and
  4. two years is the appropriate frequency for reviews of the RET.

There has been a lot of media attention given to the issue of whether the RET should be revised to reflect changes to energy forecasts.  Helpfully the issues paper refers to the 2003 Tambling Review which concluded that “By their nature, projections of electricity demand contain some degree of uncertainty …. This would adversely impact on market certainty. Risk is a key factor in investment decision making, so that any changes to RET that would reduce market certainty would also reduce the prospect of attracting the required financial backing for projects”. The need for certainty in relation to the RET has if anything increased, given the continued uncertainty surrounding the carbon price.

The issues paper highlights an interesting point in relation to the interaction between the funding available by the CEFC and the Large-scale RET. As projects funded by the CEFC would likely also generate LGCs, unless the Large-scale RET is increased so that any LGCs generated by CEFC funded projects are additional to the existing 41,000 GWh target, CEFC investment will most likely affect the mix of renewable generation rather than increase renewable generation beyond the current target. Of course determining how many certificated CEFC funded projects are likely to produce out to 2030 it likely to be difficult, although an increase would be welcomed by investors.

Because the RET was also designed to be technology neutral, it has also been criticised as over favouring wind investment and failing to encourage diversity. The Authority will consider whether additional or new multipliers, caps or banding should be applied to encourage particular types of renewable development. This could lead to a regime similar to the UK which has a “multiplier” system, whereby renewable energy generators receive a variable number of renewable certificates per MWh dependant on the relevant technology used. Technologies with higher costs benefit from greater support. This could be applied to assist in the development of large scale solar which has a higher cost base than wind and other emerging technologies.

Finally, the REE Act currently mandates that the RET should be reviewed by the Authority every two years. As the issues paper highlights, frequent reviews may create uncertainty, negatively affecting the investment climate.  Given the broad scope of the current review, the current review will also consider what future reviews should focus on.  This is an opportunity to limit and more clearly define the scope of future RET reviews.

If we are seeking to encourage investment in renewables it needs to be recognised that regulatory certainty is a key issue and this is an issue which the Authority itself has raised. The Authority chairman Bernie Fraser said in a statement “we are aware that many investment decisions hinge on the scheme’s design and the Authority will also carefully consider the impact of any possible changes”.

As to how this will play out in practice, we will have to wait until December until the final report is released. In the meantime, comments on the Issues Paper are due by 14 September and a further discussion paper will be issued in October.