The RET is an expensive burden on the economy
Australian Financial Review
Alan Moran
19 August 2014

People and firms should be free to choose how they trade off their sources of energy and price preferences.

With the carbon tax repealed, the focus has shifted to the renewable requirements. A key component of these, the renewable energy target (RET), is under review by a panel headed by former Caltex chief Dick Warburton. The RET forces electricity retailers to buy certificates to ensure they incorporate at least 20 per cent of renewable energy within their total supply. Few other countries have renewable schemes as ambitious as Australia’s.

Compared with $40 per megawatt hour, the price of unsubsidised electricity, the cheapest source of additional renewable energy is from wind and is about $110 per megawatt hour. The renewable energy certificates are intended to fill the gap but they have been trading at low prices of around $35 due to the subsidy from the carbon tax, very attractive subsidies to roof-top installations and the fact that the build-up of renewable requirements is gradual. The subsidy price, in after-tax terms, is capped at $93 per certificate (or per megawatt hour).

Two external analyses have been undertaken as part of the RET review process. While both of them adopted conservative assumptions about the required renewable subsidy, they each arrived at very high aggregate costs to the economy as a result of the existing scheme.

The review itself commissioned ACIL Allen to estimate the future costs of the present scheme in 2014 prices. ACIL Allen put this cost at $37 billion or $6 billion if the scheme were to be closed to new entrants but existing installations continued to receive the subsidy.

The ACIL Allen estimate is based on the renewable subsidy at $70 per megawatt hour. This is equivalent to providing renewables a carbon tax subsidy of about $60 per tonne of carbon dioxide compared with the now defunct broader carbon tax at about $25 per tonne.

The other study undertaken by Deloitte was funded in part by the government’s Consumer Advocacy Panel and estimated the overall cost to the economy from maintaining the scheme is $29 billion. If it were to be immediately closed to new entrants that cost would remain in excess of $16 billion. These two cost estimates of the RET ($29 billion to $37 billion) approach the combined value of the Australian electricity transmission network.

Gains to coal-fired generators

An analysis for the Climate Institute estimates the abolition of the RET would bring gains to coal-fired generators of $25 billion by 2030. Although coal would regain market share from not facing subsidised renewables, electricity supply is highly competitive and increased revenues to coal-fired generators would not involve any form of super-profit.

In terms of the direct impact on electricity consumers, the burden of renewable requirements this year is estimated by the energy regulator to add 12 per cent to the average household’s electricity costs. That’s about $260 per year.

On current policies, these costs will rise considerably over the next six years. The annual renewable energy certificates requirements will increase from 17,000 this year to 41,000 by 2020. In addition, the price of these certificates will need to rise sharply to allow incentives for the construction of new windfarms.

As a result, the cost of renewable programs for typical households could rise as much as fourfold.

In research IPA commissioned last week from Galaxy, people were asked whether they favoured retaining the present level of support, increasing support in line with current policy or scrapping all assistance to renewable energy. Only 14 per cent favoured increasing support along the lines of current policy. Twenty-three per cent favoured scrapping the scheme entirely.

While 62 per cent said they would be content to see the subsidy costs kept at present levels, people are rarely as profligate as they say they would be when it comes to their actual spending decisions. This is readily seen in the small take-up of consumers’ voluntary top-up sales of green energy at premium prices, which amount to only 0.7 per cent of the annual sales of electricity.

Moreover, the direct costs of renewable energy through electricity prices is only half of the costs that consumers bear – the rest come about through consequent higher costs of goods and services. And for businesses, the renewable requirements are much greater, as a share of total energy costs, than they are for consumers.

The renewable energy subsidies fail all tests. Consumers resent paying for them and they represent a dead weight on industry competitiveness and economic growth.

Restoring consumer sovereignty and allowing people and firms to make their own choices about trading off their sources of energy and price preferences is the appropriate course.

