Last month, the Climate Change Authority released the first review of the current renewable energy target. It largely called for the policy to remain as is and the report now rests with the federal government, which is required to respond by June.
Climate Change Authority Chief Executive Anthea Harris and Chairman Bernie Fraser explain the process and how they came to their final recommendations.
Tristan Edis (TE): In the report you state that the primary reason for keeping the RET as is, is because it helps supplement a highly uncertain carbon price and also to not undermine investor confidence in low carbon technology.
What about the idea of helping to lower the future costs of renewable technologies through learning by doing and also providing in nearer term more certain reward to encourage private sector R&D?
Bernie Fraser: Learning by doing did form part of our thinking about why you should support a fledgling renewable energy industry.
TE: But in the report … I think you emphasise that Australia’s contribution to any ‘learning by doing’ effect was too small to justify the policy.
But at the same time couldn’t you argue the same thing about Australia introducing a carbon price. That its effect on global emissions is so small that we might as well not do anything? Isn’t support by Australia for a ‘learning by doing’ process about Australia playing a responsible part in addressing a global problem – even if it is a small contribution?
Anthea Harris: Arguments have been put in Australia that local learning by doing was going to be a big part of the story and that the long-term cost in Australia would be reduced because of our own levels of response, so that’s the issue that we looked at, particularly in this report.
There was certainly some evidence of learning by doing for local conditions. We’re certainly not saying that there’s none of that at all, but it wasn’t large and it tended to be fully realized relatively quickly. But much of the projected cost reductions in the wind industry for example are really about global technologies. So yes, Australia plays a part in that… you know, it all adds up in terms of the global deployment rate, but no, it wasn’t seen as the key rationale for the RET.
TE: So, in other words, the view was that even though it might be contributing to addressing a global problem it wouldn’t on its own justify the policy. Am I correct in interpreting that that therefore means that really if the carbon price was very, very certain in terms of its signal, then you might have come to a different conclusion about the viability or the need to maintain the RET?
Fraser: No, we didn’t really dissect it at this particular time. It was more an acceptance that the carbon price mechanism wasn’t in a position to carry the burden of this adjustment at this stage and it would likely be some time before it could. And in the meantime the renewable energy target plays a valuable and necessary role in supporting the transition to a low carbon future.
TE: On this point about the carbon price being plagued by a great deal of political uncertainty due to the lack of bipartisan support in Australia, do you think though that the uncertainty around the durability of the carbon price would be resolved after the 2013 election if Labor was reelected? Do you think we’d overcome this problem around carbon price regulatory uncertainty?
Fraser: Oh, who knows, Tristan, but certainly at this point in time there is considerable uncertainty and we were careful not to add to that uncertainty by recommending any substantial changes either to the LRET or to other important elements of the scheme, which would confuse and perhaps shake the confidence of the investors in the predictability, the sustainability of the renewable energy arrangements.
TE: The target setting for the small scale renewable energy scheme relies heavily on modeling around what might be the uptake of solar systems and other small scale systems at a $40 certificate price and that has been plagued with quite a considerable degree of difficulty in accurately predicting that.
In your preliminary report you talked about the idea of keeping the costs of the SRES below I think it was 1.5 per cent of customer bills. Why couldn’t we just use that, and remove this whole exercise in trying to predict uptake and just say ‘well here’s the target for the SRES, it’s based upon keeping costs below 1.5 per cent with a maximum price for certificates at $40’? You could address the boom bust by allowing carry-over of permits if the cap was exceeded in any single year.
Harris: Look, we looked at all varieties of capping arrangements in place and they all have their particular problems. So, in terms of capping things at a particular….pick your favourite percentage for a household bill – of course there’s a huge degree of variation between jurisdictions and different tariff rates and all those sorts of things. So for me it gets into a fight about how you might estimate that. Similarly with things like payback periods, all those sorts of things that you might want to look at – there’s huge sort of challenge about estimating what that number might be.
In terms of putting in place things like a just a straight STC cap or a gigawatt hour cap, all of those things do run into a boom-bust cycle. Even with banking you run into potential boom-bust kind of situations. Also the small-scale scheme is not like the large-scale arrangement where no one gets surprised. ‘Oh, goodness, you know, a hundred megawatts of wind came out of nowhere’. That doesn’t really happen. You get a bit of warning.
Whereas the small-scale arrangements, it’s lots of little decisions being taken independently by different decision makers in an uncoordinated way, so it’s perhaps inherently an industry where volumes can be unpredictable. You can be in a situation where all of a sudden you’ve reached your cap, prices go to nothing. Then there’s a very long line of very angry people at the minister’s door. So you do have to wonder about the ongoing sustainability of any system that perhaps is almost likely to lead to those kinds of outcomes.
