Scrapping carbon tax would cripple renewables
Wind farms are viable at current wholesale power prices including the $23 a tonne carbon price when the renewable energy certificate - valued at about $32 a megawatt hour - is added. Strip out the carbon tax, however, and investment in renewable energy would dry up, said Bret Harper, RepuTex's associate director of research.
"The carbon price is linked to the renewable energy target [RET]," he said. "For those who support the RET but not the carbon price, there's a gap in the logic there."
The Coalition has vowed to dump the carbon price if it wins office in September but supports the RET.
Last week, the federal government left the RET settings basically unchanged at 41,000 gigawatt hours of electricity a year from 2020. That level will require seven gigawatts of new renewable capacity to be built between next year and 2020, or almost triple the 2.5 gigawatts added over the past decade, Mr Harper said.
Those growth plans would evaporate if the Coalition succeeded in its pledge to repeal the carbon price without altering other market conditions. Assuming the tax is repealed by July 1, 2015, RepuTex predicts the large-scale renewable energy certificate would rocket in value to about $85 per megawatt hour, or much higher than the current penalty price cap of $65.
Retailers would simply pay the penalty, limiting investment in any onshore wind farms not yet financially committed.
"The existing scheme has a penalty price, which is effectively a price cap," Mr Harper said. "If you remove the support of the carbon price but you don't adjust the cap, then you will not see the renewable projects being built."
Paul Simshauser, chief economist at AGL, agreed the viability of wind farms is linked to the RET and the carbon price.
"If you do move that carbon price out, it does mean you need to something to fill the gap for wind farms to retain their profitability," Dr Simshauser said.
Even with the RET review leaving conditions largely unchanged, many projects are on hold as investors ponder policy changes.
"Where business and industry really do struggle is when the rules of the game are uncertain," Dr Simshauser said.
Frequently Asked Questions about this Article…
According to RepuTex modelling cited in the article, removing the carbon tax would effectively halt new investment in Australia’s large-scale renewable energy sector unless other policy changes were made. The carbon price currently supports the economics of wind farms and is linked to the Renewable Energy Target (RET), so repealing it would cause investment to dry up.
The article explains that wind farms are viable at current wholesale power prices when the $23/tonne carbon price is combined with the value of a large-scale renewable energy certificate (about $32 per megawatt hour). That combined support helps wind projects reach profitability; remove the carbon price and many projects lose their financial case.
The RET is a government goal for renewable electricity generation — the article notes the RET was left at 41,000 gigawatt hours a year from 2020. Meeting that target requires about seven gigawatts of new renewable capacity by 2020. RepuTex and industry commentators say the carbon price is linked to the RET: without the carbon price, the market support that helps renewables meet the RET would weaken.
RepuTex predicts that if the carbon price were repealed (modelled as by July 1, 2015), the large-scale renewable energy certificate price could spike to about $85 per megawatt hour — well above the existing penalty price cap of $65. That mismatch could lead retailers to simply pay the penalty rather than buy certificates, reducing incentives for new projects.
Yes. The article says retailers could choose to pay the penalty price cap rather than buy certificates at much higher prices, which would limit investment in onshore wind farms and other large-scale renewable projects that are not already financially committed.
Paul Simshauser, AGL’s chief economist, agreed that wind farm viability is tied to both the RET and the carbon price. He said that if the carbon price is removed, something would need to fill the gap to keep wind farms profitable, and that businesses struggle when the rules of the game are uncertain.
The article states the RET setting requires about seven gigawatts of new renewable capacity to be built between the next year and 2020, which is almost triple the 2.5 gigawatts added over the past decade — highlighting the scale of build required to meet the target.
Investors should monitor government policy on the carbon price and the RET, certificate price movements versus the penalty cap, and whether projects are financially committed. The article emphasises that policy uncertainty — including any moves to repeal the carbon price without other market adjustments — can put many renewable projects on hold and materially change investment prospects.
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