With even the Warburton review finding that the Renewable Energy Target does not push up consumer energy prices, opponents such as the Business Council of Australia are now conjuring up a new argument.
They are claiming that the current overhang of certificates (and low prices) will prevent new projects being built to meet the target, which will result in an undersupply (and high certificate prices) within the same market.
How can this be?
Like any sophisticated commodity market, RET certificate prices are a function of fundamental demand and supply, measured by reference to the entire term of the RET (out to 2030). Apart from incorporating a cost of 'carrying' current certificates to meet future obligations (observed at about 4% per annum at the moment), the short-term overhang of current supply versus current production through to 2017 should not materially distort fundamental values.
So why are today’s prices so low, and why would they suddenly jump to penalty in a market that is traded forward over many years?
The explanation has nothing to do with the current overhang or how the market works. It comes down to the Big Three electricity retailers (Origin, Energy Australia and AGL) wanting to neuter the RET.
These retailers are campaigning for the RET to be diluted because the current policy removes the opportunity for them to extract greater revenue for energy created by fossil fuel, in which they are heavily invested. The RET also encourages competition that threatens their profits, and saves money for consumers.
More than 75 per cent of the obligations to purchase certificates are borne by the Big Three. Certificates are available in large volumes in the market right now at a small fraction of the penalty price ($30 versus $93). Any trader at the Big Three worth their salt should be mopping those certificates up until prices were close to fundamental value or penalty value.
And yet The Big Three are making an active decision not to purchase certificates at these very low prices, which runs counter to their threat of penalty prices emerging (for which they will become liable) in the near future.
This market disconnect reflects the fact that the major opponents of the RET expect to use their market and political power to diminish investment, thereby creating false justification for a change to the target in their own interests.
Any change to the RET that reduces the obligations of the Big Three in the next few years will signal that they are able to use their power to engineer Australian energy policy to their own benefit and to the detriment of consumers. This will negatively affect the energy market now and in the future, with the perception that energy policy is driven merely to meet the needs of the Big Three.
Any dilution of the RET will guarantee market failure, rather than averting it. Were this subterfuge to be permitted, it would be one of the greatest hoodwinks of all time, punishing consumers (indeed, Howard’s battlers) with higher prices so that the fossil-fuel-orientated oligopoly can continue to rip off Australian consumers.
Current certificate prices reflect the evolving odds of the Big Three succeeding in this game of regulatory blackjack. The chart below indicates early market confidence in their strategy, with low prices when Dick Warburton was appointed to the review. Prices spiked when the review failed to produce evidence of consumer price impacts, and when Palmer United Party reaffirmed support for the policy as it stands.
And what of the uncertainty associated with the absence of bipartisan support? Ironically, 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.
Ben Burge is chief executive of Meridian Energy's Powershop Australia.