LOST OPPORTUNITY AND BIG
COSTS: THE IMPACT OF AN
UNRESOLVED RET REVIEW
CLEAN ENERGY COUNCIL
NOVEMBER 2014
1
EXECUTIVE SUMMARY
Investment in renewable energy in Australia has been underpinned by 13 years of bipartisan
support for the legislated national Renewable Energy Target (RET). This began when the
original Renewable Energy (Electricity) Act and Regulations were introduced by the Howard
government in 2001 and passed with the support of Labor. Every change to the legislation since
then, including the expansion of the Large-scale Renewable Energy Target (LRET) to 41,000
gigawatt-hours (GWh) in 2009, has been fully supported by both the federal Coalition and the
Labor Party.
This enduring investment confidence was shattered in 2014 by the uncertainty created by an
additional review of the RET policy. The report of the panel that carried out the review, which
was chaired by Dick Warburton, recommended either ceasing the policy outright or slashing the
policy to a level that would lead to the devastation of the renewable energy industry.
Following the publication of the Warburton Review, the government began negotiations with
Labor in an attempt to reach a bipartisan agreement on the future of the target. Following the
government’s proposal for lowering the LRET to 27,000 GWh, or less1, by 2020, a position that
is totally unacceptable to Labor and the renewable energy industry, negotiations have broken
down.
This paper outlines the ramifications for the renewable energy industry, electricity consumers
and the Australian economy if the current impasse is not resolved.
The consequences of an ongoing absence of bipartisanship on the RET policy include:
•
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An ongoing freeze in investment in renewable energy projects. Bloomberg New
Energy Finance reported that investment for the first three quarters of 2014 (while
the Warburton Review was underway) was just $238 million, compared to $2 billion
for the whole of 20132.
A substantial negative impact on more than $10 billion worth of investments in
large-scale projects already made on the basis of the operation of the scheme out
to 2030 at currently legislated levels. An unresolved RET review would cause a
further collapse in the value of Renewable Energy Certificates, which would result
in revenue cuts for existing renewable projects of $400 - $500 million per year.
This is likely to result in the devaluation of assets and, in some cases, the default
and collapse of projects and businesses.
The closure of some of the thousands of businesses directly involved in renewable
energy, and thousands more third party suppliers and contractors.
1
Modelling by ACIL Allen for the Warburton Review calculated that a ‘Real 20%’ resulted in an LRET of
25,500 GWh in 2020
2
Bloomberg New Energy Finance, Australia Insight, 03 October 2014
LOST OPPORTUNITY AND BIG COSTS:
THE IMPACT OF AN UNRESOLVED RET REVIEW
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Significant job losses. The sector employs 21,000 people directly and tens of
thousands more indirectly through renewable energy projects and installation.
Many of these jobs would be put at risk as a result of a prolonged freeze on
investment.
A damaging halt in clean energy deployment in Australia at a time when many of
our major trading partners are pushing for greater use of zero and low emissions
energy technologies.
The loss, or postponement, of more than $14.5 billion in future investment out to
2020.
In short, continued deadlock would result in policy failure, the destruction of the Australian
renewable energy industry and a range of unintended and undesirable consequences. It is
critical that the current political impasse is overcome and the previously strong bipartisan
support – that endured for 14 years throughout multiple changes of government – is returned.
This paper explores these issues in more detail.
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IMPACT OF THE CURRENT REVIEW
The greatest risk to the effectiveness of the RET policy is that the present lack of bipartisanship
continues, eroding confidence that the current policy has an enduring future.
The RET has undergone five major policy reviews3 since it commenced operating in 2001 and
three in just the past two years. A sixth review was recently announced by the Climate Change
Authority (CCA)4. Each review has resulted in an investment freeze due to increased
speculation about changes to key aspects of the policy.
The current review of the RET, informed by the panel chaired by Dick Warburton, has been
underway for more than eight months, with similar consequences. The Federal Government
recently announced its starting position to reduce the legislated LRET from 41,000 GWh to the
so-called ‘real 20 per cent’ of approximately 27,000 GWh. With around 16,000 GWh of additional
renewable energy generation already deployed under the policy since 2001, the government’s
‘real 20 per cent’ equates to a 64 per cent reduction in the remaining target. This position has
caused anxiety among the industry and investors of a major sovereign risk event that would
materially impair the value of existing projects worth over $10 billion.
The uncertainty created by this review is the most significant factor in the freeze on large-scale
renewable energy investment this year. Bloomberg New Energy Finance reported that
investment for the first three quarters of 2014 was just $238 million, compared to $2 billion for
the whole of 20135. Significantly, all of the projects that have attracted finance in 2014 to date
have been backed by government institutions – none have been solely backed by nongovernment lenders or investors.
