Review calls for Renewable Energy Target cuts: what it means

The Renewable Energy Target adds just over a dollar a week to your power bills. AAP Image/Alan Porritt

The long-awaited review of Australia’s Renewable Energy Target has been released and, as widely predicted, has recommended winding back or even scrapping the various parts of the scheme.

We asked Conversation readers for their questions about the review, what it means for Australia’s renewable energy industry, and your household power bills. We answer the most pressing questions below.

What has the review recommended?

Short answer: cuts to investment in renewable power stations, and the scrapping of incentives for solar panels.

The report’s executive summary recommends two alternative options:

  • Closing the scheme to new renewable power stations, while continuing to support existing projects until 2030, or

  • Ensuring that new renewable power generation makes up just half of any future growth in electricity demand.

Separately, it also recommends:

  • Ending the system of financial incentives to households that install solar panels, solar hot water systems and other small-scale renewable technologies, either immediately or in 2020.

The review says that although the Renewable Energy Target has largely been successful, it has imposed “significant costs on the economy” and has “contributed to a large surplus of generation capacity”.

As a result, it says investment in new renewable energy power stations will not be needed to meet Australia’s declining energy demands, and that solar incentives for homeowners, while successful, are an expensive way to cut greenhouse emissions.

How do the recommendations differ from the current target?

Short answer: the current scheme would be scaled back, and parts of it scrapped.

The Renewable Energy Target (RET) is split into two parts: one that aims to boost large-scale renewable power, such as wind and solar farms, and another that encourages households to buy domestic-scale technology like solar panels.

The large-scale target aims to deliver 41,000 gigawatt hours of electricity in 2020, gradually ramping up to that figure between now and then. That target has been often been referred to as a “20% by 2020 target”, because the 41,000 gigawatt-hours plus the inputs from small-scale generation and from existing hydropower generation were expected to add up to roughly 20% of the electricity demand for 2020.

But electricity demand in Australia has declined in recent years, so that total looks like being a significantly higher proportion of our electricity supply by 2020. As a result, some have called for the scheme to be made less ambitious, aiming for a so-called “real 20%” instead. Renewables currently contribute about 13% of power generation.

Bureau of Resources and Energy Economics

The review says that the current large-scale scheme will cost A$22 billion in industry subsidies, and argues that there will be no need to spend this money given that declining power demand means there is no need to invest in more new renewables. It argues that the scheme now serves only to cut greenhouse emissions, and is an expensive way to do so.

The recommendations would mean an end to industry subsidies for new renewable power. The recommendations allow for the possibility that a small amount of this funding could be reinstated in the event that power demand begins to grow.

The recommendations would mean the end of financial incentives for homeowners who install solar panels – either immediately or at the end of the decade.

How much does the Renewable Energy Target cost households?

Short answer: just over a dollar a week on power bills.

The scheme’s website says this:

The Renewable Energy Target is not a tax on consumers. However, all electricity consumers pay a little bit more on their electricity bill. As part of the Government’s RET Review Call for Submissions Paper it was estimated that the Renewable Energy Target contributed approximately 4% to household electricity bills in the 2013-14 period. This equates to about $60 per year, or just over $1 per week for someone with a $1500 per year electricity bill.

Similarly, the review says:

The direct costs of the RET currently increase retail electricity bills for households by around four per cent, but modelling suggests that the net impact of the RET over time is relatively small.

Various analyses give differing verdicts on the future effects on household power bills (see below for more on this).

Meanwhile, the RET puts downward pressure on wholesale electricity prices because it introduces competition between renewable and fossil electricity.

RMIT University energy researcher Alan Pears explains that the cost has two components: the cost for retailers to buy renewable energy certificates (which pushes up electricity prices), and the downward impact of renewable energy on wholesale electricity prices (which pushes prices down).

What will happen to household power bills?

Short answer: forecasts differ over whether bills will be higher or lower by 2030 if the target is cut back.

Modelling has delivered wildly differing projections about future costs and other factors. However, all modellers are agreed that the outcome will depend on the balance between higher costs because of the subsidy payment, and lower costs because competition from renewable generators pushes down prices in the competitive wholesale electricity market.

Among a large handful of competing analyses, the one commissioned by the RET review panel itself suggests that power bills will begin to fall from 2021 onwards with the RET still in place, reaching annual household savings of up to A$91 by 2030.

But another study commissioned by peak business groups, which suggests the opposite: that renewables will drive up household power bills by between A$47 and A$65 by 2030.

Check out these contrasting forecasts:

From 2020 on, ACIL Allen forecasts that households would pay lower power bills if the current Renewable Energy Target is retained. RET Review Workshop Preliminary Modelling results presentation, 23 June 2014

Deloitte forecasts that households would pay higher power bills if the current Renewable Energy Target is retained. Assessing the impact of the renewable energy target Australian, Chamber of Commerce and Industry (Lead Sponsors) Business Council of Australia Minerals Council of Australia, 23 July 2014

However, as Dylan McConnell pointed out when comparing the two sets of figures:

The difference is likely to be pretty small in the scheme of things. As other commentators have pointed out, Deloitte’s pessimistic forecast still only adds up to an extra 50 cents a week for the average household.

