Q&A: Addressing the peak power problem

In this transcript of the second part of our interview with Ric Brazzale, he explains why there is no need for major change to the Renewable Energy Target and suggests how we can address rising electricity network costs.

In the second and final part of our interview with Ric Brazzale, CEO of Green Energy Markets and Green Energy Trading, Ric talks about:

-- What he’s hoping will come out of the upcoming review of the Renewable Energy Target;

-- What he thinks needs to be done to address spiraling electricity network expenditure and peak demand; and

-- The establishment of a new association to uphold standards for agents involved in creating and monetizing small scale Renewable Energy Certificates or STCs.

The first part of the interview transcript is available here.

REVIEW OF THE RENEWABLE ENERGY TARGET

TE: Ric, what would you like to see come out of the review of the Renewable Energy Target this year?

RB: My company’s primary focus is on the small scale scheme, but as a general principle I’d say just don’t change anything major. Just leave the rules in play and let the market players respond to them.  There is a major risk that the industry and financiers  will lose confidence in the scheme if we’re always tinkering around with it.

But that doesn’t mean that there aren’t some minor things that can be improved.  One area we’re most concerned about is the ability for the minister to reduce the $40 clearing house price under the small scale RET.  The minister is probably not ever going to exercise that power, but whilst that discretion is there, that creates uncertainty in the minds of financiers and other investors.   

But otherwise we need to be careful about change.

A challenge we’ve got is we’re currently working through an oversupply situation in both the LGC scheme and the STC scheme. As a result of that, certainly in LGCs we’ve seen a lack of new projects being committed and a lack of PPAs [power purchase agreements]. But it’s not that the projects aren’t there. It’s just that we’ve got an oversupply situation, so the price is lower than that required to support new investment.  I think we need to just hold our nerve. 

We’ll see some people claiming that the target is too aggressive to meet by 2020 and to call for it to be extended and I think there’s absolutely no case for that.  We’ve got the rules in place, people are behaving on that basis and we’ll just see the price progressively increase as we need the need the new power generation projects.

Certainly we know the projects are there.  There are more than ten thousand megawatts of renewable projects that have either got planning approval or significantly through the development process. So it’s just a matter of time for the price signals to bring those projects forward.

TE: So, you don’t believe there are any question marks about our capacity to achieve the 2020 target?

RB: Absolutely not. 

TE: With the small scale scheme it’s been quite an unusual innovation in that you’ve got government trying to set a target each year for what they think will be renewable energy installations based on a $40 small-scale REC or STC price. But it seems every year they’ve set a target the industry has massively over-delivered.  And in the end the price for certificates is substantially below the $40 clearing house price. 

It seems almost like there’s this systematic flaw in that scheme, or do you feel that it’ll fix itself up over time?

RB: Well, I think the mechanism will work because it’s a self-correcting target.  The challenge we’ve had I’d say is probably twofold:

1) In coming up with projections for the industry part of the difficulty had been that the costs of solar continue to come down, probably much greater than anyone had expected.  And we were one of the consultants that put together projections for the target. When we look back you just didn’t expect costs to come down as much as they did.

2) The other factor is we’ve had the leveraging impact of the solar credits multiplier, particularly last year with the five times multiplier [the number of STCs awarded per MWh of solar PV imputed generation].  This meant the surplus blew out to twenty million certificates quite easily.  I think for this year we’re currently on track for a bit of a surplus, but it’ll be nowhere near that.  In fact, we think it might be in the order of something like seven or eight million certificates, and that’s manageable within the carry forward mechanism. 

So, I think there’s no reason why the scheme couldn’t work.  We’re just caught  in this sort of unexpected price reduction.

But some governments would say this is a great problem to have because you’ve had an industry that’s actually achieved substantially what you wanted to achieve.  You’ve actually got a significant industry now in place.  As I mentioned we are one of the ten largest PV markets globally.  There are more than fifteen thousand people employed in the industry, so it’s a success story by any measure.

PEAK DEMAND REDUCTION SCHEME

TE: Ric, one of the major issues over the last 15 years that you’ve been part of this industry is that the prevalence of air conditioners in households around Australia has gone through the roof. Almost every household now has an air conditioner, whereas very few households had air conditioners 15 years ago. Everyone’s been talking about there being a peak power problem as a result, but no one’s done anything about it.

What are your reflections on this issue and what do you think we need to do to bring electricity costs under control?

RB: We’ve seen rising peak electricity demand drive massive investment in networks. The very large increases in electricity prices we’ve experienced in recent times are substantially due to increased network charges.  And you’re absolutely right.  We’ve been talking about doing something about this for fifteen years. In fact ever since I’ve been involved in the industry, and really it’s been an abject failure. 

