Policy On Renewable Energy Essay

Question:

Discuss about the Australian Current Policy on Renewable Energy.

Answer:

Introduction

The renewable energy policy plays an increasingly pivotal role as Australia grapples with the appropriate strategy of climate change as well as increasing penetration in renewables. The renewable energy policy environment in the recent years has turned out to be highly politicized and uncertain. The industrial implications are also significant, and the current Australian policy on renewable energy has been taken through a period of rapid changes. Currently, there is increasing concern on reduction of various interventions by the government, sectoral efficiency and having least cost solutions incentivized since the review of the 2013 renewable energy policy (Buckman & Diesendorf 2010, p.56). The priorities of government and the political parties as well as polarity in perspectives have been caused by significant policy uncertainty, policy responses and increased politicization of the climate change. The existing consensus, however, maintains that there are inefficiencies in the Australian renewables and the energy sector. The purpose of this paper is to carry out an examination of the key policy measures on renewable energy as well as their impact on the industry's future.

The single largest sector contribution in Australia is realized from the electric power generation that produces 33% of the country’s greenhouse gas emissions (GHG emissions). From the year 2012 to 2013, fossil fuels approximately provide 87% of Australia's electricity compared to 13% realized from the renewable sources (Elliston, Diesendorf & MacGill 2012, p. 89). As a result of reduced demand for electricity in the National Electricity Market (NEM) of Australia and variations in the generation mix, there has been approximately a 4% decrease in electric power emissions from 2012-2013 to 2013-2014. Generation of renewable energy is predominantly hydro though solar and wind has also been on the rise. Various environmental factors have mostly caused variation in the hydro generation while a slow-down in the deployment of the renewables has led to the increased production of the black coal generators. The successive Australian governments have been encouraged to transition away from the fossil fuel based generation by increasing domestic and international concerns related to GHG emissions.

The current Australian renewable energy policy

The dramatic changes in renewable energy policy environment have been caused by a change of the Australia’s federal government. Uncertainty has characterized the policy environment with strategic priorities differing from one political party to the other and even within the ideologies of the same parties (Byrnes et al. 2013, p.123). On both sides of politics, political uncertainty over leadership at the federal level implies that a broader risk is a consequence of internal party priorities. The focus of the new renewable energy policy environment is on the reduction of costs of electricity, least cost energy production, ensuring the development of the extractive industries in Australia such as gas sector is enhanced and allocative efficiency is realized. The energy policy goals of the Australian government, as well as its political ideologies, have been set out in a new Energy White Paper (Byrnes et al. 2013, p. 101). The White Paper concentrates on the themes of the temporary Energy Green Paper like reduction of pressure on the energy expenses for businesses and households. It also looks into the improvement of international competitiveness, increased exports and removal of interventions which are considered inappropriate and bars business innovation and competition.

The focus of the White Paper is on the themes of consumer cost reduction by increased competition, facilitation of resource development and innovation through investment and improved productivity in the use of energy (Yu & Halog 2015, p.141). As a result of productive investment and market operation, the energy mix of Australia will grow in diversity over time. Cost reflective tariff pricing enhances reduction of network investment driven by the peak loads and related expenses as well as increased demand management. Uniform or regulated tariffs are predominantly used in Australia (Byrnes et al. 2013, p.146). Despite the associated benefits in the approach relating to reduced pressure on network investment and reduced cross-subsidies, it is apparent that there is limited recognition of the capacity for issues touching on equity. It is also arguable that the function of the non-monetary signals for the behavior of electricity demand for some of the users. The users of rural electricity benefiting from subsidized electricity resulting from the high cost of local supply are likely to face vulnerability to the policies of cost-reflective tariffs.

Direct policy discussion related to renewable energy has been relatively minimal over an extended period. The focus of the policy is in large part on ensuring that a (reduced) target of renewables is kept and the Clean Energy Finance Corporation (CEFC) and Australian Renewable Energy Agency (ARENA) are abolished. The roles of these government agencies include facilitation of access to finance and commercialization of the technologies of renewable energy (Head et al. 2014, p.66). Despite emissions abatement being a priority, internalizing externalities of the environment which include emissions generated from the fossil fuels is not prioritized. Nevertheless, the low emission technologies have a policy support especially coal which undergoes carbon capture and storage. The policy environment set up by the government intends to be neutral technologically because given the insights into the needs of the market; the industry best makes decisions regarding investment on the assets which are to be generated in the future including the technological choice.

The view that price signals are diluted, competition shielded and energy markets distorted is reflected by the focus on the provision of subsidies and removal of regulatory barriers (Sims, Rogner & Gregory 2003, p.134). The market regulations and interventions should not stifle competition and consumer choice but should instead highly encourage such aspects, and cost-benefit analysis is a primary requirement needed for such regulations. Definition of investment outcomes is driven by the inherent focus on the use of the competitive energy markets. The greater focus on the policy appears to be in the gas industry development, export of energy such as uranium, gas and coal and driving competitiveness. The table below shows the various changes to key policies which exist, impacting the occurrence of renewables since 2013 and the focus are on the examination of the policies' roles and implications (Council 2014, p.75).


