STT followers have been delighted with news that Tony Abbott, Joe Hockey and Mathias Cormann have teamed up to axe the mandatory RET (see our post here).
In response to the PM’s mooted plan, the wind industry and its parasites have been reduced to making idle threats of “revenge” and bleating about “sovereign risk”. Despite a rear-guard effort by Environment Minister, Greg Hunt to salvage something of the mandatory RET, his boss has confirmed that his mission is to kill it outright. And that pretty much means the end of the wind industry as we’ve known and grown to despise it. Here’s the Australian Financial Review on the beginning of the end.
Coalition fails to budge on RET pruning
Australian Financial Review
26 August 2014
Pleas by solar and wind companies to leave the Renewable Energy Target untouched have fallen on deaf ears with the government deciding to proceed with a phasing down of the scheme.
While a final position will not be announced until next month, The Australian Financial Review understands the intent is to cut the scheme harder than a compromise scenario that was being pursued by the Environment Minister, Greg Hunt.
The end result will be closer to the abolition scenario advocated by Prime Minister Tony Abbott which would end the scheme by closing it to new entrants and grandfathering existing large scale projects.
Seeking to overcome the cabinet split, Mr Hunt, Mr Abbott and Industry Minister Ian Macfarlane met on Sunday to discuss a policy position to be put to the bureaucracy for analysis and then to the cabinet for a final decision.
The government is being guided by the findings of the review into the RET conducted by businessman Dick Warburton, a person the industry has argued is ill-suited to the task because he is a climate-change sceptic.
The guiding principles of the final decision will be to balance investor risk with the impact of the RET on household and business power bills. Mr Abbott claims the RET has had a significant impact on power prices. The government’s own modelling shows while the RET has added $40 a year to average household power bill, prices will fall over the medium term as more renewable energy is produced.
The industry is ramping up its warnings that any dilution of the current scheme will not only jeopardise more than $11 billion in the renewable energy investment pipeline, but create a broader sovereign risk perception for Australia.
Close watch on outcome
Philip Green, the London-based partner of the Children’s Investment Master Fund (TCI), which has a 33 per cent stake in renewable energy company Infigen, said the issue was being watched closely. “Sovereign risk has already increased in Australia given the media coverage of the carbon debate and now the RET. Sovereign risk will increase more if the stories about cuts to the RET are confirmed,” he said in a statement.
“This comes at a cost to the nation through higher capital costs as it seeks future investment in infrastructure. The Australian RET had strong bi-partisan political support [including from the current prime minister]. It can take a long time to restore trust and in some cases this is only achieved with a change in leadership/policy/party.”
Under the RET, a policy which hitherto had bipartisan support, 20 per cent of Australian’s energy production by 2020 would come from renewable sources. Based on earlier predictions of power production in 2020, this 20 per cent target was calculated at an annual production of 41,000 gigawatt hours.
But the 2020 production total has been downgraded following the decline of the manufacturing sector, including automotive and aluminium.
Consequently, 20 per cent of the revised production target is 27,000 GWh. This is the “real 20 per cent” scenario for which Mr Hunt is advocating.
Under the push by Mr Abbott, renewable energy output would be frozen at current levels of about 16,000 GWh.
Any proposed change faces a near impossible passage through the Parliament with Labor and the Greens opposed to any alteration, while Clive Palmer says he will not allow any change unless Mr Abbott goes to the next election in 2016 and wins a mandate.
Australian Financial Review
STT thinks the constant reference to Dick Warburton as a “climate-change sceptic” is just churlish bitterness from the vanquished. From STT’s viewpoint, Dick did precisely what he was supposed to do: standing up for Australian power consumers and helping to bring an end to the most costly and pointless piece of policy ever devised.
And, yet again, the wind industry – and those with shirts to lose when it collapses – trot out the furhpy about “sovereign risk”. Not only is it utter bunkum (see our posts here and here and here and here), harping on about it won’t save the wind industry from the inevitable demolition of the mandatory RET.