Renewable energy is more expensive than fossil fuels unless emissions are priced, says the Grattan Institute’s Tony Wood.

“The best policy approach is to begin again with what we are trying to achieve, and surely it is to address climate change as efficiently as possible. That means a carbon market,” he says.

Has the target successfully cut emissions?

Short answer: yes.

The Clean Energy Council says that scrapping the RET now would cause an extra 34.7 million tonnes of carbon dioxide emissions every year from 2020 – emissions that would have to be saved elsewhere if Australia is to stay on track to meet its 5% emissions reduction pledge.

Renewable energy has also delivered some notable successes at a state level – such as in South Australia, where wind farms now supply more than a quarter of the state’s electricity.

Another option would be to expand the system of incentives to cover not just renewables but also lower-emissions sources such as natural gas. But such a move would be well outside the remit of the current review.

Sydney Town Hall is among the 1.3 million Australian buildings with solar panels. AAP Image/City of Sydney, Paul Patterson

Will solar panels get more expensive?

Short answer: no, but installing them in Australia would.

While solar panels themselves (most of which are manufactured in Asia) are unlikely to get any more expensive, Australian homeowners would pay more if they lose access to financial incentives that offset the installation price.

ACIL Allen forecasts that solar photovoltaic prices will continue to decline. RET Review Workshop Preliminary Modelling results presentation, 23 June 2014

The Small-Scale Renewable Energy Scheme – the part of the RET that promotes domestic-scale renewable energy – offers credits to homeowners for installing any of a range of devices including solar hot water, solar power or wind turbines. The scheme allows customers to earn Small-Scale Technology Certificates – 15 years’ worth are paid up front to anyone who installs a solar power system, a subsidy worth about A$2500 for a typical 3 kilowatt system.

Australia has seen a huge boom in the uptake of solar panels, which are now fitted to 1.3 million roofs. As panels have a working life of at least 20 years, those already in place will not be removed any time soon.

The Melbourne Energy Institute’s Dylan McConnell said that if the incentives are removed, “the number definitely won’t decline, but it maybe won’t increase as fast”.

The Australian Solar Council has criticised the idea, arguing that this would remove one of the only ways homeowners can buffer themselves against future power price rises.

Will fewer wind farms and other renewable power installations be built?

Short answer: yes, but it will depend on future financial support.

As much as they might annoy Joe Hockey, new wind farms under construction will still keep appearing, in the short term at least.

But if the scheme is closed to new entrants, in line with one of the review’s recommendations, then the rate of new investment will tail off in the medium term.

Renewable energy still has some backers at a state level. The ACT government, for example, is pushing ahead with a plan to source 200 megawatts of wind power, as part of a plan to make 90% of the territory’s electricity renewable, and has also invested in large-scale solar plants such as the Royalla Solar Farm. But this is small compared with the levels of renewables growth in the current RET framework.

Meanwhile, renewable energy doesn’t enjoy such supportive state government backing in the states with conservative governments – apart from Tasmania, which benefits from its hydro and wind developments. And funding certainty will be vital for long-term investment in wind and solar farms.

Is there a tipping point where renewables will be viable without the RET?

Short answer: it’s unlikely without continued incentives.

The review describes the renewables industry as “established” on Australia’s electricity landscape. Yet the fact is that to compete on cost against 20- to 30-year-old coal-fired generators, in a market where supply greatly exceeds demand, new renewables facilities won’t be financial viable without extra backing.

That picture would be different if Australia still had a steadily rising carbon price, which would have made fossil fuels gradually more expensive until renewables became preferable in their place. But Australia no longer has a carbon price.

Some analysts, such as the Australian National University’s Andrew Blakers, argue that Australia can get to 100% renewable energy.

“If the federal government leaves the RET alone, Australia will be on track for an all-renewable electricity system by mid-century,” Blakers wrote. But if the scheme is wound back and carbon pollution is not penalised, coal and gas suddenly become much more attractive options, in the short term at least.

Could pumping water uphill solve renewable energy’s storage problem? Martin Kraft/Wikimedia Commons, CC BY-SA

The other issue with widespread uptake of renewable energy is the matter of grid reliability – it will be necessary to store and then release power to smooth out the supply, ensuring that electricity is available even when it’s not sunny or windy. However, Blakers points to South Australia, which shows that this is not urgent – in July, South Australia obtained nearly half of its electricity from wind and solar, and nobody noticed any diminution of supply quality.

Opinion is divided over how feasible a 100% renewable electricity system is: some say it’s eminently achievable with the aid of technology already used for hydroelectric power; others say it’s not so simple; while still others say that it’s easier than it sounds, given the right mix of different renewables.

Will the government accept the recommendations?

Short answer: it depends on Cabinet and the Senate.

The government has yet not formulated a response to the review. The key players are likely to be Prime Minister Tony Abbott, industry minister Ian MacFarlane (both of whom might be expected to endorse the review), and environment minister Greg Hunt, who backed the RET before the Coalition’s election victory last year.

If the recommendations are taken to Parliament, then another Senate battle looms, particularly with the Palmer United Party, which has backed the RET until 2016. Clive Palmer, let’s not forget, is difficult to second-guess on environmental issues.

Thanks to readers who submitted questions, including Matthew Nicholas, @SulphurCocky (via Twitter), and others.