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March 07, 2014 12:26:56
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What is the renewable energy target and how does it work? (Caddie Brain)
The Federal Government has announced a review into the Renewable Energy Target that aims for 20 per cent of power drawn from renewables – like wind and solar – by 2020. One task given to the review is to determine whether the RET is pushing up the price of electricity.
The scheme provides a financial incentive for the energy market to produce renewable energy, but does it drive up the overall cost of energy for consumers? ABC Fact Check investigates.
How it works
The Howard government introduced the RET in 2001 to encourage growth in renewable energy.
There are two distinct groups who produce renewable energy. Large producers include wind farms, hydro-electric projects and solar power plants. There are also small-scale producers, like households with solar panels.
To meet Australia’s renewable energy target more investment in large-scale production is required. But building renewable power plants, like wind farms, is expensive. The cost of investment in renewable energy is much higher than investment in traditional energy sources like coal and gas. The RET provides an incentive for companies to invest in renewables.
According to the Clean Energy Regulator – the federal government body that oversees the RET – at the end of 2011, investment in renewable energy power stations totalled around $10.5 billion and there were more than 1,329,000 installations of items including solar panels and solar water heaters between 2001 and 2011.
In recognition of the difference between the household and industrial sectors, the RET was split into two parts, the small-scale RES and the large-scale RET (sometimes referred to as the LRET) in 2011 – but the basic premise of the system remained the same.
Energy retailers – the companies that deliver power to consumers – are required by law to purchase renewable energy certificates generated by renewable energy producers. The number of certificates the retailers are required to buy is set annually by the Clean Energy Regulator.
Miles George, managing director of Infigen Energy – a wind and solar power producer – said without the RET, it would be difficult to encourage growth in renewables.
“If you didn’t have the RET you wouldn’t have the investment in the first place… we need to know that we’re going to have a longer term source of revenue, which is provided through the certificates.”
The cost of the RET
Energy retailers pass the cost of the RET on to consumers through retail pricing. Some of Australia’s energy regulators – some states have their own, others are solely monitored by the national body – estimate the cost of the RET to consumers makes up between 1 and 5 per cent of power bills.
In Queensland, the regulator estimates that the cost of the RET to an average yearly household bill in 2013-14 is at least $55.24 and would rise depending on what energy products households use. A spokesman for the Queensland Energy Minister, Mark McArdle, told Fact Check that renewables make up 5.7 per cent of energy generated in the state.
“The Queensland Government supports renewable energy where it is cost effective. The RET needs to be revised to take pressure off Queensland electricity prices,” Mr McArdle’s spokesman said.
The NSW Independent Pricing and Regulatory Tribunal (IPART) argued in a submission to a 2012 review of the RET by the Climate Change Authority – which provides independent advice on Australian government climate change strategies – that it was pushing up power prices for consumers.
“IPART estimates that in 2012-13 the cost of complying with the RET adds on average $102, or 4.8 per cent, to an indicative regulated electricity customer’s bill in NSW,” the submission says.
In July 2013, IPART released its review of regulated energy prices for 2013 to 2016. It found that 1.3 per cent of the increase in the cost of an electricity bill was because of “green scheme” compliance – which includes the RET.
The Australian Energy Regulator’s State of the Energy Market 2013 report does not look specifically at the RET – but says price increases were largely driven by the carbon price, reduced production of power due to falling demand and the increasing cost of gas.
Potential benefits
The RET also affects wholesale electricity prices because creating renewable energy once the infrastructure is in place is relatively cheap. Sources like solar and wind power are produced from elements that are free – unlike coal or gas power, which have higher ongoing production costs.
The Climate Change Authority, in its 2012 review, explains it like this: “The RET can result in additional supply entering the market earlier than would otherwise have been required to meet demand. Secondly, this extra capacity is likely to be characterised by low marginal costs of production – it sits at the bottom of the supply curve, and means that the dispatch of generators with higher short run supply costs is sometimes avoided.”
Miles George echoes that sentiment.
“Because we have no fuel cost, we always underbid the thermal generators and that tends to bring the price down. You can’t see that in most states, except South Australia where it’s blindingly obvious because in South Australia renewables have about 30 per cent… when it’s windy the price goes down and it reduces the need for thermal generation. So it has a significant effect of depressing the wholesale price,” Mr George told Fact Check.
“That effect more than offsets the prima facie cost of the certificates,” he said. But there is a crucial flaw: “Consumers may not see the price reduction because retailers might not pass it on”.
Modelling for The Climate Change Authority’s review concluded that power prices from 2012-13 to 2020-21 with the current RET in place, and including the impact of the wholesale price drop, would be roughly $15 higher each year than what prices would be with no RET.
“All other things being equal, the modelling estimates that the higher the large-scale renewable energy target the greater the increase in renewable energy development and the lower the wholesale price. At the same time, however, there will be a greater number of renewable energy certificates created,” the authority said.
“The net effect on energy consumer bills will therefore reflect the balance of the change in wholesale costs and change in certificate costs.”
In the AER’s State of the Energy Market 2013 report it says wholesale spot electricity prices hit historic lows in 2011-12. That’s attributed to declining demand and “the rising uptake of renewable generation”. But the prices rose sharply again in 2012-13, which the report says is largely because of carbon pricing.
