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Australia

Investment on hold as market destabilises

The future of the Australian wind market hangs in the balance. Investment decisions are on hold while the renewables industry waits anxiously for the commonwealth government to make up its mind on whether to keep its Mandated Renewable Energy Target, or resign the green power regulation to oblivion. To be or not to be? The answer will determine the fate of Australian wind power.

Caught between demands for the entire abolition of the Mandatory Renewable Energy Target and demands to not only keep it, but also strengthen it, the Commonwealth government is remaining quiet. A nervous wind industry can only wait

The future of the Australian wind market hangs in the balance. Investment decisions are on hold while the renewables industry waits anxiously for the commonwealth government to make up its mind on whether to keep its Mandated Renewable Energy Target (MRET), or resign the green power regulation to oblivion. To be or not to be? The answer will determine the fate of Australian wind power.

Retaining MRET will see today's momentum in the wind market -- including the setting up of Australian manufacturing facilities by Vestas and NEG Micon -- continue full steam ahead. Scrapping it will "pull the rug out from under Australia's renewable energy industry," says Frances MacGuire of Greenpeace.

It is a decision few in the industry had expected would now be on the agenda. MRET aims for a 2% increase by 2010 on the 10.5% share of power supply held by renewables in 1997 (a target of 9500 GWh by 2010). Until November the main questions over the two-year-old MRET's future were if and how it will be restructured and whether it will remain at 2% or increase to 5% or 10%. It was a policy supposedly guaranteed for 20 years -- a commitment that gave investors the confidence they needed to put their money into the 2000 MW of wind project plans which have moved ahead under the MRET regulative framework since it was launched.

That guarantee is gone, for now at least, following publication two months ago of the draft Energy Market Review by the Council of Australia Governments (COAG). The draft calls for MRET to be scrapped, arguing it is "poorly targeted" and imposes "significant and unnecessary costs on the Australian community." Instead COAG favours a national emissions trading system (which would take up to five years to establish) as the way forward for Australia to reduce its emissions. COAG condemns MRET for diverting "investment away from more efficient carbon reducing options." The renewable energy industry strongly refutes the COAG assessment, in particular pointing out the apparent failure to recognise that MRET is designed to foster development of a new industry as well as reduce emissions.

Reassurance needed

Calls have been made to government for reassurance that a U-turn on MRET will not take place. They seem to have fallen on deaf ears, leaving the industry in paralysed shock and investors taking their fingers off the pulse. "Already discussion about new schemes since the release of the draft report has clearly had a destabilising effect on market certainty and investor confidence," says Andrew Rayne of investment company Viridis Energy Capital. Cancelling MRET, he adds, "will be detrimental to both existing and future investments."

The introduction of MRET has helped to create "an environment of certainty" which has given equity investors and debt holders with diverse risk profiles the confidence to invest. "Without this level of certainty, the potential sources of funding for investment would be restricted to a small group of investors with high risk profiles," Rayne says. "Thus the rate of implementation of sustainable energy solutions would be significantly slowed due to capital constraints."

Babcock & Brown's Adrian Rizza is even more emphatic. The international investment banking firm has several renewable energy projects in the pipeline in Australia, including A$1.3 billion of wind projects, the first of which is scheduled to begin construction within the next few months. All of these "would be considered uncommercial by any dismantling of the MRET," Rizza warns. "MRET has been very successful to date. If the MRET regime was not implemented, Babcock & Brown would not have supported the development of these projects." He notes too: "The recommendation to repeal the legislation...has created an adverse investment climate and has already slowed the pace of investment."

The deadline for responses to the COAG draft report has come and gone and its final report was expected late last month. The majority of responses to the draft from business and industry are unrelenting in their support of MRET; they also argue that an emissions trading system is required to run alongside it. However, many from the public are not supportive, with wind and large-scale hydro being cast in the villainous roles. It is yet to be seen which arguments will sway COAG and how the federal government will react.

The signs are that the government is unlikely to endorse a complete U-turn on MRET. It has kept its lips tightly sealed on the COAG draft report, but its review of the Renewable Energy (Electricity) Act 2000 -- which implements MRET -- is proceeding as planned. With enthusiastic words, which will have been music to the wind industry's ears, environment minister David Kemp notes: "MRET has proven eminently successful thus far, with generation from renewable sources exceeding the interim target for 2001 and well on track for 2002." MRET, he further stresses, is "an important element of the Howard government's response to climate change."

