Power retailers could turn renewables victory into defeat

Large-scale wind and solar project developers could win minimal change to the RET under current negotiations, only to be undermined by a Coalition government sanctioned strategy of civil disobedience by power retailers.

So far, it appears the Abbott Government has been caught flat-footed and unprepared by the fightback mounted by the renewables industry against the attempt to slash the Renewable Energy Target.

But could the renewables sector be too successful in defending the scheme against attack?

At present the renewable energy lobby is arguing that there’s no justification for change, so just leave the scheme 'as is'.

For the small-scale solar sector such an approach makes good sense. The scheme continues to work for solar companies in spite of considerable uncertainty hanging over its continuation because the subsidy is received upfront on installation of the system, rather than as electricity is generated.

In addition the sector has very strong community support across the political spectrum and households are direct beneficiaries of the scheme, so politicians are wary of taking a knife to it. Even one of the most openly vociferous opponents of the Renewable Energy Target, Angus Taylor, has in more recent times adjusted his stance in favour of solar while still opposing the large-scale scheme.

However, for the large end of town – involving wind and megawatt-scale solar farms – there is a risk with a strategy of conceding no ground. The large-scale projects really need a deal between Labor and Liberals that will stick. If it’s not perceived as lock-tight then everything could unravel.

It’s possible that under the present negotiations that Labor, spurred by the renewables lobby, play extreme hardball in negotiations with the Liberals. There is no budging in the date at which the final end-target is to be achieved (2020) but a token concession is offered of a small reduction in the target to exempt the aluminium smelters. This might mean 39,000 gigawatt-hours by 2020, instead of 41,000.

Such a target would require a three-year surge with project developers dramatically scaling-up from their current hiatus to commit to construction of somewhere between 2500 and 3000 megawatts next year and a similar amount the year after, before then declining to about 1500 to 2000 MW the year after before pretty much dying.

The Liberals, keen to just get the issue off the table before the 2016 election, reluctantly take this offer. But they let it be known, with perhaps a wink and a nod to the power retailers, that they strongly believe the target can’t be achieved. While going into the election they publicly state they have no plans to alter the scheme, although possibly hinting at some caveats to their commitment.

The power retailers take this hint to mean that if it becomes clear that insufficient projects are being constructed to meet the target, then the Coalition, if re-elected in 2016, will re-prosecute the case to have the scheme closed, with existing projects grandfathered.

The large retailers – EnergyAustralia, Origin Energy, AGL and GDF Suez (who owns Simply Energy)  – could then enact a civil disobedience strategy. One by one they announce in public that the target is impossible to meet. This acts to signal intentions to rivals, so they each know they will not be competitively disadvantaged if they fail to contract or build sufficient renewables projects to meet their legal obligations.  Helping to reinforce such informal co-operation is that they each know the others’ commercial interests are served by seeing the scheme frozen.

The big retailers then make token attempts to comply with the target, contracting or building a few hundred megawatts of projects, but well below the more than 2500 MW required in 2015 to avoid falling short of the target in 2017. They argue that they are doing the best they can, but it is impossible to scale-up to several thousand megawatts in such a short period of time.

The Coalition is re-elected in 2016 and then in 2017 the shortfall hits and retailers start paying the penalty. 

The Coalition Government argues that this means the design of the scheme must be revisited, as it simply represents a tax on energy consumers with no benefit to the renewable energy industry or the environment.  Labor and/or Palmer United feel compelled to co-operate given the negative press surrounding this apparent new tax. Consequently the large-scale RET is hastily amended dramatically downwards.

Such a scenario is entirely conceivable. The reason why is because just four power retailers completely dominate the contestable retail power market, and all of them would be major beneficiaries from a radical cut to the scheme because of their significant ownership of fossil fuel generation (as would the largest retailer in WA – Synergy). The potential to gain significant market share by going against the tide and seeking to comply with RET obligations is quite limited because the cost of the RET is a small percentage of final-end prices. On the counter-side it is actually quite risky for a retailer to strive to comply if you believe the government would like to severely scale-back the RET. 

Because of this reality, it is potentially in the renewables sector’s interests that the large-scale target is pushed back in time to require a more moderate level of annual project construction but over a longer period of time (provided the scheme's life is extended beyond 2030). This could give them the same amount of project capacity to build and improved financial returns, while at the same time being immune to claims that the target cannot be met and a sly game of government-sanctioned civil disobedience.  

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