AGL CEO: Scrap RET, start again fresh

AGL Energy's chief executive, Michael Fraser, has made the claim on ABC's Radio National Breakfast program that the Renewable Energy Target scheme is broken and should be abandoned.

According to Fraser, this is because investors have lost faith that the settings of the scheme will be left in a state that ensures a viable return for investments in large-scale renewable energy projects.

This is the case, according to Fraser, even if the government and Labor managed to reach agreement on any changes to the scheme. He says government needs to look at a new framework that not only injects new renewables into the system but at the same time encourages existing old fossil fuel generators to exit.

This is actually not a new argument from AGL, but I would suggest the underlying issue can be resolved without the radical change they suggest.

Fraser is spot on that even if Labor and the Coalition were to agree to some kind of compromise around the RET, investor confidence has been incredibly badly shaken by the Coalition Government's Warburton Review shenanigans. To even place it on the table for consideration that existing renewable energy investments would be left high and dry by axing the RET completely, as Dick Warburton did early in the review, was completely outrageous.

In addition, the removal of a carbon price means that the financial returns from a wind farm investment, even if the RET settings were left untouched, are marginal and incredibly dependent on the revenue from renewable energy certificates. Once the RET scheme ends and the certificate revenue dries up, revenue for large-scale projects is likely to plummet.

To make a wind farm investment viable requires certificate spot prices to go from about $33, now, to double that within the space of a year and possibly a bit higher to compensate for inadequate revenue later in the wind farm's life. Investors have been left rattled about whether a Coalition Government will leave the market to do its job once LGC prices start rising above $65 and towards the tax-effective penalty.

However, the revenue problem can be easily solved by extending the length of the scheme beyond 2030. If wind farms are given an extra five years of LGC revenue then things look far less marginal and the loss of revenue from a depressed wholesale electricity market is less problematic.  

But will the Coalition agree to such change?