In an investment setting characterised by capital-intensive projects and uncertain returns, the RET scheme plays a crucial role in ensuring the economic viability of renewable energy projects. To ensure that projects are delivered, investors and financiers need reasonable confidence in expected returns; something which the RET scheme has arguably failed to deliver since its introduction in 2001.
Since that time, no fewer than five policy reviews and two legislative amendments have been undertaken in relation to the RET scheme, which is hardly conducive to delivering the stable policy setting investors and financiers require.
In its 2012 review, the Climate Change Authority has shown it understands the importance of predictability for investors and risks of shifting policy. The recommendations in its October discussion paper seek to minimise future policy uncertainty.
Some background on the RET scheme
The Renewable Energy Target was introduced in 2001 to harness Australia’s renewable energy resources. It’s founded on a commitment that at least 20% of Australia’s electricity supply will come from renewable resources by 2020.
The scheme creates demand for renewable energy by legally obligating purchasers of wholesale electricity (typically retailers) to surrender a certain number of renewable energy certificates each year.
The two components to the scheme are the Large-scale Renewable Energy Target and the Small-scale Renewable Energy Scheme. The LRET supports large-scale renewable energy projects such as wind farms and commercial solar. The SRES, on the other hand, assists households, small businesses and community groups with the upfront cost of installing small-scale renewable technology systems.
The LRET is constituted by fixed, annual targets with the target for 2020 being 41,000 GWh of renewable energy production. This fixed target, based on 2007 demand projections, was estimated to represent 20% of Australia’s electricity consumption in 2020.
The legislation supporting the RET scheme mandates that the RET should be reviewed by the Authority every two years.
The Climate Change Authority launched its scheduled 2012 review with the release of an issues paper in August. The scope of the Authority’s review garnered significant industry attention, particularly in light of forecasts by the Australian Energy Market Operator in June 2012 showing a substantial decline in projected electricity consumption from previous forecasts, and the introduction of the carbon price.
Questions were raised whether the LRET should be changed from a fixed annual GWh target to a variable target representing 20% of Australia's actual energy needs in 2020, or whether the RET scheme should be abolished altogether.
The Authority received around 8,700 submissions to its issues paper – demonstrating the influential role Federal government policy settings play in renewable energy investment.
The discussion paper represents the Authority’s preliminary response to those submissions.
Policy stability the key to investment
The Authority recognises that policy stability and predictability are essential to encourage new investment at a reasonable cost. It also acknowledges that recommending major changes to policy settings could increase risk premiums required by lenders and investors in renewable energy, and may affect perceptions of risk for investors in clean technologies more broadly.
Retaining the existing LRET target
Consistent with this approach, the Authority takes the view that the existing LRET target should not be changed, and that the benefits of any change would be outweighed by the costs of increased regulatory uncertainty.
It maintains this view despite acknowledging that future electricity demand may be substantially lower than previous forecasts, resulting in the RET accounting for more than 20% of Australia’s total energy supply in 2020.
The paper also proposes the LRET remain fixed in terms of gigawatt hours, and that a one-off change to the level of the target risks damage to the investment environment, and that a target expressed as a percentage, or in gigawatt hours adjusted through time would be even more damaging.
Interaction with the carbon price
The paper broaches in part the perceived conflict between the RET scheme and the carbon price, both of which are designed to aid Australia’s transition to a clean energy economy. The Authority acknowledges that while the carbon price is intended to be the main policy driver, the ongoing regulatory uncertainty around the carbon price means the RET will continue to play a role in bolstering investment in renewable energy.
However, the Authority diplomatically distances itself from the debate by stating that the focus of the RET review is not whether the RET should exist, but instead what changes could be made to it in order to improve the scheme within the current policy environment and that a key challenge of the review is to find the appropriate balance between promoting policy certainty against the scheme costs.
Frequency of RET reviews
In order to promote greater confidence and predictability, the Authority’s view is that the frequency of the scheduled reviews should be changed from every two years to every four years. This approach would see the next scheduled review take place in 2016.
Implications for the investment landscape
The Authority’s views on policy stability and predictability should be well received by participants in the renewable energy industry.
As the 2003 Tambling Review suggests, “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”.
By trying to dispel uncertainty around the structure of the RET scheme, the Authority appears cognisant of the need to create a stable investment environment for renewable energy investors and financiers. With the future of the carbon price uncertain, investors and financiers will be looking to a predictable RET scheme to drive project economics.
Industry participants are likely to breathe a collective sigh of relief when the Authority releases its final report in December 2012 – but in the absence of a bipartisan response to climate change policy and with an election looming in 2013, that relief may be short lived.