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25 Mar 2010

Expanding the Renewable Energy Target Scheme: the devil will be in the detail

by Claire Smith, Naveena Rajaretnam, Graeme Dennis, Nick Thomas

The Federal Government has decided to split the RET scheme into small-scale and large-scale renewable project schemes and fix the REC price for small-scale renewable projects. A key goal is to stabilise the REC market, so as to assist large-scale renewable energy project proponents in achieving long-term off-take contracts at viable prices. There will be a lot more detail to work out if the revised RET scheme is to be effective for large- and small-scale projects.

The Federal Government's announcement on 26 February regarding the enhancements proposed to the Commonwealth Renewable Energy Target Scheme has been welcomed by industry and other proponents of renewable energy.

However, critically important details of the Enhanced RET Scheme are yet to be developed (or are not yet available). These details will be critically important in the RET design and implementation. They will determine whether the enhancements will prove to be effective in meeting Australia's commitment to investment in renewable energy, especially in the context of the current State-based schemes and existing energy infrastructure.

A key driver for the changes was concern in the renewable energy industry that State-based feed-in tariffs for small-scale renewable energy projects (eg. solar panels for buildings) were jeopardising the Renewable Energy Certificate (REC) market for large-scale projects (eg. wind farms) and, as a result, slowing investment in these large-scale projects.

The Enhanced RET Scheme will involve two component schemes - a Small-scale Renewable Energy Scheme (SRES) and the Large-scale Renewable Energy Target (LRET). Both components will contribute to meeting the aim of sourcing 20 percent of Australia's energy needs from renewable energy sources by 2020.

Essentially, the existing RET of 45,000 GWh by 2020 will be split:

  • the LRET target for 2020 is 41,000 GWh; and
  • the SRS target for 2020 is 4,000 GWh.

The Department of Climate Change Fact Sheet sets out annual LRET targets (to commence in 2011):

Year

Revised targets (GWh)

2011

10,400

2012

12,300

2013

14,200

2014

16,100

2015

18,000

2016

22,600

2017

27,200

2018

31,800

2019

36,400

2020 - 2030

41,000

 

The LRET will focus on large-scale renewable energy projects such as wind farms and commercial solar and geothermal plants. The SRES will focus on small-scale renewable energy units such as solar panels, solar hot water systems and presumably smaller wind turbines. As part of the SRES, for each megawatt hour of electricity produced, households will receive a new fixed price of $40 per REC. The REC price under the LRET will, of course, be market-driven.

The Government will need to consider the implications of the Enhanced RET Scheme on the existing energy frameworks and take these frameworks into account in the implementation of the Scheme. In order to be successful and effective, the Enhanced RET Scheme must not operate in a vacuum. Instead, it must complement and support the steps and measures taken to date.

Some of the issues that the Government should take into account in preparing amendments to the RET legislation are discussed below.

  • The interrelationship with the State feed-in tariff schemes: In the absence of a comprehensive Commonwealth feed-in tariff scheme for small renewable energy generation, the States have stepped in to fill the gap. Now that these Schemes are up and running, and they are all different to some extent, where will the enhanced RET Scheme fit in? For example, the NSW feed-in tariff scheme applies to solar and wind farms with a capacity of up to 10kW, yet the Federal Government proposes its SRES will apply to a project as small as a 1.5kW solar panel, therefore covering the same ground as the NSW Scheme to some extent. Clearly if the State Schemes are to remain, the nexus between the Enhanced RET Scheme and these existing State Schemes will need to be carefully considered.

  • Paying for electricity produced versus electricity exported: The basis of payment illustrates the difficulties of devising a national scheme. The State feed-in tariff schemes differ as to whether households are paid on a gross basis (ie. for all electricity generated) or on a net basis (i.e. only for electricity exported to the grid). The Government's announcement suggests a gross charge will be applied where households will be paid per megawatt hour of electricity produced. Given most States adopt a net tariff, consideration will need to be given to how (if at all), the Schemes will operate together as clearly in the short term the gross tariff is more favourable to households.

  • Augmentations and extensions to existing infrastructure: Increasing the supply of renewable energy must be accompanied by the necessary improvements to existing electricity networks. Existing networks across the country still require significant capital investment to ensure the networks are suitable for renewable energy generating units. The Ministerial Council on Energy's proposed legislative amendments to the National Electricity Rules focus on scale-efficient network extensions. This seeks to facilitate network connections of remote generation units and should assist in fostering the developments in network infrastructure required. However, if initiatives and investment in renewable energy sources are not matched by investment in networks, the benefits from the Enhanced RET Scheme will be significantly undermined.

  • Impact on REC market and Liable Entities: The Enhanced RET Scheme will require entities REC liability to meet their liabilities with RECs from small and large scale renewable sources. Although the price of LRET is not capped, the capped price of the SRES will have an impact on the prices paid for RECs obtained as part of the LRET.

The announcement has already resulted in a significant increase to spot REC prices. The details of the new mechanism for obliging liable entities to purchase RECs created through SRES are still to be finalised. However, the Government has stated in its Fact Sheet that existing banked RECs may be used by liable entities to meet their obligations under the LRET to ensure that the RET split does not impact market liquidity. Nevertheless, the LRET target for the next few years is ambitious, particularly when viewed in the light that small scale renewables have to date produced a larger share of RECs under the MRET. Will liable entities without large-scale REC agreements now need to dash to buy LRECs? What is the position where retailers have already purchased (or entered commitments for) significant volumes of RECs from small-scale generation? What about existing forward contracts to purchase RECs? Will they be frustrated? If they define the large and small RECs as different products, will there still be RECs available to be delivered?

The proposed enhancements to the RET Scheme are commendable. The split of the RET and fixing the small-scale REC price will create an improved market price and certainty for the development of large-scale renewables. The SRES will also provide more certainty for those wishing to invest in small-scale renewable energy generation. However, making the Enhanced RET Scheme work effectively will be a challenge. The Government will shortly release an industry consultation paper and intends to legislate the RET changes in May or June 2010.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.