Australian Solar Council Submits Excellent Letter to the RET Review Panel

Australian Solar Energy Council

Australia is reviewing its Renewable Energy Target (RET) to derive at least a fifth of its electricity from clean energy by the end of the decade. The panel set up by the government is evaluating the program’s impact on electricity prices and its contribution to reducing emissions. The review is fueling concerns that the 2020 target of 41,000 gigawatt hours of electricity from renewable sources will be scaled back significantly. Renewable energy companies and industry groups are sending letters to the commission to impress upon them  the importance of maintaining the RET at it’s current level. Here is a copy of the letter submitted by the Australian Solar Council:

Dear Sir/Madam

The Australian Government must keep its election promise to maintain the Renewable Energy Target.

The Australian Solar Council wishes to place on the public record the reasons for maintaining the RET all of which are backed by robust research and modelling.

 Key Messages

• Solar saves money and creates jobs. • Australia has some of the best solar resources in the world. • We have some of the best solar scientists in the world, and we have the skills and education to build a stronger solar industry. • 18,500 Australians work in solar industry. • 18,400 new jobs will be created in renewable energy industry if RET is maintained. • There are around 4,500 businesses in solar industry, mostly SMEs. • There will be $14.5 billion in new investment by 2020 if the RET is maintained, in addition to the $20 billion that has already been invested. • The RET is zero cost to the Federal Budget.

 Australian Solar Council

The Australian Solar Council is the peak body for Australia’s solar industry. With more than 2,000 members, the Australian Solar Council is the largest renewable energy industry association. Our members include solar manufacturers, retailers and installers, academics and interested individuals. Our membership includes residential, commercial and large-scale solar PV, solar thermal and solar hot water companies. You can find more information on the Australian Solar Council at www.solar.org.au

 Context of RET Review

Under the Renewable Energy (Electricity) Act 2000 [the Act], there is a statutory obligation to review the Renewable Energy Target every two years, including 2014. The Climate Change Authority (CCA) has a statutory obligation to review the RET, and the Australian Solar Council believes the CCA should have been tasked to manage the 2014 RET Review and the modeling exercise as required by law.

The RET was last reviewed in 2012, with a final report in December 2012, just 16 months ago. SKM MMA undertook extensive modeling for the 2012 RET Review, and that work should be the basis for the modeling assumptions for the 2014 Review.

It is important to note the RET Review cannot make any recommendations that are inconsistent with the objects of the Act (s162 (11) of the Act). The modelling assumptions should reflect this fact.

The objects of the Act are:

a) to encourage the additional generation of electricity from renewable sources; b) to reduce emissions of greenhouse gases in the electricity sector; and c) to ensure that renewable energy sources are ecologically sustainable.

The RET is designed to ensure that at least 20 per cent of Australia’s electricity generation come from renewable energy sources in 2020. The Terms of Reference for the RET Review and the Consultation Paper on the Proposed Approach to Key Modelling Assumptions incorrectly state the “RET scheme is designed to ensure that 20 per cent of Australia’s electricity generation will come from renewable energy sources by 2020”.

The Australian Solar Council endorses the conclusions of the 2012 RET Review, conducted by the Climate Change Authority. They are the Solar Council’s primary recommendations to the current Review:• “Confidence and policy stability are critical for ongoing investment in renewables…

• On balance, the benefits of changing the target do not appear likely to outweigh the costs of reduced investor confidence… • The target should remain fixed in terms of gigawatt hours to provide confidence to investors… • The SRES should remain a separate scheme, and its broad structure remain largely unchanged. This would provide a degree of confidence and predictability for the small-scale installers, small businesses, households…participating in the scheme.”

The Australian Solar Council calls on the RET Review Panel to endorse these conclusions from the 2012 review.

 Need for Climate Action

The RET Review must be considered in the context of the need for action on climate change, both in terms of the requirement for Australia to take its fair share of action to tackle climate change and in terms of the object of the Act to reduce emissions of greenhouse gases in the electricity sector.

The Australian Solar Council is concerned that neither the modeling for the RET Review nor the Review team’s deliberations will adequately consider the implications of climate change. The failure to properly consider climate change will seriously undermine the credibility of the report. It is inconceivable that there won’t be some sort of price on carbon out to 2030, just as it is inconceivable that the price of fossil fuels will remain steady over that time period. Investors will increasingly make decisions based on carbon risk and will reward countries with strong renewable energy targets.

At the very least any modelling should include scenarios using a range of sensitivities on an assumption of possible carbon price – not a single model assuming no carbon price out to 2030. The Council suggests a reasonable approach would be to include modelling based on the EU carbon price (currently sitting at around €5.00 tonne CO2e), one based on the Regional Greenhouse Gas Initiative (RGGI) (currently at US$4 a tonne CO2e), one based on the Direct Action target price of around A$12 tonne CO2e, one based on the Chinese pilot ETS scheme (currently at around RMB¥130 tonne CO2e) and one on the Californian cap & trade scheme of between US$40-US$55 tonne CO2e.

