Federal warming

However you cut the global warming policy cake, the critical ingredient is cost and the Rudd government's months of consultation only serves to emphasise this.

While the proposed emissions trading scheme gets by far the greatest share of media attention, the planned large expansion of the renewable energy target (RET) is hardly less important to many involved in the electricity market, whether suppliers or consumers.

Unlike emissions trading, the states are front and centre in the RET negotiations because the Rudd government must win their support in order to merge several regional schemes into a national whole.

It is unlikely that Victoria, for example, will agree to merge its renewables target in to the national scheme unless Canberra accepts that the subsidy will be its program's $43,000 per gigawatt hour (GWh) rather than the $40,000 imposed by the Howard government under the initial MRET (mandatory renewable energy target). The Victorian subsidy is also indexed against inflation.

Nor are some of the states likely to agree to terms unless the Rudd government accepts something that is causing so much angst in developing the emissions trading scheme – exempting trade-exposed, energy-intensive industries from its burden.

The Victorian scheme explicitly exempts aluminium smelting while the NSW scheme exempts designated energy-intensive manufacturers (with state energy minister Ian Macdonald describing the Rudd RET as "a silent assassin" for industry at a meeting with business representatives earlier this year). The Queensland government provides an exemption for large, energy-intensive customers for its low emissions target scheme, which has helped to drive the highly successful development of coal seam methane as a generation fuel.

The critical issue here is what is defined as energy-intensive. Overall, the major users in manufacturing, employing more than a million people, buy a third of all the electricity consumed in Australia.

The aluminium sector, which uses about 15 per cent of total Australian power consumption, is lobbying to be excluded from the baseline for the target – which alone would reduce the target by 9,000 GWh a year.

If the Rudd government accepts such exemptions, it is going to have to back away from its election commitment to achieve 20 per cent electricity use from renewables by 2020 – a target based on demand (calculated on current growth trends) at the end of the next decade standing at 300,000 GWh a year.

The scheme proposed would cover 60,000 GWh in 2020, made up of 15,000 GWh of power provided annually by the hydro-electric generators (not beneficiaries of the existing MRET), the 9,500 GWh from 2010 resulting from the Howard MRET and the estimated 35,500 GWh a year from new supply that it is estimated would be needed to meet a 20 per cent share. The supply requirement from new investment would be higher if the existing hydro-electric systems were unable to deliver their full share because of low water availability.

One business argument to the government is that it should cut its losses and go for simplicity – specifying a percentage of wholesale power purchases to be met from renewables each year after deleting the energy-intensive manufacturing share.

The energy supply industry, in any event, is telling the Federal government that its current 2020 ambition, and the $4 billion worth of transmission investment required to serve it, would be a "vastly bigger" generation development program in a decade than Australia has ever attempted before, especially when taken with new investments required to replace coal-burning plants stranded by emissions trading.

Estimates of the renewables generation expenditure needed vary according to the modelling exercise, but if the whole supply had to come from wind farms, it would involve building 13,000 MW at a cost in today's terms of about $33 billion (wind power is estimated to have a delivery capacity factor of about 30 per cent, much less than conventional, fossil-fuelled plants not dependent on variable weather).

The Energy Users Association, representing major industrial consumers, goes so far as to claim that $50 billion in renewables investment will be needed.

Phasing in the 20 per cent by 2020 target would earn the renewables industry a cumulative $12 billion in subsidy income over 10 years, to which would be added the going wholesale price of power and this, in turn, would include whatever carbon charge was being imposed under the emissions trading scheme. It is claimed that the RET by itself will push up retail prices by about 10 per cent in 2020.

The Federal government is committed to having the new RET in place by the middle of next year, which does not leave it a great deal of time in which to finalise negotiations with the states, complete drafting the legislation and win approval in the Senate. Some observers believe the government's aim will be to produce legislation that the Opposition can support because it does not want to be held to ransom in the Senate by Bob Brown and the Greens (or to give then a political win they can put to use at the next election).

The government's decision making has to include an awkward landing on when to phase out the RET because, in theory at least, it should go when emissions trading is fully functioning (supposedly 2020).

Renewable investors need projects to be subsidised for about 15 years to win the development finance they need and their ambit claim is for the scheme to be fixed in place to at least 2030 – and also for the subsidy to be indexed to inflation (which Howard refused to do).

There is very serious money at stake in all this – an extra 10 years of subsidies at $43,000 per GWh, multiplied by 35,500 GWh, would deliver a cumulative $15 billion in revenue between 2020 and 2030 before indexation against inflation. By comparison, the existing Howard MRET is estimated to cost consumers an extra $320 million to $540 million a year from 2010 to 2020.

It is estimated that the Rudd RET as currently planned will deliver about 20 million to 30 million tonnes a year of carbon dioxide abatement by 2020.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.