Indeed, shortly prior to publication of COAG's draft report, Kemp, along with trade minister Ian Macfarlane, released a report under the Renewable Energy Action Agenda hailing the success of the renewables industry. The report detailed some A$600 million in planned investment -- all of which is in jeopardy if COAG's recommendation to scrap MRET is accepted. The renewables action agenda is a ten year plan for the industry's growth.

Increase the target

Bruce Godfrey, author of the review released by Kemp and Macfarlane, urges government to increase the MRET target. "The very existence of uncertainty is threatening to slow the flow of investment into the sector," he warns. "The investments are long term by nature and therefore require a longer time frame to produce adequate returns. Options to improve the domestic investment climate would include increasing the mandated level of renewable energy, increasing the level beyond 2010 and/or extending the time frame of the legislation from 2020 to 2050."

Assuming MRET continues then the question becomes in what form. Persuasive arguments are being mounted to strengthen the regulation. Higher targets will mean more renewables development at less cost, say supporters of MRET, while the impact on electricity consumers will be far less than the COAG favoured emissions trading option.

An increase in MRET to 5% or 10% by 2010, combined with increased gas generation, could cut Australia's electricity sector emissions growth in half this decade, according to McLennan Magasanik Associates (MMA). In its report, Incremental Electricity Supply Costs from Additional Renewable and Gas Fired-Generation in Australia, MMA says the cut can be achieved without reducing Australia's relative cost competitiveness for electricity. "The increased renewable supply predominantly will be delivered by wind power. Some additional gas turbine standby plant is needed to back up the wind generation," suggests MMA.

Without further policy initiatives, the study says, emissions from the electricity sector will increase by 63% from 1990 to 2010, despite the introduction of a National Greenhouse Strategy. Over a third of the increase is projected to occur during the rest of this decade. A business as usual scenario with no increase in MRET would mean Australia failing to meet its target under the Kyoto Protocol, which aims for greenhouse gas emissions to reach 108% on 1990 levels by 2010, states the report. Although Australia has refused to ratify the protocol, the government is committed to its emissions reduction target. Without further action, however, emissions will be at 111% on 1990 levels, according to the government's own figures.

"There is a large wind resource in Australia, which will not be fully exploited under the current MRET scheme," says MMA. "The level of wind generation under MRET is limited by the availability of low cost opportunities in biomass and hydro-electric generation. These low cost options are largely exhausted under MRET, leaving wind generation to take up the bulk of any increase in the target."

The study finds a $1/MWh increase in the wholesale market cost for every 5% increase in MRET, "highlighting the strong opportunity for renewable energy technologies to reduce emissions in a cost-effective manner." Up to 14 million tonnes per annum savings in electricity emissions (half the growth this decade) is possible during the First Commitment Period (2008-2012) of the Kyoto Protocol at about $2/MWh if a 10% MRET is introduced, gas generation encouraged, and new coal plant restricted.

Conservative assumptions are made by MMA on the capital and operating costs of wind farms (A$77/MWh to A$105/MWh) over the coming decade. Domestic policy initiatives that increase wind power's contribution "could be expected to significantly lower costs as a result of economies of scale in wind turbine production and assembly in Australia, similar to the substantial cost reductions in wind power seen overseas over the past decade as industry capacity has accelerated."

market certainty

The Australian Wind Energy Association (AusWEA) agrees with MMA and adds that a significantly higher target will "have the instant effect of strengthening the investment signal due to increased demand, driving wind and other renewable development, particularly if higher early yearly targets are set." With the addition of a more realistic penalty of around A$80/MWh, compared to the current A$40/MWh, for retailers missing their mandated targets for electricity production from renewables -- and higher targets for years beyond 2010 -- investors in wind power would have the market certainty they need to invest in major new projects, AusWEA argues.

The association wants to see the MRET target increased from today's 2% to 10% new renewables over 1997 levels, equivalent to some 30,150 GWh of additional renewables. If wind provides half of that, 5037 MW is needed by 2010. Increasing the target to 20% over 1997 levels opens up a market for 13,163 MW of wind power by 2020, presuming wind provides half the 69,130 GWh of renewables required, calculates AusWEA.

At this level, wind would provide12% of Australia's total energy requirement -- the target set by the European Wind Energy Association and Greenpeace in their Wind Force 12 blueprint for global wind power development. Construction of 5037 MW of wind capacity by 2010 represents an investment of A$10 billion, over 9000 new jobs and annual savings of around 15 million tonnes of carbon dioxide, adds AusWEA's Rick Maddox.

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