Climate Change Authority staff are likely deep in the process of assessing the 168 submissions received on its Renewable Energy Target Scheme Issues Paper. It is an unenviable task, not merely because of the volume, but also because of the fact the submissions contain a broad range of views on the future of the RET. Some are seeking a reduction, some seeking its continuation unamended and others seeking the removal of the target altogether – views which the CCA must ultimately address. The CCA is tasked with completing this exercise every two years.
Undoubtedly in an effort to respond to stakeholder submissions and to understand what the future may look like, the CCA will complete a modelling exercise. This exercise will require a number of assumptions to be made on parameters such as the future carbon price, energy demand, and the capital and financing costs of alternative forms of generation capacity.
These are difficult parameters to get right and, as we have seen from recent modelling exercises, results can differ greatly from actual outcomes. This can ultimately require policy reformulation, recent examples being the revised Australian Energy Market Operator National Electricity Market demand forecasts and Treasury’s carbon price modelling.
What the CCA’s modelling is unlikely to capture however, is the adverse impacts on market participants of the continual review of policy settings. In a sector where infrastructure costs are high and investment time horizons are very long, the continual review of policy settings comes at a cost – to project proponents, consumers and the broader economy.
With 505 MW of installed wind energy capacity, an additional 420 MW currently under construction and having recently acquired the rights for the Silverton Wind Farm in NSW (up to 300 MW in stage 1), AGL is well placed to understand the impacts of RET policy uncertainty.
Fundamentally, policy uncertainty diminishes investor confidence. The impacts of this are clear and hardly surprising. First and foremost, diminished investor confidence has a direct impact on whether a project actually gets off the ground or is delayed until confidence in policy settings returns.
Policy uncertainty also has direct impact on project financing – both in terms of the availability of financial capital and its cost. Investors are typically reluctant to lend finite capital to projects with significant regulatory or policy risk and where they do so they will charge more for the capital lent – as investors seek to manage the perceived risk by ‘insuring’ the project against possible market changes. This in turn increases overall project costs, costs which are likely to be ultimately borne by consumers. Accordingly, in the long run policy uncertainty will make the target more expensive to deliver and cost consumers more.
The broader economic impacts arise as a result of three factors; the costs associated with the investment not taking place; the costs of project delay and the additional costs borne by consumers which diminishes overall spending capacity.
From AGL’s perspective there is a ready solution to address the possible adverse impacts identified – leave the target unchanged and recommend the requirement to conduct a two yearly review of the scheme be removed. This approach would mean that investors will have greater confidence in the policy settings and can get on with investing to meet the 20 per cent target.
Simon Camroux is Manager of Regulation & Market Development and Tim Nelson is Head of Economics at AGL Energy.