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No consensus on market structure -- Australia raises its sights

The latest planned hike to Australia's mandatory renewable energy target (MRET) -- calling for 20% of energy supply to come from renewables by 2020 -- can be achieved under the government's proposed market structure and will result in A$19 billion worth of new investment over the next decade, most of it in wind power, says an economic analysis produced by McLennan Magasanik Associates (MMA) on behalf of the federal government.

Most investment is likely to occur in 2013-2017, provided the upgraded MRET is implemented alongside the country's Carbon Pollution Reduction Scheme (CPRS), planned to take effect next year (box). If it is not, investment in renewables will not happen until after 2035, says MMA. The cost of the MRET to the Australian economy will amount to A$2-3 billion, with gross national product reduced by around 0.01%, according to MMA. But, it adds: "From 2025, most of the costs to the economy start to disappear."

Renewable energy industry groups do not share MMA's confidence in the likely success of the proposed market structure. They say the MMA analysis is flawed and neither the renewables targets nor carbon reduction targets can be met without key modifications to the legislation. The proposals "will create a boom-bust cycle for the industry," and risk only delivering 15% of energy from renewables by 2020, says Matthew Warren of the Clean Energy Council (CEC).

Under the federal plan, the MRET will increase from 9500 GWh by 2010 to 45,000 GWh by 2020, requiring around 10 GW of renewables capacity. That level will be maintained to 2025, by which time the CPRS will be coming into its own, allowing the MRET to gradually sunset between 2020 and 2030, with the requirement scaling down to 23,000 GWh. "Once the carbon price reaches a level at which it strongly influences investment decisions, the effects of the renewable energy target will phase-out naturally, reflected in the decline of the price of renewable energy certificates," says the report. "Consequently the phase out design for the renewable energy target does not impact materially on the scheme as long as the carbon price is sufficiently high at the time of phase-out."

Wind power would account for 50% of the increase to 2020, says the report, Benefits and Costs of the Expanded Renewable Energy Target. Australia has about 1.3 GW of wind capacity today. According to the MMA, renewables will actually need to generate 54,300 GWh a year to meet the 20% goal, 10,000 GWh more than the government projects. The volume is easily achievable based on projects already planned on the back of an expanded MRET, it says.

Many of the current MRET features remain in place under the increased target. As now, renewable energy certificates (RECs) will be acquired by utilities to prove compliance with annual targets, which increase each year. All projects, once accredited, will be eligible to create RECs until the program expires -- this includes existing projects already operating under the current MRET. Project developers will generate revenue from both the sale of RECs to utilities and, separately, the sale of the physical electricity. Each REC represents a megawatt hour of generation and certificates can be banked by project owners and then sold to other utilities or surrendered to compliance authorities in later years. Banking is permitted for the lifetime of the program.

A fixed penalty for non-compliance by utilities is to be set at a level just above the projected peak REC price. It will not, however, be linked to the Consumer Price Index (CPI) or any other escalator, which has disappointed the renewables industry. "The current world economic situation has highlighted the risks faced by developers," says the CEC. "It will be very difficult to predict the future of prices and costs. To reduce the risks of people choosing to pay the penalty rather than find certificates, it is recommended that the penalty price escalates with CPI." The government has not announced the penalty rates and the CEC is calling on it to do so "as a matter of provide industry with the confidence to start the final planning for the first projects needed."

According to MMA, REC prices under the new MRET would start at around A$70/MWh, falling gradually to about A$20 in 2030 as carbon prices rise. The CEC disagrees. "The modelling is intellectually pure, but does not reflect the reality of how these investments work," says Warren. The MMA analysis "assumes a relatively stable and predictable carbon price over the next decade. This assumption has no underpinning research to support it and is not consistent with leading analysis about the key determinants of a future carbon price." Warren points to an analysis by Deutsche Bank that predicts carbon prices will be driven largely by oil prices with "a lot of volatility" in the next six to ten years. "As such, the real world carbon price is likely to be much more volatile, which means the real value of renewable energy certificates will also be much less predictable," says CEC.

"The [MMA] modelling also assumes perfect future knowledge by investors...often up to ten years or more in the future," it says. "This is the same as assuming investors are able to correctly predict the future value of oil prices. Such foresight would be genuinely remarkable." Investors, says CEC, cannot act on possibilities. "The purpose of the renewable energy target is to provide investor certainty," it says. The government, it says, should maintain the 45,000 GWh target through to 2030. "The uncertainty created by this proposed post-2024 trajectory will stall investment from around 2014," it warns.

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