3
These are: The Tamblyn Review in 2003; a review when the RET was expanded in 2009; a review when the
RET was enhanced in 2010; the Climate Change Authority Review in 2012; the Warburton Review in 2014
4
The CCA review is required by the current RET legislation
5
Bloomberg New Energy Finance, Australia Insight, 03 October 2014
LOST OPPORTUNITY AND BIG COSTS:
THE IMPACT OF AN UNRESOLVED RET REVIEW
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If the current negotiations on the future of the RET between the government and the Labor Party
are not resolved, this investment freeze is likely to continue until at least the next federal election
in 2016. The result of this ongoing investment freeze would be higher emissions, job losses in
the renewables industry, reduced economic activity in regional areas, and higher electricity
prices.
Keppel Prince Engineering, which locally manufactures wind towers for wind farms using
Australian steel in Victoria, announced last month it would lay off 100 staff as orders had dried
up. This is just a taste of what is to come if we can’t resolve the current situation quickly.
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IMPACT ON CURRENT INVESTMENTS
A reduced RET would have a significant impact on the value of large-scale generation
certificates (LGCs) and therefore the value of investments already made under the current
legislation, which has had long-standing bipartisan support.
LGCs are currently trading at around 50 per cent of their expected market value. This is putting
existing projects under significant financial strain as their revenue has effectively been halved.
The following analysis calculates the expected market value of revenue, based on modelling
undertaken by ACIL Allen for the Warburton Review, compared to the current substantially
discounted certificate value.
Year
LRET
generation
(GWh)
2014 15707
Expected
LGC price6
($/MWh)
$56.00
Current
LGC price7
($/MWh)
$29.00
Expected
value
Current
value
Lost value
$864 million
$456 million
$408 million
2015 16185
$58.00
$29.00
$939 million
$469 million
$470 million
2016 16185
$61.00
$29.00
$987 billion
$469 million
$518 million
This lower revenue is already having a material impact on the $10 billion worth of large-scale
projects already made on the basis of the operation of the scheme out to 2030 at currently
legislated levels. While the impact of this on each project and business will vary, over time it is
likely to result in the devaluation of assets and, in some cases, the default and collapse of
projects and businesses.
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IMPACT ON FUTURE RENEWABLE ENERGY INVESTMENT
Ongoing policy uncertainty and frozen investment will have far reaching consequences.
6
7
Based on analysis by ROAM Consulting for the CEC
Based on Clean Energy Regulator data for Weighted Average Market Price
LOST OPPORTUNITY AND BIG COSTS:
THE IMPACT OF AN UNRESOLVED RET REVIEW
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Over $14.5 billion of future investment in large-scale renewable energy infrastructure is at risk.
A significant pipeline of renewable energy projects has been identified to meet the 2020 target of
41,000 GWh, but these opportunities are waiting on policy resolution before they can be fully
developed. Investments have already been made to get projects ready for construction, but the
ongoing uncertainty surrounding the RET means many of these projects will not proceed,
leading to lost investment and jobs across the industry.
These losses, in terms of investment and employment, are considerable and will be felt right
across Australia:
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New South Wales could lose $4.24 billion in projected investment out to 2020, and
more than 4400 existing jobs would be at risk.
Victoria could lose almost $3 billion in investment, with 3700 industry jobs on the
line.
Queensland employs 6545 people in the renewable energy industry – all of whom
face an uncertain future if the RET were to remain unresolved.
Projected investment in South Australia would practically dry up, going from $2.1
billion to just $580 million.
Resolving the current review and restoring bipartisanship as soon as possible will give these
investments the greatest opportunity to proceed.
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IMPACT ON THE COST OF THE SCHEME AND ELECTRICITY PRICES
The Warburton Review concluded that the RET will act to lower power prices over the period
2015 to 2030. Conversely, if there is no new investment due to a breakdown in bipartisan
support for the RET, this will lead to less renewable energy investment and higher power prices
in the future.
Analysis by the Clean Energy Council using the results of the ACIL Allen modelling for the
Warburton Review of the RET has shown that by early 2020 the average household power bill
would be an estimated $35 a year higher if there are no new investments under the RET
compared to the successful delivery of the current target. By 2030 power bills are expected to be
more than $70 a year higher on average.
There is strong political support to provide all activities classed as ‘Emissions Intensive Trade
Exposed (EITE)’ with a full exemption from the RET. These increased exemptions would only
take effect if the regulatory and legislative changes are made, and this is unlikely to occur if
there is no resolution of the current review. To enable EITE sectors to avoid paying the RET cost
in 2015 a decision is needed by the end of 2014, to allow the necessary legislative and
regulatory changes to be made in good time.
LOST OPPORTUNITY AND BIG COSTS:
THE IMPACT OF AN UNRESOLVED RET REVIEW
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