Renewables vs aluminium - what's going on?

There has been a range of media reports, including by Climate Spectator, fueling speculation that it has been pretty much accepted that the large-scale Renewable Energy Target should be reduced from 41,000 GWh in 2020 down to 39,000 GWh in order for aluminium smelters to be fully exempted from paying a proportion of the cost of the scheme.

Aluminium smelters are presently exempted from nearly 70 per cent of the cost of the LRET when it reaches its peak in 2020 – however, this does not come at the expense of the overall level of the target.

This speculation has in part been a function of a leaked letter to the media from the Clean Energy Council to ministers Hunt and Macfarlane, explaining that they would not have a problem with aluminium smelters receiving an increased exemption if it would assist restoring bipartisan support for the scheme.

However, Clean Energy Council has informed Climate Spectator that this letter has been misinterpreted by much of the media. In an e-mail they explained:

The important thing is that we are not advocating for the LRET to be reduced one jot. We believe you can exempt the aluminium sector and leave LRET unchanged – as ACIL Allen, ROAM and other modellers have shown, any reduction in the target will actually increase power prices over the long term.

Under the present legislation there are a range of industries who have been assessed as ‘emissions intensive and trade exposed' and therefore eligible for an exemption from a portion of the costs associated with the RET.

Originally this exemption was devised to avoid a counterproductive outcome from the introduction of a carbon price, not the RET. The exemption was intended to avoid the possibility that a carbon price might be such a significant cost for some industries exposed to competition from overseas producers that it might cause them to become uncompetitive, shifting production overseas yet without any reduction in overall global emissions.

The original RET introduced in 2001 had no exemptions for such industries. However with the RET being expanded at the same time that the Rudd Government was designing the emissions trading scheme, the idea of exemptions was extended to the RET as well. This was in spite of the fact that for a large number of EITE businesses their carbon intensity is largely a function of direct CO2 emissions, not their electricity consumption. Hence, the cost of the RET is almost inconsequential to their competitiveness.  

These exemptions do not in any way act to affect the overall level of renewable energy required under the scheme, but rather shift the costs of subsidising renewable energy away from EITE businesses and onto others.

The aluminium smelters and their associated union, the Australian Workers Union, have been lobbying quite intensively and effectively to expand the sector's 70 per cent exemption to 100 per cent. To counter concerns that this would push additional costs onto other consumers they've floated the idea of carving out a reduction in the RET associated with their electricity demand.

Naturally this has worried the renewables sector, who would prefer exemptions to operate as presently structured, where they don't act to reduce the level of the target.

They have commissioned analysis by energy market analysts, ROAM Consulting (recently acquired by Ernst & Young) which they point out indicate that if aluminium smelting was given a full exemption from paying its liability under the RET while leaving the target unchanged, it would only add $2 to $4.50 per annum to the average household electricity bill. Meanwhile, they argue that any proposal to reduce the legislated target is unlikely to offset this cost because it would also lessen the suppression of wholesale electricity market prices by reducing the additional supply from renewable energy.

Of course, there is an alternative angle to this whole argument which is to ask why on earth we continue to grant exemptions for the RET based around cost exposures to an emissions trading scheme which has been abolished.

The table below, taken from the original government consultation paper on establishing exemptions under the RET, illustrates that there is just one EITE industry for which the RET represents a cost any greater than 1 per cent of its overall revenue – aluminium.

For every other industry its costs are 0.4 per cent of revenue or less and therefore likely to be inconsequential to their competitiveness. What's more, for most of them they end up better off from the RET because of its effect in lowering wholesale electricity market prices.

Table: Original analysis of the electricity intensity of trade-exposed industries in Australia and RET cost, as proportion of revenue