Skip to content.

Home

Allens Arthur Robinson

Focus: Climate Change – July 2008

Expanded Renewable Energy Target Scheme

In brief: On 2 July 2008, Federal Climate Change Minister Penny Wong released a discussion paper canvassing two regulatory approaches for an expanded national renewable energy target scheme. Partner Grant Anderson (view CV), Senior Associate Robyn Glindemann and Lawyer Jessica Moir look at the discussion paper.

How does it affect you?

  • Wholesale electricity purchasers will be required to meet a growing proportion of their energy requirements from renewable energy sources – the requirements of the expanded national scheme will be significantly more onerous than the requirements under existing schemes.
  • The treatment of trade-exposed emissions-intensive businesses under the scheme is to be addressed in a separate consultation process.
  • Submissions on the design of the proposed scheme need to be made by 30 July 2008.
  • Parties to electricity offtake and hedging agreements should review those agreements to ensure that they are sufficiently broad to accommodate the replacement of existing renewable energy certificates with those issued under the proposed scheme.
Background

The Federal Government has committed to a 20 per cent renewable energy target (RET) for Australia, to be reached by 2020. This target translates into approximately 60,000 gigawatt-hours (GWh) of electricity to be generated from renewable energy sources, and this requires a considerable increase from the existing 15,000GWh of renewable capacity that has already been installed in Australia.

At present, there are two legislated RET schemes operating in Australia: the Mandatory Renewable Energy Target (MRET) scheme at the federal level, and the Victorian Renewable Energy Target (VRET) scheme. Other states and territories have plans to implement similar schemes – for example, in New South Wales, legislation to create a New South Wales renewable energy target scheme is currently before NSW Parliament.

The Federal Government's expanded national RET scheme will 'absorb' the existing MRET scheme as well as any RET schemes operating at a state or territory level. However, the Government has undertaken to ensure that renewable energy projects that have already been approved under state or territory RET schemes will remain eligible under the national RET scheme. The Government is currently discussing with the Victorian Government the transition of the VRET scheme into the national RET scheme.

As a step towards meeting the Federal Government's commitment to introduce a national RET scheme, the COAG Working Group on Climate Change and Water has prepared a discussion paper on Design Options for the Expanded National Renewable Energy Target Scheme (the discussion paper), which was released by the Federal Climate Change Minister Penny Wong on 2 July 2008.

It is intended that, following consultation on the design options that have been put forward in the discussion paper, the final design of the national RET scheme will be presented to COAG in October 2008, following which implementing legislation will be introduced into Federal Parliament and (it is hoped) passed by mid 2009. It is proposed that the Office of the Renewable Energy Regulator, which is currently responsible for the administration of the MRET scheme, will administer the expanded national RET scheme.

Return to top

Design options

The purpose of a RET scheme is to increase the amount of renewable energy that is generated. Under such a scheme, electricity retailers and large users (ie wholesale purchasers of electricity) must effectively acquire a certain proportion of their electricity requirements from renewable sources.

When wholesale electricity purchasers buy electricity from an accredited renewable energy generator, they receive renewable energy certificates (RECs). Once acquired, RECs may be surrendered to satisfy a wholesale electricity purchaser's liability under the RET scheme or they may be traded. Wholesale electricity purchasers that fail to surrender the necessary number of RECs to meet their obligations under the RET scheme must pay a charge that is calculated by reference to the shortfall.

The discussion paper canvasses two design options for the new national RET scheme. The primary focus of the first design option is to achieve the renewable energy target at least cost by facilitating the creation of a large number of RECs over the life of the RET scheme. It therefore seeks to encourage as much investment in renewable energy generation as possible in the early years of the RET scheme. The second design option seeks to ensure that the renewable energy target is achieved through more even investment in renewable energy generation during the life of the RET scheme by limiting the supply of RECs from renewable energy projects. While the first design option provides a strong 'early-mover' incentive to invest in renewable energy generation using market-ready technologies, the second design option provides a comparatively greater incentive for investment in new technologies that only come on stream later in the life of the RET scheme.