Alan Moran is director of the Institute of Public Affairs’ deregulation unit.
Australian Financial Review

Alan Moran is alive to the scale and scope of the wind power fraud (see our posts here and here and here). But we think his calculator must have flat batteries in order to explain his observation in the piece above that:

“The annual renewable energy certificates requirements will increase from 17,000 this year to 41,000 by 2020.”

In fact, the “renewable energy certificate requirement” referred to by Alan will increase from 16.1 million RECs this year to 41 million RECs each and every year from 2020 to 2031.

The target figures in the legislation are set in GWh (1 GW = 1,000 MW): 16,100 GWh for 2014 (which converts to 16,100,000 MWh); rising to 41,000 GWh in 2020 through to 2031 (which converts to 41,000,000 MWh) (here’s the relevant section).

The “renewable energy certificate requirement” is that retailers purchase renewable energy (with which they receive RECs) and surrender RECs sufficient to satisfy the mandated target: 1 REC has to be surrendered for each MWh set by the target. If they fail to surrender enough RECs, they will be hit with the mandated shortfall charge of $65 per MWh for every MWh below the mandated target (see our post here).

Wind power generators are issued 1 REC for every MWh of power dispatched to the grid – and this deal continues until 2031: the operator of a turbine erected in 2005 will receive RECs (1 per MWh dispatched) each and every year for 26 years.  Retailers aiming to satisfy the target purchase RECs through a Power Purchase Agreement with a wind power generator. The rates set by PPAs see wind power generators receive guaranteed prices of $90-120 per MWh (versus $30-40 for conventional power). PPAs run from 15 and up to 25 years.

As part of the PPA deal, whenever a MWh of wind power is dispatched to the grid, the generator claims a supply under the PPA; and recovers the guaranteed price from the retailer. For the same supply, the wind power generator is issued RECs (1 REC per MWh) by the Clean Energy Regulator. In accordance with the PPA, the wind power generator transfers the REC to the retailer which can cash it in, thereby reducing the net cost of the power supplied under the PPA (RECs are currently trading around $30).

For example, if the price set under the PPA is $110 per MWh, the retailer sells the REC that comes with it – pocketing $30 – and reducing the net cost to $80 per MWh (which is still double the rate for conventional power). In this example, the retailer pays, and the wind power generator gets, $110 per MWh (or, in reality, whatever the PPA price is) irrespective of the REC price. In that respect, the value of the REC operates as a direct subsidy, designed to support the inflated (fixed) price received by wind power generators under their PPAs.

In practice, the full cost of wind power supplied to retailers (as set by PPAs) is recovered from retail customers (with a retail margin of 7-10% on top of that). As such, the REC is a Federal Tax on all Australian power consumers (see our post here). On the other side of the equation, the RECs issued to wind power generators operate as a direct subsidy for wind power; the value of which allows wind power generators to charge retailers prices under PPAs 3-4 times the cost of conventional power.

While the RECs transferred to retailers act as a “sweeteners”, the failure to purchase RECs leaves retailers liable for the $65 per MWh shortfall charge – and it was the threat of being whacked with a whopping fine (bear in mind the conventional power retailers purchase costs less than $40 per MWh) that provided “encouragement” to retailers to sign up to PPAs. Although, a number of the big retailers – like Origin and EnergyAustralia – have said they would rather pay the shortfall charge than purchase unreliable wind power and pass the full cost of the fine on to their customers.

Between now and 2031, the cost of the REC Tax/Subsidy will range between $40 billion to $60 billion; depending on the price for RECs.

The total renewable energy target between 2014 and 2031 is 603,100 GWh, which converts to 603.1 million MWh. In order for the target to be met, 603.1 million RECs have be purchased and surrendered over the next 17 years.

Even at the current REC price of $30, the amount to be added to power consumers’ bills will hit $18 billion. However, beyond 2017 (when the target ratchets up from 27.2 million MWh to 41 million MWh and the $65 per MWh shortfall charge starts to bite) the REC price will almost certainly reach $65 and, due to the tax benefit attached to RECs, is likely to exceed $90.

