Combet's renewables tick

The renewable energy sector will be breathing a sigh of relief with the release of the Climate Change Authority's final report, which has endorsed the need for the renewable energy target and argued against radical changes.

In addition Climate Change Minister Greg Combet has provided a press release that, while it doesn't state so explicitly, seems to suggest he agrees with the Authority's arguments to make minimal changes to the scheme. 

Target for the Large-Scale Renewable Energy Target (LRET) should be left unchanged

The Authority has resisted calls for the large-scale component of the target to be drastically scaled back to what was pushed by incumbent fossil fuel generators as a “real 20 per cent”. Instead they've recommended it stays at the currently legislated 41,000 GWh.

According to the Authority, a scale-back would have delivered an almost imperceptible reduction in consumer bills. Its modelling estimated the reduction in retail prices would be between $0 and $2 per MWh on average for 2012-2021 and $0-$4 per MWh out to 2030-31. 

At the same time the Authority believed a scale-back would come at the risk of significantly increasing the degree of regulatory risk and uncertainty perceived by investors in greenhouse gas abatement activities. In other words a major cut in the RET would not just undermine investor confidence in renewable energy, but also confidence in any carbon reduction policy measures, including the carbon price. 

Containing the cost of the Small-Scale Renewable Energy Scheme (SRES)

The solar PV sector should be greatly relieved that the Authority has dropped a key initial recommendation aimed at containing the costs of the SRES. This would have granted the relevant minister discretion each year to reset the amount of small-scale certificates solar PV systems would be eligible for based on a 10 year payback estimate. Such a move would have opened the scheme to considerably greater uncertainty because a 10 year payback estimate would be open to widely varying interpretations.

However, as reported in Climate Spectator on Friday, the Authority has included three recommendations that still aim to contain the likelihood of a surge in the cost of the SRES:

1- Systems between 10kW and 100kW in size will be shifted into the large-scale RET, which has a binding cap on the amount of certificates that can be created. 

2- Solar PV systems that can currently claim or deem certificates for 15 years of generation upfront will instead see this deeming period reduced by a year at a time. So in 2017 systems will only be able to claim certificates for 14 years of generation and in 2018 it will be 13 years and so on.

3- The relevant minister responsible for the RET will retain the power to reduce the price cap for small scale renewable energy certificates or STCs below the current clearing house price of $40.

In terms of point one the Australian Solar Council has stated it, “will significantly undermine investor certainty and lead to business plans being ripped up.” However when you do the financial analysis it is possible this could improve the financial returns on these intermediate-sized systems. That's because even though they'll only be able to redeem certificates upfront in five-year blocks, not 15, they're likely to receive a certificate price in the LRET in the range of $50 to $60, instead of about $30 to $40 under the SRES. 

If anything it may be the wind and biomass sectors that should be most concerned about this recommendation. As detailed in the Climate Spectator interview with Oliver Hartley of Q.Cells, it's possible that commercial solar could be as big as the residential market over time. This would take quite a noticeable chunk out of the market for wind and biomass power projects.  

Point two above is clearly a step backwards relative to what solar systems currently enjoy, but it is a major improvement over the earlier proposal from the Authority that would provide certificates according to a difficult to predict method estimating a 10-year payback.  

Point three means the sector will continue to have a figurative sword of Damocles hanging over it – where it remains subject to the whims of a minister, rather than an act of parliament.

Future reviews of the RET

On the issue of frequency and scope of future reviews of the RET, the renewable energy sector has also achieved a win but not all it was after.

The current state is for the RET to be reviewed every two years, something which wind developers argued was making banks nervous and also deterring some electricity retailers signing onto long-term power purchase agreements. Their hope was that reviews be less frequent and the scope constrained to remove the possibility of reducing the level of the target. 

In the end the Authority has recommended reviews be held every four years instead of two, but the scope continue to consider all aspects of the scheme. However it has also provided some reassurance about the potential for future major change (at least if the current personnel remain in charge of reviews), stating:

“In regard to the review scope, the Authority considers that, to encourage investor confidence and predictability, at the time of the next review substantive changes to key components of the scheme such as the form and level of the 2020 target, should only be considered in the event of extenuating circumstances.

“The Authority anticipates that its approach to future reviews will remain consistent with the approach established for this review. That is, the Authority will consider the scheme in the policy context at the time of the review and only make changes if a compelling case can be made.”

Combet's response favourable

Minister Combet issued a press release this morning that implies, but does not explicitly state, that he largely agrees with the Authority's recommendations.

It states that the RET plays an “essential role” and is an “important complement” to the carbon price. Crucially it says, “The government recognises the importance of stability in the nation's climate change policies in delivering clean energy investment and opportunities.” 

This seems to suggest that the government concurs with the Authority that it would be unwise to reduce the level of the Renewable Energy Target because it would undermine investor confidence in government carbon reduction policy initiatives.

Thankfully for the industry the release also states the government intends to provide its response to the Authority's recommendations “early in 2013”.

The sector will also be sweating on the Coalition's response and whether it explicitly commits to the 41,000GWh LRET rather than a “20 per cent target”.