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Where to now for the RET?

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There is no need to dump the Renewable Energy Target. But, as Innes Willox writes, now would be a great time to improve it.

The current Renewable Energy Target Review is a real opportunity to make sensible, bipartisan improvements to the scheme and to remove some of the investment uncertainty plaguing Australia’s electricity sector.

It is Ai Group’s strong view that a change of course is preferable to crashing the current scheme altogether. As current evidence and our members’ experiences suggest, neither deep cuts in the target nor abolishing it altogether would deliver overall benefits to energy users.

The RET has swings and roundabouts for energy users. For instance, the RET entails a substantial build of wind farms and solar panels. The gross costs of this are passed on to consumers by energy retailers. However, by cramming new generators with zero short-run supply costs into the market, the RET also drives down wholesale prices somewhat, partly offsetting its costs to many consumers. Reducing the RET would certainly ease difficult conditions for other generators. But there doesn’t seem to be much in it for most energy users.

Investment in large scale renewables has been held back in recent years by policy changes and uncertainty. As a result there are now concerns as to whether the existing 41,000 gigawatt hour target can be met by 2020.

Ai Group has urged the RET Review panel to consider the practical deliverability of the current target. If there is a genuine risk of missing the target and incurring penalties, the target should be trimmed. But on the current evidence base, cutting the target below this point would not advance energy users’ interests. We will continue to refine these judgments on the basis of any further evidence that emerges from the RET Review process.

There are no simple answers. Investment certainty, sunk costs, transfer costs and the costs of alternatives all have to be factored in.

Of course the RET is just one element of many energy debates and reviews this year. Two issues are by far the most important. In electricity, network costs have dramatically increased retail prices in recent years, partly because of real investment needs, but also due to flawed regulations and excessive demand forecasts. In gas, wholesale prices are tripling because of a huge rise in LNG exports and the unwillingness of key state governments to back development opportunities. Ai Group has been actively participating in these discussions and will continue to play a key role to ensure accessible, reliable and affordable energy for business.

Nonetheless there are improvements to be made to the RET. Small scale solar photovoltaic (PV) systems continue to fall in price and improve in performance, and it is vital that the level of support for these systems reduces over time to reflect their growing competitiveness. Excessive and poorly coordinated subsidies in previous years imposed substantial and unsustainable costs. Recent changes have lowered those costs significantly while stabilising the solar sector. Further reductions in subsidies will be needed in coming years, and they should be as predictable, automatic and timely as possible.

Emissions intensive and trade exposed industries have difficulty in passing on costs and are often less able to benefit from wholesale price impacts of the RET. The assistance arrangements for these industries need to remain a core part of the RET. Unwinding the scheme totally would lead to a major compensation or grandfathering arrangement, or a serious financial impairment of existing good-faith investors and associated increase in sovereign risk. Any of these outcomes would have substantial costs.

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