Renewable energy faces a dire future in Australia. Currently, in a climate of repeated reviews and an uncertain future of the Renewable Energy Target scheme, renewable energy investment has all but stopped.
As the federal government prepares to cut back the RET, questions of how renewables can be supported, especially on a state level, resurface. A recent report by the Climate Council calls for strong state action.
The states have stepped up to cover for federal inaction before, when the Howard government refused to expand the Mandatory RET, the predecessor of the current target. When the initial low target was reached, investment in renewable energy stalled. In all states, various renewable support schemes were introduced, including the Victorian Renewable Energy Target scheme (VRET).
It was only when the Rudd government introduced the expanded RET in 2009 that state based schemes such as the VRET were transitioned into the RET.
As state election looms in Victoria it is therefore timely to consider options for the states to step up support their renewable energy industries, given the policy vacuum and uncertainty at the federal level.
Whichever party forms government will have to craft a policy response to restore certainty to the popularly supported renewable sector.
Legal barriers to state engagement
So – could the states step in again to compensate for a lack of leadership at the federal level?
One impediment for strong state action may be a section in the Renewable Energy (Electricity) Act 2000 that provides that corporations need not comply with state schemes that ‘substantially correspond’ to the RET.
The question is whether the relevant section 7c will prevent any state scheme ‘topping up’ the federal target.
However, the amendment was introduced to avoid schemes similar to the RET scheme operating in the states. It was especially meant to support the operation of a single national target scheme – as agreed by the states and the federal government in 2009.
Unfortunately for prospects of reintroduction, at the time the VRET was deemed to ‘substantially correspond’ to the RET scheme. However, ‘feed-in tariffs or other support mechanisms for renewable energy’ were expressly taken to not substantially correspond.
Thus, section 7c does not prevent states from introducing their own renewable energy targets as long as an alternative mechanism to an RET scheme are used to achieve them. Indeed, neither the various state small-scale solar feed-in-tariff schemes, nor the ACT large-scale FIT scheme, have so far been challenged as substantially corresponding to the RET.
What could a state scheme look like?
There are various ways to support renewable energy.
For a long time an ideological divide was drawn between target schemes such as the RET on the one hand and FIT schemes on the other hand.
The latter were non-competitive, with government setting and guaranteeing generation specific feed-in-tariffs for a certain amount of time, usually 15-20 years.
The main advantage of FITs was investment security for renewable generators and protection from the volatility of the wholesale electricity markets. They also allow for generation-specific support, through setting tariffs according to the cost of different kinds of renewable generation. Setting the right tariff level has been the major difficulties of FIT schemes, with overly generous tariff setting leading to unnecessary costs for consumers.
Target schemes, on the other hand, such as the RET or its UK counterpart, the Renewables Obligation, are designed to support the lowest cost renewable energy. Tradable certificates are created for renewably generated electricity, which have to be purchased by retailers to show that they have acquired a set portion of their electricity from renewable sources.
Renewable generators under these schemes sell their electricity in the wholesale market, just like conventional generators. Certificate trading provides them with an additional source of income to cover the higher costs of renewable energy.
RET-type schemes support the cheapest source of renewable energy, in Australia mostly wind energy. They do not readily provide for an opportunity to diversify the renewable energy portfolio by providing support to less established technologies. These schemes also face long-term price risks, because generators face two potentially volatile markets – the wholesale electricity market and the certificate market. This leads to higher financing costs for projects. Indeed, in Australia, it is now almost impossible to leverage renewable energy investment without a power-purchase agreement with a retailer.
New mechanisms emerging
As a new development, hybrid instruments, which combine the advantages of RET type schemes and FITs are increasingly introduced. Examples include the UK contracts for difference arrangements (CIDs), the German direct marketing provisions for renewable energy, as well as the ACT large-scale FIT scheme.
These instruments guarantee a certain rate of return on renewable generated electricity for a long-term, thus improving investment security and access to finance.
Unlike non-competitive FITs, though, these new, hybrid instruments aim to introduce renewable energy as cost-effectively as possible.
This can be achieved in two different ways.
Firstly, in common for all these schemes is the guarantee of a top-up from the price achieved in the electricity market to a pre-agreed level, the ‘strike-price’. Similar to a power-purchase agreement, the contract for difference covers the difference between the wholesale spot market price and the agreed strike price. If the wholesale market price exceeds the strike price, the generator has to pay back the difference. This guarantees that future gains will be passed through to the consumer, and do not just benefit the generator.
Secondly, the setting of the strike price can be achieved competitively, thereby avoiding setting and potentially too generous tariffs, which have dogged many FIT schemes. A reverse auction process s used to determine the lowest price at which a certain capacity of renewable energy can be delivered. For example, the ACT scheme has so far undertaken two auctions for a set capacity of wind and large-scale solar energy.
Unlike the RET, the new hybrid schemes achieve competitive gains not between but within certain sources of renewable energy. This will ultimately allow for the targeted development of a diverse renewable energy portfolio.
Finally, these instruments could easily be adapted to be flexible in the light of future reforms to the RET. The strike price could be set to cover the difference between the price achieved in the wholesale market plus the price achieved for Renewable Energy Certificates.
Thus, if the RET survives the currently planned cuts, or even gets extended in the future, or if the wholesale market price rises, for example through the re-introduction of a carbon price, cost gains will flow back to the consumer.
A true energy transition to a low carbon economy will require a diverse portfolio of energy sources. The new hybrid models of renewable energy support can achieve low-cost diverse renewable energy support, while at the same time closing the gap currently left by federal inaction.
Anne Kallies is a law lecturer at RMIT's Graduate School of Business and Law.