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Energy target not a bullseye

Energy target not a bullseye

Subsidy plans for green power generation are not without their flaws, but the benefits far outweigh the costs, write Dominic Bortoluzzi and Anthony WichtA renewable energy target of 20 per cent…

Subsidy plans for green power generation are not without their flaws, but the benefits far outweigh the costs, write Dominic Bortoluzzi and Anthony Wicht

A renewable energy target of 20 per cent by 2020 certainly sounds like a good idea. But the elegance of the symmetry in the Federal Government's election promise is problematic. A difference of 1 or 2 per cent in the amount of renewable energy will have a big impact on the cost of electricity and emissions reduction, yet the 20 per cent target appears to have been chosen as much for its sound as its effect.

Subsidising renewable energy is not new. The Mandatory Renewable Energy Target (MRET) was established in 2001 to provide extra revenue for green generation. Since then, Australian electricity retailers have been required to purchase a gradually increasing percentage of electricity from green energy, which has driven wind farm development in particular.

Renewable energy is closely linked to a reduction in Australia's greenhouse gas emissions, because in this country the electricity sector is responsible for 50 per cent of emissions. Renewable energy sources such as wind, solar and geothermal produce minimal carbon emissions, so replacing existing fossil-fuel generators with renewable energy is an essential part of Australia's carbon reduction strategy.

Green generators are entitled to create Renewable Energy Certificates (RECs) under the MRET. Retailers which sell electricity to households and businesses are required to purchase RECs based on the amount of electricity they supply. A green generator such as a wind farm earns money both from the sale of RECs to retailers and the sale of electricity. There is no physical difference between green electricity and black electricity, so wind farms are paid the same amount as coal power stations for electricity produced at the same time.

Generally, green electricity is more expensive to produce and the revenue from selling RECs is essential to making renewable energy projects viable. However, once the CPRS imposes a price on carbon emissions and generators factor in the cost of purchasing permits, generation from carbon-intense sources such as coal becomes more expensive. At a particular carbon price, black generation becomes more expensive than green generation.

"… the 20 per cent target appears

to have been chosen as much

for its sound as its effect"B

TX

It has been argued that maintaining the MRET will distort the carbon reduction market. The rationale behind tradeable emissions is that companies which can reduce emissions most cheaply will do so first, but the MRET mandates that even at the commencement of the CPRS, some of the carbon reduction must result from increasing renewable power generation.

Remember that the full cost of carbon reduction will be passed on to consumers through higher prices for goods, including electricity, so mandating particular areas for reduction will make the short-term cost to consumers higher.

Garnaut's economic analysis describes the combination of the CPRS and the MRET as an "adverse interaction" because it does not necessarily deliver lowest costs to consumers.

Superficially, the higher prices paid by consumers become profits for renewable energy generators. The price of carbon under the CPRS will augment electricity prices, so the price paid to all generators will increase. Renewable generators obtain the price increase without a corresponding increase in their costs, so any increase in the carbon price over time represents pure profit.

At the same time, renewable generators collect the MRET's green bonus for all electricity produced. Renewable energy's detractors have pointed out that if the carbon price under the CPRS becomes sufficiently high, what was intended as an incentive will translate into a windfall gain for generators of green electricity.

However, there are some good reasons for maintaining the MRET. It can be difficult to increase renewable energy generation levels quickly. For example, wind is highly dependent on location. Australian sites with the best wind and closest proximity to demand centres have already been used.

The other big benefit of the MRET is to bring forward the construction of new renewable energy projects. Renewable generation will only be developed in response to a clear price signal. These projects are expensive and need to be shown to be profitable over longer than 15 years to attract investors.

Without the MRET, the right price signals are unlikely to come during the early years of the CPRS because cheap emissions reduction will soak up demand for carbon reduction in the first few years.

Building additional renewable generation is the next phase, but when the economic case becomes clear, it will not happen overnight.

It takes years to develop a wind farm from scratch and most other renewable technologies take longer. There is no doubt that at some point there will be significant emissions reduction from power stations, so proponents argue that the MRET can establish these reductions early.

The effects of an emissions reduction scheme will always be complex. There will be winners and losers, no matter how elaborate the scheme and its compensation measures.

The bottom line is that the goal of CPRS is to reduce high-carbon-intensity activities and promote low emissions. These are complicated issues which risk being trivialised when reduced to a catchy political slogan.

Dominic Bortoluzzi is a partner and Anthony Wicht is a solicitor at Mallesons Stephen Jaques.

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