Scrap the Renewable Energy Target

The AFR leads today with an examination of the current brouhaha surrounding the Renewable Energy Target and the carbon price. The positions of the political parties on this is a nice illustration of how our politics gets in the way of good economic policy. Apparently:

Labor and the Coalition have signalled they are prepared to consider reining in the 20 per cent renewable energy target under pressure from industry leaders, who warn it will eventually drive up electricity prices more than the carbon tax.

Origin Energy managing director Grant King said the target, also known as the RET, will be the main driver of electricity price rises by 2020 because it locks in increasing reliance on more expensive sources of electricity, such as solar panels and wind turbines.

Mr King’s views on the contentious issue have split the industry, part of which is more worried that changing the target would damage prospects for investment after numerous modifications to green schemes at both federal and state levels.

“Given current forecasts for energy demand in 2020, the RET scheme in its current hard-wired form will deliver a lot more than 20 per cent,” Mr King told The Australian Financial Review.

“The community signed on for 20 per cent by 2020. If it is 25 or 30 per cent then it will mean more costs.”

OK, so we don’t want to overdo it. Fair enough. But what about the respective positions of the major parties here? By objecting to the regulatory approach of the RET on the basis that it will raise costs further than otherwise, the Coalition is essentially trashing its entire carbon policy platform, which is to use selective regulation to lower emissions.

Labor, on the other hand, which does favour a market-based solution to drive lower emissions, has left the RET in place for fear of upsetting The Greens. It may be easing back now but scrapping the RET should have been part of the policy from the beginning.

No self-respecting capitalist can endorse the RET when markets are positioned to drive a more efficient (read cheaper for consumers) transformation than a regulated green output target simply by the nature of private enterprise.

This can illustrated by an examination of what is driving the current price rises. As the AFR says:

Prices are being driven higher mostly by investment in transmission and distribution networks, which are having a bigger impact than either carbon or green schemes.

Turning to the second Garnaut Review, this is explained thus:

In most of Australia, the generator market is competitive and therefore wholesale prices are determined primarily by the dynamics of supply and demand. As overall prices have risen in the past three years, there has been an easing in the growth in demand. As well, over the past year, milder weather reduced summer demand and industry sources also suggest that the insulation program and photovoltaic installations have had some effect. There have been price fluctuations, in part because of drought as the costs of water-cooled coal fired power stations rose and because of a reduction in output of Snowy and Tasmanian hydro-electric systems. The end of the drought placed downward pressure on generator prices from mid 2010.

Distribution costs, on the other hand, have marched higher on the back of a surge in investment. Distribution is split into the transmission network and distribution network. Transmission is the extremely high voltage assets— metal towers connecting generators to substations. Distribution is the lower-voltage wiring that brings power from substations to customers. Both are regulated under similar rules.

Transmission network investment over the current five-year regulatory period is forecast at over $7 billion and $32 billion for distribution networks. This represents a rise in investment from the high levels of the previous period, of 84 per cent and 54 per cent (in real terms) in transmission and distribution networks respectively.

These high levels of network investment have been attributed to the need to replace ageing assets, electricity load growth, and rising demand, as well as rising peak demand and changed standards in reliability and service requirements.

This explanation raises questions. Demand growth has been slow in recent times, long before the cooler summer of 2010–11. Why does old investment from the 1950s and 1960s suddenly have to be increased now? Certainly there has been growth in peak demand, but this is avoidable: other countries provide high incentives to reduce energy demand at the peaks, while the Australian regulatory system rewards distributors for growth in peak demand.

And it goes on:

A second explanation for the rising network costs is that several states have recently adopted higher reliability standards for distribution networks. These require additional capital investment by the network businesses in these states to ensure that the higher standards can be achieved within the regulatory requirements.

The setting of reliability standards and service requirements has not been subject to institutional or regulatory reform. It is important that disciplines are introduced that balance consumers’ interest in low prices with marginal improvements in reliability within a reliable system.

This marginal increase in reliability comes at a cost that is paid by all electricity consumers, and not necessarily valued at anything like their cost by many of them.

