Origin's fickle renewables outlook

Yesterday I reported that Grant King, CEO of Origin Energy, called for the level of the Renewable Energy Target to be reduced from 45,000 gigawatt-hours (GWh) to 35,000, which would be devastating for the renewables sector.

King's argument stems from the idea that even though the target is legislated in GWh, it is communicated as 20 per cent market share by 2020. In the past few years consumption of electricity from the grid has dropped off markedly, so therefore we need less renewable energy in 2020 for it to achieve 20 per cent market share. 

In light of King raising the issue, it's worth examining some background around the target being set in units of energy and not a percentage of demand, because there's no technical reason why the target couldn't be enacted through percentages.

Back in December 2008, when the government was trying to decide how it should alter the legislation to increase the RET, it issued a consultation paper. This paper specifically stated:

“Stakeholders' views are sought on possible approaches to setting annual targets and their implications for investment mix, generation profile and cost of the measure.”

Origin in its submission to this consultation paper did say, “Origin strongly supports the Australian Government's key election commitments on climate change, including increasing MRET to 45,000 GWh or 20 per cent by 2020.”

But its submission did not even once hint that the target be set as a percentage of electricity consumption rather than in GWh. If this was such an important issue from Origin's perspective, then why didn't the company raise this when it would have been most useful – when the expansion was being legislated?

It is also worth noting that in subsequent government consultations on changes to the RET, Origin did not once flag a concern with a GWh target. 

This issue was actually examined in detail back in 2003 as part of the Tambling Review of the Renewable Energy Target. The Review committee concluded:

“While acknowledging that several submissions called for a percentage target, the Review Panel became convinced during its consultations that any future target should continue to be expressed in terms of a fixed GWh level. By their nature, projections of electricity demand contain a degree of uncertainty. The changes in projected electricity demand that have occurred since MRET was announced demonstrate that a percentage-based target would require the corresponding generation level to be regularly revised. This would adversely impact on market certainty.

“Risk is a key factor in investment decision making, so that any changes to MRET that would reduce market certainty would also reduce the prospect of attracting the required financial backing for projects. The Review Panel considers that a fixed target is more compatible with market certainty, with MRET's industry development objective, which defines a level of renewable electricity generation rather than a percentage of a fluctuating electricity market over which the industry has no control.”

Indeed, these issues were front of mind for the renewable energy industry in the lead-up to the 2007 federal election. Myself and others involved in the renewable energy industry insisted that Labor specify the RET expansion in gigawatt-hours, and not just a percentage.

This is because gigawatt-hours are a physically measurable quantity not open to wide interpretation. Also, it is what ultimately matters for those planning and investing in power projects. A percentage on the other hand was open to a myriad of creative interpretations. As an illustration, the Queensland government specified its 13 per cent gas target in a way which excludes a range of large industrial energy users!

There is a range of issues in continuing with a GWh-based target, but regularly adjusting it to fit with changes in forecasts of electricity demand, which King seems to be proposing.

As one example take Origin's use of AEMO electricity demand data in King's presentation, shown below. This fails to account for the fact that a notable part of the reduction in electricity demand is due to installation of Solar PV and Solar hot water. These are assessed as contributing towards the renewable energy target, but aren't measured by AEMO in calculating electricity demand.

If you used Origin's approach this leads to an accounting  error.  To illustrate, imagine electricity demand in 2020 was 100MWh so a 20 per cent RET would be 20MWh. If solar PV generates 10MWh, this would be counted towards the RET, leaving another 10MWh that needs to be generated from other sources to reach 20 per cent. But AEMO would measure this 10MWh of solar as a reduction in electricity demand to 90MWh. Grant King would then declare that the RET be reduced to 18MWh. This would leave us with 18 per cent renewable energy, not 20 per cent.

In addition while Origin forecasts that electricity consumption in 2020 will be 250,000 GWh, the Bureau of Resource and Energy Economics forecast just in December last year that it would be 289,450GWh. This hardly justifies any change to achieve 20 per cent.

I don't actually think the Bureau's forecast is any better than Origin's, but what it illustrates is the impracticality of chopping and changing the target because someone's forecast of energy demand has changed. Origin could have argued for the target to be specified as a percentage back in 2009, or even in 2010, when substantive changes were made to the RET legislation, but it didn't.

To close on this topic it's worth repeating Origin Energy's own advice to government on the issue of regularly changing the RET (taken from a January 2010 submission):

“Clear and stable regulatory instruments are necessary to achieve sustainable long-term climate change policy. We observe that the frequent changes to the UK Renewables Obligation and the California Renewables Portfolio Standard have been correlated with failure to meet policy objectives. We believe that ongoing regulatory change is one of the biggest risks facing the RET market.”