The renewable energy sector is one of the fastest growing industries in Australia and there has been a major boost in interest from investors looking to get involved in related projects.
But it is a complex, heavily-regulated area.
In the first of a three-part series, we take a look at the legislative background concerning renewable energy, particularly for solar, looking at what is happening internationally – and how Australia compares.
What is renewable energy?
Renewable energy is energy that is collected from renewable resources such as sunlight, wind, rain, tides, waves, and geothermal heat. Rapid deployment of renewable energy and energy efficiency is resulting in significant benefits globally relating to energy security, climate change mitigation, and economic development.
Worldwide investments in renewable technologies amounted to more than US$286 billion in 2015. After hydro and wind power, solar photovoltaics (another name for solar power) is the third most utilised renewable energy source globally. At the end of 2016, worldwide installed solar photovoltaics capacity increased to more than 300 gigawatts (GW), covering approximately two per cent of global electricity demand. China, followed by Japan and the United States, is the fastest growing market, while Germany remains the world's largest producer, with solar photovoltaics providing seven per cent of annual domestic electricity consumption.
Globally, there are an estimated 7.7 million jobs associated with renewable energy industries, with solar power being the largest renewable employer.
As of 2015, worldwide, more than half of all new electricity capacity installed was renewable. At least 30 nations around the world already have renewable energy contributing more than 20 per cent of energy supply.
International renewable energy markets are projected to continue to grow strongly in the coming decade and beyond. At least two countries, Iceland and Norway generate all their electricity using renewable energy already, and many other countries have set a goal to reach 100 per cent renewable energy in the future. For example, in Denmark the government aims to switch the total energy supply (electricity, mobility and heating/cooling) to 100 per cent renewable energy by 2050.
In Australia, the Federal Government has designed a policy called the Renewable Energy Target Scheme (RET) which has been operational since 2011. The policy is divided into the Large Scale Renewable Energy Target (LRET) and the Small-Scale Renewable Energy Scheme (SRES).
Large-scale Renewable Energy Target
The Large-scale Renewable Energy Target (LRET) effectively created a financial incentive for the establishment or expansion of renewable energy power stations such as wind and solar farms or hydro-electric power stations.
Large-scale generation certificates (LGCs) are issued in return. One LGC is issued for each megawatt-hour of eligible renewable electricity produced by an accredited renewable power station.
LGCs can be sold to entities (mainly electricity retailers) who surrender them annually to an industry Energy Regulator to demonstrate their compliance with RET’s scheme’s annual targets.
The revenue earned by the power station for the sale of LGCs is additional to that received for the sale of the electricity generated.
The LRET includes legislated annual targets which will require significant investment in new renewable energy generation capacity in coming years.
The legislative targets aim to ensure that at least 33,000 GW of Australia’s electricity comes from renewable sources by 2020.
Small-scale Renewable Energy Scheme
The Small-scale Renewable Energy Scheme (SRES) creates a financial incentive for domestic households, small businesses and community groups by encouraging the installation of small-scale renewable energy systems such as solar water heaters, heat pumps, solar power panel systems, small-scale wind systems or small scale hydro systems.
It does this by legislating demand for SRES Certificates (STCs). Like LGCs, the STCs are created for these systems at the time of installation according to the amount of electricity they are expected to produce or displace in the future. For example, the SRES allows eligible solar power systems to create, at the time of installation, STCs equivalent to the expected system output between the time of installation and the end of the RET Scheme in 2030.
While it is possible for owners of renewable energy systems to create and sell the STCs themselves, in practice, installers of these systems usually offer a discount on the price of an installation or a cash payment in return for the right to create STCs.
In addition, Australia has implemented legislation as a result of the Renewable Energy Target Scheme. The following Acts, in particular, are administered by the Australian Government’s clean energy regulator (as per the Clean Energy Regulator Act 2011), which is a body responsible for administering legislation that will reduce carbon emissions and increase the use of clean energy within Australia.
What does this mean for investors?
Renewable energy projects often appeal to entities that see potential in entering into the renewable energy market within Australia, whether they are:
- entities established in other countries or within Australia, or
- entities currently within the research and development phase with existing or new concepts in the renewable energy space.
It is important to understand the crucial framework of both large and small scale renewable energy projects. In our experience, we have found there to be particular issues when assisting clients in this space.
Initial phase prior to any investment
- funding and financial mechanism and framework required to assist in large or small scale projects (e.g. construction and testing phase loans)
- corporate structuring and asset protection mechanisms
- Australian Tax and duty obligations
- foreign element issues (FIRB Approval).
- testing phase – trial and error, data and reporting
- legal and financial due diligence in any LRET or SRES scale renewable energy project
- competition and consumer protection requirements
- green power schemes
- government grants
- feed in tariffs
- impact of Legal regimes for off-shore renewable energy
- impact of Legal issues concerning bio-fuels
- planning approval, council requirements and environmental impact assessments
- property law issues (e.g. regulating rights to solar access, exclusivity and completing land interests)
Implementation or execution phase
- construction and development framework/deployment
- third party arrangements.
Risk management phase
- ongoing and implementation of risk management systems
- exit and expanding strategies
- implementation of extra key players
- growth and expansion