Support for renewable energy

Anita Talberg, Science, Technology, Environment and Resources and Kai Swoboda, Economics

Key issue
Choosing a policy to promote renewable energy in Australia has involved some trial and error. Essentially, two approaches can be taken: one that sets a target to be met at any cost or one that sets a price without commitment to the amount of renewable energy. To date both have been deployed in Australia, at the federal and/or state level.

Renewable energy is growing

Renewable sources provided around 10% of Australia’s electricity generation in 2011–12. More than half of the renewables total came from hydropower, and wind power accounted for a quarter. Over the 2012 calendar year, 14 new large-scale renewable energy projects were delivered and 322,000 additional rooftop solar systems were installed. Another 15 major renewable energy projects, including 10 wind farms, were underway by January 2013.

A key objective of renewable energy policies in Australia is to reduce greenhouse gas emissions. The two main policy instruments currently driving increases in renewable energy are the Australian Government’s Renewable Energy Target (RET) scheme and state-based feed-in tariff (FiT) schemes. Reviews of these schemes show that they have increased investment in renewable energy infrastructure and increased uptake of renewable energy systems. However, there has also been criticism of both types of mechanism, particularly in relation to cost and investment certainty.

The Renewable Energy Target scheme

The RET scheme—which began in 2001 and has bipartisan support—is a market-based mechanism with the aim of adding renewable energy to electricity demand. When the RET began in 2001 it aimed to increase electricity from renewable sources by 9,500 gigawatt-hours (GWh) by 2010.

The RET scheme works by requiring energy retailers to relinquish a certain number of Renewable Energy Certificates (RECs) to the government, where each REC proves that one extra megawatt-hour of electricity has been produced from renewable sources. RECs are bankable and tradeable. In 2009, new legislation increased the target to 45,000 GWh by 2020 (representing 20% of projected demand). The mechanics of the scheme were reviewed and amended in 2010 when the scheme was split into two parts: one for small-scale household systems and another for large-scale projects.

Despite almost doubling the capacity for electricity from renewable sources, and thereby achieving emission reductions of 20 million tonnes since 2001, the RET has been the subject of heavy debate.

Some criticisms of the RET

Target and cost: the RET is an absolute target in GWhs. Because energy demand projections have been revised downwards, the RET may overreach its 20% goal. Industry groups say this will increase costs.
Policy uncertainty: the RET scheme has been the subject of regular reviews and numerous legislative changes. This adds investor risk and increases costs. Because the RET legislation does not guarantee connection to the grid, renewable energy developers must negotiate long-term power purchase agreements (PPAs) with electricity retailers. The availability of these PPAs is hampered by policy uncertainty as energy retailers are wary of committing to long-term contracts.
Interaction with state laws: the RET scheme does not compel state or local governments to facilitate the development of new renewable energy projects. Planning laws are making it increasingly difficult and costly for project developers to find suitable sites.

Despite these criticisms, the Climate Change Authority (CCA) review of the RET in 2012 made few recommendations. Chief among these were that the target remain unchanged and that reviews be undertaken only every four years.

State-level feed-in tariffs

The RET scheme imposes a target than can be met at the lowest cost. An FiT scheme sets a firm price for renewable energy and allows the market to decide how much capacity will be added. Every Australian state or territory has offered some form of FiT for renewable energy. Most of these are aimed at household systems, such as rooftop solar panels. Under such a scheme the household is guaranteed connection and receives a set rate for the electricity fed into the grid.

The popularity of these FiT schemes has exceeded all expectations with more than one million rooftop solar systems have now been installed in Australia. Nonetheless, these schemes are not without problems.

Some criticisms of FiT schemes

Increased network costs: a grid that was designed to export electricity must now be changed, at some cost, to import as well.
Cross-subsidising: to recoup out-of-pocket FiT costs, electricity retailers increase their charges. As a result, the benefits of reduced energy bills enjoyed by those people with rooftop solar panels come at the cost of increased energy charges for everyone else (often the people least able to afford it).
Boom/bust: in response to unanticipated high uptake of rooftop solar panels, governments have reduced tariffs or ended schemes with little or no warning. This has injected uncertainty into the policy landscape and affected small solar panel businesses.

Coal-free and gas-free electricity?

A modelling exercise by the Australian Energy Market Operator concluded that all of Australia’s electricity could be generated from renewable sources by 2030. This would cost at least $219 billion, would require 2,400 to 5,000 square kilometres of land, and would need an installed capacity more than double the expected maximum peak demand (because of the intermittent nature of renewable energy).

Interaction with other policies

In theory, a price on carbon could provide a boost for renewables by reducing the relative competitiveness of carbon-intensive electricity generation. Incentive for reducing emissions is also provided through energy efficiency programs and direct co-investment by governments in renewable energy technologies.

The Australian and state and territory governments are using intergovernmental forums to address the overlap between various policies to reduce carbon emissions.

The CCA’s 2012 RET review recognised jurisdictional overlaps. However, the CCA considered that the RET was important because it mitigates the risk that uncertainty in a carbon price – in Australia or elsewhere – might suppress investment in renewables.