Time for the RET to go back to its original intention

The RET was intended to cut carbon. Opening it up to more forms of efficient generation would help get that result.

The debate over the renewable energy target has ended up exactly where you would expect a debate on subsidies to end up. The beneficiaries of the subsidy are taking the high moral ground while those adversely affected by the subsidy are crying foul.

We see similar debates in the agricultural sector. Australian farmers complain they face unfair market conditions because the international farmers they compete with have the protection of subsidies, while our government provides none.

In this case, the coal-fired generators claim they are finding it hard to recover their costs on existing investments while the renewable generators who earn a subsidised return, claim their future investments are threatened.

Both arguments are founded on the same concept – investment certainty.

What has been lost in all this debate is the original objective of the RET. The renewable industry has focused on the benefits it brings to customers by suppressing the price coal and gas generators can charge customers. But as PJ O’Rourke once observed about the US health system, “If you think healthcare is expensive now, wait until you see what it costs when it’s free.” The economic costs of lowering the wholesale price charged by thermal generators by subsidising renewable generators will be enormous.

The renewable energy sector has cleverly confused the concepts of economic costs, which are the costs of the resources used to produce renewable energy, with prices. They do this to disguise the real cost impact of the RET on the economy and to make themselves a smaller political target.

RET never about pricing

The goal of the RET was never about suppressing prices, but this is now the cause célèbre of the renewable industry because they know this will appeal to politicians looking to reduce electricity price pressure. The RET was aimed at encouraging a reduction in greenhouse gas emissions by actively promoting the, then-fledgling renewable industry.

The debate about the RET really should be re-focused on how we can achieve our environmental targets most economically. If we can minimise the costs of reducing emissions, then it follows that we are more likely to reduce emissions further, which Australia will inevitably be pressured to do at the Paris round of climate negotiations in late 2015.

More recently the renewable generators claim they are now cost-competitive with thermal generators. While these claims are probably overstating the relative economics of the thermal versus renewable generation, there is certainly less need to continue to subsidise investors in renewable generators as the RET has done its job in developing a local renewable industry. It is now time for the renewable industry to face competition and this competition should lead to lower economic costs and lower consumer prices.

This could be achieved by progressively levelling the playing field between all potential sources of electricity supply and demand so that all technologies can compete to supply emissions reductions.

Recent analysis of the opportunity to reduce the economic costs and price impacts of the RET by making it more technologically neutral, for example by allowing gas generators to compete with renewable generators and create partial credits under the scheme to reflect emissions abated, has shown that this approach can simultaneously reduce the economic cost of the RET by more than $1 billion and reduce prices for customers by more than $50 a year. This cost could fall further if other forms of cleaner generation could also compete vigorously with gas and renewable generators.

Part of the reason that this cost and price reduction occurs is that it makes use of existing gas capacity that mostly sits idle that could compete with coal under a more technologically neutral RET. This approach of broadening the RET to allow a wider range of technologies to compete to supply emissions reductions, is one of those rare no-regrets policies.

Competitive pressure

If no technology is able to compete with the renewable technologies (for example due to the risk of rising gas prices) then the worst thing that would happen is that wind generators would continue to be built. The only complaint that the renewable industry could have against such a proposal is that they would be subject to more competitive pressure.

With lower costs and prices from such a transformation of the RET, the government could afford to leave the target where it is and rely on the transformed RET to do more work to contribute towards the achievement of Australia’s emissions reduction.

Unfortunately, the only beneficiaries from such a transformation of the RET are customers and the economy and, sadly, there is nobody to advocate for these stakeholders in the current RET debate.

Danny Price is managing director of Frontier Economics.