Table 1: Key policies on renewable energy and their status

Policy instrument

Does it exist?

The comments

Emissions Reduction Fund (ERF)

Yes

The recent policy initiative of ERF is designed to encourage the abatement of least cost investment. Nevertheless, it is not likely to have direct support for the renewable sector.

Carbon pricing scheme (Operative 2011-2014)

No

In 2014, the plan was repealed, and in the short term, the price of carbon is unlikely.

ARENA

Yes

ARENA's future is uncertain. There is the commitment by the Federal government for its closure although the Senate has prevented this step. The government will honor the existing funding obligations if it is closed.

CEFC

Yes

CEFC's future is also uncertain. The Federal government has shown its commitment to close it, but the Senate has prevented this initiative. The government will have to honor the financial obligations it is closed.

Renewable Energy Target (RET)

Yes

The Renewable Energy Target in 2015 from 41,000-gigawatt hours by 2020 to 33,000-gigawatt hours in 2020. The biannual reviews were also targeted for removal.

Electricity Tariffs

Yes

Although electricity tariffs vary significantly between Territories and States, FiTs still exist in Australia. The agenda includes the tariff reform.


The Emissions Reduction Fund (ERF)

The Federal government’s key climate policy include ERF worth $AU 2.55 billion (Clarke, Fraser & Waschik 2014, p.197). Its aim is the reduction of organization and household’s GHG emissions by use of positive incentives through an auction process that is considered silent. The government has imposed a maximum bid price that remains undisclosed, and any project will not be paid for if it goes above the set bid price. It is also committed to buying 80% of the emissions’ volume falling below the maximum bid price for every auction (Regulator 2015, p.176). The carbon credits are paid at the bid price if the process is successful at the auction. The selection of successful projects is solely based on the lowest bidder. This policy looks into directing strategies of reducing emissions to the least cost projects and favoring minimal incremental variations such as forestry and light replacement in industrial buildings over projects that are more capital intensive (Walsh, Russell-Smith & Cowley 2014, p.131).

The core objective of this policy is to aid Australia in meeting its target of emission reduction of 5% below 2000 levels by the year 2020 through a scheme which ensures cheapest methods of emissions reduction thus increasing productivity and reducing costs (Byrnes & Brown 2015, p.202). ERF covers a non-exhaustive list of projects including:

  • Improvement of agricultural soils.
  • Reduction of waste coal mine gas.
  • Revegetation and reforestation.
  • Capturing the landfill gas.
  • Improvements in the efficiency of energy.
  • Use of technological development to reduce electricity generator emissions.

Since ERF is a new policy in Australia, it is not easy to carry out an assessment of the impact it has on the renewable sector. Nevertheless, it is unlikely to be favorable to the deployment of renewables given its focus and objectives on the efficiency of energy and the capture and storage of emissions (Byrnes & Brown 2015, p.199). A significant support to the existing operations is provided by the scheme though it does little as far as support of new households and businesses without emissions’ track record to abate is concerned.

Carbon pricing

The previous labor government introduced the carbon pricing scheme to help in internalizing the costs of carbon for the primary polluters. The fact that carbon pricing was removed in 2014 after some negotiations is one of the major election scorecards for the current regime (Fahimnia et al. 2013, p.214). As a result, carbon price no longer exists in Australia unless the price is provided by the ERF. However, forming part of the scheme were other measures which include CEFC and ARENA, and they have not yet been removed. Some parts of Australian electorate have exhibited hostility to pricing carbon meaning that the absence of global agreement, political leadership, tax or a carbon trading scheme have largely contributed to such behaviors.

The Australian Renewable Energy Agency (ARENA)

The role of ARENA is fundamental to improve the increased supply of renewable energy and the competitiveness of renewables (Sioshansi 2011, p.104). It is technology impious and focused on the erosion of commercialization and technological barriers and sharing of knowledge. The senate has thwarted the attempts by the Australian government to close ARENA. The agency has continued to assess and fund projects despite its pending demise. At the time of its repeal, the government has committed honoring the funds which are allocated by ARENA.

ARENA carries out an enabling function for initiatives and projects faced with commercialization and technical challenges that hinder market support (Simpson & Clifton 2014, p.188). Its focus is more on commercialization of technology rather than the approaches which are utilized. Some projects especially in the remote communities are however faced with multifaceted and complex commercialization changes and may not easily match the remit of ARENA. The kind of risk that surrounds the future of ARENA is not conducive to the deployment of renewables. The project development is resource and time intensive. The incentive for resource and time allocation is most likely to lead to the reduction of particular uncertainty concerning the future of ARENA.

The Clean Energy Finance Corporation (CEFC)

The CEFC is a financier getting its funds from the government to aid in overcoming the funding challenges which are associated with the development of clean energy including technologies on low emissions and renewable energy. Its focus is on the provision of funds at a concessional rate for projects on clean energy with a positive rate of return. The concession highly relies on the benefits that do not emanate from within provided by the project and can be in the form of longer duration, reduced costs and higher rate of risk (Hua, Oliphant & Hu 2016, p.45).

