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Allens Arthur Robinson

Focus: Energy – February 2004

Review of the Commonwealth's renewable energy target

In brief: In March 2003, the Commonwealth Government established a panel to review its Mandatory Renewable Energy Target as stipulated under the Renewable Energy (Electricity) Act 2000. Although the panel reported to Parliament in September 2003, its report was only released to the public in January this year. Senior Associate Robyn Glindemann examines the significant findings of the panel. 

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Review of the MRET legislation

On 27 March 2003, the Commonwealth Government appointed a four-member panel to review the operation of the Renewable Energy (Electricity) Act 2000 as required by the terms of the legislation. The panel was chaired by Northern Territory Senator Grant Tambling and included Dr Peter Laver, a former vice-president of BHP and the current chair of the Australian Building Codes Board; Monica Oliphant, a research scientist with particular expertise in renewable energy; and Neville Stevens AO, a former Secretary of the Commonwealth Communications and Industry portfolios. The panel received 264 substantive submissions on the legislation, together with 4800 'campaign' submissions that were standard form letters. In the course of compiling its report, the panel also held meetings with 115 representative groups and visited 16 communities. The report was delivered to the Prime Minister, the Commonwealth Environment Minister and the Commonwealth Minister for Industry, Tourism and Resources on 16 September 2003 but was only released to the public on 16 January 2004.

(For a comprehensive review of Commonwealth and state greenhouse gas abatement schemes, see Focus: Energy October 2003.)

The panel's terms of reference encompassed a review of all facets of the Act's operation, including:

  • the extent to which the Act has contributed to lower greenhouse gas emissions and encouraged the generation of electricity from renewable sources;
  • the sufficiency of both the overall target set by the Act and the interim targets;
  • the appropriateness of overall energy policy settings; and
  • the operating environment created by the scheme, including the level of participation in the scheme, the baselines for existing generators and the projected 2020 end-date for the scheme.

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Key findings

The key findings from the panel's review were that the Mandatory Renewable Energy Target (MRET) scheme should continue to operate and that the interim targets prior to 2010, as well as the 9,500GWh target for 2010, should remain unchanged.

For the period between 2010 and 2020, the panel recommended that the MRET should increase from 9,500GWh at the same rate as before 2010, levelling out at 20,000GWh in 2020. The panel also recommended that existing generators and projects commissioned before 2005 should continue to receive renewable energy certificates (RECs) until 2020, when new baselines should be set for them. Finally, the panel recommended that the MRET scheme should continue beyond 2020 to allow renewable energy projects that start up after 2005 to receive a full 15 years' worth of RECs (15 years being the standard period of time for a project to recoup capital expenditure costs).

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MRET scheme operation so far

The first half of the panel's report summarises its findings on the first two years of the MRET scheme's operation.

According to the Office of the Renewable Energy Regulator, more than 4 million RECs (representing approximately 4,000GWh of new electricity from renewable sources) had been registered under the Act by 18 August 2003. Moreover, nearly twice as many RECs have been created as are required under the interim targets, and these RECs have been banked for use in future years. Most of the RECs have been generated from projects in Queensland, New South Wales, Tasmania and Victoria, principally from hydro projects (36 per cent). Wind power projects accounted for only 11 per cent of RECs, but there has been considerable growth in the wind power generation industry.1

Since the scheme's commencement, the price for RECs has remained relatively stable, with the price sitting at between $36 to $38 per REC in 2003.

On a broader scale, the panel found that the MRET scheme had a very small negative impact on the Australian economy. Nonetheless, it noted that renewable energy industry sales had grown from $1.1 billion prior to the scheme's commencement to $1.8 billion in 2002-03, and that the industry had contributed to the creation of thousands of jobs.

The panel also identified no specific adverse impacts on the environment as a result of the scheme, and found that renewable energy generally had broad community support, with people being prepared to pay more for energy that came from renewable sources. However, the panel found that the scheme had made only a small contribution to the abatement of greenhouse gases (although this is expected to increase as 2010 draws closer). In addition, the panel considered that, by 2007, sufficient capacity is likely to have been installed to meet the 9,500GWh target so that investment beyond this date is likely to be significantly lower (almost zero). A further investment inhibiting factor was found to be the fact that the Act makes no provision for continuing the target beyond 2020. Given that the standard return on investment period is 15 years, there is little incentive to build projects after 2005 with a shorter payback period.

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No change to 2010

While a majority of submissions supported an increase in the 9,500GWh target for 2010, the panel agreed with those submissions that advocated the need to maintain investment certainty, and so recommended that no fundamental changes be made to the MRET scheme before 2010.

Increases in the 9,500GWh target for 2010 of 2 per cent, 5 per cent or 10 per cent were suggested. Modelling based on the increased targets conducted by McLennan Magasanik Associates for the Australian Greenhouse Office indicated that the REC price under a higher target would increase to a maximum of $47, $55 and $62 per REC respectively, with a corresponding increase in compliance costs.

