On 26 February 2010, the Minister for Climate Change and Water, Senator the Hon Penny Wong, and the Minister Assisting the Minister for Climate Change, the Hon Greg Combet AM MP, announced changes to be made to the Renewable Energy Target (RET) scheme. While the legislation for the changes has not yet been released a discussion paper has been published which gives some detail of the proposed changes and calls for submissions (Discussion Paper).

What is the existing RET Scheme?

The existing RET scheme is a market-based mechanism introduced with the aim of sourcing 20 per cent of Australia's electricity supply from renewable energy by 2020. Under the scheme, parties who buy wholesale electricity are required to meet a Renewable Power Percentage (RPP) each year, a requirement they can fulfil by purchasing Renewable Energy Certificates (RECs) at market price. Each REC represents 1 megawatt-hour (MWh) of renewable energy. RECs are then surrendered annually by purchasers in order to certify their compliance with the RET scheme.

What are the shortcomings of the RET scheme in its current form?

The RET scheme operates in conjunction with the Solar Credits scheme, which was introduced in June 2009, and applies up to a 5-times multiplier to the RECs deemable against the first 1.5 kW produced by small wind, solar or hydro systems. An unintended consequence of the Solar Credits scheme, which was designed to replace direct Federal rebates, was a severe drop in the price of RECs and a subsequent loss of investor confidence in large-scale renewable projects. Pacific Hydro in South Australia, Roaring 40s in Tasmania and AGL in Victoria for instance, have all announced holds on wind farm projects as a direct result of falling REC prices.

What are the proposed changes to the RET scheme?

The key proposal coming out of the Discussion Paper is that from 1 January 2011, the existing RET scheme will be separated into two parts – a Small-scale Renewable Energy Scheme (SRES) and a Large-scale Renewable Energy Target (LRET).

Combined, the Government expects the new LRET and SRES to deliver more renewable energy than the existing 45,000 gigawatt-hour target in 2020. The degree to which the 20 per cent target is exceeded will depend on the uptake of small-scale technologies by households, small business and community groups.

The changes would see liable entities being required to source RECs from both the SRES and the LRET schemes.

The Small-scale Renewable Energy Scheme (SRES)

The SRES would set a fixed $40 price for each REC produced by households, small business and community groups from small-scale technologies like solar panels and solar water heaters. The number of systems receiving support under the SRES would be uncapped to ensure small-scale installers have certainty.

These changes would also dramatically alter the nature of the obligation the RET scheme imposes on wholesale purchasers of electricity. Whilst the cost of each REC will be fixed, the quantity is uncapped, and wholesale purchasers would be collectively obliged to purchase all the RECs produced under the SRES. Two broad options are under consideration to address uncertainty created by the uncapped quantity of RECs under the SRES:

  1. an uncapped annual liability to ‘clear the pool’ of RECs created in each previous year; or
  2. an annual target set at the start of each year based on an estimate of the total RECs to be produced that year, with a ‘smoothing’ mechanism to adjust for any underestimation or overestimation in the following year.

The first option sets liability in the year after RECs are created, the second provides greater upfront certainty as to future liabilities.

Entities currently liable under the RET would be obligated to purchase RECs under the SRES and surrender them through either a voluntary or involuntary clearing house mechanism (both options being proposed). An alternative model, also noted in the Discussion Paper, would involve effectively transferring SRES liability from retailers to electricity distributors, who could in turn then pass through costs. The Government appears to have already rejected this model on the basis that it would be too difficult to implement.

The Large-scale Renewable Energy Target (LRET)

Liability under LRET would operate in much the same way as under the existing RET scheme, with the Regulator announcing the RPP early in each year. From 1 January 2011, it is proposed that only RECs produced from large-scale generation (and existing banked RECs) will be able to be used to meet LRET liabilities.

Eligibility for the LRET Scheme would be the same as that for large-scale technologies for the current RET Scheme, and include accredited power stations using eligible renewable energy sources such as wind, solar, biomass, hydro and geothermal energy.

The LRET would have a target of 41,000 GWh for 2020, with the aim of achieving a level of large-scale renewable electricity generation above what was expected under the RET scheme. The LRET portion of the overall target would be increased to ensure the 45,000 GWh target is still met in 2020 if the uptake of small-scale technologies is lower than anticipated, but the annual LRET targets would not be reduced if uptake of small-scale technologies is greater than anticipated.

Liable entities would be allowed to use existing banked RECs (that is, RECs from both small and large scale technologies produced before the separation of the RET scheme into the two new schemes) to meet LRET obligations, but not SRES obligations.

It is also suggested, however, that RECs produced under small scale systems installed up to 31 December 2010 will also be able to be used to meet liabilities under the LRET. This approach has been suggested to ensure that the changes to the RET Scheme do not impact on liquidity available in the market for RECs. Two alternatives to this approach are proposed:

  1. allowing RECs from small-scale systems installed in 2010 to be banked and used to meet only the 2010 compliance year LRET obligations; or
  2. bringing forward all LRET and SRES arrangements to commence from 1 July 2010.

Generally, the Government does not wish to intervene in existing contracts. Only where a contract involves the sale of RECs that were to be created from small-scale technologies after 1 January 2011 would parties be affected by the changes to the RET scheme. As a transitional measure, either of the parties to such a contract would be able to apply to the Regulator to have their contract recognised as a ‘relevant pre-existing contract’. If approval is given, the RECs created from small-scale technologies under the contract in question could be validly used to satisfy the purchaser’s liabilities under the LRET.

How do these changes improve the RET scheme?

The adjustments will hopefully stabilise the price of RECs, which have fallen sharply since the introduction of the Solar Credits scheme, by separating incentives for small-scale technologies from the market system which applies to utility-scale generators and retailers. The latter would continue trading RECs at market price under the LRET, and would meet the majority of the renewable energy target by 2020, while RECs earned from small-scale technologies would be sold at a fixed price of $40 per MWh under the SRES. The adjustment is expected to restore confidence in the REC market and re-start progress on utility-scale wind farms, while increasing incentives in the small wind and rooftop solar markets.

Submissions on the Discussion Paper are due 14 April 2010. The Government plans to release an industry consultation paper on the new RET arrangements shortly, and will consult with stakeholders on the implementation aspects of the scheme. The Government has stated its intention to legislate the changes in the Winter Sittings of Parliament. The Government will also continue to work with state and territory governments to respond to the other issues being considered by the Council of Australian Governments’ Review of Specific RET Issues.

While the proposed changes to the RET Scheme address some of the uncertainty in the current market for RECs, uncertainty about the Carbon Pollution Reduction Scheme is likely to continue to dampen market sentiment.