The RET scheme was first introduced in Australia in 2001. It imposes legal liability to support electricity generated from renewable sources on retailers and large wholesale purchasers of electricity. These 'liable parties' are required to meet a share of the renewable energy target in proportion to their share of the national wholesale electricity market. Liable parties must prove that they have purchased the relevant proportion of renewable energy by surrendering certificates or paying the shortfall charge, which is a penalty for non-compliance.
The RET Review
The RET legislation contains a requirement for review of the scheme and enabling legislation every two years. In February 2014, the Coalition Government announced a review of the RET by an expert panel.
The terms of reference for the panel are to consider:
- the economic, environmental and social impacts of the RET scheme, in particular the impacts on electricity prices, energy markets, the renewable energy sector, the manufacturing sector and Australian households
- the extent to which the formal objects of the legislation establishing the RET are being met
- the interaction of the RET scheme with other Commonwealth and state/territory policies and regulations, including the Commonwealth Government's commitment to reduce business costs and cost of living pressures, cut red and green tape, and the Direct Action policies under development (i.e. the Emissions Reduction Fund)1.
The panel is due to provide its report to the Prime Minister, the Treasurer and the Ministers for Industry and the Environment by mid-2014. The panel has been receiving submissions and undertaking consultation meetings with stakeholders.
Issues raised regarding the RET review
Some of the issues that have been raised so far regarding the RET review are summarised below, some of which are in favour of retention of the RET, whereas others support a major reform of the RET.
- Impact of the RET on electricity prices
- The RET is expected to deliver more renewable energy than is required by the existing target by 2020. In other words, the Commonwealth Government anticipates that, by 2020, the 20 percent renewable energy target will be exceeded.
- This is because electricity demand has been declining for various reasons, including reductions in the manufacturing sector, energy efficiency initiatives and consumers responding to higher electricity prices.
- Consequently, the argument has been made that the fixed target is too high and results in unduly high electricity costs for consumers.
- The cost of electricity has risen 58 percent in the last four years.2 This is partly attributable to the RET because electricity retailers pass on the costs of renewable energy certificates, although the RET only represents 4 percent of a typical household electricity bill.3
- The review will take into account modelling of future electricity demand levels and growth rates to determine whether the RET targets should be adjusted. Initial modelling has shown that in the long term, household energy bills will be reduced by retaining the RET. However, between 2015-2020 prices will be higher.
- On the other hand, wholesale energy prices may be reduced by the scheme as it encourages new sources of energy to be supplied to the market. However, this does not necessarily translate into lower prices for end users.
- Impact on investor confidence
- Concern has also been expressed that uncertainty about changes to the RET will have a negative impact on investor confidence in the scheme, which could have a chilling effect on investment in renewable energy.
- There are indications that this uncertainty is already having such an effect. A report published by Bloomberg New Energy Finance shows that investment in large-scale renewable energy in Australia such as wind farms is at the lowest level since the first half of 2001.4 This is in contrast to worldwide trends which show an overall rise in clean energy investment.
- Were the RET to be abandoned, it has been argued that thousands of jobs in the renewable energy sector are at stake. Modelling also suggests that around $16 billion of investment in wind power and $2 billion investment in solar would be sacrificed.
- As returns on investment in large-scale projects accrue in the long term, investors may be reluctant to invest in such projects unless they are confident that government policy will remain consistent over time.
Main options available
There are numerous options open to the panel regarding reform of the RET, some of which are outlined below.
- Revision or retention of target
- The review panel could recommend that the target be revised from 41,000 GWh to the ‘true’ amount of 20 percent of actual electricity consumption for 2020 based on current projections. However, it is very difficult to accurately predict future energy consumption levels, as evidenced by the unexpected decrease in demand for energy.
- Alternatively, the panel could freeze the target at the 41,000 GWh level.
- Either of these options would provide the desired certainty to business groups.
- Abolition of the RET Scheme
- Introduce ‘banding’, which sets limits on the amount of energy produced from each type of technology. This could be done if the review retained existing targets or reduced them. However, it would likely increase costs as wind energy, which is the cheapest renewable, would be restricted.
