28
Aug
2014

What lessons do we take from the mistakes of RET?

by Tony Wood


Published by The Australian Financial Review, Thursday 28 August

In the next few weeks the federal government is expected to apply radical surgery to the only policy that Australia currently has to address climate change. This looks bad and the next steps are very unclear.

The government is expected to shortly release the report from its Renewable Energy Target (RET) Review Panel chaired by Dick Warburton, with a decision to follow within weeks. That decision will require support from Labor or minor parties to get through the Senate.

While extreme outcomes are possible, the government is expected to adopt a recommendation to cut the target of 41,000 gigawatt hours of renewable energy by 2020 to somewhere between 16,000 and 27,000 gigawatt hours. This will be a big change and subject to loud criticism. So, how should the panel’s recommendation be judged?

The RET was designed to deliver a steadily increasing supply of renewable energy at lowest cost. It has done so effectively and efficiently. Today’s problem lies with fatal flaws in the design and implicit assumptions that have proven to be wrong. The “20 per cent by 2020” target was a marketing slogan with little sound policy rationale. The target was then converted to a fixed volume based on a forecast of electricity consumption growth that was always going to be wrong, and the only question was by how much. The answer has turned out to be: quite a lot.

The target date of 2020 created a cliff face that was originally a long way off but looked perilous as time marched on.

Finally, there was at least an expectation that the RET would exist in a climate change policy framework where a rising price on greenhouse gas emissions would effectively make the RET redundant as high-emission technologies became increasingly expensive. How wrong that was.

NO RIGHT ANSWER

There is no politically or economically correct answer to the challenge posed to the RET panel. A recommendation along the lines described above, including a firm commitment to no further reviews, will represent a least bad balance between support for renewable energy and cost to electricity consumers. How this avoids serious destruction of investments made in good faith will lie in the detail. Criticisms citing sovereign risk will be unavoidable.

Where do we go from here in constructing a credible, bipartisan approach to address climate change from the ashes of the 2014 climate change policy bonfire? Three fundamental imperatives emerge.

First, policies on energy and climate change are inextricably linked and both require clear long-term direction. The 2014 Energy white paper should be harshly judged when it is released if this is not a key element. Separating the RET from both central climate change policy and the reality of the electricity market has shown the importance of this linkage. It should be obvious that policies such as the RET should be justified and designed as complementary to a central climate change policy. It is more than unfortunate that our recent experience has been the opposite, to the extent that the RET is now the only climate change policy left standing.

Second, both the fixed RET target and the recently departed fixed price emissions trading scheme (aka carbon tax) show just how bad it can be to base policy on a forecast. Scenario planning and economic modelling can help explore the viability of a policy or investment under various plausible futures, but taking one such scenario as a forecast of the future leads to bad outcomes. Maybe we will learn next time.

Third, partisan politics and its associated continual change are poisonous to investment that desperately needs a credible and predictable framework to deliver the reliable, affordable and sustainable energy that Australians expect. A deal between a major party and minor parties that may get reversed under a change of government just is not good enough. In this context, the fragmented voice of industry and its associations has only added to the problem. The major industry groups have expressed support for addressing climate change and doing so at least cost. This principle needs to be crystallised into firm proposals.

It seems that the government’s direct action plan will be unacceptable to Labor and any form of emissions trading scheme will be rejected by the Coalition even if valid concerns with each approach could be addressed. In this context, the prospect of a carefully crafted extension to the RET to include all technologies that reduce emissions from the electricity sector might be worth serious consideration. At least the RET has bipartisan support in principle. The shelves are looking pretty bare otherwise.