IPART’s June 2013 review of regulated prices said the cost to consumers of the electricity generation component of NSW power bills are going down 3.3 per cent but the green schemes cost will rise 1.3 per cent.
In 2008 The Business Council of Australia put out a report into emissions trading that looked at the RET and concluded that it was causing a drop in the wholesale price, but the report didn’t assume that the benefit would extend to the consumer.
“Although retail prices are higher under the RET scheme (due to the obligation on retailers to [purchase certificates]), wholesale prices are lower… This is because renewable generators typically have low marginal costs, and also because they receive a [certificate] revenue ‘subsidy’ that lowers the revenue they require from the energy market to justify their investment,” it said.
What does it mean for consumers?
Modelling undertaken for Meridian Energy Australia, a renewable energy company, produced by consultancy firm Sinclair Knight Mertz, found that the RET should deliver a cost benefit to consumers with wholesale prices cancelling out the cost of certificates – although the benefit evaporates post-2020.
“These results show that customers in Australia are on average likely to have a price reduction over the period to 2020 as a result of the LRET, albeit that there may be a modest increase in prices from sometime after 2020,” the June 2013 report says.
“The price reduction is due to the wholesale price effect of the LRET… [which] more than outweighs the impact of increased liabilities for certificates as the target grows.”
But the report contains some important caveats. It says that for consumers to benefit, energy generators will most likely see their profits decline. And it says that as at mid-2012 there is not enough renewable energy generation in most energy markets to have enough of an impact on wholesale prices for consumers to benefit.
The best indicator of whether increasing the amount of renewable energy in the grid will lower the price of power, might be to consider a market where there is already a large amount of renewable energy in the system.
South Australia is the leading Australian state for renewable energy generation.
In 2011 South Australia reached its 20 per cent of energy generation from renewables target, and its 2020 target is 33 per cent.
The Australian Energy Market Commission – an independent body that makes the rules and guidelines for Australia’s national energy market – said South Australia’s prices would drop by 0.9 per cent a year to 2016, and attributed that in part to a strong wholesale market.
“Competitive market costs are expected to show a steady decrease of 4.3 per cent on average over the three years from 2012-13 to 2015-16,” an AEMC fact sheet on the South Australian market said. It attributes the drop in wholesale prices to an increase in energy generation and falling demand. And it also said environmental policies – including the RET – would put downward pressure on prices in coming years.
According to the AER, renewables made up 28 per cent of the South Australian market in 2012-13.
“Climate change policies also contributed to change in the generation sector by altering the competitiveness of alternative technologies. The renewable energy target scheme stimulated investment in wind generation, which supplied 3.4 per cent of electricity in the [National Energy Market] in 2012–13 (including 28 per cent of output in South Australia)”, the State of the Energy Market report says.
The bottom line
According to an AEMC report from December 2013 residential electricity prices are “expected to moderate over the next three years”.
“This national trend is largely driven by stabilising regulated network costs, and both upward and downward pressure from the costs of different government environmental policies,” it says.
The retail price is made up of environmental policy costs, retail costs and network costs. The AEMC report puts the wholesale price component in the “retail costs” section. It says the large-scale renewable energy target can affect wholesale prices.
“The renewable generation that is supported by the LRET also tends to offer its capacity into the wholesale spot market at a low price. In regions where there is significant entry of renewable generation, the net effect of this behaviour may be an overall reduction in wholesale spot market prices,” it says.
But it goes on to note that consumers won’t necessarily notice the difference because the RET’s certificate scheme costs will cancel out the benefit.
“Although the LRET may contribute to low wholesale spot market prices, this does not necessarily translate into lower residential electricity prices. This is because the cost of the renewable energy target, which retailers face directly, is also recovered from consumers via retail electricity prices.”
It is clear that the RET adds to the cost of household electricity bills. The amount varies from state to state and depends on the conditions set by regulatory bodies. There is evidence to suggest that encouraging renewable energy into the electricity market does push down wholesale prices – but whether that benefit can cancel out the cost of complying with the RET – or even makes it to the consumer – is not clear.
Sources
IPART Submission – Renewable Energy Target Review – September 2012
Climate Change Authority, Renewable Energy Target Review, December 2012
Australian Energy Regulator, State of the Energy Market, 2013
IPART, Review of Regulated Retail Prices for Electricity – From July 2013 to June 2016
Business Council of Australia, Modelling Success: Designing an ETS that Works, August 2008
Australian Energy Market Commission, 2013 Residential Electricity Price Trends, December 2013
Government of South Australia, media statement, 22 June, 2011
Australian Energy Market Commission, South Australia electricity price trends, December 2013
Queensland Competition Authority, letter to Energy Minister Mark McArdle, May 2013
Estimating the Impact of Renewable Energy Generation on Retail Prices, SKM, June 2013
Renewable Energy Target Review, Terms of Reference, February 2014
Grattan Institute, submission to the Senate Inquiry into Direct Action, 2014
Topics:
environmental-policy,
government-and-politics,
electricity-energy-and-utilities,
environment,
alternative-energy,
solar-energy,
wind-energy,
energy,
australia
First posted
March 07, 2014 08:00:00
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