And on:

The first of these other government policies is the Renewable Energy Target scheme, in which retailers must ensure that a proportion of their electricity supply comes from renewable energy sources. Renewable energy is currently a more expensive source of electricity and therefore adds to wholesale electricity prices. Unlike economy-wide carbon pricing, the Renewable Energy Target does not necessarily encourage the lowest-cost means of reducing emissions. Nor does it encourage innovation: it favours the lowest-cost established technologies that are eligible within the scheme.

And on:

There is a pressing need to revisit the state-owned distributors. There is an unfortunate confluence of incentives that may be leading to significant over-investment in network infrastructure. It is clear from market behaviour that the rate of return that is allowed on network investments exceeds the cost of supplying capital to this low-risk investment. The problems are larger where the networks continue to be owned by state governments. State government owners have an incentive to over-invest because of their low cost of borrowing and tax allowance arrangements. In addition, political concerns about reliability of the network, and about the ramifications of any failures, reinforce these incentives.

A comparison of costs between Victoria, where the network providers are in private hands, and New South Wales and Queensland, where the network providers are in state hands, provides compelling evidence to support this contention. While there are likely to be genuine differences between the states that explain some of these divergences, it is unlikely that these differences explain the majority of them.

Distribution networks are, of course, natural monopolies. So a strong regulatory regime is required to prevent price gouging.

Basically, this is known as “gold plating” infrastructure: unnecessary investment in service delivery that consumers neither need nor wish to pay for, owing to regulatory distortions.

Returning to the RET versus the carbon price, this analogy holds in that the market rather than the government will be driving abatement decisions, ensuring the lowest cost transformation. The likely outcome is a surge in gas generation until innovation and global spillovers bring down the cost of newer technologies.

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  1. rankly I dont give a dam about carbon emission and I dont think many do as this effort appear masochistic as best (the coal we dont use we well it, if you want to reduce CO2, stop mining)

    But I think they are selling the carbon tax wrongly, this renewable targets will provide really good jobs, high tech jobs, long term jobs, research jobs, that cannot be off-shored to india…and we get to sell more coal/gas to India.

    all good

    • Partly agree with you. RET is seriously flawed and will be ‘played’ by participants, definitely result in significantly increased costs in energy provision. Together with the carbon tax must be either abolished or rejigged to the point of irrelevance.

      Suspect you might be a little over-optimistic in number of high-tech jobs etc produced – almost certainly will continue to import majority of ‘green’ tech from offshore.

      And don’t forget, at current utilisation rates there is some 1,500 years reserves of coal in the Latrobe alone…a cheap source of power generation for millions of Victorians.

      Electricity supply is an essential service, provision should be reliable and affordable.

      • there is some 1,500 years reserves of coal in the Latrobe alone

        Or we could leave that dirty brown coal and its appalling EROEI in the ground and use it as an “insulating blanket” for generating baseload power from shallow geothermal energy. Much cheaper and easier than drilling through granite in the SA desert, and much closer to existing infrastructure.

        Apart from geothermal, one of the most promising forms of renewables for base load power is concentrated solar thermal. If we build the massive numbers of mirrors needed here in Australia then the benefits will flow through the economy.

      • Agree Geothermal prospects promising, a couple of decades away I would suggest. The other much debated potential exists in increasing possibility of exporting brown coal via continuous hydrothermal de-watering technology ( apparently reduces emissions by 40%). Who knows if the Victorian economy goes to the dogs, a viable mining sector may become an attractive proposition.

      • 1,500 ??
        i am a bit surprised by this #

        for what I found, if rate of extraction increases at the current rate (not constant) we could pretty much run out of black coal by 2050. a far cry of your 1,500.I know we export a lot but still.

      • “In our own back yard, in the Latrobe Valley, the demonstrated brown coal reserve is about 40 billion tonnes, representing about 5% of the global reserve. But the inferred resource is estimated at a staggering 100 billion tonnes, some or all of which could conceivably become economic at some future time.

        That is a truly phenomenal amount of coal. At the current production rates of around 70 million tonnes per year there is enough coal in the Latrobe for 1500 years.”

        Mike Sandiford
        Director, Melbourne Energy Institute at University of Melbourne

      • dam only a very very small % of the brown coal in place has been drilled up to a standard required for JORC resource.

  2. Jumping jack flash

    Why doesn’t the government use the proceeds of the carbon tax for something useful and effective like subsidising the purchase of green energy to meet the RET so it doesn’t cost the public more than coal power?

