The dirty dozen myths of the RET debate

Much to the chagrin of opponents, the Renewble Energy Target has emerged from the Warburton Review as a policy for Howard’s battlers.

Not discouraged by facts, economics or the laws of physics, the anti-RET lobby (led by the 'Big Three' retailers – Origin, AGL and Energy Australia) has conjured up various myths about the scheme. Here are the 'dirty dozen':

1. The LRET drives up electricity prices

Many studies have explored how the RET impacts the consumer’s hip pocket.  On balance, the net effect seems to be negligible either way, owing to this mechanism.

Even the government’s own Warburton Review found that repealing the RET altogether would save each household a grand total of $1 (NPV) over the next 15 years. Other studies suggest that the RET delivers a net benefit to consumers – for example, Bloomberg New Energy Finance found that "Cutting or reducing the Renewable Energy Target is likely to result in … strong future increases in the price of electricity," 

This of course ignores the more significant impact the RET has in driving down retail prices by enhancing competition (see Myth 2).

2. The RET might reduce wholesale prices, but consumers won’t enjoy the savings

In the Australian market, wholesale contract prices reflect (i) expected spot prices and (ii) the cost of insuring against the risk of high spot prices. The RET reduces (i), and makes no change to (ii). Accordingly, contract prices are reduced by the RET, and competition (itself enhanced by the RET) ensures that this benefit is delivered to consumers. 

Which leads us to the bigger point – retailers who support the RET are 20-30 per cent cheaper than retailers who oppose it. 

The Big Three energy companies control 75 per cent of the market, having emerged from state-owned monopolies. They are highly inefficient, lazy businesses that have relied on overcharging Australians for decades. Householders and businesses experience this as a "loyalty penalty" – the longer they have been with one of the Big Three, the more they pay.

The RET is the only policy that encourages new entrants to make long term investments in this highly concentrated industry, a fact endorsed by the Consumer Action Law Centre and other consumer advocacy groups.

Data published in a December 2013 report by the Essential Services Commission of Victoria revealed that electricity retailers backed by renewable energy generation are the cheapest deals in Victoria, when averaging residential offers reviewed by the ESC. Big Three retailers are being forced to offer discounts of more than 30 per cent just to stay competitive with these new entrants. If the RET is diluted, those discounts will disappear.

Recent financial market announcements by the Big Three indicate they are already banking an uplift in profits if the RET is diluted. They won’t pass this on to consumers.

3. The RET is just a cross-subsidy and is economically inefficient

The RET has no cost to the Budget and is not a taxpayer subsidy. It imposes obligations on retailers to purchase certificates whose costs are (contrary to Myth 1) more than offset by countervailing reductions in wholesale energy prices.

Consumer savings delivered by the RET do indeed result from regulatory intervention. But who cares, as long as Australians save money and it doesn’t impact the budget? The only net costs of the RET are borne by an unofficial cartel. Arguably, the Big Three are now just paying back what they have been pocketing from Australian consumers for years, and the RET is just redressing past government intervention – not dissimilar to enabling Optus (and others) to compete against Telstra.

4. We don’t need the RET because the market is already oversupplied

As an auction-based system that clears every half-hour, market "oversupply" is not technically possible. More supply is experienced by the consumer as lower electricity prices.

The Warburton Review concluded that the RET was bad for the economy because it injected new supply into a market that was already well served. Such logic would suggest that Aldi building supermarkets to compete with Coles and Woolworths is also bad for the economy. How many consumers – who have benefitted from lower prices at Aldi, and even Coles and Woolworths – would agree with this?

5. 'Renewables cannot be relied upon because they are intermittent', 'Renewables don't lower prices on high demand days' and 'Renewables cause network issues'

If the market is already adequately supplied with generation capacity (see Myth 4), the intermittency of renewables is not a disadvantage.

Empirically, renewable energy (both solar and wind) are significant contributors during periods of high demand. For example, a study of market pricing during the January 2014 heatwave by Sinclair Knight Merz revealed that:

"In the seven days to January 19, wind farms contributed around 6 per cent of overall supply in SA and VIC, and as a consequence, wholesale prices were at least 40 per cent lower (on a consumption weighted average basis) than they would have been without the contribution of wind."

Recent AEMO studies confirm that the Australian network is capable of absorbing the levels of generation contemplated by the existing RET with minimal requirements for change, and the Warburton Review did not identify network capacity as an issue.