TE: I suppose the alternative argument though would be that it seems quite unlikely that we’re going to get to say 1.5 per cent of customer build in the future with the reduction in the multiplier. So that just sits there as an insurance policy, and at the same time gives people clarity about rules. In the meantime people get $40 a certificate and we remove this constant uncertainty that we’ve already got with consultants trying to predict uptake of solar PV that they regularly get wrong. As well as ministers perhaps intervening in advance of what they said they were planning on doing, in terms of reducing the amount of certificates the systems can earn?
Harris: So if your benchmark was some sort of percentage of customer bill, that doesn’t change that fundamental architecture. So you would still… unless you’ve got something else in mind… you would still be having an estimate for next year so you can set the STC…
TE: Well, no. I mean you would do some kind of forecasting upfront, so… then you lock it in and say ‘right okay here’s your number of certificates that we think is a tolerable cost for community’. We’ve based that on what we think will be the 1.5 per cent. It’ll probably be wrong, but heck here it is and at least we’ve got some certainty and we’ll lock that in out to say 2030.
Harris: So, in practice that would be an STC cap?
Harris: But you still run into that problem though where there is still that risk of breaching it.
So, on balance we think that looking at all the possible combinations and permutations of things that are recommended in this area, so again going back to your point that without the multipliers and generous feed-in tariffs that’s a risk and the really big uncertainty is commercial PV; if, when might that take off?
TE: Okay. I’m going to go onto a topic that hasn’t really been broached at all. Can either of you explain to me why hydro generators built more than three decades ago should still be eligible to earn RECs as late as 2030?
Harris: I’m not sure I’m surprised that this didn’t come up because well as you know, back in the day that this was one of these big issues, you know, the whole issue about their baselines in the first place. But it didn’t come up. It wasn’t a real focus for the review. It wasn’t something that stakeholders were particularly exercised about.
Certainly we had some arguments from the hydro generators themselves, that while they were built a long time ago, the RECs revenue is actually very important for them in being able to maintain and incrementally expand the efficiency of those systems.
And on the whole it just didn’t seem like any kind of threatening problem that needed to be solved.
TE: Okay. I mean that extends more broadly because there are a number of other projects, for example wind projects that have been built on the basis of the prior policy before the expansion in the target. And naturally you could also apply this rule to them and say ‘well really they shouldn’t be eligible after 2020 either for RECs because they built it on the basis of a prior policy’ and that might save consumers money or alternatively allow additional renewable energy to be supported at the same cost.
Harris: Again, Tristan, it just wasn’t an issue that was covered this review. So, it just wasn’t something that stakeholders were exercised about. So, for this 2012 review out of all of the issues that we needed to be focused on that wasn’t one of the priority ones.
TE: Okay. Just one last question and this might be more a question for you Mr Fraser… If we had a blank piece of paper to start with rather than a legacy of pre-existing legislation, do you think that the Climate Change Authority, if they were asked, would still recommend a quite substantial policy to support the deployment of low emission technologies in addition to a carbon price?
Fraser: My guess as a newcomer, Tristan, is yes. It would be a different kind of arrangement with the benefit of hindsight, but there would be a case on the basis of renewable energy constituting this transitional stage through to safer reliance on a carbon price mechanism down the track, way down the track…
TE: Okay, excellent. One perhaps more philosophical question, Bernie, is that some people within senior levels of policymaking have seen the RET as almost a backward step in the Hawke-Keating tradition of deregulating the economy and removing restrictions on competition. For them the Renewable Energy Target is almost an abomination.
Do you look at that and see this as undermining this legacy of moving towards a more competitive market approach to running our economy where we don’t try to pick and choose winners?
Fraser: No, not really.
In the absence of an efficient and well functioning market mechanism which might be conceived to be the best approach to deliver an emission reductionoutcome that you’re talking about. In the absence of that, and the likelihood that any such efficient mechanism is some way down the track and the degree of urgency attached to trying to do something about emissions in the meanwhile, the Renewable Energy Targets are in that sort of space.
And as far as the long-term, the large-scale arrangements are concerned, they are technology neutral. They don’t try to pick winners. They try to allow these lowest cost technologies to rise to the top, and this is basically what’s been happening with the wind generators who are dominating that space.
TE: Okay, I suppose the counter to that is that perhaps they’re supporting the technologies that are most mature and not necessarily encouraging development of less mature technologies that might have greater spillovers – greater technology spillovers and knowledge spillovers?
Fraser: That’s true, but I think the task of promoting and encouraging diversity and infant technologies to become more established I think are the responsibilities of other bodies and I do think the CEFC when it comes into being rather than the LRET.
TE: Thank you very much for your time. It’s very much appreciated.
Fraser: Thank you.