Australia: Expanded National Renewable Energy Target Scheme

The Climate Change Minister Penny Wong has recently released a discussion paper outlining two possible approaches for an expanded national renewable energy target (RET). The discussion paper was prepared by the Council of Australian Governments (COAG) Working Group on Climate Change and Water. In fulfilment of Labour's 2007 election commitment, the expanded RET aims to deliver the equivalent of at least 20% of Australia's electricity supply from renewable sources by 2020. Public comment on the discussion paper closed at the end of July and it is expected that the amended legislation will be in place by mid-2009.

Brief overview of current Mandatory Renewable Energy Target (MRET)

The MRET scheme came into force in April 2001 with the objectives to encourage the additional generation of electricity from renewable sources, reduce the emission of greenhouse gases, and ensure that renewable energy sources were ecologically sustainable. The MRET scheme creates a guaranteed market for renewable electricity by placing a legal liability on wholesale purchasers of electricity (retailers and large users) to purchase renewable energy certificates (RECs) that are created by renewable energy generators or pay a shortfall penalty of $40 per MegaWatt hour (MWh).

Interaction between MRET and Emissions Trading Scheme (ETS)

The MRET scheme is not considered to be incompatible with the proposed ETS in ways in which other schemes, such as the NSW and ACT based Greenhouse Gas Abatement Schemes (GGAS) are considered to be. However, a common misunderstanding about the proposed ETS is that renewable energy projects and energy efficiency projects will be able to create credits within the scheme. This is not the case. The viability of such projects is ultimately enhanced because a carbon price increases the costs of electricity.

While many commentators consider the MRET scheme to be redundant upon the introduction of an ETS there are good arguments for its continuance, for example:

  • the scheme encourages investment in renewable technology as a priority over lower emission generation;
  • it sends a strong price signal during the initial period of the ETS when carbon prices may be volatile; and
  • it provides certainty for those investing in renewable energy projects.

Naturally, once the ETS is well established with a credible carbon price the utility of the MRET scheme is greatly diminished. This is acknowledged by the Discussion Paper, and it is expected that the RET will be phased out between 2020 and 2030.

Overview of the expanded Renewable Energy Target

According to the Discussion Paper, the Australian government has committed to implementing a national RET scheme that will:

  • ensure the equivalent of at least 20 per cent of Australia's electricity supply is generated from renewable sources by 2020;
  • bring both the national MRET and existing state-based targets into a single national scheme;
  • phase out between 2020 and 2030 as emissions trading matures and prices become sufficient to ensure that a RET is no longer required; and
  • retain the eligibility of all renewable energy projects that have been approved under existing state-based schemes.

The Discussion Paper canvasses two approaches to achieve these goals – a least cost and a lowest risk.

Approach 1: Least cost

The primary focus of this approach is on achieving the 2020 RET target at the least cost. It is based closely on the existing MRET scheme and is anticipated to create a strong incentive for early investment in the scheme. Key features of this approach are as follows:

  • unlimited banking of RECs, that is, RECs may be used in any future year; and
  • no limit to a renewable energy projects' eligibility to create RECs.

Approach 2: Lowest risk

Approach 2 also aims to keep the costs low but seeks greater certainty that the 2020 target will actually be met. In contrast to approach 1, this approach encourages a smoother investment profile to help bring forward new technologies in the latter part of the scheme. While the two approaches have some common ground, key features of this alternate approach are as follows:

  • limited banking; and
  • accredited renewable energy projects only remain eligible to create RECs for 15 years.

Some key issues

Existing renewable energy generators

Currently, generators that were built prior to the announcement of the MRET (pre-1997) can create RECs but only for electricity production above a predetermined annual baseline that reflects a historical average level of generation.

Treatment of pre-existing power generators under the expanded national RET could also have implications for the credibility and effectiveness of the scheme in driving additional generation. Currently both approaches exclude generators that were built:

  • before the MRET scheme was announced (pre-1997); or
  • after the introduction of the MRET and before December 2007,

from participating in the scheme after 2020 to avoid windfall gains to investments made on the basis of MRET's original design, which involved the expiration of the scheme in 2020.

Trade-exposed, electricity-intensive industries

The MRET scheme does not currently include exemption for trade-exposed electricity-intensive industry. The Discussion Paper does not consider whether trade-exposed, electricity intensive industries would be exempt from scheme obligations and leaves the matter open for consideration under the proposed emissions trading scheme. However, the report does acknowledge that any assistance that would be provided to trade-exposed firms to address the impact of the expanded national RET would need to be balanced against the burden that this would impose on other sectors of the economy, including households, which would ultimately have to pay more for electricity.

Transitional arrangements

The expanded national RET will absorb all existing and proposed state-based schemes. Importantly, all renewable energy projects approved under existing state-based schemes will be eligible under the RET to ensure that no developments already approved are

disadvantaged. While the existing and proposed schemes are broadly similar, there are some design differences such as the types of eligible technologies (for example, the treatment of solar water heaters) and energy sources (for example, the inclusion of native forest wood waste), whether existing projects can generate RECs and, if so, under what timeframes.

The only renewable energy scheme that has been legislated, other than the MRET, is the Victorian renewable energy target (VRET) scheme, which commenced on 1 January 2007. It is expected that transitional arrangements between these two schemes will be finalised later this year.

Phase out

The expanded national RET scheme is intended to provide interim stimulus for the deployment of renewable-based electricity during the early years of an emissions trading scheme. The scheme is to be phased out between 2020 and 2030 as electricity prices rise under an emissions trading scheme to allow renewable-based electricity to compete without the price support provided by the RET.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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