Renewables hit by an irrelevant debate

Over the last few months we've had a rather heated argument about whether the renewable energy target should be reduced to reflect what is termed by Origin Energy as a “real” 20 per cent market share, which they argue would match the original policy intent.

But when you delve into the detail, nailing down precisely what is a “real” 20 per cent is not as straightforward as you might think. This may seem odd but there is an array of different ways you can define the size of the market.

Once you consider all of this complexity you're left thinking – well, what is it that is so magical about 20 per cent anyway? Considering you can cut and dice the 20 per cent target to mean lots of different amounts of energy, does it really matter? 

Firstly, to go back to the original policy intent you need to look at the commentary accompanying the legislative amendments to expand the Renewable Energy Target. Commentaries are regularly provided alongside legislation to help with interpretation and to provide context about the intention of legislation.

The commentary that accompanies the original 2008 draft bill to expand the target within the Renewable Energy Act states on the very first page, “The expanded scheme will deliver the government's commitment that the equivalent of at least 20 per cent of Australia's electricity supply is generated from renewable sources by 2020.”

The key words here are ‘at least' and ‘supply'.  

The words ‘at least' to any reasonable person would suggest that exceeding 20 per cent would actually not be inconsistent with the policy intent. However undershooting 20 per cent most definitely would be and we'd run a greater risk of undershooting under Origin's proposal.

Also the use of the term electricity ‘supply' suggests that Origin's numbers are in fact missing a number of components, thereby understating the amount of renewable energy required to achieve 20 per cent.

Firstly, there is a not insignificant amount of electricity used off the main grids, which Origin hasn't included because it's not liable under the legislation. But it most definitely is part of Australia's electricity “supply”. This supply source is rapidly growing because of resource sector expansion, and also encompasses a significant amount of what is termed ‘self-generation' which is also exempt from a RET liability.

By the way you'll notice in a number of submissions from resources companies to the Climate Change Authority that they'd like the rules around qualification for this self-generation loop-hole to be loosened. This would act to shift a greater proportion of the RET costs on others.

Secondly, the estimate of the size of the market used by Origin also excludes electricity generated that is lost in the transmission system, and also electricity used by the power stations themselves. This is actually a very large amount of our electricity supply. 

If you check the estimates by the Australian government's Bureau of Agricultural and Resource Economics (now the Bureau of Resource and Energy Economics), Australia's total electricity generation in 2009-10 was 239TWh but our final electricity consumption was 209TWh. So 12.5 per cent of our electricity supply was consumed by the electricity system itself.

The Bureau of Resource and Energy Economics has provided an all inclusive projection of Australia's electricity supply out to 2034-5 which covers these missing components. It projects electricity generation to be 310TWh in 2020.

So would the RET give us 20 per cent of supply under this projection?

To assess we need to look at three items:

1. The large scale Renewable Energy Target of 41TWh

2. The likely generation of baseline generators, mainly hydro, in place before 1997 who can't create RECs for all their output; and

3. The small scale renewables, predominantly solar PV and solar water heaters.

These numbers are detailed in the table below.

With the LRET it's quite straightforward – 41,000TWh would equate to 13.2 per cent market share under BREE's projection of 310 TWh.

With the baseline generators what has been regularly assumed is that they will generate 15TWh that won't create RECs. However it's not that simple, because the output of hydro generators varies quite a lot with rainfall. So some generators manage to exceed their baselines in a year and so create RECs that count towards the LRET, while others fall well below their baselines.

Overall generation is no larger, but the LRET has been cannibalised. Green Energy Markets closely follows hydro generation and it estimates an average of 13TWh of renewable generation that does not produce RECs. So that's 4.2 per cent.

With small scale your guess is as good as mine. The Climate Change Authority's modelling estimates 11TWh, which equates to 3.6 per cent.

All up we've got renewables representing 21 per cent of overall electricity supply.

Now it is entirely possible that electricity supply could be lower than what BREE estimated. Indeed I would argue the government would be doing a poor job in executing energy efficiency policy if electricity generation was this high.

But according to the International Energy Agency, if Australia were to play its part in keep temperature rise below 2 degrees (a goal both the government and opposition have accepted), we shouldn't be building any new fossil-fuel power plants anyway. This is because it would just need to be shut down prematurely not that far into the future. The Climate Commission has made a similar point in a report released today.

In this light, and considering the huge amount of regulatory uncertainty around the carbon price, if all new build is renewables it should help avoid a bad hangover of redundant power plants in 15 to 20 years time. So does it really matter if the RET delivers 20% or 25%, as we need this renewable energy anyway to meet climate goals. 

In the end the only reason it matters is if you want to persuade politicians that it's OK to break a legislative commitment without appearing to have broken a promise.