- Merging the large scale and small scale schemes
- Greater exemptions for some energy-intensive industries
- One idea that has been raised is to introduce greater exemptions under the RET for some energy-intensive industries, in particular aluminium smelting. The aluminium industry already receives a partial exemption but there has been some discussion of implementing a total exemption for that sector to subsidise its falling profitability and support the manufacturing sector.
Submissions to the RET Review
As part of the review process, the RET Review Panel called for submissions from the general public and interested stakeholders. These submissions are published on the RET Review website and include:
- Clean Energy Council
- The Clean Energy Council is generally of the view that the RET as it currently operates is effective. However, the frequency of reviews represents a challenge for the industry and the viability of the scheme.
- An improvement suggested by the Clean Energy Council is to extend the scheme beyond 2030, while leaving the 2020 target in place.
- Beyond this, the Clean Energy Council argues that a reduction in the target would have a negative impact on the economy and energy consumers.
- Energy Retailers Association of Australia (ERAA)
- The ERAA argue that the small-scale scheme, in combination with other government policies such as feed-in tariffs, has distorted the market by providing overly generous subsidies for solar photovoltaic (PV) units.
- They also highlight the regulatory burden on energy retailers under the scheme, particularly the uncertainty around how many certificates they will be required to purchase on a yearly basis. Inaccuracy of data on availability of certificates and the need to acquire certificates on a quarterly basis were also problematic.
- The ERAA recommend that the SRES and LRET be harmonised so that requirements on retailers under both schemes are consistent, rather than being collapsed into a single scheme.
- Finally, the ERAA argues that the frequency of reviews should be decreased, with the next review ideally scheduled for 2020.
- Energy Supply Association of Australia (ESAA)
- The ESAA argues that the RET should be revised to reflect 20 percent of actual electricity generation at 2020 levels, rather than the current fixed target.
- As with many of the other submissions, ESAA agree that installation incentives for small scale technologies should be removed as there is an oversupply of energy to the National Energy Market.
- ESAA points out that, while there has been a fall in demand for energy, there has also been an increase in supply which means that wholesale power prices have become unbalanced.
- The ESAA warns that electricity generation is capital-intensive and based on long-lived assets. Short-term legislative reviews and policy instability are harmful to the energy sector as a whole (not just the renewable sector) and, therefore, the next review should not be held until 2020.
- Energy Networks Association (ENA)
- The ENA advocate the abolition of the small scale scheme as they argue that the scheme has achieved its objectives as the market for such technologies is mature and no longer requires subsidisation.
- They also argue that the small-scale scheme is not ‘technologically neutral’ as some technologies subsidised under the scheme are not the most efficient from an emissions abatement perspective, in particular hot water heating systems. This means that the scheme may actually disadvantage more effective technologies.
Possible legal implications
Off-take agreements are commonly undertaken between a producer of renewable energy and a liable entity for the purchase of portions of the producer’s future output. These agreements are normally negotiated prior to the construction of a new facility in order to secure funding and loan arrangements for the capital costs of new investments and tend to be long-term in nature (typically 15-20 years).
If the panel recommends that the RET is reduced or abolished, off-take agreements will be impacted. As liable entities will be required to purchase less, or possibly no, renewable energy certificates from producers, contractual off-take arrangements could be compromised. If this results in reduced or ceased payments from purchasers to suppliers, this could have a flow-on effect in compromising the ability of producers to repay loans.
In terms of existing RET projects:
- Such projects, which have been developed under the RET scheme, would potentially face losses due to changes in legislation, presenting a sovereign risk to power producers. It is possible that producers who find themselves in such a situation may push for government compensation or grandfathering arrangements if changes to the RET result in projects becoming unprofitable.
In relation to prospective RET projects:
- Continued uncertainty about the RET is likely to lead to greater reluctance by retailers to enter into off-take agreements with large-scale renewable energy project owners. This may lead to a lack of investment by developers and an unwillingness by off-takers and liable parties to enter into off-take agreements.
The review report is expected to be released by mid-August. Once finalised, the government must table it in each house of Parliament within 15 sitting days after completion. Within six months, the government must reply tabling their response in Parliament.
In parallel with the RET Review, the Government is in the process of developing an Energy White Paper which will consider energy policy in Australia broadly and is due for release in September 2014. The White Paper is likely to incorporate any outcomes of the RET review process.