Review of renewable energy target released

The federal Climate Change Authority’s (CCA’s) final review of the Renewable Energy Target (RET) has been released after almost six months of detailed analysis and extensive stakeholder engagement.

The Australian Government has welcomed the release of the report, claiming that the RET plays an essential role, alongside the carbon price, Australian Renewable Energy Agency and Clean Energy Finance Corporation, in driving new renewable energy investment in Australia, delivering a clean energy future and making the most of Australia’s significant renewable energy resources.

The government commends the chair, board and staff of the CCA for their thorough and comprehensive analysis of the issues. To support investment certainty, the government will respond to the authority’s detailed recommendations early in 2013.

But in contrast to the review of the RET, research from carbon analytics firm RepuTex indicates that a lower Australian carbon price will result in a significant rise in the price of large-scale credits (LGCs) created under Australia’s renewable energy scheme, with prices to hit as high as $65/MWh by 2020.

The CCA is forecasting LGC prices to collapse by 2026, as the carbon price becomes high enough to meet 100% of the cost of renewable energy - doing away with the need for renewable generators to sell credits in order to subsidise the cost of building and operating new clean energy plants.

In its analysis, the CCA assumes that Australia’s carbon price will trade at $29/t CO₂-e in FY 2016, when Australia moves to flexible price trading and links with the EU Emissions Trading Scheme (ETS), rising 5% per year thereafter. According to RepuTex, the CCA may be overly optimistic, with RepuTex forecasting a carbon price 50% under government expectations.

RepuTex Associate Director of Research Paul Bourke notes that the lower than expected carbon price is due largely to policy influences from Europe as a result of the Australian carbon market’s linkage with the EU ETS from 2012.

“With the linking of the two markets, the possibility of the CCA’s forecast for an Australian carbon price being met over this time frame is almost zero. The reality of a significantly lower carbon price is almost certain,” Bourke said.

“Given the current magnitude of the oversupply of carbon allowances in the EU ETS, we believe that even with reform in Europe, carbon prices in Australia are likely to trade at an average of $16 between 2016-20, meaning that renewable generators will continue to rely on renewable credits to meet their costs.”

Under RepuTex’s more moderate carbon price scenario, LGC prices will retain their value, reaching a high of around $65/MWh in 2020, with the carbon price not expected to displace renewable energy credits until well after 2020.

According to RepuTex, an understanding of the dynamics between European policy and the Australian carbon and renewable energy markets is critical for local operators and investors as EU policy continues to drive the local carbon and renewable price.

“Should the EU Commission backload permits in the EU ETS, we will see the Australian carbon price temporarily rise, then fall again as those withheld permits are returned to the market towards 2020,” said Bourke.

“Should more permanent reform be actioned in the EU, as is being touted by key markets such as the United Kingdom, we may see a more permanent high trajectory for the Australian carbon price, which would result in a faster timeline for the Australian carbon price to meet the economics of Australian renewable investors and developers.

“Without that high carbon price to do the heavy lifting, the Australian RET will remain a key driver of investment in renewable generation well beyond its previous shelf life.”

The CCA’s report can be found at http://climatechangeauthority.gov.au/ret.