    I think the RET is a good idea if the government was really serious about reducing coal burning.

    As an aside, if electricity is quickly becoming out of reach for the average Australian, how does the government expect that people are going to be able to afford to charge all those electric cars we’re all meant to buy? As far as I’m aware, you need to charge them pretty much all night every night. What if you have 2 or 3 of them? That’s a lot of cost.

    I currently pay more for electricity than petrol each week. I shudder to think how much it would cost if I had an electric car sitting in the garage all night sucking it down as well.

    • drsmithyMEMBER

      As an aside, if electricity is quickly becoming out of reach for the average Australian, how does the government expect that people are going to be able to afford to charge all those electric cars we’re all meant to buy? As far as I’m aware, you need to charge them pretty much all night every night. What if you have 2 or 3 of them? That’s a lot of cost.

      As a quick back of the envelope calculation:

      The Nissan Leaf has a 24kWh battery and a range of 120-175km. Origin Energy rates are (from memory) about 25c/kWh peak and 12c/kWh off-peak, which is going to work out at around $6 and $2.90 for a “fill”, respectively, or $42 and $20.30 per week.

      Say you’re covering 130km/day to need a full recharge every night, that’s going to mean 910km/wk (aside: that’s about about 3x the national average).

      Assuming fuel prices of $1.30 for ULP and $1.40 for diesel, that means your petrol car will need average fuel economy of 1.7-3.5L/100km to be equivalent and your diesel car will need economy of 1.6-3.3L/100km.

      So from a pure running costs perspective, it would appear electricity prices could easily double before electric cars were even *as* expensive to drive as normal cars, let alone more.

      (That actually came out much better for electrics than I was expecting. Can someone check my maths ?)

      • Jumping jack flash

        sounds ok.

        It is $2 more than what I spend on petrol each week, but I don’t fill my tank, I have a strict budget and only buy what I need.

        So it breaks roughly even, perhaps even a little better given the increased range for the extra $2.

      • drsmithyMEMBER

        So it breaks roughly even, perhaps even a little better given the increased range for the extra $2.

        It should do well more than just break even. I think you might have missed some of the devil in the details there. 🙂

        I don’t know what type of car you drive, but assuming an average fuel consumption of 8L/100km and fuel price of $1.30, your $40/wk will take you around 385km.

        385km in a Leaf will only cost you about $19 in electricity, even using worst case calculations (120km per recharge, recharging at peak rates). More likely it would be around $9 (150km/tank, recharging offpeak).

    • Why doesn’t the government use the proceeds of the carbon tax for something useful and effective like subsidising the purchase of green energy to meet the RET so it doesn’t cost the public more than coal power?

      They went one step further – instead of subsidies, they have the $10b Clean Energy Finance Corporation to finance startups in renewable energy.

      But the Liberals and the assorted wingnuts in the media pretend that CEFC is the second coming of Chairman Mao and the Socialist revolution.

      • Jumping jack flash

        Will the new startups continue to gouge regardless?

        I suppose time will tell.

        In Australia, for some reason more competition doesn’t usually mean lower prices. Instead, new competitors all charge roughly the same amount as the existing players, give or take a dollar, and add obfuscation to mask it. Look no further than the quagmire of internet and telecommunications providers. Will electricity end up the same way? In my opinion it is very likely.

  3. Merit Order Effect.

    The Merit Order Effect is a phenomenon that is well understood around the world. Germany’s Federal Minstry for the Environment considers the merit order effect induced by renewables in their analysis of the cost of the various support mechanisms used to deploy them.

    Whilst the Energy White Paper correctly notes that “Analysis suggests that this effect does impact pool prices”, it incorrectly concludes that “the overall impact of the bipartisan expanded Renewable Energy Target has been to increse prices to consumers.” This is a completely and utterly unqualified and potentially inaccurate claim. German experience has shown that the Merit Order Effect can completely offset the cost of the scheme, and in some cases return a net saving to consumers. This occurs when the merit order effect is greater than the [cost of] the scheme… and would certainly be the case in Australia with the wind industry under the LRET. (my emphasis)

    • “the Merit Order Effect can completely offset the cost of the scheme”

      (That was the bit I wanted to emphasise – didn’t realize that WordPress doesn’t do underlines.)