Infigen up, Warburton down?

The wind developer's shares strangely rose after release of the government review recommending the withdrawal of support for wind power. Key executives in the renewables sector believe climate sceptic Dick Warburton is actually helping their cause.

On the day it was revealed that the government-commissioned Warburton Review had recommended the government shut down the wind industry, the share price of one of Australia’s major wind farm developers, Infigen Energy, surprisingly went up by 7 per cent and stayed there the day after. Yet Infigen’s own chief executive, Miles George, told ABC 24 that the two options put forward by the review were effectively a choice between being "shot or hung".

The gyrations of companies’ share prices can be difficult to divine and subject to a complex array of factors. For example, sometimes bad news can be already factored into the share price before that bad news is formally released. Nonetheless, a 7 per cent rise seems to fly in the face of what Warburton and his panel recommended. It has since lost a bit of its gains but remains well above the lows the share price plumbed back in May and June.

However, there could be some logic to such a counter-intuitive move.

Firstly the price of renewable energy certificates, known as LGCs, which provide a premium for power from renewable energy generators didn’t move all that much in response to the release of the Warburton Review report. It seems LGCs have already priced-in all the bad news.

Indeed, the Warburton recommendations could be interpreted to mean that LGC prices are extremely undervalued. That’s because the review suggested that if the government were to freeze the large-scale RET, as it recommends, then some kind of price support for LGCs would be required to ensure prices did not collapse and the value of past investments would be protected. The current spot price of LGCs, around $27.50, would need to be closer to something like $50 – or possibly higher – to do this.

Also, since the review’s report was released Climate Spectator has held discussions with a number of key players in the renewable energy industry. These reveal a group who appear surprisingly upbeat given the RET Review’s recommendations would kill the wind and bioenergy power industry in the country and likely slice in half the market for solar.

This is because they almost universally feel the Warburton Review report is extremely helpful to their interests.

Industry participants were most worried that the fossil fuel interests in conjunction with climate sceptic Coalition MPs would repeat their carbon tax cost-of-living scare campaign against the RET. However, the Warburton Review has confirmed the industry's own analysis that the scheme is more likely to reduce retail electricity prices than increase them. It hobbles Tony Abbott’s ability to repeat his claim that the RET was “adding significant price pressure” to power bills.

In addition, these executives feel the report’s central argument for taking the axe to the scheme is weak and vulnerable. It’s reliance on the claim that the Emissions Reduction Fund would be a cheaper means of reducing emissions they believe fails to carry weight with journalists and economic analysts who for the most part consider that scheme as token fig leaf. In addition, the report’s suggestion that the scheme must be pared back because it is adding to overcapacity in the power market appears to have been greeted with a yawn in the media. It simply serves to reinforce a populist line that it will be big, polluting  power companies that will gain from scaling back renewable energy; not consumers. 

The industry now feel they have a relatively secure beach-head in the Senate from which to defend themselves, and that the government will have to come to them asking for a deal.   

Naturally, they know they can rely on the Greens to hold strong.

But what has been critical is that Labor has seized on this as an opportunity for political advantage.  The leadership group has fallen behind environment spokesman Mark Butler’s position, rather than that of Gary Gray, to reject any move to reduce the target to cap renewables at 20 per cent market share. Also critical is that the leader, Bill Shorten, has been prominent in criticising the Warburton Review. If this external criticism wasn’t there, or was half hearted, the industry believes the Coalition would feel little pressure to resolve the issue. But it’s now apparent that Labor feel they’re onto a political winner with championing the RET.

Lastly, the sector now feels far vastly more secure that Palmer United will block changes. In what must have come as music to the ears of the renewable energy industry, Clive Palmer said in Parliament on Monday that the Warburton Review recommendations on the RET were, “dead on arrival”. He also repeated the sector's central defence against Abbott’s cost of living attack, which is that the extra supply from renewable energy enhances competition, acting to moderate power price rises, with the main winner from a cut to the scheme being incumbent power companies.

Palmer said:

“I would like to acknowledge the efforts of Dick Warburton and his team in taking six months, spending $6 million and reading 23,000 submissions to reveal what we already knew: the RET brings new companies with cheaper prices into the market. It looks like the only winners from this proposal will be the big energy companies.

"Why would we reward the same companies that have been ripping off Aussies for decades? The Prime Minister is not just breaking his promise to retain the Renewable Energy Target he is breaking his promise to try to maintain cheaper electricity prices in Australia.”

Such populist rhetoric clearly oversimplifies the issues but, as Abbott himself has shown, it plays extremely well in marginal seats hypersensitive to power price rises.