Reading Dick Warburton's mind

How might the RET Review panel chair Dick Warburton and his colleagues frame their argument? Here's a preview of what might be the opening letter of their report.

While it is impossible to know for certain what the RET Review might ultimately conclude, there are a range of guideposts available to channel the thoughts of Dick Warburton and his fellow review panel members. Here’s my shot at what the Review Panel might say, based on a range of sources that provide hints as to what will have influenced their views. Tomorrow I'll consider how the renewable energy sector might argue its response.

Dear Prime Minister,

Thank you for the opportunity to lead this Review of the Renewable Energy Target. We took a great many submissions and listened to a wide range of stakeholders around the country.

Much has changed since the RET was originally conceived and implemented by the Howard Government back in 2001, and expanded in 2009. It is worth noting that the scheme has already reached a level of renewable energy production that is around twice the size of the original target set by the Howard Government. Meanwhile, expected growth in electricity consumption has plummeted to be 15 per cent lower than what was forecast when the RET was expanded. This plunge in expected consumption demands a re-evaluation of the settings for the RET. 

After much consideration the review panel has come to the conclusion that the costs of the RET outweigh its benefits and the scheme should be closed to new entrants. New renewable energy projects would still be eligible for support as they could bid in to the government’s Emissions Reduction Fund. Also, investments in existing renewable plants would be protected as they would continue to receive a premium renewable energy certificate payment for power that these plants produce.

Modelling by ACIL Allen finds there would be a reduction in resource costs of $12.8 billion if the scheme was closed to new entrants.

These findings, that costs outweigh benefits, are robust even with a sensitivity for a price on carbon (linked to expected European emission permit prices from 2021 onwards).

In addition, these costs could be greater depending on assumptions and taking into account flow-through impacts across the macro-economy. For example, Deloitte Access Economics found that abolishing the scheme would provide a $28.8 billion benefit to the broader macro-economy.

In the end the RET represents a high-cost means of achieving greenhouse gas abatement because it restricts the available options for reducing emissions. The cost of the large-scale component of the scheme is $54 per tonne of CO2 abated, which is an order of magnitude larger than abatement under the UN’s Clean Development Mechanism. And the small-scale scheme, which largely supports solar, has an astronomical cost per tonne of CO2 abated of $186.

A policy that was open to a broader set of abatement options is likely to achieve the government’s emissions reduction goals at lower cost. This has been pointed out by the NSW’s Independent Pricing and Regulatory Tribunal and has also been observed by the Productivity Commission.  

We note that the government’s Direct Action Emissions Reduction Fund is intended to be open to any source of abatement, irrespective of technology. It, therefore, represents a better policy mechanism for cutting carbon emissions than the RET.  

In addition, the cost of renewable energy has now declined to such a degree that it is beginning to compete on level terms with fossil fuels in some circumstances, as detailed by Bloomberg New Energy Finance. It therefore seems that past rationales for supporting renewable energy to overcome experience disadvantages are no longer valid and the time has come to withdraw the leg-up the RET provides.

Furthermore, the industry continues to receive subsidies via the Australian Renewable Energy Agency and distorted residential electricity tariffs that smear the costs of providing reliable power during peak periods.

There has been considerable focus on the likely impacts of the RET on the end-prices consumers pay for delivered power. A number of energy market modelling exercises suggest that the impact of the RET on end-consumer prices would be moderate because the extra power supply it induces acts to displace high-cost generators, particularly the need for new-entrant gas power plants. This acts to reduce prices across all energy sold in the wholesale electricity market. However, as the Australian Energy Market Operator and the Energy Users Association of Australia have noted, such price prediction exercises are fraught with uncertainty because a range of factors beyond underlying cost structures can influence market price outcomes.

For example, several of these energy market model exercises are predicated on assumptions of electricity demand growth forecasts made in 2013. Based on more up-to-date information, AEMO has substantially reduced the level of electricity consumption growth it expects over the next decade. Based on modelling by ACIL Allen, which explored a low demand sensitivity, keeping the RET at current levels would have very little effect in reducing wholesale electricity prices relative to reducing it to a real 20 per cent market share. 

This now highly likely scenario suggests consumers would bear the lion's share of the extra costs associated with the RET. As shown by analysis prepared for the Business Council of Australia, for some large energy consuming businesses ineligible for exemptions as emissions intensive and trade exposed companies, this cost would represent a substantial share of their overall power  bill.

In conclusion, the RET is undermining effective operation of the Australian Electricity Market; encouraging the addition of additional power supply when it is not needed. At the same time it represents a significant impost on the economy and better alternatives exist to deliver emission reduction goals.

We therefore urge you to close the scheme effective immediately.

Yours sincerely,

RET Review Panel

Tomorrow I'll consider how the renewable energy sector might respond to the argument above.