Between 2014 and 2031, with a REC price of $65, the cost of the REC Tax to power consumers (and the value of the subsidy to wind power outfits) will approach $40 billion – with RECs at $90, the cost of the REC Tax/Subsidy balloons to over $54 billion (see our post here).

As Liberal member for Hume, Angus Taylor – in his attacks on the cost of the subsidies directed to wind power outfits under the mandatory RET – puts it: “this is corporate welfare on steroids” (see our posts here andhere). STT thinks Angus is the master of understatement. In Australia’s history, there has never been an industry subsidy scheme that gets anywhere near the cost of the mandatory RET.

In the same edition, the AFR’s Editor chimed in with this eminently sensible piece of analysis.

Renewable target is not sustainable
Australian Financial Review
19 August 2014

The Abbott government’s moves to wind back or even scrap the Renewable Energy Target, as reported exclusively in this newspaper, would reduce a major distortion of the electricity market that has produced only a limited and expensive reduction in carbon emissions. How the RET affects the electricity market and prices is subject to much argument, including contradictory findings by computer modelling groups. But it clearly has forced considerable additional electricity supply – intermittently generated by windmills – into the market at a time of static electricity demand.

That extra capacity is pushing down wholesale prices at the expense of the margins of conventional electricity producers, as some modelling efforts have suggested. But force-feeding high-cost supply into a market of stagnating demand is likely to have some unintended consequences. One has been to short-circuit the hoped-for shift to less emissions-intensive gas plants. They have been squeezed out by the mandated high-cost windpower at one end and the sunk cost of the dirtier coal-fired power stations at the other. So the RET has restricted the expansion of an important transition fuel.

The RET scheme was conceived by the Howard government with a small initial target of 5 per cent of electricity consumption. But it took on a new life in 2010 when the Rudd government lifted the target to 20 per cent of estimated electricity consumption by 2020. That renewables target of 45 terawatt hours by 2020 assumed that the demand for electricity would continue to grow. Instead, demand has stalled due to soaring power prices and the decline of power-hungry manufacturing plants. So the absolute mandated target may amount to as much as 30 per cent of electricity consumption by 2020. That leaves the nation’s power grid heavily reliant on whether the wind blows.

Informed by a review by business leader Dick Warburton, the Abbott government is set to decide whether to wind the renewables mandate back to a “real 20 per cent” or even to end the scheme. In a world of a general carbon price, of course, a renewables target would become redundant. But, without a carbon price, Australia has been left in the worst of worlds. We have abandoned the lowest-cost mechanism for reducing emissions, adopted a budget-sapping “Direct Action” scheme that is surely no long-term answer and, so far, retained a high-cost renewables target. The government does need to be careful about the sovereign risk of changing its investment incentives. But mandating 30 per cent of our energy to come from high-cost renewables is not a sustainable energy policy.
Australian Financial Review

The mandatory RET is the most expensive and utterly ineffective policy ever devised.

As the AFR points out, the RET is simply not sustainable. Any policy that is unsustainable will either fail under its own steam; or its creators will eventually be forced to scrap it. European governments are responding to their unsustainable renewables policies by winding back subsidies and tearing up wind power contracts (see our posts here and here). And Australia won’t be far behind them.

STT hears that Tony Abbott is acutely aware that the mandatory RET is an entirely flawed piece of public policy; and is nothing more than an out of control industry subsidy scheme.

As such, it represents a ticking political time-bomb for a government that doesn’t need anymore grief from an angry proletariat. And boy, the proletariat are going to be angry when they find out that under the mandatory RET they’re being lined up to pay $50 billion in REC Tax – to be transferred as a direct subsidy to wind power outfits and added to their power bills – over the next 17 years.

For Tony Abbott to have any hope of a second term in government, the mandatory RET must go now.