Is Australia's renewable future a target?

Key Points:

Should the RET should be raised or lowered from its current 2020 setting? Should the RET scheme be abolished altogether?

The Australian Government's Climate Change Authority, established on 1 July 2012, is about to embark on its first review of Australia's Renewable Energy Target (RET) scheme, and already there is considerable debate about whether the RET should be raised or lowered from its current 2020 setting, or whether the RET scheme should be abolished altogether.

What's the RET scheme?

The RET scheme operates through the Renewable Energy (Electricity) Act 2000 and Renewable Energy (Electricity) Regulations 2001 and related legislation. Essentially, the RET scheme:

establishes a system of renewable energy certificates (RECs), which are created by the generation of electricity from renewable sources (eg. wind, solar, hydro, geothermal, biomass and others); and
imposes a liability on wholesale purchasers of electricity (ie. electricity retailers and large scale electricity users) to create or acquire, and then surrender, RECs each year in an amount which corresponds with the amount of electricity they purchase in the preceding year.

The goal is to provide additional encouragement for investment in renewable energy.

The RET Act establishes increasing GWh renewable generation targets each year until 2020, and target settings are based on forecast energy demand. The present intention of the RET scheme is that Australia will generate 20% of its forecast electric energy demand in 2020 from renewable energy sources¹.

The RET scheme was enhanced in 2009 and 2010, primarily to provide separate RECs for large-scale and small-scale renewable energy technologies, and separate annual targets for these two types of REC. This was done to address concerns that an over-supply of small scale RECs (largely from household solar panels) was reducing the incentive for investment in large-scale renewable technologies.

Who administers the RET?

As part of the current Government's Clean Energy Future package:

the Clean Energy Regulator was established – it will inherit the administration of the RET scheme from the Office of the Renewable Energy Regulator from 2 April 2012; and
the Climate Change Authority was established to have an overarching administrative role for the Clean Energy Future, and to review the Carbon Price and the RET.

Scope and timing of the RET review

The Climate Change Authority 's review is intended to analyse the RET's impact on Australia's economic efficiency and the RET's effectiveness as an environmental measure. The review by the Climate Change Authority will fulfil the scheduled biennial review under section 162 of the RET Act, which requires the Climate Change Authority to review the operation of the RET Act and RET Regulations and the legislation which administers the RET shortfall charges, together with the diversity of renewable energy access to the RET scheme (with reference to a cost-benefit analysis of the environmental and economic impact of that access). The review must be completed by 31 December 2012.

The board of the Climate Change Authority has indicated its intended timeline for its review is:

publication of an issues paper in August 2012, which the Climate Change Authority CEO Anthea Harris has indicated will be a neutral platform for submission responses;
publication of a discussion paper in October 2012, which is expected to detail the Climate Change Authority's position in draft; and
issue of the Climate Change Authority's final report by the end of 2012, following which the Minister must table the report to be discussed in Parliament in order to produce a written response to the report's recommendations.

There has been much debate recently on two aspects of the RET scheme.

Should the annual GWh renewable energy production targets set by section 40 of the RET Act be reduced?

In order to translate the annual GWh target into the surrender obligation for liable entities for that year, a renewable power percentage is established annually under section 39 of the RET Act, but this applies only if no percentage is prescribed by regulation.

Each year since the scheme's introduction, typically in March of a calendar year, the relevant Minister has prescribed the renewable percentages for that calendar year. The RET Regulations in section 23 and section 23A presently set the renewable power percentage for the large-scale RET (LRET) and the small-scale technology percentage for the small-scale renewable energy scheme (SRES) until 2012.

In the absence of any further regulation, the LRET renewable power percentage can be calculated using a formula in section 39 of the RET Act – which is intrinsically linked to the required GWh renewable source electricity set for each year until 2030.

For the SRES small-scale technology percentage, the formula differs and is linked, not to forecast electric energy demand, but to the total value, in MWh, of small-scale technology certificates created in the previous two years.

The forecast total grid demand for 2020 is now well below the forecast used in setting the GWh targets in the RET Act, which means that the GWh target in 2020 will be higher than the intended 20% of actual electric energy demand to be achieved by the RET scheme. As a result, some market participants are calling for the quantity targets to be reset, having regard to the latest lower demand forecasts.

This does not necessarily require amendment of the legislation – the Minister already has the power to prescribe by regulation any target that the Minister determines, having considered the required factors in the legislation, and the Minister already has power to mitigate the impact of the surrender obligations by setting a lower renewable power percentage under section 39(5) of the RET Act, so it is not essential to amend the annual GWh targets set out in the RET Act. However, some stakeholders would feel more comfortable if this were not left to the Minister to determine.

Do we still need the RET scheme if we have a carbon price?

The RET review begins within weeks of the commencement of the Carbon Pricing Mechanism, which is the centrepiece of the Clean Energy Act 2011, and its package of related legislation (the Clean Energy Scheme)

The Minister for Climate Change, Greg Combet, has indicated that the Government does not propose to amend the RET. This is stated to be firstly in anticipation that new binding international emissions reduction targets will be developed and secondly due to the nature of carbon initiatives, including the RET, the Clean Energy Future policy and Carbon Farming Initiative, providing a "holistic and comprehensive set of measures" designed to drive a clean energy future.

Some groups (including Mr Combet) argue that the two schemes are mutually supporting, with each creating incentives to drive renewable energy investment and to influence strategies to reduce Australia's emissions, and co-operating to reduce the cost on customers of achieving the 2020 RET (through the impact of Clean Energy Finance Corporation funding). This is predicated on an earlier report by the Australian Energy Market Commission and modelling in 2010 and 2011 by the Australian Energy Market Operator.

However, other camps suggest that the schemes impose a duplicative burden on industry and, consequentially, customers.

When the jury returns, Clayton Utz will assess the Climate Change Authority's proposed position on these debates.

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Footnotes

¹ The large-scale RET is currently set at 41,000 GWh for 2020 (section 40 RET Act). However, this figure increases to 45,000 GWh of additional renewable energy with the contribution of the small-scale renewable energy scheme. ^back

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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