Leslie Nielson, Economics Section

Current policy

Under the current Renewable Energy Target (RET) scheme, Australia will be generating at least 20 per cent of its electricity from a variety of renewable sources by 2020 (at least 45 000 gigawatt-hours (GWh) in that year). Briefly, large scale electricity users and retailers must purchase the required number of Renewable Energy Certificates (REC) and surrender them to the government regulator each year. One REC is equal to one mega-watt hour per year. These certificates are created by the generation of electricity from renewable sources. Failure to surrender enough RECs leads to a substantial financial penalty.

From January 2011, the RET scheme will be separated into two components. The first component is the Small-scale Renewable Energy Scheme (SRES) covering small-scale generation and residential based power generation (that is, solar hot water heaters and photo-voltaic panels). The second component is the Large-scale Renewable Energy Scheme (LRET), covering commercial-scale renewable power generation. The set targets for the LRET rise from 10 400 in 2011 to 41 000 GWh in 2020. The balance of renewable power generation above this figure will be made up of units installed under the SRES. The graph opposite shows the LRET targets from 2011 to 2020.

Surplus Renewable energy targets

The various state and territory feed-in tariff schemes, and the fall in the photo-voltaic system costs, have created an effective incentive for the installation of a large number of residential renewable energy schemes. This has led to a large number of RECs arising from this source alone. One estimate suggests a surplus of some 23 million RECs by the end of 2010. RECs arising from the SRES may be used to meet the LRET, but not after December 2010.

Part of the incentive for the installation of commercial-scale renewable energy projects is the return they may receive from selling the RECs they give rise to. The expected surplus may depress the REC price to the extent that some large-scale renewable power generation projects may be deferred, until the long-term REC price rises. At present the REC spot price is about $37 per certificate.

This deferral of large-scale projects may restrict the supply of RECs to the extent that there will not be enough such certificates created to meet the required targets in later years. This may raise the REC price to an unstainable level for current scheme participants in the short term. The only way these participants can recover this cost is to substantially raise the retail electricity price or the price of a large-scale electricity user’s products. Thus, the REC market requires constant monitoring.

The LRET scheme allows for the temporary increase in its targets if there is a large surplus of REC’s issued at the end of 2010. Parliament may need to examine the need for government to expand the LRET.

Crowding out

There are a significant number of renewable energy projects, mainly wind farms, which are being developed. One estimate puts the power that will be generated by these projects at over 1000 mega-watts (MW). In particular the Australian Gaslight Company (AGL) has announced the development of the Macarthur wind farm with a capacity of 420 MW. One analyst has suggested that all the currently announced renewable energy projects will keep the REC market in rough balance for some years to come, even before taking account of the projected surplus of RECs arising by the end of 2010.

Though these projects are welcome there are some likely consequences:

• the future REC price may be lower than required to provide an incentive for further renewable energy projects, and
• a low REC price favors already established technologies, such as wind and solar thermal, at the expense of developing technologies, such as geothermal and tidal/wave power generation. New technologies are expected to require larger amounts of capital (and hence a higher REC price) to establish.

Technical diversity in renewable energy generation is important. By their nature solar thermal and wind are intermittent power sources, where geothermal and tidal/wave power may provide renewable energy on a constant basis. While diversity is a desired outcome, it may require a mandated share of energy to be generated by specified means (such as geothermal).

Transmission lines

Australia’s renewable energy resources tend to be in remote locations, far from major centers of electricity demand and major transmission lines. All developers of new power generation facilities must now provide their own transmission lines. Thus renewable energy generators face an additional cost to develop their projects in comparison to conventional power station developers who have closer access to existing transmission lines. There may calls for government assistance by renewable energy developers to help meet this cost.

More please

Currently, the European Union has a goal of sourcing 20 per cent of its total energy requirements (including liquid fuel requirements) from renewable sources by 2020. To meet this overall goal at least 33 percent of its electricity will be generated by renewable means.

The Australian Greens have proposed that Australia’s RET be lifted to 30 per cent by 2020. They have also proposed other changes to the RET, such as removing electricity generated by waste coal mine gas from the scheme.

Library publications and key documents

G Baker, Operating wind farms by Commonwealth Electoral Division, Background note, Parliamentary Library, Canberra, 19 February 2010, http://www.aph.gov.au/Library/pubs/bn/stats/Wind%20Farms_CED.pdf

S Needham, Renewable energy technologies update, Background note, Parliamentary Library, Canberra,
30 November 2009, http://www.aph.gov.au/Library/pubs/BN/sci/RenewableEnergy.pdf

AGL Energy, $1 billion wind farm in Victoria’s south west to be biggest in southern hemisphere, media release, 12 August 2010, http://www.agl.com.au/about/media/Pages/$1billionwindfarminVictoria%E2%80%99ssouthwesttobebiggestinsouthernhemisphere.aspx