Under both options:

  • Annual targets will be set for each year to at least 2030. The first-year target will be relatively high, reflecting the higher 20 per cent target and the renewable energy targets under existing and proposed state and territory RET schemes. The annual targets will then increase in a linear manner, although the rate of increase will be lower for the years 2011 to 2015 than the years 2016 to 2020, reflecting the higher starting position and the expectation that new technologies will develop, and economies of scale improve, as 2020 approaches. The annual targets for 2021 to 2024 will flatten out at 45,000GWh, after which they will decline.
  • Subject to any transitional arrangements relating to the VRET scheme, existing renewable energy projects will not be able to participate in the RET scheme after 2020. For these purposes, existing renewable energy projects comprise those power stations built before 1997 (which are currently able to create RECs under the MRET scheme for generation above annual baselines) and those power stations built after 1997 but before 2008. The reason for the 2020 cut-off date for these kinds of projects is that, under the existing MRET scheme, they are only entitled to create RECs until 2020. To enable the creation of post-2020 RECs might lead to those RECs crowding out the post-2020 market, as well as to the project proponents benefiting from windfall gains given that their initial investment was made on the basis that the REC revenue stream would only be available until 2020.
  • The shortfall charge will not be indexed to inflation but will be set above the projected peak REC price (so as to take into account inflation). Setting the shortfall charge in this manner signifies that its purpose is not so much one of imposing a cap on the REC price as to encourage scheme participants to acquit their liabilities by surrendering RECs rather than by paying the shortfall charge.
  • Native forest wood waste treatment will remain the same as under the MRET scheme, ie as long as native forest biomass is a harvest residue or processing waste, it will be an eligible fuel (subject to harvesting operation conditions).
  • There will be unlimited banking of RECs (except, in the case of the second design option, this will be subject to modelling outcomes).
  • The RET scheme will be reviewed in 2015. Unless the parameters that may be changed following such a review are specified up front, this may have an unsettling effect on investment in renewable energy projects.

The differences between the two design options, which reflect their differing focuses, are:

  • Under the first design option, there would be no time limits on the entitlement of renewable energy projects to create RECs where those projects are accredited after 2007, whereas under the second design option such projects would only be entitled to create RECs for a maximum of 15 years.
  • Under the first design option, the RET scheme would be phased out from 2024 by either reducing the shortfall charge or the annual targets by a constant amount from 2025 to 2030, whereas under the second design option the RET scheme would be phased out from 2024 to 2035 by reducing the annual targets more gradually than under the first design option.

In addition, while both options would allow the creation of RECs as a result of the installation of solar water heaters (on the basis that the use of solar water heaters displaces the use of energy from fossil fuels), the second design option is more restrictive in terms of their inclusion and would phase them out of the scheme earlier.

Return to top

Key design issues

The key design issues raised in the discussion paper, and on which views are sought, are as follows:

  • the profile of annual targets under the RET scheme;
  • the renewable energy sources that are eligible under the RET scheme;
  • the banking of RECs, ie the ability to surrender RECs that are created in earlier years of the RET scheme to acquit obligations that arise in later years of the RET scheme;
  • the period for which an accredited renewable energy project is entitled to create RECs;
  • the eligibility of existing renewable generation projects to participate in the RET scheme;
  • the duration and manner in which the RET scheme is to be phased out, given the Federal Government position that the scheme will be phased out between 2020 and 2030 as the proposed Australian emissions trading scheme should then be sufficient to stimulate investment in renewable energy generation where this is economically efficient; and
  • the appropriate level of the shortfall charge (under the MRET scheme the shortfall charge is currently set at $40/MWh (after tax) and is not indexed to inflation).

These parameters will influence the investment profile, the quantity of renewable energy generation, the renewable energy generation mix and the overall cost of the RET scheme, as well as the liquidity of the RECs market.

Return to top

Interaction between expanded RET scheme and emissions trading scheme

The expanded RET scheme has been criticised by the Productivity Commission1 on the basis that it subsidises zero emissions (but higher cost) renewable energy generation at the expense of low emissions (but lower cost) alternatives (such as gas-fired electricity generation) and, as a consequence, will result in higher electricity prices. It has been estimated that such a scheme will add between $6 to $8/MWh to electricity prices.

