Baker & McKenzie: Renewable Energy Target Review -- The RET to remain unchanged

Overview

In a much anticipated report released recently, the Climate Change Authority ('the Authority') has recommended that the key elements of Australia's Renewable Energy Target ('RET') remain unchanged.

Maintaining policy certainty and predictability was a key factor in the Authority's decision to recommend that the existing large-scale renewable energy target ('LRET') of 41,000 gigawatt hours ('GWh') be retained. To provide further certainty and predictability, the Authority recommended that the frequency of the scheme review be extended from every two years to every four years, with the next review to be in 2016.

The Authority did recognise that certain changes were needed in the operation of the RET scheme and made the following preliminary recommendations in respect of the LRET:

●    Large electricity consumers should be able to 'opt in' to assume direct liability for RET obligations, to allow them to manage their own compliance costs;

●    Partial Exemption Certificates should be tradeable and made usable by any liability entity (and not just their electricity supplier), which should increase the likelihood that the recipient would receive a market value for the Certificates;

●    The level of the shortfall charge should be reconsidered by the Authority in its 2016 review (or earlier if necessary); and

●    The Productivity Commission should consider the level of the emissions-intensive, trade exposed exemption under the RET as part of its broader review of the carbon pricing mechanism Jobs and Competitive Program in 2014-2015.

The Authority has also recommended that the threshold for a small scale solar PV system should be reduced to below its current 100 kW limit (e.g. to 10 kW).

The Minister for Climate Change and Energy Efficiency, Greg Combet, has welcomed the report and has stated that the Government will respond to its recommendations in early 2013.

We have we have set out in this alert the Authority's key decision to retain the fixed LRET target, proposals for containing the cost of the small-scale renewable energy scheme ('SRES') and its recommendation to implement an 'opt-in' facility.  Further details on the changes recommended by the Authority are set out in Appendix 1. 

41,000 GWh or 20% renewable energy by 2020?

The key outcome of the Authority's final report was its conclusion that the existing large scale renewable target of 41, 000 GWh should not be reduced in line with projected lower electricity demand.

Essentially, the Authority considered that the projected resource cost savings to society that might be achieved by reducing the target would not be large enough to offset the damage to investor confidence caused by such a change.The Authority did leave open the possibility of adjusting the RET after the next review due in 2016, by which date there may be more certainty regarding the future of the carbon price, the impact of Clean Energy Finance Corporation ('CEFC') investment and trends in electricity demand.

The Authority considered it unnecessary to increase the target while the industry is subject to a sufficient carbon price.   

'Opt-in' for large electricity consumers in the LRET scheme

A significant proposal put forward by the Authority is to implement a 'opt-in' facility to promote greater flexibility and lower costs in the LRET scheme for large electricity consumers. This would be in line with policy developments surrounding large consumers of liquid fuels under the Carbon Pricing Mechanism ('CPM'). Such a 'opt-in' facility would allow large energy users to manage their own liability under the RET in an efficient manner.

The Authority found that such an amendment would have benefits from a market efficiency perspective. Increasing the number of buyers of Large-scale Generation Certificates ('LGCs') and Small-scale Technology Certificates ('STCs') in the market would increase market liquidity and encourage the development of low cost renewable energy projects. The Authority also found that introducing large electricity consumers into the market would substantially increase demand for low cost projects and increase the competitiveness of the LGC and STC markets. 

Containing costs in the Small-scale Renewable Energy Scheme

Another major focus of the Authority's report was to investigate changes to the RET that would lower overall costs and ensure an equal distribution of costs. The Authority recognised that in recent times STC costs have had a disproportionate impact on retail electricity prices. The Authority has made a number of recommendations to lower these costs:

●    The Minister should retain the power to lower the price cap for STCs below the current clearing house price of $40;

●    Some small-scale systems could be moved into the LRET by lowering the threshold for  small-scale solar PV systems from its current 100 kW limit (e.g. to 10 kW);

●    No new displacement technologies should be added to the SRES (although existing solar water heaters and heat pumps should be maintained); and

●    Small scale accreditation system should be open to accreditation bodies other than the Clean Energy Council.  The Authority hopes that this would result in increased services to the industry and/or reduced costs for participants.

The Authority also proposed that rules for clearing houses for STCs be amended to a 'deficit sales facility' whereby new certificates may only be placed on a transfer list when the clearing house is in deficit.  This would allow the ongoing operation of the clearing house to act as a price-cap.

In between the release of the discussion paper in October this year and the final report being handed down, the Government announced that the solar credits multiplier would be phased out six months ahead of schedule, on 1 January 2013. This was done to avoid any further upward pressure on electricity prices caused by the high uptake of roof top solar panels.

Conclusion

The Authority found that the RET has so far been a success and predicted Australia's renewable energy goals will be met under current arrangements, assuming that the carbon price does not approach zero.

Avoiding uncertainty in the market was clearly one of the primary aims of the recommendations put forward by the Authority in the report in order to ensure that the policy objectives of the RET are achieved. The Authority recognised the importance of certainty to the renewable energy market in the context of political uncertainty around carbon pricing and other climate policies, as demonstrated by the Authority's recommendation that review periods be extended from two to four years.

The report has received initial support from the Federal Government. In a subsequent media release Minister Combet recognized the key theme of the report when he stated "the government recognises the importance of stability in the nation's climate change policies in delivering clean energy investment and opportunities".

Appendix 1 - Summary of Authority's recommendations