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ERM Power penalty exposes flaws of Renweable Energy Target

The snub to the 2020 Renewable Energy Target by one of the country's biggest business electricity retailers has revived calls for investment in new renewables projects to be halted and exposed the risk of the consequences for consumers of missing the goal. ERM Power on Tuesday revealed it had elected to pay a $123 million penalty charge to discharge its 2016 liability under the RET scheme, rather than backing renewables projects as intended under the RET regulations.

The snub to the 2020 Renewable Energy Target by one of the country's biggest business electricity retailers has revived calls for investment in new renewables projects to be halted and exposed the risk of the consequences for consumers of missing the goal.

ERM Power on Tuesday revealed it had elected to pay a $123 million penalty charge to discharge its 2016 liability under the RET scheme, rather than backing renewables projects as intended under the RET regulations.

The decision means ERM's customers are effectively helping pay a fine rather than supporting new renewable energy projects to meet the end-decade target.

Clean Energy Regulator chair Chloe Munro accused ERM of undermining the objectives of the RET and urged the company to rectify the shortfall in the next years.

But the incident has opened up the RET to further criticism from the anti-renewables lobby given the possibility other retailers could follow the same strategy. That would leave consumers paying prices that cover the cost of additional renewable energy generation, without that energy being produced.

The Company sells electricity to large and small business customers in Australia and the United States. The Company also has ownership interests in and operates two low emission gas-fired power stations in Australia.

Major shortfalls have already been forecast in the subsidy scheme, despite the target being reduced in 2015 to 33,000 gigawatt-hours from the Rudd government's target of 41,000 GWh. Bloomberg New Energy Finance calculates that investment in large-scale renewables needs to more than double to meet the 2020 goal, to $US2.9 billion a year, compared to last year's $US1.1 billion.

Western Australian Liberal Senator Chris Back said the "debacle" of the RET was a "wake-up call" for the sector.

He called for a moratorium on new wind farms until the Productivity Commission carries out a cost-benefit analysis on the effect the RET is having on the electricity market and on retail power prices.

Senator Back said the system could result in more than $1 billion a year of fines paid between 2020 and 2031 because there will not be enough renewable energy available to satisfy the 33,000 GWh target.

"All consumers are in effect paying a federal tax on electricity either as the subsidy issued in the form of renewable energy certificates or the shortfall charge recovered as a penalty – so where is the benefit to the environment from such a scheme?" the Senator questioned.

Under the structure of the RET, electricity retailers are supposed to purchase Large-scale Generation Certificates (LGCs) or generate renewable power themselves to meet an increasing proportion of their sales and surrender them each year to the Clean Energy Regulator. If they fall short of their quota by more than 10 per cent, they pay a penalty of $65 per certificate, which is not tax deductible, making its effective cost $93. Retailers can claim back the penalty over the following three years by surrendering certificates they have bought or generated.

ERM opted to pay the penalty rather than source 1.9 million LGCs at a cost of about $86. Citigroup analysts said the move means the company is shifting $37 million of costs out of its gross margin into the tax line for fiscal 2017. It can now wait to purchase certificates if or when the LGC price falls.

Until now, shortfalls in LGC submissions have been much smaller in comparison.

Federal Energy Minister Josh Frydenberg signalled he saw ERM's case as a one-off because of its desire to accelerate the use of tax losses and noted the high rate of compliance for the RET scheme until now, totalling more than 99 per cent in 2014 and 2015.

ERM said on Tuesday its decision wasn't driven by a view on the RET, nor on future LGC prices, which surged last year.

But Citigroup analyst Michael Dargue told clients ERM was "taking a position on the outlook for LGC prices".

"With EPW [ERM Power] paying the penalty rate (i.e. the maximum possible) in FY17, any reduction in LGC prices over the next three years allows EPW to benefit," he said.

At the same time, Mr Dargue took ERM to task for "clear omissions" in its previous profit guidance and said the impact of accounting for the penalty fee is constitutes in effect a "very material profit downgrade".

ERM shares, which sank 9.6 per cent on Tuesday, lost another 3 per cent in early trading on Wednesday.


Source: http://www.afr.com/business...

JAN 26 2017
http://www.windaction.org/posts/46255-erm-power-penalty-exposes-flaws-of-renweable-energy-target
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