Any modelling that neglects to run such scenarios will skew the results towards BAU outcomes using fossil fuels and so dramatically understate the real price impacts on electricity consumers of a BAU path. A wide range of scenarios as described will allow an open an transparent assessment by consumers about the impact of clean and renewable energy sources versus polluting energy sources.

Climate change is directly relevant to the RET for a number of reasons. First, one of the objects of the Act is to reduce greenhouse emissions. Second, in the absence of a carbon price, the RET will need to do more of the heavy lifting in meeting the national emissions reduction target. Third, investment decisions will be increasingly influenced by the risk of stranded, high carbon assets.

The science on climate change is as robust as any other. It is simply not a rational or sustainable position to ignore such a large body of evidence, which if incorporated in modelling, would have a major and critical impact on the comparisons and assessments being made. The International Energy Agency has suggested that solar energy – a combination of solar PV and concentrated solar thermal with storage – could become the dominant source of energy across the world, accounting for more than 27 per cent of all electricity produced by 2050.* Australia cannot afford to be left behind.

The Climate Institute’s cost of abatement per tonne for the various target and grant based measures undertaken in Australia, puts the cost of abatement at an average of $114 per tonne (if we include the two highest costs as part of the average) or $63 per tonne (if we remove the two highest costs from the average). The cost of abatement from the Renewable Energy Target is $63 per tonne.

Should the Renewable Energy Target be abolished or wound back, it will be extremely difficult to meet the Government’s target of a 5 per cent reduction in emissions by 2020 (on 1990 levels), let alone the 15 per cent reduction target recommended by the Climate Change Authority.

*  “Baseload to be marginalized as solar takes pole position”, RenewEconomy, 13 May 2014.

 Solar creates jobs

The Australian Solar Council estimates that some 12,000 jobs could be lost or foregone in the solar industry by 2018 if the Renewable Energy Target is axed. Analysis undertaken by Solar Business Services for the REC Agents Association estimates there will be 20,000 jobs in the solar industry in 2018 if the RET is maintained, and only 8,000 jobs in the industry in 2018 if the RET is axed.

The current RET Review has created enormous anxiety and uncertainty for the solar industry, but this situation would be even worse if the RET was axed or cut. The Australian Solar Council surveyed its members to better understand the consequences of cutting or axing the RET. The survey found:

• 81% of solar firms will sack staff if the RET is axed; • 60% of solar firms will employ more staff if the RET is maintained.

 Solar saves money

The RET provides downward pressure on wholesale electricity prices (due to increasing competition form renewable energy sources and reduced demand across the NEM). As a result wholesale prices are considerably lower than expected. The REC Agents Association has estimated the reduction in the wholesale price due to the RET to be $6.70 per MWh (0.67 cents per kWh):

• In the case of the SRES the reduction in the wholesale price cancels out the future cost increase that gets passed through to customers; • The impact of the RET in reducing energy demand is likely to have a downward price impact on network costs due to reduced pressures for additional network investments over time; • Regulated transmission and distribution costs has been the biggest driver of rising power prices to date and is expected to be the major contributor to rising power prices in the future; • Though not yet quantified, by reducing demand on the local electricity distribution system solar PV supported by the SRES also reduces losses and reduces the stress on peak demand periods reducing the likelihood of customers losing power supply; and • The reduction in demand caused by the SRES creates some protection for electricity consumers so that higher-prices of gas will not necessarily equate to higher-prices for electricity.

A recent report by the Centre for Energy and Environmental Markets at the University of New Wales concluded that the increasing amount of wind energy has placed considerable downward pressure on wholesale electricity prices through the so- called merit order effect.”

A recent report by the Centre for Energy and Environmental Markets at the University of New South Wales notes that there are “likely significant redistributive transfers between different energy user classes under current RET arrangements. In particular, some energy- intensive industries are benefiting from lower wholesale electricity prices whilst being largely exempted from contributing to the costs of the scheme. By contrast, many households are paying significant RET pass through costs whilst not necessarily benefiting from lower wholesale prices.”

 Importance of SRES

The solar industry is in decline, due to the parallel closure of State and Territory feed-in tariffs, the phase-out of the Solar Multiplier and the uncertainty created by the RET Review and constant government policy changes. The solar market has fallen by about 30 per cent last year, and is projected to continue to contract, regardless of what happens to the SRES. This is due, in part, to reaching high penetration levels in most markets.