And I tend to think we’re actually looking at this the wrong way.  A number of players in the electricity industry see the panacea as time-of-use pricing, but I don’t think that will be effective. But in any case it will take years and years to actually implement that in any reasonable way. 

Yet in the meantime there are a lot of lessons we’ve learned from some of these other market-based schemes whether it’s the RET scheme or the energy efficiency schemes where we’ve over-delivered on achievement of targets.  So wouldn’t it be fantastic if we could over-deliver on reducing peak power demand and therefore in the long term over-deliver on reducing network investment and customer costs? 

And so, I believe that what we should be looking at now is how could we incentivise or create incentives for the reduction in peak power demand in a way that mobilises market forces to deliver lowest costs outcomes. Just as we’ve seen with some of these other market-based schemes.  This needs to be seriously looked at because frankly we just can’t sit by and do nothing about this. 

TE: Why not just send the right price signal to the end households. Why not hit the customer over the head and say look you guys are imposing costs, you need to bear it, and then they’ll respond?

RB: Will they? Is there evidence that they will respond? And certainly will governments sit by and let it happen? 

If regulators are authorizing network businesses to spend huge amounts to cope with increased demand, there’s surely a corresponding benefit in supporting someone else to reduce demand and avoid that network cost altogether. So what we’re talking about here is providing a reward for decommissioning an inefficient air conditioner and installing an efficient one, or putting in battery systems, or a number of other technologies.

But I can’t see it happening – unless you create that incentive.

TE: But how does that incentive work differently to a price signal to end consumers?  Who’s seeing the incentive?

RB: The key point there is the incentive can be captured and internalised by a whole lot of different market players whether it’s the manufacturer, aggregator, energy efficiency service provider.

TE: Energy consumers… The problem is they just don’t have the time or the inclination to learn about those things.

RB: Yes, but if a service provider could internalise that value, then they will be incentivised to go out and knock on consumers’ doors and tell them… and provide a one stop or a complete solution which is typically what customers are looking for.

ESTABLISHMENT OF THE REC AGENTS ASSOCIATION

TE: Ric Brazzale, you’re involved in establishing a new association for agents/aggregators fpr small-scale renewable energy certificates – what exactly do these agents do?

RB: In short, REC agents help the REC market operate by facilitating the flow of funds between electricity retailers and small renewable energy installers which enables the end consumers to get an upfront discount for their systems.  Also the regulatory requirements for creating the certificates for installation of solar is quite administratively onerous. Agents provide a mechanism to actually take a lot of the pain and the hassle out of completing the paperwork for our clients.  So, that’s the sort of role the agents perform.

TE: So why do you need your own industry association?

RB: What we saw happen in the middle of last year, we saw a couple of agents go into administration and left a bit of a trail of destruction.  We saw a number of solar installers who had relied on these agents and thought that these agents were vetted by the government. They were left out of pocket and many millions of dollars were lost as a result. 

What we learnt from that is the need for a code of practice and accreditation. In the long term this is the best approach to have a robust compliance and accreditation program, rather than perhaps some heavy handed response from the government that would potentially impose a lot of costs onto solar companies and solar consumers. 

Our plan over the next couple of months will be to consult with the industry more broadly, government, the regulator on putting together a code of conduct and an accreditation process.  Our objective is to have a robust accreditation process so that consumers and also the solar industry can have confidence that REC agents are going to perform and deliver.

TE: Why not just get government to create the right framework of regulations that will ensure that we avoid a situation of disreputable participants? 

BR: There are regulatory requirements for the creation of certificates, but government typically does not involve itself in the regulation of commercial transactions between organisations specifically for renewable energy.  Typically that’s a role for the likes of ASIC or the ACCC in some circumstances or the Office of Fair Trading in each state. 

But reliance on these groups can end up being a case of too little, too late. This is what we’ve found with the Well Being Green issue last year. Hence there’s an important role for an industry association to prevent these problems happening in the first place.   

TE: What do you see as being some possible things that might go wrong without a strong association such as yourselves enforcing standards through voluntary mechanisms?  Could there be risk beyond just heavy handed regulation though?   

RB: The bigger risk is probably no regulation.  The risk is that the government didn’t do anything and then there is no confidence in the sector is the bigger risk.

TE: And could that undermine confidence in the underlying renewable energy targets?

RB: Yes.  We need to ensure the community and government and the industry have confidence in the renewable energy scheme.  The fact that it has delivered substantially to date and it would be a shame if some poor commercial behaviour by a few select businesses actually worked to undermine the viability of the schemes.  And that’s the risk we saw last year with people  blaming the scheme rather than the practices of some individual organisations. 

TE: A bit like the insulation rebate scheme?

RB: I think the solar installation is quite a lot different from the insulation scheme yet I think there are certainly some parallels there. And certainly our policymakers will always see this in light of the insulation scheme and we’d certainly want to avoid some of the outcomes that happened there.

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