Origin and EnergyAustralia's policy disobedience

Having successfully campaigned to get the carbon price neutered, Origin and EnergyAustralia are arguing the same fate should await the Renewable Energy Target. And they're very confident they'll get their way... again.

The corporate equivalent of civil disobedience on renewable energy laws continues on the front page of the Australian Financial Review on Thursday. Having succeeded in getting the carbon price watered down from $24 to something likely to fall below $10, Origin Energy and EnergyAustralia are now arguing this means the Renewable Energy Target must be neutered too.

According to Origin’s Grant King, “You can’t tamper with one without having to open up the other.”

EnergyAustralia’s Richard McIndoe also argued that the target was impractical because it couldn’t be met in time and so they’d just end up paying the fine for non-compliance.

Yet there’s one problem with their rhetoric: it doesn’t align with what they’re doing in the marketplace for large-scale renewable energy certificates, referred to as LGCs.

Under the Renewable Energy Target, if a retailer fails to acquire the required amount of renewable energy, they pay a fine. This fine, once non-tax deductibility is taken into account, equals nearly $93 for each LGC (equivalent to a MWh of renewable energy) a retailer is short of their obligation.

If the retailers were making a genuine effort to comply with future RET obligations, but thought renewable energy supply would fall short, then logic dictates they’d be buying up LGCs whenever the price was a few dollars below $93. Yet the spot price of LGCs last traded at $31.75 and there’s not much interest from retailers as buyers according to participants in the market. 

It does not make any economic sense that retailers are passing up the opportunity to buy LGCs at about $32, if they think they’ll be paying $93 instead.

If the move from a fixed carbon price to floating was a critical development that suddenly made the RET so difficult to achieve, then why didn’t the LGC price noticeably spike up at this time, instead of just decline? According to the AFR, Origin’s own estimates are that LGCs will need to rise to $53 to adjust for the drop in the price of wholesale electricity with the move to a traded carbon price. This didn’t happen. What’s more, $53 is a long way south of the $93 penalty. 

So does this suggest that there’s not a problem at all in reaching the target? Not really. 

The reality is that we are running out of time to be able to build enough renewable energy projects to meet the legislated target. This is touched upon in the interview we are running today with Michael Fraser of AGL, but was also explained in more detail in an interview from last year with Infigen CEO Miles George. Current LGC prices do not reflect the fundamentals of supply and demand and need to go higher.

So why is the LGC price so low if we desperately need to start building more renewable energy projects? It’s pretty simple – Origin Energy and EnergyAustralia are taking a calculated risk that they won’t ever have to pay the fine.

Right now the clock is running down such that in another year and a half a Coalition government could quite rightly say it’s not possible to meet the target, therefore we need to lower it.

Origin Energy and EnergyAustralia then end up at less of a competitive disadvantage to AGL, which has a better renewable energy project portfolio. In addition this will help reflate the wholesale electricity price to the benefit of their fossil fuel generation portfolio.

Origin Energy and EnergyAustralia complain a lot about regulatory uncertainty. Yet if they were to stop actively lobbying for the RET to be downgraded, and instead started seriously contracting for LGCs to meet the target, they could single-handedly remove the major cause of uncertainty surrounding this scheme.

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