Will 2015 be the year of the climate change barnacle?

Many of those concerned about climate change and clean energy are likely to be feeling pessimistic heading into 2015. Last year was certainly one of disappointment on the Australian government policy front. The Abbott Government seemed determined to take an axe to anything associated with reducing carbon pollution, and this even extended to programs aimed at cleaning up coal.

However, there are a range of reasons to suggest that heading into 2015 there are good reasons to be optimistic that the Abbott Government's disdain for green technology can be overcome.   

This may be hard to believe given that the fate of the Renewable Energy Target remains highly uncertain. This policy underpins the businesses, jobs and investment of the renewable energy industry that in combination with energy efficiency is central to decarbonising the Australian economy.  

However, as the recent backflip over Medicare has shown, the government is coming to realise that its ideological zeal to strive for a smaller government and to hell with pre-election promises and reassurances, is electorally poisonous.

In addition, factors outside Australian government control indicate the clean energy sector is powering on in spite of what might happen in our small part of the world.

2014 the hottest year – harder and harder to ignore the science

According to a combination of NASA, the US national meteorological bureau (the National Oceanic and Atmospheric Administration, or NOAA) as well as the Japanese equivalent, 2014 was the globe's hottest year since instrumental global records began back in 1880.

While those who seek to sow doubt and confusion about the science of climate change suggest global warming has paused, the reality is that this past decade is exceptionally warm relative to the past. The Climate Council's Will Steffen, professor at the Australian National University, notes that this is part of a long-term trend with all of the world's top 10 warmest years having occurred since 1998. His latest report also points out there is no sign of any cooling reversion to historical averages, with 2014 being the 38th consecutive year of temperatures above the historical average. It makes a mockery of claims by the Prime Minister's business sector adviser and former banker, Maurice Newman, that the slowing the rate of warming since 1998 suggests we are on the verge of dangerous cooling of the climate.

Rooftop solar powers on in spite of regulatory uncertainty

According to analysis from Green Energy Markets based on data from the government's Clean Energy Regulator, Australia installed more than 800 megawatts of solar PV on building rooftops last year. This is the fourth year in a row that solar has managed to crack 800MW of installed capacity. While the market experienced no growth compared to last year, if the sector were to maintain 800MW per annum of installations, then by 2030 its installed electricity generating capacity, at 16 gigawatts, would be greater than every other fuel source other than black coal (currently about 20GW).  

The chart below from Green Energy Markets illustrates a trend of steady expansion in capacity installed month on month in Victoria, NSW and WA; but it contracted in Queensland and SA where penetration of solar is high at more than one-in-five homes.

Figure 2: Installed capacity of solar PV by month and state over 2014

Source: Green Energy Markets – STC snapshot December 2014

One can now declare that a solid several hundred megawatt market for solar PV is here to stay. The solar PV market has managed to maintain a level of greater than 800MW per annum even though government financial support for solar PV has plummeted. Back in 2008 there was $8000 of government money available for a kilowatt of solar, now it's about $800, yet remarkably the market is far bigger.

In addition, the government – while keen to cut the level of the Renewable Energy Target – has said they do not intend to make any cuts to financial support available to “household solar”. The definition of this term is vague but appears to mean systems below 10 kilowatts in size.

Still, shadows on the horizon remain.

Firstly the drop off in sales in SA and Queensland may be a sign of a saturation effect. As penetration of solar PV reaches levels approaching a quarter of detached dwellings it may become harder to sell into the remaining homes. If so Victoria, NSW and WA may begin to see growth tail off, as we now see in Queensland and SA.

In addition, the commercial rooftop market (systems above 10 kilowatts), which is starting to emerge as increasingly important (the blue segment in the chart above), remains under threat of government regulatory change. The government seems to be keen to find some way of cutting the level of rebate such systems receive, although Labor indicated late last year that they were not interested in agreeing to any such change in negotiations over the future shape of the RET.

Lastly there is the prospect of changes to electricity pricing structures that could reduce the extent to which a solar system reduces power bills. Some utilities have been hiking their fixed charges while reducing the price paid per kilowatt-hour of energy consumed. Victoria is now going through a process of adjusting the network pricing for households towards a model based less on kilowatt-hours of energy consumed and more towards peak usage. This process will be one to watch because it could herald changes that will flow through to other states as meter technology is upgraded.

The decline of power demand – a permanent fixture?

The key to Australia's exceptional and largely unanticipated decline in greenhouse gas emissions over the last few years has been the decline in power demand. 2014 was the sixth year demand for power from the NEM centralised grid was stagnant or declined after a century of steady growth and the question on everyone's lips is whether this signals a permanent change. Demand for centralised generators declined by 1.1 per cent in 2014, falling in every state except Queensland, and again Green Energy Markets has been at work seeking to understand what's going on.

Below is their breakdown of what drove the decline. The Point Henry aluminium smelter closure was clearly a once-off event, but solar PV and energy efficiency improvements seem to be more permanent features of Australia's power market. Solar has already been discussed. In addition the election of Labor in Victoria means a retention of the Victorian Energy Saving Incentive Scheme and the NSW Liberal government is keen on expanding its energy efficiency scheme.

Figure 3: Breakdown on drivers for change in NEM power demand in 2014 compared to 2013

Source: Green Energy Markets (2015)

Despite gloom in Australia, the renewable energy industry kicked goals overseas

While investment in large-scale renewable energy in Australia stalled last year, across the globe clean energy investment jumped 16 per cent in 2014 to US$310bn, according to data released by Bloomberg New Energy Finance. The increase was driven by a 32 per cent expansion in China's commitment to renewables to US$90 billion, while the US (8 per cent growth) and Japan (12 per cent growth) also made an important contribution, increasing investment to US$51.8 billion and US$41.3 billion respectively.

The chart below illustrates that after a tough year in 2013 (due in part to a positive development – plummeting prices of solar and wind equipment), the industry is back on track to strong growth. Much of this is due to rapid growth in the solar PV market, where investment grew by 25 per cent and now represents almost half of all clean energy investment at US$150 billion.

Figure 4: Global investment in clean energy sector by quarter

The international pressure of the Paris conference

The G20 meeting in Brisbane was a major embarrassment for the Abbott Government, as a number of other world leaders subtly rebuked its attempt to shove the issue of climate change under the carpet. With UN climate treaty negotiations on the post-2020 period due to be concluded in Paris in December this year, and Europe and the US having already stated their post-2020 emissions reduction commitments, the government's lack of meaningful, long-term climate policy is likely to generate international diplomatic tension. The government may be able to shrug this off without domestic political fallout, but it makes things more difficult for a government already under pressure in the polls.

As carbon and energy market analysts RepuTex have revealed in analysis today, Australia's climate policy framework is woefully underfunded to meet even its relatively weak 2020 emissions reduction target. In addition, a lack of investor confidence in the credibility of what the government proposes to do about carbon emissions is now acting to seriously undermine the country's ability to make emission reductions after 2020.

While the business of clean energy and low carbon goes into 2015 clouded by regulatory uncertainty, there are good reasons to believe better days are ahead.