The government’s renewable energy target is not 20%. It may not even be 25%. It could be 30%. It could be more. Nobody knows how far past 20% it will go. What we do know is that it’s designed to exceed 20% - by an uncapped amount - and is certainly expected by the government to exceed 20%. How do we know that? Minister Wong has said as much. At the CEC national conference in Adelaide last week she said the government’s latest changes to the RET, and I quote “are actually expected to deliver more renewable energy than the original 20% target” – end quote. The Parliament has previously supported a 20% target. It has not
supported a 20% plus target.
I’ll come back to the magic pudding RET, but there’s another unknown that also needs to be on the table. And it’s the price of power. How much will the second Rudd RET in a year drive up prices? We don’t know. There are wildly differing estimates. What we do know is that the scheme is deliberately designed to drive prices up – in the same way as it is designed to exceed 20%. Both issues need very close examination.
I’ll deal with the RET size first. The necessary background is that in June last year the government legislated for 45,000 gigawatt hours of power to be sourced from renewables by 2020.
There were two other big variations to the Howard era MRET, which the first Labor RET replaced. The first was an increase in the penalty that so-called liable entities – the big wholesale consumers and retailers of electricity - who will have to meet the target – will have to pay if they fail to meet their annual obligations under the scheme. That rose from $40 to $65 per megawatt hour – per RET - which was a bid to carve room for a profit margin for big end of town renewable producers – who needed a REC price of around $50 to make a profit, and attract investors. The second major change from the MRET was totally contradictory of that bid to provide an opportunity for wind. And that was provision of extremely attractive subsidies for the roof-top solar power generators, roof-top solar hot water systems, and to a lesser extent the roof top heat pumps, that were already flooding the REC market.
This part of the RET - boosting the small scale operations - had immediate effect – from the middle of last year. The government well knew, even when it legislated mid last year, that federal and state subsidies were creating a flood of RECs from roof-tops. They had doubled between 2007 and 2008, and were growing rapidly in 2009. But they went ahead, anyway, with a policy designed to increase that flood, and thus to defeat what was supposed to be their principal purpose - of encouraging wind. And that’s exactly how it played out. Within weeks of the full implementation of the scheme in January – with the commencement of the need for liable entities to start accounting for their RECs - the policy was turned on its head. And it was turned on its head – mid-February - because the flood of roof-top RECs had, totally predictably, collapsed the price. RECs fell late last year, as the new policy bit, from over $40 to barely $20.
In 2009 almost half
of the RECs created – about four and a half million - were from subsidised roof-top domestic solar hot water systems. Another 16% were from roof top solar generators. Wind created 25%. Wind couldn’t compete with solar hot water. Co-generation in sugar mills couldn’t compete. The price of RECs was so low it killed investment, and the return, from these projects.
So Rudd’s first RET had dud written all over it before ever it started. Failure was built in. The lights were on – but nobody in the government was home.
The first Rudd RET thus has the hallmarks of the insulation debacle, the education revolution debacle, the NBN debacle, the boat people debacle…Badly thought through policy, badly administered, with poor oversight, and lots of high-minded spin. In its place we now have a two headed RET. We have the LRET: the large scale renewable target, which will be 41,000 gigawatt hours. That target will have to be met - by liable entities - exclusively from big end renewable projects - which means from wind.
We also have the SRES: the small scale renewable energy scheme which is mainly roof top generating and water heating. The SRES is nominally, but only nominally, 4000 gigawatt hours. In fact it is uncapped. And that’s the big trigger for a plus 20% RET. Liable entities will have to buy every single SREC produced, even though they won’t be able to use them against their target. And that small scale sector continues to boom. Big subsidies, from the federal and state governments, remain in place. People who put in roof top solar generators still get -upfront - five times the number of RECs that their system will generate over 15 years. At a locked in price of $40 per REC in the SRES, that’s an average $6000 plus subsidy of the installation cost. Householders then on-sell all, or some, of the power they generate. That’s done through state power tariffs typically set at around three times the price of grid power.
Solar hot water systems, and heat pumps will also continue to be popular. Their upfront government subsidies have just been downgraded from $1600 and $1000 – respectively – to $1000 and $600, but they also still receive their “phantom” RECs upfront.
It’s this area – the SRES – that will provide the momentum for what Minister Wong has described as the - quote “original” - unquote - 20% target being exceeded. As more people put these things on their roofs the higher the price of power will go and the more people will put these things on their roofs to cash in.
Now let’s consider the price issue. What’s going to be the impact? The Minister says it will be a mere $4 per household per year. Industry estimates are vastly different. Origin Energy, for example, suggests the RET will be a major factor – not the only factor, but a major
factor - in a 200% to 300% increase in power prices by 2020. ERM Power estimates prices will go up, again strongly influenced by the RET, by almost double. The aluminium industry says in its submission on the new RET that prices will rise by almost as much as if the CPRS and the RET were in play. That will in part be driven by the fact that big end RECs are now a sellers market, and are likely to hit $90. That’s the real floor under the price, given that the $65 penalty for non-compliance is not deductible, and is therefore a $90 plus cost to liable entities. Minister Wong’s own department secretary, Dr Martin Parkinson, has said that roof-top abatement is vastly expensive abatement: $200 billion to put a solar power system on every roof.
So we have vastly different assessments of the price impact of renewables. As with the overall size of the 20% plus RET – the only thing we really know is that we don’t know what the price impact will be – other than that there will clearly be upward pressure. And of course we have to know what that price impact will be. If we see prices double over the next 10 years, then it won’t just be the aluminium and the concrete industries that will disappear offshore. We will see food processing disappear. Very few Australian industries or manufacturing processes could withstand a doubling of electricity prices.
The first thing we need to see is the Minister’s modelling. We need to know what it includes, and what it doesn’t. For example, does it include the fact that wind power is so intermittent that much of it has to be backed up by conventional power? I’ll bet it doesn’t. How many people realise that we are going to have to build thousands of megawatts of conventional capacity to make up for the fact that wind has a capacity factor of – very generously, point three (0.3)? The rating means wind is going to be useful less than one-third of the time. That means we’re going to have to build thousands of back-up megawatts, at a cost of billions, with that huge investment then sitting idle for much of the time, ready to come into operation every time the wind drops, or blows too hard – which is about 70% of the time.
Does the Minister’s modelling take into account that often remote, relatively small, wind farms will have to be connected to the grid – and that that’s going to be immensely expensive? These are the realities by which a fraction of power consumption being provided by renewables can have a massive end cost – way out of proportion to its scale – and economic value.
So come clean – Minister. You don’t have a blank cheque. Just how big is this RET going to be – over and above the – quote – “original” – unquote – 20%? And how much is it really going to cost Australian families and businesses?