Grattan Institute's renewables shake-up a bridge too far

A new Grattan Institute report proposes a useful policy mechanism - reverse auctions - for increasing the diversity of low emission technologies at Australia's disposal. This would be an excellent replacement for the Clean Energy Finance Corporation, but it's an unrealistic substitute for the Renewables Target.

While there is heated disagreement on what role government should play in supporting low emission technologies, almost everyone agrees we haven’t a hope in hell of keeping global warming below three degrees let alone two degrees, without some pretty radical changes in electricity generation. Whether it be renewables, clean coal or nuclear; none of them are likely to get far based on carbon prices the Australian and international governments are willing to implement over the next decade.

What else should we do other than a carbon price to accelerate improvement of these technologies?

The Grattan Institute, in its recently released report Building the bridge: a practical plan for a low-cost, low-emissions energy future, thinks it has the answer. The details are explained at a high level within the article we’ve published today by Tony Wood, the author of the report.

But for readers the most important point is that it involves a scale-back in the level of support for new renewable energy capacity to approximately 600 megawatts per annum for the next 10 years, allocated through a reverse auction process. While not explicitly spelt out, the Renewable Energy Target, grant schemes (such as the Carbon Capture and Storage Flagships), the Clean Energy Finance Corporation and feed-in tariffs would be dumped. However support for technologies still in early stages of development, via ARENA, would remain.

According to author, Tony Wood, the proposed reverse auction process would overcome a number of shortcomings with grants, feed-in tariffs and the Renewable Energy Target.

By selecting winners and paying the subsidy based solely on a premium for electricity output, it avoids the subjective guessing games we’ve seen with past Australian grant programs. It also has several components within the scheme that should deter speculative and unrealistic bids.

Wood also believes it is an improvement over the Renewable Energy Target because it would support a greater diversity of technologies, through providing auctions for separate technology categories.

Technology diversity is extremely important to control for the fact that:

-- At present it is not clear which low carbon technology or mix of technologies can reliably meet our future electricity needs at the lowest cost; and

-- It takes a long time to develop electricity generation technologies so they can be rapidly scaled-up at an affordable cost. 

The whole justification for government support beyond a carbon price is to accelerate the time and reduce the risk and cost involved in decarbonising our electricity supply. If we put all our eggs into one or just two technology baskets, we could end up stuck in a dead-end without any quick options to get us out.

Wood also thinks an auction is an improvement over feed-in tariffs because competition amongst bidders determines the price premium, rather than government. Additionally, the auction process has built-in constraints over how much capacity gets built, avoiding the installation booms and cost blow-outs that have plagued feed-in tariff schemes when they set the tariff too generously.  

The Grattan proposal is not perfect but it’s likely to be an improvement over past grant programs such as Solar Flagships and the Low Emissions Technology Demonstration Fund.

However it’s probably unrealistic to expect that such a scheme could completely replace the Renewable Energy Target, which already has built-up a great deal of investment momentum and would be incredibly difficult to unwind. Also the auction scheme would not work at all for technologies such as solar PV installed in small project increments on household and business rooftops.

A more realistic way of putting such a scheme into practice would be to use it to supplement the Renewable Energy Target to support a greater range of technologies than just wind and solar PV. For example, the scheme could be designed to primarily support technologies that can supply power on a controlled basis with greater independence from short-term weather fluctuations. This could help drive technologies such as solar thermal with heat storage, battery systems, or coal with carbon capture and storage that are important to augment the variability of wind and solar PV.

Importantly, such a scheme already has a source of funding available – scrap the renewables element of the Clean Energy Finance Corporation, and redirect the money towards funding the auction process.