Imagining where Warburton went wrong

Yesterday in the article, Reading Dick Warburton's mind,  I imagined what were likely to be the findings of the Warburton Renewable Energy Target Review, based on the available indicators. Today I've delivered a possible response to its findings from the perspective of the renewable energy industry. 

Dear Prime Minister Tony Abbott,

Your RET Review Panel’s recommendation to abolish the Renewable Energy Target is highly problematic.  

Since 2007, when it became official government policy to expand the target, our businesses and several thousand staff have set to work to deliver on the target. This has involved considerable investments by both domestic and international investors and, indeed, a large number of individuals who have dedicated their careers – often at considerable sacrifice – to successful achievement of this goal.

This has been done with an understanding:

1) that there is overwhelming support among the general community, as illustrated by a variety of surveys; 

2) and expansion and adjustments to the scheme have been passed not just by Labor, but also Coalition parliamentarians.

The RET Review panel suggests that because the scheme will be preserved for existing projects this does not damage investments made in good faith and will not have damaging flow-on consequences.

We must beg to disagree.

While the investment of financial capital is greatest when a renewable energy project is built, considerable resources have been invested by both companies and individuals in building up a pipeline of projects, intellectual capital, skills and supporting infrastructure capable of delivering the target as currently legislated.

If the scheme were to be frozen at current levels then much of this effort will come to nothing. To waive this away as unimportant is a bit like saying that the only thing of value in BHP-Billiton is its operational mines. Meanwhile, its resource exploration data, future mine plans, engineering and marketing expertise – as well as the skills of its people – are worthless.

We have participated in this review in good faith but must admit that we are left confused about whether the Review Panel appreciate the broader, longer term policy context that needs to guide it.

The official policy of this government is that you agree with Labor on the need for Australia, in conjunction with countries overseas, to substantially reduce greenhouse emissions to contain global warming to around 2 degrees above pre-industrial levels. Such a goal requires the complete decarbonisation of Australia and the globe’s electricity supply within a few decades (by the way, Australia has the most emissions-intensive electricity supply in the developed world – higher than China’s).

Yet the review panel has structured its analysis as if emissions reduction efforts beyond 2020 don’t matter.

The idea that a 2-degree commitment is consistent with a carbon price of $9.50 per tonne of CO2 in 2021 rising at 3 per cent per annum, as incorporated in the review panel’s economic modelling, is simply ridiculous. This makes the panel's claim that the costs of the RET outweigh its benefits completely invalid. We would point out that use of this single value is completely out of step with guidelines for regulatory cost-benefits analysis set by both the United States and United Kingdom governments.

Now, if your government is indeed genuine about Australia doing its fair share in a global effort to decarbonise electricity supply, you need to recognise this requires upfront capital investment in projects costing hundreds of millions apiece. These then typically take a decade or more of operation to recover those costs. As you can imagine, with such large amounts of money sunk into these projects, perceptions of regulatory stability and risk are extremely important.

Your review panel has suggested that you should make an abrupt and significant change to a policy mechanism, in the RET, which has proven itself to be quite effective at supporting such long-lived investments. Indeed, it has already underpinned investments of several billion dollars.

In its place they propose a replacement, in the Emissions Reduction Fund, that:

– has a funding commitment time horizon of just four years (and subject to a yearly expenditure review);

– involves a contract that provides revenue only lasting five years;

– is yet to be properly and transparently costed;

– is yet to be legislated; and

– exists as little more than a thumbnail sketch. 

Please forgive our bluntness, but to suggest the ERF would be a better policy response than the RET for decarbonising our economy requires extraordinary imagination beyond that possessed by our investors and bankers.

We would also point out that ACIL Allen’s assessment of the cost of abatement for the small-scale RET is highly abstract and difficult to reconcile with market outcomes. We think it is important to point out that the staff member chiefly responsible for this cost estimate, Owen Kelp, acknowledged this modelling was subject to considerable weaknesses and uncertainty. In introducing the findings from his modelling of the small scale RET, he told an audience of public stakeholders that it was "notoriously difficult to forecast" solar demand. Asking himself aloud how much error there might be in his results, he said "a lot". He also acknowledged that "I no doubt recognise this will be horribly wrong".

The review panel suggests that with demand having declined substantially it is necessary to reduce the level of the target because it is inducing new power supply into an already oversupplied market. We struggle to understand the public policy benefit that justifies such an intervention. It will have no benefit for power reliability as more supply than demand is good for reliability. Also, more supply should mean lower prices for consumers.

In addition, arguments that this has undermined investor confidence for future investments are also likely to be untrue. Almost all the power generation capacity in Australia owned by the private sector (more than 20 gigawatts) was purchased by its current owners after 2007 when the expansion of the RET became official government policy. 

Meanwhile, we can assure you that abolishing the target or cutting it to a ‘real 20 per cent’ will shatter the confidence of the investors who are looking to construct the low carbon power infrastructure Australia requires in the future. In addition it will increase risk premiums these same investors apply in financing other vital infrastructure in Australia.

It’s important that we correct you on your suggestion that the RET is adding significant pressure to power bills. Over the last few months there have been several attempts to model the costs of the RET. None of them are likely to be precisely right, but most indicate that energy consumers are better off keeping the RET as it currently stands or even expanding it to 30 per cent by 2030, with the costs borne largely by power generators. Even the modelling commissioned by the biggest critics of the scheme suggested the extra cost was perhaps, at worst, a few extra dollars on an average household’s $500 quarterly bill.

In addition, the latest contribution to this tsunami of economic modelling, by Jacobs SKM, which considered the possibility of lower electricity demand growth, found consumers would be worse off if the RET was closed.

Lastly, we would like to conclude on a positive note. By virtue of Australia’s location, vast land mass and low population we have a major competitive advantage in power from wind, solar and bioenergy. As the cost of this equipment continues to decline Australia could be one of the greatest beneficiaries. We are now beginning to put in place the skills and capital to exploit this advantage. For example, we are the lowest cost installers of residential solar in the world. 

We would welcome the opportunity to show you some tangible examples of what we are capable of achieving and allow you to meet a few of our thousands of talented and passionate staff. It would be a tragedy to see this go to waste.

Yours sincerely,

The Renewable Energy Industry