Getting it right on clean energy subsidies

The proposed $10bn Clean Energy Finance Corporation (CEFC) a very significant development in the subsidy of renewable generation. It joins a variety of government R&D and deployment subsidy programs to be consolidated under a new agency – the Australian Renewable Energy Agency (ARENA), the Renewable Energy Target (RET) and Small Scale Renewable Energy Scheme.

We now have rebates, grants, tradable certificates, feed-in tariffs, subsidised loans, credit guarantees and government equity in our renewables subsidy armoury. In the taxonomy of subsidy mechanisms, almost all the possible bases are now covered.

While electricity users are likely to continue to bear the brunt of renewables subsidy under the RET, through the creation of CEFC and consolidated ARENA it seems that government is now also coming to the party in a serious way, funding its contribution at least in part through emission permit income.  

If these policies come to fruition, renewable electricity is surely going to start to enter the big league in Australia as it has in some countries in Europe, states in America and provinces in China.

This is not to suggest that subsidising renewables is some new discovery in Australia. Significant subsidies have already been paid (and are payable) for renewable plant already commissioned. But the track record is not glorious. In terms of renewable energy production or greenhouse gas mitigation, there is not much to show for the substantial outlays.  Australia is not unique in this. In other countries success – measured in terms of value for money - seems to be the exception rather than the rule.

Designing and successfully implementing a renewables subsidy mechanism is a non-trivial task. Seemingly insignificant details turn out to be very important. There can be few policy areas as pregnant with unintended consequences as this. Careful design and disciplined execution are both very important.

The CEFC is potentially a very significant development. The Government's announcement is that it will receive $10bn over five years, and that it will eventually become a self-funding entity. Will it be able to borrow against its Government subscriptions and through that double or triple its balance sheet? Will its focus be on early stage technologies, providing R&D grants, or early-stage venture capital? Or will it see its task as “turbo-charging” the deployment of the most viable technologies? If its focus is on levelling the playing field for less economic technologies, will this crowd-out the most viable technologies, as PV feed-in tariffs and REC multipliers have done for wind farms? Having clear objectives could not be more important.

Australian now has extraordinarily ambitious renewables subsidies. A lot of money is on the table. There is a great deal to think about in ensuring that the money is wisely spent. Institutions need to be strengthened, and governance structures established to ensure that the thinking is done, that it is widely consulted upon and through this the very best ideas and high quality execution is brought to bear. For the sake of our tax-payers, electricity users, renewables developers and the environment, we must learn from past mistakes.

Bruce Mountain is the director of Carbon Market Economics