Heavy industry profits from the RET

Analysis by Climate Spectator reveals that energy intensive industries will end up saving money on their electricity bills as a direct result of the renewable energy target. This is due to a combination of large exemptions from the cost of the RET for these industries, combined with the effect of additional renewable energy supply depressing wholesale electricity prices.

When the Renewable Energy Target was expanded from its original 9.5 million megawatt-hours to the new target, energy-intensive industries were granted substantial exemptions from the cost associated with the increase in the RET beyond the original target. For industries like aluminium, zinc, steel smelting, oil refining, and paper production the exemption is 90 per cent of the cost.

While these industries don't have to pay for the full cost of the RET, they can receive the full benefit from lower wholesale electricity prices caused by the injection of additional electricity supply from renewable energy. This benefit turns out to be very substantial and outweighs the costs these industries are required to pay for the RET.

According to the Australian Energy Market Commission's report, Impact of the enhanced Renewable Energy Target on energy markets:

“The LRET [large-scale Renewable Energy Target] will act to dampen wholesale electricity prices by increasing renewable generating capacity beyond the quantity that would have been developed without the additional revenue streams provided by the LRET to renewable generation.”

Essentially what will happen is the subsidy from the RET will induce a lot of extra supply of electricity into a market which is already oversupplied with generating capacity. This will naturally depress the electricity market price. This applies equally to the small scale renewable energy target (or SRES) as well. As shown by University of Melbourne analysis, solar PV has a particularly noticeable impact on prices because it generates most of its electricity during the peak period in the middle of the day during summer.

The modelling for the AEMC is not ideal for estimating the effect of the RET on wholesale prices for a variety of reasons, but does provide a rough indication.  In a scenario where it was assumed the carbon price was not implemented and electricity demand was robust, the RET acted to depress pool prices by $10 to $15 per MWh below what would have occurred without the RET. 

They also modelled another scenario where demand was depressed and the RET acted to lower wholesale prices by $5 per MWh.  However this result is likely to underestimate the effect of the scheme because it assumed a lower level of renewables would be built than required to meet the target. If current wind turbine prices and characteristics were employed, they would have come to a different answer. 

In the absence of detailed modelling, let's assume a mid-point where the RET depressed wholesale prices by $10 to examine the overall effect of the RET on energy intensive industry. For an aluminium smelter as an example, they consume 15MWh per tonne of aluminium metal they produce. With the RET and carbon price in place, the wholesale electricity price in 2020 is expected to be about $70, and without the RET depressing pool prices, it would be $80.

Without the target the aluminium smelter faces an overall wholesale energy bill per tonne of metal of 15 x $80 = $1200.

With the RET the wholesale energy bill is $1050. But then you need to add the cost of the RET subsidy.

I've provided calculations and assumptions in the table below.  For the LRET, its costs are $6.86 per MWh purchased and $2.50 for the SRES. However once you take into account the 90 per cent exemption for the expanded RET the total end cost is $2.48. Multiply that by the 15MWh the smelter consumes and the total amount they pay for the RET and it comes to $37.14 per tonne of aluminium.

Overall the smelter is better off to the tune of more than $100 per tonne of aluminium with the target in place ($1087.14 vs $1200).

It's worth noting that even if the RET depressed wholesale electricity prices by only $5 per MWh, the smelter would still be better off by around $36.

Wholesale electricity costs for aluminium Smelter with and without RET

Assumptions: LRMC for large renewables (wind) - $100/MWh based on discussions with project developers; Ancillary services cost for large renewables (wind) - $6.40/MWh taken from AEMC; Electricity demand and proportion of electricity sales to which RET applies taken from ACIL Tasman