RET: Hail fellow, not well met

Here’s a question: When do you expect Australia will be able to produce 25 per cent of its electricity needs from clean energy sources. By 2020? 2030? 2050?

Try 1965. That was the last year Australia produced one quarter of its energy needs from renewable energy. Almost all of it was from Snowy River hydro scheme. The second correct answer could be 2011, but you will have to read below to find out why. It’s not quite as it seems.

Last Friday marked the 10th anniversary of Australia’s Mandatory Renewable Energy Target – an initiative developed by the Howard government at a time when Australia was apparently not afraid to lead the world in matters of clean energy and emissions reduction.

Australia was not just the first country in the world to establish an MRET, it was also the first to do so with a tradable certificates scheme. "The (MRET) is the advent of a new way of thinking about electricity,” the Howard government trumpeted at the time through its newly established Renewable Energy Regulator, David Rossiter. “It places a separate value on the environmental quality associated with the method of generation of the electricity.”

It was a bold and innovative move, but enthusiasm for the scheme did not last long. The Howard government was taken aback by the response of the nascent renewable energy industry, which met the modest 2 per cent target in half the time expected. (Indeed, almost all of the wind farms that the right wing media rail against today were built under the Howard government mandate). And despite commissioning the Tambling Review, which recommended the target be doubled to 20,000 gigawatt hours and extended, the government chose not to extend it at all, arguing that the scheme had been “too successful.”

The warnings by the Tambling Review – that investment in renewable energy generation would stall after 2007 and Australia would be locked out of technical advances that would reduce costs if the MRET was not expanded and extended – have proven to be correct. Australian renewable energy companies turned their focus overseas, some international groups packed up altogether, and investment dried up.

Some interest was revived when various states, led by Victoria, toyed with state-based renewable energy targets, but these were more or less abandoned after the election of the Rudd government in 2007, which promised a 20 per cent renewable energy target by 2020, which translated into a five-fold increase of Howard’s target, to 45,000GWh of new renewable energy from 2001 to 2020 (not including pre-existing hydro and other sources).

Since then, however, the RET scheme has continued in market failure. Despite warnings against it, the government allowed household systems such as solar hot water and rooftop PV to be included in the target, and in the case of PV, with a five-fold multiplier. The result has been a flooding of the market in such proportions that enough renewable energy certificates (RECs) will be deemed in 2011 to satisfy a 20 per cent target.

Almost 15 per cent will come from credits from small-scale installations – although many of these will be so called “phantom credits,” created by small-scale solar – and only 5.6 per cent will come from large-scale renewables. So, on paper at least, clean energy – if you include pre-existing hydro – will likely account for 25 per cent of the market in 2011. In reality, however, it will be less than 10 per cent. In 2010, clean energy accounted for 8.7 per cent of actual energy produced – and two thirds of this came from hydro, which benefited from newly refilled reservoirs. Solar PV contributed less than 0.2 per cent of real energy.

Despite splitting the scheme into two divisions – large-scale and small-scale – the massive development pipeline, estimated at some $20 billion, remains stalled, and the few large-scale schemes that are going ahead have been driven by green energy mandates from state government to offset the power required for desalination plants and the like.

Last week, the first turbines to be erected in Victoria since 2009, were installed at the community-owned two-turbine Hepburn Community Wind Farm. “It’s ironic that in Victoria the only wind farms under construction are Hepburn – built out of community frustration – and AGL's Macarthur and Oaklands Hill projects, both of which are significantly driven by commitments to Victoria's new desalination plant,” said Simon Holmes à Court, the chairman of Hepburn Wind. “All three investment decisions were taken with the RET as a secondary consideration.”

It’s not hard to see why. The economic argument for a RET is to add a “green price” in the form of RECs to the “black price” – the wholesale electricity market – to make renewables cost competitive with fossil fuels.  But the most dramatic movements in the price of RECs have been driven not by technology but by policy announcements. Investment in the scheme has been governed more by sovereign risk than it has by technology risk.

Starfish Hill, the South Australian wind farm owned by Transfied Infrastructure Servicec, highlights the problem. One of the few farms operating without a power purchase agreement, it received an average price of just $48 per megawatt hour in the first six months of fiscal 2011. That compares to more than $100/MWh in the previous corresponding period. The combined price is now around $70, but it is impossible for wind farm developers to lock in PPA around the price they need ($100a/MWh at least depending on the location and wind speed) to make the investment worthwhile.

Which is why the market is stalled, at least for another year, according to most industry insiders. Few, if any, new developments will be committed to while the REC price remains weak – the major obligated parties, the large retailers such as AGL, Origin and TruEnergy, have enough in the bank to last several years.

The election of the Baillieu government in Victoria has also created doubts about new wind development in that state  and caused two companies – wind developer Pacific Hydro and tower maker Keppel Prince – to threaten to leave the state.

There is pressure for the RET to be wound back should a carbon price should finally be introduced. Professor Ross Garnaut said as much last week, suggesting it could be phased out if the carbon price was high enough. But that is what the RET was designed to do in the first place. If the carbon price is high enough to breach the gap between fossil fuels and renewables, then market forces will push the REC price close to zero. The problem is that the carbon price will need to be more than $50/tCo2e for that to occur. And extra measures will still be required to bring other technologies – such as geothermal, large-scale solar, and ocean energy – into commercial production.

Matthew Warren, the CEO of the Clean Energy Council, argues that the RET has, ironically, achieved what Rossiter envisioned a decade ago – a change of thinking about the electricity industry. He says one of the biggest benefits of the RET has been learning how to manage new variable supply technologies into a grid that had not experienced a structural change for decades. “This has forced a change in thinking,” he says. “Initially it looks difficult. But network business people smart and practical and solve issues. They have found that what seems insurmountable is in fact achievable.”

Warren is confident that the 20 per cent target can be met, as long as the policy position remains clear. One interesting remark that came out of the recent Senate committee hearings into the economic and social impacts of wind farms, was the Department of Climate Change estimate that one third of the RET will be met through wind technology. Most industry observers expect that figure to be more like 80 or even 90 per cent.

But that downplays the benefits that scale can bring to a technology. Warren notes that most people thought that solar PV would be nothing more than a boutique technology, but now it’s turning into a “game changer”. He says it’s not unreasonable to expect that other technologies could do even better.

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