A positive consequence of the contraction in the solar market is the commensurate reduction in the cost of the SRES. As a demand side activity, solar PV and solar hot water suffer from similar barriers to energy efficiency. Even though it may make economic sense for a family to invest in solar, the upfront cost is a barrier to that investment. The SRES helps reduce that upfront cost.

Barriers to investment in solar are well documented and include:

• Energy is typically a relatively small proportion of a consumers total income and does not get the attention that it deserves; • This is not equal across income quartiles – the lowest quartile spends around 7% of disposable income on energy; the 2nd and 3rd quartiles around 2% and the highest income earners less than 1%; • Capital is not available to fund the energy efficiency improvement and where it is available, very short investment payback periods are required; • Energy consumers may lack the knowledge or information to assess and implement energy efficiency improvements; and • Split incentives (eg. between landlords and tenants)

The SRES has been important in addressing a number of these barriers through:

• being able to reduce the payback period to more acceptable levels; and • the creation of an industry where service 
providers are able to bundle the value of the STCs into packaged solutions to customers.

Without the SRES, the solar PV market would crash further, falling by and estimated 40-50 per cent.

 Solar hot water

The RET has delivered significant outcomes for the solar hot water, although the solar hot water industry faces its own challenges separate to the PV industry. The RET has been particularly important in ensuring strong regulatory standards for the industry and protection for the consumer.

Australian Standard AS2712 is directly linked to the RET. This ensures safety and suitability of all SHW systems certified for sale in Australia.

The SRES has been an important protection for solar hot water and a strong Australian manufacturing industry.

The recent history of solar hot water sales is illustrated in the graph below.

Solar Installed-graph

Source: Clean Energy Council – Clean Energy Australia Report

Solar hot water sales have shrunk by some 70% since 2009, following the removal of a Federal Government rebate. The loss of the RET will completely destroy the market, and end Australian manufacturing of solar hot water systems.

 Importance of LRET

The RET has created a market in which all industry players have the certainty they require to make long-term investment decisions, both in the higher risk development of projects and in their long-term financing and operation and maintenance. Whilst there are only a small number of solar projects that currently utilize the LRET, the certainty provided by the LRET will become increasingly important.

Renewable energy projects are capital intensive with longer payback periods and are therefore highly sensitive to the cost of capital. The longevity of the RET, in operation since 2000, has given industry players sufficient certainty to make investments at a low cost of capital, thereby lowering their cost of production. This is one reason the uptake of renewable energy has been so strong relative to the target. When the target has been certain, uptake has been strong and costs have been low. When reviews have been introduced, the uncertainty has created costs and slowed progress.

Many other alternative schemes are “one-off” or grant based and don’t create the long- term certainty that is able to drive down the cost of capital – and therefore the cost of renewable energy projects. The RET exists now, is credible, has been proven to work over the long term, is expected and well understood by the market, and has enjoyed bipartisan support. All of these factors create a foundation of confidence for the industry and for financiers. It would be irresponsible to put at risk a measure that has attracted so much investment and been proven to work so well against its objectives.

The RET puts an obligation on retailers to purchase certificates in addition to electricity. However, this cost is approximately offset by the reduction in wholesale electricity prices that result from the extra supply of electricity from renewable energy into the market at all times.

The RET is not paid by customers, but rather by the owners of existing power stations (predominantly coal, but also gas) who experience lower prices in the wholesale electricity market as a result of the new renewable energy supply coming into the market.

These power stations are overwhelmingly many decades in age and have little or no capital investment risk left in them, having made their capital cost back many years ago. The fact that the RET forces their prices down to their short-run marginal cost is a benefit to the wholesale market in terms of lower prices. It ensures they respond appropriately by transitioning out of the market once the plant reaches the end of its life, or updating the plant as appropriate.

Economic analysis by ROAM Consulting for the Clean Energy Council indicates that household energy prices would be $50 per year lower by 2020 with the RET in place – a combined saving of approximately $500 million.

 Conclusion

The Australian Solar Council calls on the RET Review Panel to recommend the continuation of the RET as it is currently structured and in line with the recommendations of the review completed in 2012, i.e. four year reviews.

The Solar Council calls on the RET Review Panel to undertake another consultation process once it has finalised a draft report and before the report goes to the Government.

The Solar Council also calls on the Australian Government to publicly release the final report as soon as it is delivered to Government.

Yours sincerely

John Grimes

Chief Executive, Australian Solar Council

Tracey Smith About Tracey Smith
Tracey is an accountant and entrepreneur with a passion for nature. This passion is what spurred her interest in renewable energy, and the rest is history as they say. Tracey is a principal in Energy Think Group, the publisher of Solar Thermal Magazine and Tek-Think. She is also the principal at Women's Financial Help Desk. She spends her free time in the outdoors with her horses and dogs. She loves to travel.