The RET-go-round 3

The key message in the Australian Energy Market Commission submission to Dick Warburton’s renewable energy target review panel needs to be read by a wider audience of those engaged in federal and State policy development for one paragraph.

The AEMC, rule-maker for the national electricity market on the east coast, highlights the theme of its submission in this way: “Energy and environmental policy have different objectives and it is important they are developed in a manner where any efficiency trade-off and costs are well understood.

“Environmental policies that are appropriately designed and integrated can achieve their objectives and minimise consumer costs in energy markets.

“Evidence from international markets suggests that, if this does not occur, the impact on the efficacy of price mechanisms, together with uncertainty and policy risk, will likely require government intervention in otherwise well-functioning energy markets, transferring investment risk and costs on to consumers.”

That’s good advice from an independent corner and can be applied to consideration of more than the RET.

The commission adds that three “high level principles” should be pursued in electricity market development.

The first is to accept that competition and market signals lead to better outcomes than central planning.

The second is that rules for market participants should be clear and consistent.

The third is that risk allocation and accountability for investment should rest with parties best placed to manage them.

How much better off we would be today if policymakers had adhered to these principles over at least the past eight years.

So far as the current renewables target is concerned, the AEMC says it is unlikely to be met and therefore the policy is “not sustainable” when you consider the shortfall payments required under a failure scenario.

The commission offers two alternatives to the present set-up.

One is to move the RET to a floating 20 per cent target of 2020 demand, shifting, it asserts, the demand risk from consumers to investors, “who are better placed to manage it and profit from efficient decisions.”

The other step would involve a whole new approach: transitioning the measure to an emissions intensity-based scheme for the electricity sector.

“Such a scheme,” the AEMC contends, “could be designed in a number of ways, including (one) where generators below a defined level create certificates that generators above the level are liable to purchase.”

The commission suggests that retailers and other liable entities under the existing RET scheme should not be able to participate directly in this new arrangement.

It argues the proposed scheme would encourage all lower emissions technology options, not only renewable energy, and therefore meet any target at a lower cost.

“The expected cost,” it adds, “would depend on the size of the target and the type of technologies in the mix.”

AEMC says the scheme could contribute to the policy certainty necessary to provide industry with confidence to go on investing in the energy sector.

In the UK and Europe, where regulatory risk relating to government subsidy decisions is high and future prices are a lottery, the commission adds, investors have been unwilling to finance new plant despite a well-recognized need for new capacity and the British government has been forced to intervene in the market. “As a result UK consumers will be subsidizing the energy industry for the near future.”

Here, it warns, if environmental policy is not integrated efficiently with energy policy, the NEM may reach the point where participants do not have confidence to make investment decisions in response to price signals.

“This is likely to result in a scenario where government intervention is required along with the consequent transfer of investment risk on to consumers and the likelihood of higher costs.”

Such a situation, the commission says, would see a move back to government central planning, “with taxpayers bearing the risk of over- or under-investment in capacity.”

On the other hand, if environmental policies are integrated effectively with energy policy, there is a greater likelihood of consumer costs being minimized.

On the controversial issue of the current cost of the RET to consumers, the commission makes another cogent point: emissions-intensive industries exempt from contributing are benefitting from lower wholesale prices resulting from the pushing of capacity into an over-supplied NEM, but residential customers are paying significant pass-through costs while not necessarily benefitting from lower wholesale prices.

Power station closures resulting from the state of the over-supplied market, the AEMC says, are likely to put upward pressure on wholesale prices, offsetting the merit order effect the green boosters are crowing about at present and “eventually shifting the costs of the RET back to consumers.”

Overall, this is important advice and it hard to see the Warburton panel ignoring it with respect to the RET – whether one can hope for the body politic as a whole to get the messages in the larger context is another matter; for a start it will require the mainstream media to absorb them and communicate them to the broad community in a way that provides an antidote to all the snake oil.

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