The Renewable Energy Target Review has cast a distracting shadow over what is really at stake for the renewable industry and energy retailers moving forward.
Unless a renewable energy policy, like the RET, is fundamentally flawed, it is highly preferable to maintain it in its current form than to amend it. There are a number of examples where the slight alteration or winding back of a regulatory mechanism has resulted in the implosion of a renewable industry, often ensuring that it will take years for it to recover.
Regardless of whether the RET continues in its current guise, a significant amount of renewable energy capacity will still need to be built by 2020. To achieve this, global experience suggests the RET should ideally comprise a balanced portfolio of renewable generation. With this in mind, it is critical that liable entities under the RET (i.e. energy retailers) are actively encouraged to participate in programs like ARENA and the CEFC in the near-term.
The critical decision for ARENA and the CEFC is whether they should be enabling projects with participants that merely view their programs as tools for opportunistic profiteering, or rather, with participants that have been involved in power projects in this country for many decades and will certainly be involved for decades to come.
The involvement of traditional power market players, such as the liable entities and Australia’s large institutional banks, will only ensure viable and replicable projects are proposed and delivered under ARENA and the CEFC. It will also serve the dual purpose of lending a significantly higher degree of credibility to, and spurring broader industry adoption of, emerging renewable technologies.
Enemy or ally?
Why are energy retailers considered the enemy?
Like any oligopoly, energy retailers command their fair share of market power. But this is the case in any mature sector that has been deregulated – be it energy, supermarkets, retail banking or any number of other established industries. This paradigm should not be cause for concern, but rather, a positive affirmation of the fact that Australia benefits from a free and efficient capitalist market system.
To this end, the involvement of an energy retailer in a renewable energy project only serves to heighten its economic and commercial viability, especially through the provision of a long-term revenue stream that institutional banks will finance against.
Renewable industry participants and policymakers need to accept that any mature, deregulated industry will over time result in a concentration of market leaders. Trying to unwind it or crying foul is a waste of valuable time. Similarly, given energy retailers are for-profit enterprises whose primary obligation is to their shareholders, the renewable industry should stop being shocked and appalled when energy retailers promote policy positions that are aligned with their financial interests.
So who will be responsible for commissioning the renewable generation plants that will meet the RET? Who needs to adopt now, in order to safeguard the sector once programs like ARENA and the CEFC cease to exist?
In its second quarter 2012 Australia REC Market Outlook, Bloomberg New Energy Finance indicated that almost 11GW of new renewable energy capacity is required between 2012 and 2020, in order to deliver on the current 41TWh RET.
So the answer is pretty clear. Energy retailers are not the enemy. They are the liable entities essential to achieving the aggressive development schedule required to meet the current RET. Although their respective views on how the RET should be measured and structured may differ, the simple fact remains that whatever the outcome of the RET review, it is the energy retailers that will be deciding which projects get developed and which technologies those projects will incorporate.
Giving peace a chance
The first step is ensuring that energy retailers, in addition to Australia’s large institutional banks and equity investors, participate in the kinds of opportunities that ARENA and the CEFC will provide.
ARENA and the CEFC are largely regarded as being critical to bridging the commercialisation gap that currently exists for every renewable energy source except for wind. Recognising that they need to be crossing that gap hand-in-hand with those that will be responsible for developing renewable projects under the RET after ARENA and the CEFC no longer exist should be critical to their respective mandates.
This is why the structure of both bodies is so important. Underpinned by strict viability criteria and efficient and effective review processes, ARENA and the CEFC will be adequately armed to encourage liable entities to participate. Sensible project viability criteria will also transfer the responsibility to pick winners from government to the private sector, which is ultimately where it will have to reside. There is no long-term benefit in shielding the renewable industry from the grown-up world of our deregulated power market.
Feed-in-tariffs and contracts for difference merely provide a crutch that precludes the need for typical power market participant involvement. This may be attractive in the short-term, but less so over time when companies unaccustomed to dealing with a typical power market transaction procurement process are ill-equipped to survive without the government running defence.
If ARENA and the CEFC were to implement mechanisms such as feed-in-tariffs and contracts for difference that leave no role for energy retailers or institutional banks in selected projects, the inevitable outcome will be a boom and bust cycle that has become common in similar programs globally. Avoiding indirect exclusion of key power market players is equally as important as promoting direct encouragement of their participation.
Let’s get real
Adoption by energy retailers will require government to rethink its role in incentive programs by allowing traditional power market participants to lead project selection and profiles. Energy retailers are in favour of a more diverse renewable generation portfolio, they just need to be given the platform to embrace one.
Until emerging technologies are cost effective, appropriate economic support in the short-term is needed to encourage energy retailers and institutional banks to participate in projects that are not yet economically viable. Criticising them for not entering into PPAs or financing arrangements for projects that do not exhibit appropriate economic and commercial viability characteristics displays misguided judgement and a lack of understanding as to how the real commercial world works.
Whilst the RET debate rages on, significant thought must be given to how liable entities under the RET (in whatever guise it may take) are being encouraged to participate in programs like ARENA and the CEFC now. ARENA and the CEFC need to look beyond their existence as to what the renewable energy landscape will resemble once they are gone, who will be developing, financing and owning those projects, and ensuring that they are the entities that are being encouraged to participate today. This is the only way to defend against building a commercialisation gap bridge to nowhere.
Equally important is changing the tone of the debate within the renewable industry as it pertains to energy retailers. We do not have to agree with every policy position that they promote, and we can still agitate for change. But we do have to recognise that having a bifurcated renewable market and wholesale power market is not in our long-term interests.
Energy retailers are the incumbents in Australia’s power market, they are the only entities in the country that are obligated to procure a significant amount of renewable generation before 2020, they are not going anywhere, and they can no longer be viewed by our industry as the enemy.
Jack Curtis is Vice President – Business Development and Sales, First Solar, Inc.