The AFR talks about Australia risking “$11 billion in the renewable energy investment pipeline” as if that were some kind of loss to Australian power consumers, in an already over-supplied market. As we’ve previously pointed out, the threatened “investment” is hardly a “no-strings attached-gift”. The would be investors are after annual gross returns in the order of 20% on that figure – ie, a cool $2.2 billion, every year – which can only be recouped from power consumers through higher power bills – with a fat pile of RECs underwriting the “investment” (see our post here).
As a piece of friendly advice, we wouldn’t be betting the house on Clive Palmer blocking any changes to the RET in the Senate. Horse trading is the life-blood of politics; and a week can be a very long time for anyone engaged in the political caper. As you’d expect, STT hears that Tony Abbott is already doing business with the Senate’s cross-benchers, including the PUP in order to come up with a workable solution to the debacle that is the mandatory RET, which has utterly failed as a cost-effective CO2 abatement policy.
Clive Palmer wants an Emissions Trading Scheme (albeit with the price of credits set at zero). So the Coalition’s Direct Action policy is being reworked by top energy market economist, Danny Price in a manner that will not only resemble something like what Clive is after, but in a way that will slash the value of the subsidies to wind power outfits (as promised by the RET) by around 90%. One of the cross-benchers, Nick Xenophon – who works closely with Danny Price – is in on the mission to kill off the wind industry, by introducing some tweaks of his own to Coalition policy, aimed at achieving least-cost CO2 abatement (see our posts here andhere). Another cross-bencher, David Leyonhjelm penned a piece for The Australian today (we’ll cover it shortly) setting out his eagerness to kill the mandatory RET, which he sees as “just government mandated corporate welfare” that will cost power consumers $billions “for no measurable environmental benefit”. No, STT didn’t write David’s article.
But, in the result, whether or not changes to the mandatory RET occur during the life of this parliament is a matter of passing academic interest. The wind industry is doomed simply because – from here on – NO retailer in touch with their earthly senses will enter a long-term Power Purchase Agreement with a wind power outfit – which means that those desperados still hoping to build wind farms will never obtain the finance needed to do so. Moreover, the REC price is bound to head south over the coming weeks and months, placing outfits with current wind farm operations in mortal financial jeopardy.
One of those facing an early exit from the stage is our old favourite, Infigen. These boys have just announced an $8.9 million loss for 2013/14, which follows a $55 million loss in 2011/12 and an $80 million loss for 2012/13 (see our posts here and here). Those hefty losses were all racked up at a time when the mandatory RET was set in stone, such that the regulatory cards were all firmly stacked in Infigen’s favour.
With the mandatory RET set for the chop, Infigen is preparing to emulate its predecessor (Babcock & Brown) with another spectacular financial collapse. Here’s the Australian Financial Review setting the scene for Babcock & Brown Mk II.
Infigen at risk if RET wound up
Australian Financial Review
26 August 2014
Wind power producer Infigen Energy has warned it could fall into breach of its debt covenants within three months should the 2020 Renewable Energy Target be wound back with no compensation for affected investors.
Managing director Miles George said either of the two outcomes apparently being favoured by the government for the overhaul of the RET would be “disastrous” for both the industry and Infigen.
He said significant write-downs would follow, with the loss of value for Infigen more than its current market cap of about $185 million.
The government is thought to be considering two potential outcomes for its RET review, one involving reining the 2020 target back to represent a “real” 20 per cent of electricity use, rather than the 26 per cent to 28 per cent it is currently expected to represent.
The other involves closing off the scheme to new entrants, while honouring existing contracts only.
“Either of these scenarios is disastrous for our industry,” Mr George said, after Infigen posted an $8.9 million full-year net loss, affected by the regulatory uncertainty. “They are both death for the renewable energy industry and, to be frank, they are death for Infigen.”
He said if no compensation was provided for investors, the resulting weakness in the price of large-scale renewable energy certificates would cut cash flow for debt servicing. As a result, Infigen would be at risk of breaching its covenants within three months.
Australian Financial Review
This couldn’t be happening to a nicer bunch of lads.