An umpire calls for an RET overhaul

RET cost burdens will shift back to consumers if the market stays in its current 'messy' state, the east coast energy market regulator said as it recommended a floating target. But it also came up with another plan.

Getting the ball booted in to touch by the umpire is unexpected in any game and must be somewhat blindsiding those in green jumpers in the RET grand final.

The Australian Energy Market Commission, which makes the rules for the east coast’s national electricity market, is a late contributor to the renewable energy target review being undertaken by Dick Warburton & Co.

Its judgment on the state of play is that the game’s up.

“Based on analysis carried out as part of the AEMC’s retail price trends report, our conclusion is that the (2020) target is unlikely to be met,” says the submission signed by commission chairman John Pierce. “Given the extent of shortfall payments associated with not meeting the target, we do not consider the current policy is sustainable.”

The AEMC’s main recommendation is that the large-scale RET should be moved to a floating 20 per cent target rather than the fixed 41,000 gigawatts goal that has been adopted by the green team as their current holy grail.

Suggestions to the contrary from corporate players have seen them demonised in recent weeks as “dirty” and other things.

However, going down the 20-in-20 route, the rulemaker says, will shift the allocation of risk away from consumers and hand it to investors, “who are better placed to manage (it) and profit from efficient decisions.”

In explaining its view, the commissioner notes that the certificate price of the RET scheme is “a subsidy to renewable energy generators and is paid by consumers through an additional cost on (their) bills.”

And it adds: “it is important to note that the merit order effect does not decrease the total cost of the RET; it is a transfer from existing [fossil-fuelled] generators, which receive lower pool prices, to consumers.

“In effect, a strong merit order effect means a larger cross-subsidy from existing generators to consumers [and] new renewable [suppliers].”

The problem over time, the AEMC argues, is that “a properly functioning market that delivers efficient outcomes for consumers is likely to be unsustainable when price signals in the upstream segment are not informing choices made by consumers downstream.”

For readers who feel the MEGO effect – “my eyes glaze over” – striking about now, the bottom line, as perceived by the commission, is that if the market continues in its present “messy” state, to use the Grattan Institute adjective, closures of fossil-fuelled power plants are likely to put upward pressure on wholesale prices, eventually shifting the RET cost burden back on to consumers.

Where things hit in the fan is when the market muddle sees the high existing RET not reached late this decade and the shortfall charge kicking in for unsupplied green power.

Modelling throws up all sorts of numbers, with a worst case cost, using today’s money values, exceeding $3 billion in 2020. That’s not a prediction, just a scenario.

Mess things up sufficiently, the AEMC says in effect, and you reach a situation where investors aren’t confident enough to build new plant.

When that happens, given the essential service aspect of electricity supply, government needs to step in, bringing with it “the consequent transfer of investment risk on to consumers and the likelihood of higher costs.”

A move back to government central planning, the commission adds, leaves taxpayers bearing the risk of over- or under-investment in capacity.

The AEMC’s main proposition, when all this is taken in to account, is to shift to 20-in-20, but it has surprised a few observers by also coming up with a Plan B.

You could go another way, it says: transition the RET to an emissions intensity based scheme just for electricity.

“This approach would encourage all lower emissions technologies, not only renewable energy, and meet any target at a lower cost.”

The cost, says the AEMC, depends on the target you set and the type of low-emission technologies offered to the market.

Such a scheme might “contribute to the policy certainty [needed] to [give] industry confidence to invest.”

This is not so much booting the ball in to touch as suggesting the game is switched to another code and I can’t think of a faster way to turn green persons red.

Winding up its submission, the commission has a message aimed beyond the Warburton panel to politicos of all colors: it is important, the AEMC says, for efficiency trade-offs and costs to be understood when environment and energy policies are being developed.

“Environmental policies effectively integrated with energy will have a greater likelihood of minimising costs faced by consumers.”

It’s a bit long but this is a message that ought to be on banners all round the ground I reckon.

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