The Senate has barred the commitment by the Australian government to ensure CEFC is closed. The reason for the closure of CEFC comes into sight to provide a reflection on the perception that the government is not to provide funds if the profile of the project risk is unacceptable to the private sector. The CEO of CEFC asserted that the willingness of private financier to take part in the Australian market had been reduced by the uncertain and complex policy environment (Martin & Rice 2015, p.97). Therefore, the CEFC’s role is critical due to this policy environment. The availability of finance is restricted by the tendency to focus on established businesses and the requirement for concessional market returns in an attempt to take charge of the profile of credit risk. The large projects with lower transaction costs have high capacity to attract finance from the CEFC specifically those that involve more established businesses. The organizations which are less established with limited access to funding like smaller projects, small businesses or community groups may not be included (Hua, Oliphant & Hu 2016, p.49). Lack of products’ standardization, high costs of transactions, perceived risks of investment, locational challenges, inability to acquire co-finance or complexity related to the alignment of stakeholders are some of the causes for their exclusion.

The Renewable Energy Target (RET)

The aim of RET is the reduction of GHG emissions from the generation of electricity through the provision of certificates for generation of renewable energy (Cludius, Forrest & MacGill 2014, p.55). The large systems are given proper documentation based on the generated MWh while the small systems which are less than 100 kW are provided with upfront payments. The electricity retailers who are liable entities have to make purchases of a given number of certificates. This policy is significant as it has played a key function in the facilitation of the deployment of renewables and reduction of emissions in Australia. RET was reviewed in 2014 by the federal government (Panel 2014, p.133) signaling its intention to have the target reduced and it was concluded that:

  • Given the availability of abatement alternatives for lower cost emission, the cost to the community of the RET has shot up.
  • RET is funded via a cross-subsidy by the consumers, electricity retailers and incumbent generators.
  • The impact of RET on the prices of electricity is small.
  • Approximately $13 billion of the large-scale generation which is not required will be developed given the changes in the electricity environment.
  • RET provides investment incentive in the production of renewable energy which is not essential in meeting demand and not viable without subsidy by RET.

The Federal government is committed to enabling the reduction of RET and initially set targets of 26,000 GWh following the review of the RET. At the period RET of 41,000 GWh of generation of renewable energy by 2020 was being written was reduced to approximately 33,000 GWh in 2015 (Stock 2015, p.111). This is a clear reflection of the contractual amount between the two key players resulting from the protracted negotiations. Moreover, there has been considerable confusion surrounding the involvement of wood waste as a source of renewables and trade exemptions exposed in industries from the RET.

RET has played a crucial role in the facilitation of the deployment of the renewables in Australia. If the reduced RET target is made efficient, it will assist in the reduction of uncertainty through the provision of a floor target which is not likely to go down in the near future (Martin & Rice 2012, p.162). Significant reduction in the investment in the renewable energy especially for the large-scale systems has been caused by the uncertainty that surrounds the RET.

Tariff policies and Feed in Tariffs (FiTs)

The Territory and the State have the responsibility of implementing the tariff policies. The FiTs of the household have entirely gone down across all the States and Territories and are currently low. As a result of information asymmetry regarding the impacts of network and capacity of offsetting the wholesale price (Oliva, MacGill & Passey 2014, p.152), there is uncertainty in the value of household PV that is under exportation to the grid. The regional DNSP in Western Australia came up with a scheme with FiTs to a tune of $0.50/kWh (Byrnes et al. 2016: 210) for the encouragement of the deployment particularly in the off-grid diesel networks although as a result of a range of non-monetary and monetary barriers, there has been limited success. The rationales behind reductions in FiT are twofold. First of all the household solar PV in the urban areas is relatively cost competitive. Secondly, the declining revenue and the cost of network adaptation covering similar asset base leads to an impact in distribution throughout the network specifically for those who do not have solar (Martin & Rice 2013, p.71).

The use of uniform tariff policies in Australia has significant impacts in distribution specifically in some regions where the cost of supply is estimated to be much higher than the rates of tariffs (Chapman, McLellan & Tezuka 2016, p.124). Distribution businesses, retail, and governments need to take into consideration the tariff policy to show the changing nature of the electricity networks.

Conclusion

The renewable energy sector in Australia has faced a lot of uncertainty and several significant policy changes. The potential for utilization of renewable technologies and storage to optimize the operation of the network is significant as penetration of distributed generation increases. A good policy should proactively address the resultant opportunities and not respond reactively to the challenges that may arise where there is the use of inappropriate policy (McHenry 2009, p.164). As the technology matures over time, flexibility to adapt to the technological changes, payments in capacity and payments in lump sum of the operating subsidies for solutions that are innovative in some areas will become more significant. Primary barriers to deployment, enabling rules and regulations, firm support and institutional frameworks developed for the industry dealing with fossil fuel have been identified through analysis of the renewable energy policy environment and the economic theory. The justification for intervention by the government to support the renewable energy sector and improvement of the general economic efficiency resulted from this context. The energy policy's central tenet appears to rely on the market mechanisms for competitive determination of supporting extractive industries in particular in the export markets and optimum generation mix. As a requirement for integration into the future energy mix, it implies that the market will efficiently develop innovative solutions and direct enough resources.

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