Renewables are not the only green energy Australia needs

by Tony Wood

Published at The Conversation, Friday 11 July 2014

Just when we thought there could be no more twists in the saga of Australia’s Renewable Energy Target, along comes Clive Palmer.

Palmer’s recent climate policy backflip sent the government’s current review of the renewables target into a spin, led the Prime Minister to make questionable claims about the high cost of the target, induced a group of aluminium-friendly backbenchers to call for exemptions, and encouraged players in the renewable energy sector to suggest they now have greater certainty for investment.

Pity the Renewable Energy Target review panel! How is it supposed to come to a practical, robust answer on the future of the target?

Unfortunately for them, the most sensible option – expanding the scheme to include not just renewables, but all sorts of other emissions-reduction strategies too – is probably beyond the review’s remit.

Uncertain future

The Renewable Energy Target (RET) is designed to deliver 41,000 gigawatt hours of lowest-cost renewable energy per year by 2020. It has moved steadily towards that target since its creation in 2001, despite continual fiddling and calls for either its expansion or abolition. Both main parties officially support the target, which was created by a Coalition government and expanded by a Labor one. Yet its future has never been less certain.

The “20% by 2020” tagline was a great marketing tool, but came from The Hollowmen book of policy design, with no underpinning rationale. While several of the scheme’s details have been problematic, the main trigger for the current debate was the decision in 2001 to express the headline percentage target as a fixed amount. The change would provide investor certainty, the government said. The figure of 41,000 gigawatt hours was based on a forecast of electricity demand for 2020.

This target, as with the fixed price the Labor Government adopted for its carbon pricing scheme, has starkly shown the folly of hitching a crucial policy design element to a forecast. The only question in both cases was: how wrong can it be?

Falling electricity demand means that the fixed 41,000 gigawatt hour target, together with small scale renewable energy also supported by the RET, now looks like being more than 25% of all power generated by 2020. This has opened the door to criticism that the policy is no longer doing what it was supposed to do, is going beyond its scope, or is just too expensive.

The panel reviewing the target is presumably looking to strike a balance between investor certainty and consumer cost. There is no right answer. It is even hard to decide the real cost of the scheme, and who bears these costs. Economic modellers have had a field day in support of claims and counter-claims. The result depends on whether the claimants are focused just on consumer costs or take an economy-wide perspective.

Renewable energy can suppress the wholesale price and this flows to consumers. However, this consumer benefit is effectively a tax on existing generators, welcomed by renewable supporters, but it is an unintended consequence of the Renewable Energy Target.

Decision time

This investor uncertainty could be removed with a single, simple decision. Opting either to freeze the target at the level of existing and committed investment, or to revert to an actual 20% of all electricity generated, would provide much-needed predictability for investors, as long as the target was then left alone.

Yet any final decision must consider the broader context of climate change and energy policy, and this is where it gets really tricky, especially for a panel charged with making recommendations within weeks.

Four main scenarios seem possible.

First, if the carbon tax were left to shift to a market-based price, as the previous government had planned, the renewable energy target would not reduce greenhouse gas emissions because the emissions cap would take care of that. Rather, the target would act as an industry policy to support the lowest-cost renewable energy (whatever that happens to be). In this scenario, it would be wise to freeze the target, while leaving the old incentives in place for projects that are already up and running.

Second, if the carbon price were set to zero, as Clive Palmer has proposed, or even at a token low price, there would be no overall emissions cap. The job of significantly cutting emissions would then largely have to be done by the renewables target. Yet it would be a fairly expensive option. Again, freezing the target would seem a reasonable balance.

Third, if the carbon tax is repealed and replaced with the direct action plan, the renewables target would again be needed to help the government meet its 5% emissions reduction pledge. But any weakening of the target would put more pressure on the direct action plan’s Emissions Reduction Fund, which has a fixed budget and is not certain to deliver the necessary carbon cuts.

Fourth, if the carbon tax is repealed and parliament rejects the direct action policy, then the renewable energy target, with all its flaws, is effectively the only climate change policy left standing.

A way out of this mess

There is an alternative under these last two scenarios, one that would create a phoenix from the ashes of Australia’s climate change policy bonfire. Rather than scrap or freeze the renewable energy target, we could expand it into a “Clean Energy Target”.

Expanding the scheme to include other technologies such as gas, carbon capture and storage, or even nuclear power, might be a good option. This approach could retain the essence of the Emissions Reduction Fund, which aims to fund a wide range of emissions-reduction strategies, while avoiding some of its flaws, including its limited funding.

Such a bold recommendation is almost certainly beyond the scope of the Renewable Energy Target’s review panel. Its recommendations will probably stay within narrower confines and then be tossed into the bigger and highly-charged political melting pot in which climate change policy is now being brewed.

But Australia must develop a credible, long-term climate change policy beyond 2020, with bipartisan support and the ability to meet future targets that governments may adopt. That policy is still up for grabs.