This modelling also indicated that such an increased target would result in an increase in capacity of between 2,500-7,000MW (primarily serviced by increased wind energy). However, the panel was concerned that the industry would not be able to achieve the higher levels of investment and generation needed to meet the proposed higher targets. Moreover, it stated that:

Higher targets for 2010 would only be achieved with increased MRET assistance, resulting in the commissioning of more costly projects. Any increase in the target in the short term would be detrimental to future renewable industry development and run counter to the policy intent of MRET as 'an ongoing basis for commercially competitive renewable energy'. An increase in the MRET target prior to 2010 would also increase the overall cost of the measure and potentially expose liable parties and electricity consumers to higher electricity prices.

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Beyond 2010

While the panel was not convinced that there was a need to change the MRET scheme's settings before 2010, it did believe that there was a need to increase the target after 2010 to maintain the scheme's momentum without adversely affecting electricity users with higher electricity prices.

The panel concluded that maintaining the 9,500GWh target to 2020 was insufficient to underpin the level of investment required to develop a sustainable domestic renewable energy industry and recommended a steady increase in the target to the higher level of 20,000GWh by 2020. The panel believed that this new target would maintain the momentum established by the 9,500GWh target and provide a more stable investment framework that would encourage the development of a long-term, commercially viable Australian industry.

Under the Act's current terms, the MRET scheme is due to end in 2020. However, the panel believed that this was inconsistent with the scheme's industry development objective and recommended that the end date be extended without recommending what the new end date should be. The panel considered that this would encourage investment after 2005 by allowing projects commissioned after that date to receive RECs for a full 15 years. Nonetheless, the panel did not feel it was necessary to correspondingly increase the MRET beyond 20,000GWh in 2020.

The panel also recommended that the REC shortfall charge that is paid by participants who do not generate sufficient numbers of RECs in a given year should be fixed at $40 per MWh until 2010, and then indexed to CPI to ensure that the charge remained at a higher level than the REC price.

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Other recommendations

The panel made several recommendations on the broader operation of the scheme, including:

  • Electricity generation reported to the Office of the Renewable Energy Regulator in electricity generation returns for a compliance year should cease to be eligible generation (for the purpose of REC creation) after 10 October of that calendar year. The panel considered that, if generators were required to create their RECs within such a specified period of time of the generation occurring, there would be an improvement in market transparency and efficiency.
  • The Act should be amended to permit the Office of the Renewable Energy Regulator to publish baselines
  • Wind generators, industry groups, National Electricity Market (NEM) management, leading research institutions and government bodies should cooperate to address the following issues:
    • the capture of cost synergies and the reduction of cost barriers for wind generators that provide wind data and generation forecasts;
    • the lack of strategic, aggregate and controlled management information provided to NEMMCO about wind power generation;
    • the need for independent advice on the sustainable and appropriate management of wind energy to be provided to NEM regulators and management, wind generators, governments and market participants; and
    • the need for a knowledge management facility to build industry capacity and conduct independent research to maximise wind resource benefits.

In this regard the panel recognised that, while the wind data developed by individual developers was commercially sensitive, the most significant barrier to the industry's development and the reduction of NEM management risks was the lack of a comprehensive wind mapping database, and that such a database was necessary to better equip the NEM to cope with the problems of integrating the intermittent generation from wind farms into the national grid.

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Where to from here?

The MRET review panel's report is one of a number of energy industry reports that impacts on the MRET scheme and that is currently being considered by the Commonwealth Government.

The December 2002 Parer Report on the national energy market made recommendations across the board on the Australian energy industry, including the MRET scheme.2 In addition, in November 2003 ACIL Consulting completed its National Hydrogen Study for the Commonwealth Department of Industry, Trade and Resources. There is a significant amount of international research being conducted on the benefits of hydrogen as a clean source of energy and on the commercialisation of different hydrogen-based technologies. The National Hydrogen Study is intended to be an assessment of the opportunities and impediments associated with Australia's possible transition to a hydrogen-based economy and the strategic steps that government, industry and other stakeholders would need to consider if Australia is to make greater use of hydrogen to meet future energy needs.3

These reports must also be considered in light of the Commonwealth Government's broader strategy for managing climate change. It has been reported that the Commonwealth Government has stopped all work on an international greenhouse emissions trading scheme by the Australian Greenhouse Office on the basis that Australia is able to meet its emissions reduction target under the Kyoto Protocol without the need for emissions trading and that there is still considerable uncertainty surrounding the Protocol itself.4 Instead, efforts at an international level are to be focussed on bilateral agreements and partnerships with other countries.

With a federal election due this year, it is reasonable to expect that a comprehensive energy policy will be announced soon. It is also reasonable to assume that, given the results of these reports and the Commonwealth's position on Kyoto and climate change, energy from renewable sources, be it wind, water or hydrogen, will have a role to play in that policy. What remains to be seen is how significant that role will be.

References
  1. According to the submission from the Australian Wind Energy Association, the wind industry's average annual growth rate between 1999 and 2002 was 118 per cent.
  2. See AAR Focus: Energy articles of November 2002 and December 2002.
  3. Information about the study can be found on the Department's website (www.industry.gov.au).
  4. Sydney Morning Herald, 12 January 2004.

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