This criticism has been taken up by the Garnaut Climate Change Review in its draft report (see our Focus on the Garnaut Review), which clearly expresses the view that such a scheme is unnecessary once Australia's proposed emissions trading scheme is fully operational. On the contrary, according to the draft report, the coexistence of the two schemes will cause economic distortions and could result in a cannibalisation of the emissions trading scheme. As the draft report states2 :

The [emissions trading scheme] is expected to deliver required reductions in emissions. Other policies operating alongside an emissions trading scheme can have no useful role in reducing emissions once the emissions trading scheme is in place. From that time, the only useful role for additional policies of this kind is to reduce the effect of market failures in adjustment to the emissions price, so as to reduce the cost of adjustment to the low emissions economy. Rather, other polices should allow the scheme to achieve its emissions reduction goal at a lower cost than would occur if the scheme was operating alone.

While reserving its quantification of the economic costs of maintaining an expanded national RET scheme in conjunction with the emissions trading scheme for its supplementary report in August, the Garnaut Review does suggest that, at the very least, the shortfall penalty should continue to be $40/MWh (which currently happens to correspond to around $40/tCO2-e), as this will limit the effect of the RET scheme to a scenario where the carbon price is less than this amount.

Return to top

Supply concerns

There has also been some concern expressed as to the feasibility of achieving the renewable energy target under the national RET scheme. Currently it seems that only wind power is likely to be able to make a major contribution to meet this target, but even this is a considerable stretch, given that wind power currently only accounts for 817MW (or 0.5 per cent) of Australia's generation capacity. Moreover, as an intermittent generation source, a massive expansion in wind power may bring with it power system security issues and may, in any case, need to be 'backed up' by fossil fuel fired generators.

Conversely, proponents of the RET scheme argue that it will perform a valuable role in encouraging investment in renewable energy generation while the carbon price under an emissions trading scheme is low, and in broadening the generation mix (the drought having demonstrated that coal fired generation is heavily water dependent). In addition, wind power projects generally have a shorter life and shorter lead time than coal and gas fired generation projects, which means that the deployment of wind power can assist in responding more quickly to adjusted targets under an emissions trading scheme (eg as may occur if more ambitious emissions caps are set under any future global climate change agreement).

Return to top

Trade-exposed emissions-intensive industries

Trade-exposed emissions-intensive businesses may be affected by the RET scheme in two ways. They might be directly liable to surrender RECs where they are wholesale electricity purchasers and (even if they are not directly liable) they will face increased electricity costs because of the scheme (at least to the extent their electricity retailer can pass these increased costs through to them). One of the key features that is currently under consideration in the design of Australia's proposed emissions trading scheme (see Focus: Climate Change – July 2008) is the manner in which, and the degree to which, trade exposed emissions intensive industries will be given structural assistance to adjust to the higher electricity prices that they will face as a result of the imposition of a price on carbon. As the discussion paper recognises, the increased electricity prices that businesses in these industries will face due to the new RET scheme is a factor that needs to be taken into account in the consideration of this issue – although whether these businesses will be shielded from such an increase in the electricity price will need to be balanced against the increased burden that this would impose on other electricity consumers. This issue will be dealt with in a separate consultation process.

Return to top

Contractual issues

At this stage, businesses also need to be aware that, in negotiating electricity offtake and hedging agreements, renewable energy certificates under existing RET schemes may cease to exist and be replaced with new certificates under the national RET scheme. Accordingly, to the extent that such agreements provide for or contemplate the creation and transfer of existing renewable energy certificates, the relevant provisions will need to be broad enough to capture any replacement certificates. Equally, businesses should review their existing contracts to ensure that they accommodate the certificates that may be issued under the national RET scheme.

Return to top

Submissions

Interested stakeholders are invited to make submissions on design issues and the approaches canvassed in the discussion paper (preferably by email) to:

The Renewable Energy Sub Group Secretariat
Renewables, Offsets and COAG Branch
Department of Climate Change, GPO Box 854
CANBERRA ACT 2601

Fax 02 6275 9754
Email RET@climatechange.gov.au

The closing date for submissions is 30 July 2008.

A full copy of the discussion paper is available for download from the Department of Climate Change website.

If you would like assistance in preparing any submissions in response to the discussion paper, or further information about the proposed national RET scheme and the opportunities and risks it presents for your business, please contact any of the people below.

Footnotes
  1. Productivity Commission 2008, 'What Role for Policies to Supplement an Emissions Trading Scheme?' (Productivity Commission submission to the Garnaut Climate Change Review, May 2008).
  2. Garnaut Climate Change Review, Draft Report (June 2008), p.351.

Return to top

For further information, please contact:

Return to top

Bookmark with

What are these?

Recent Climate Change publications