More renewable generation means Australia is less reliant on coal and gas, both of which are exposed to the dynamics of global energy markets. (See Myth 6).

Gas and other thermal based generation impose their own risks to energy security long-term due to risk of export market diversion of supply, potential for system-wide supply interruption, and failure of large format generators impacting networks.

6. The RET is forcing gas plants to shut

The federal government’s Energy White Paper Issues Paper notes the existence of "growing international demand and potential shortages of low-cost east coast gas". To the extent that Australia’s electricity supply requirements are met by gas-fired generation, prices will be higher. To the extent that gas is withdrawn from domestic consumption in order to supply higher-priced export markets, there is a risk that security and reliability of electricity will be imperilled.

In the long term, the availability of gas to meet domestic energy needs is a function of the whim of those who seek to maximise returns from their gas resources, whereas the economic imperative ensures that wind and solar plants (with essentially zero short-run marginal cost) always seek to maximise their output and have no alternate use for their fuel. To this extent, gas generation is likely to be more "intermittent" than renewable energy sources over the medium-long term, and substantially less predictable.

In economic efficiency terms, to the extent that gas that is exported (as opposed to consumed domestically for electricity generation), this has a more positive impact on Australian GDP, provided that the displaced generation is replaced by a form of generation with a lower (or equivalent) cost. While the cost of wind is currently estimated to be higher than gas generation, even a modest increase in international gas prices could reverse this situation.

By encouraging a diversity of fuel sources (which are not tied to international energy pricing) the RET provides insurance against the Australian economy being subjected to an energy crisis and/or a gas price squeeze, and any consequential GDP impacts.

7. Large retailers have consumers’ interests at heart

Only joking – see here.

The behaviour of the Big Three in relation to the RET is quite predictable. AGL is a classic example. In their 2012 sub mission to the Climate Change Authority, AGL confirmed that it "is a strong supporter of retaining the RET in its current form", highlighting "the significant financial cost associated with both reform to, and a repeal of, the RET policy." 

Yet in the Warburton Review AGL’s position is reversed, campaigning for a substantial dilution of the policy. Why? Since 2012, AGL become the largest thermal generator in the country, buying Loy Yang and Macquarie Generation. It is now overwhelmingly in AGL’s interests to dilute the RET so as to extract higher wholesale energy prices from Australian consumers.

8. The target is not achievable – there are not enough projects and they can’t be built in time

Several studies have shown the 41,000GWh target is achievable, most recently the Warburton Review itself.

9. 'The LRET should only target 20 per cent of demand by 2020, and should be reduced to reflect falling demand

The 41,000 GWh per annum target was designed to guarantee the delivery of renewable electricity generation representing "at least 20 per cent" of demand by 2020.

The possibility that the target may exceed 20 per cent of total electricity demand is neither problematic nor unforseen.  Indeed, the intention of setting the fixed GWh p.a. target was to allow for exactly this type of variation of demand while delivering investment certainty.

10. The cost of the RET is spiralling out of control

Given that the RET is at worst cost-neutral to consumers (see Myth 1 and Myth 2) and does not impact the government budget, this myth is moot. But for completeness, the pricing of certificates is significantly below forecasts at the time of setting the target. As a consequence, the cost of the scheme is significantly lower than was planned.

11. Renewables are putting existing generators at risk of withdrawal

The withdrawal myth is not consistent with economic reality or the economic incentives of the current market. While some generators may currently be operating below their long-run marginal cost – and therefore incurring losses and (in some cases) an impairment of their ability to service equity and debt – it does not follow that plants will be withdrawn or shut down.  Provided that wholesale prices remain above the short run marginal cost and average fixed operating and maintenance costs, it will always be in the interests of equity and debt holders to continue to operate these plants. 

As wholesale energy prices are unlikely to fall below this level, the risk of premature withdrawal or failure is simply not real.

Withdrawal of gas plant relating to LNG markets is a different matter and would occur irrespective of the operation of the RET (see Myth 6).

12. The current political impasse results in unworkable uncertainty

We addressed this in an article published in Climate Spectator last week, in which we concluded that the Warburton Review has laid the issue of policy uncertainty to rest once and for all. No sane political party would risk a promise to water down this extremely popular "battlers’ policy", when there is no evidence that doing so would save consumers any money.