On 20 August 2009, the Senate passed legislation for the government’s Renewable Energy Target (RET) Scheme. Renewable energy generation in Australia is set to expand markedly over the next two decades, creating significant opportunities for renewable energy companies and investors.
By international standards, the renewables market in Australia is relatively small and progress in implementing commercial-scale renewable energy projects has not been as rapid as in countries with more favourable policy settings.
However, this is set to change with the introduction of new policies by the government designed to support the development and deployment of low emissions energy generation. This article discusses the opportunities for investment in Australia’s renewables sector arising from recent policy initiatives, including: the expanded RET scheme; the proposed emissions trading scheme known as the Carbon Pollution Reduction Scheme (CPRS); and new government funding programs, such as the Clean Energy Initiative.
Australia’s national renewable target scheme
Australia’s current Mandatory Renewable Energy Target (MRET) scheme was introduced in 2001 by the Renewable Energy (Electricity) Act 2000 (Cth). The MRET scheme was the first of its kind globally and is designed to create demand for renewable energy generation through tradeable certificates.
The MRET scheme mandates a target of an additional 9500 GWh of electricity from renewable sources by 2010, to be maintained until 2020. Australian electricity retailers and certain large electricity users (known as ‘liable parties’) are required to meet a share of the renewable energy target in proportion to their share of the national wholesale electricity market.
The MRET scheme provides for the creation of Renewable Energy Certificates (RECs) by generators of renewable energy. One REC represents one MWh of electricity from eligible renewable energy sources. Eligible renewable energy sources include hydro, wave, tide, wind, solar, biomass and geothermal. Installations of solar water heaters and small generation units (including rooftop solar photovoltaic (PV), small wind turbines and micro-hydro systems) are able to create RECs under deeming arrangements prescribed in regulations.
Once registered, RECs are able to be traded and sold to liable parties, who surrender them to the Renewable Energy Regulator to demonstrate their compliance and avoid paying the shortfall charge (currently $40 per MWh). Any surplus RECs held by a liable party may be banked for the life of the MRET scheme.
The MRET scheme has helped stimulate the growth of renewable generation in Australia. The Renewable Energy Regulator estimates that at the beginning of 2009, total investment in renewables in Australia stands at approximately $5 billion. The generating capability of the system is in the order of 9,000,000 MWh of eligible renewable energy per typical year. While hydro remains the largest source of renewable energy, there has been more diversification recently, with more wind, biomass and solar coming online.
However, in recent years, investment in renewables in Australia stalled when it became apparent there would be sufficient capacity to meet the MRET scheme target to 2020. Limited stimulus was provided by state governments with their proposals to introduce state-based renewables schemes, but further incentives were required.
The expanded scheme
The government has now set a new target to achieve a 20% share of renewables in Australia’s electricity mix by 2020. To achieve this, the government has expanded the MRET scheme to provide for higher targets and a longer term. Existing and proposed state-based renewables schemes will be rolled into the expanded national scheme, which will be known as the RET scheme.
Under the RET scheme, the national target has increased more than four times to 45,000 GWh of renewable energy by 2020. The existing target is for 9500 GWh in 2020, so the expanded target implies an additional amount of around 35,500 GWh of renewable generation. Of this, around 4000-5500 GWh is expected to be taken up by solar water heaters. This leaves around 30,000 GWh available for new large-scale renewable generation1.
The new targets will ramp up over a number of years, starting at 12,500 GWh in 2010, rising to 20,100 GWh by 2014, and reaching 45,000 GWh in 2020, to be maintained until 2030, 10 years beyond the term of the MRET scheme.
What will remain the same?
Many of the existing features of the MRET scheme remain the same under the RET scheme. For example:
- The same eligibility criteria for renewable energy sources will apply.
- Banking of RECs will be permitted for the life of the RET scheme without restriction.
- Accredited renewables projects will be able to create RECs for the life of the RET scheme.
- All existing eligible projects under the MRET scheme can participate in the RET scheme.
What will change?
In addition to the increased targets and term, other changes include the following:
- An increase in the penalty payable by a liable party for failing to surrender the required number of RECs in a year. The shortfall charge will increase from $40 to $65 per MWh, maintained in nominal terms over the life of the RET scheme.
- A new multiplier effect, known as Solar Credits, will allow additional RECs to be earned by small solar, wind and hydro-electricity generation units installed after 9 June 2009.
Status of the legislation
The legislation implementing the RET scheme was passed by the Senate on 20 August 2009 following a deal between the government and the Coalition. Most important for the deal was the government’s concession that all emissions-intensive, trade-exposed industries would be eligible for assistance to offset any increase in electricity prices as a result of the RET scheme, regardless of what happens with the CPRS.
In addition, the government has announced that it will ‘top up’ the RET scheme to allow existing waste coal mine gas projects to generate RECs. To achieve this, the government proposes to increase the annual targets for the years 2011 to 2020 to ensure the inclusion of waste coal mine gas does not displace renewable energy generation.
The future of renewables under the RET scheme
The Climate Institute recently observed:
“With over 200 renewable energy projects already planned for the coming years Australia is in the beginning of a clean technology boom. These projects will deliver more than five times the total capacity of the iconic Snowy Mountains Hydro Scheme, which took 25 years to complete.”
Recent economic modelling conducted for the government on the impact of the RET scheme2 suggests:
- Investment in new renewables capacity in the period to 2020 will increase to around $19 billion in total.
- The RET scheme will tend to favour technologies that are market ready, such as wind and biomass. By 2020, almost half the extra renewable generation induced by the RET scheme is predicted to be taken up by wind generation.
- Geothermal generation is also projected to contribute strongly to achievement of the target, albeit in the latter stages of the RET scheme.
- A small amount of additional investment is also projected in hydro-electric generation. These additional investments are anticipated to be mainly in the form of upgrades of existing generation facilities, as opposed to the development of new hydro-electric sites.
Government funding for renewables
While the RET scheme will help bring forward investment in proven renewable energy technologies, it is likely to have limited effect in supporting technologies at an earlier stage of the innovation life cycle. In order to supplement the RET scheme, a number of new government funding initiatives have recently been announced to support early research, demonstration and commercialisation of new technologies.
Principal among these is the $4.5 billion Clean Energy Initiative, announced in the 2009-2010 budget. This compromises a number of programs, including the following:
- Solar - $1.6 billion in funding for solar technologies, including new funding of $1.365 billion for the new Solar Flagships program. This program will support up to four solar power generation projects which may demonstrate both solar thermal and solar PV technologies, creating an additional 1000 MW of solar power generation capacity. Understanding the size of existing projects internationally gives an appreciation of the scale of the Australian government’s commitment. Currently, the largest operating solar PV plants in the world are in the order of 50-60 MW and the largest planned concentrating solar thermal plants in the order of 250-280 MW.
- Clean energy grants - the ongoing Energy Innovation Fund will provide $150 million over four years, and includes $50 million for the Clean Energy Program. The Clean Energy Program will provide competitive grants for large-scale research and development projects in clean energy technologies, with grants from $3-10 million. Grants are provided on a dollar-for-dollar basis and will fund up to 50% of the cost of eligible project inputs, including up to 50% of the cost of capital items. This program complements the $500 million Renewable Energy Fund, which supports large-scale renewable energy demonstration projects, geothermal drilling and second-generation biofuels research and development.
- Renewables research - $465 million to establish Renewables Australia to support leading-edge technology research and bring it to market. The new body will advise governments on the implementation of renewable energy technologies, and support growth in skills and capacity for domestic and international markets.
- Clean coal - $2.4 billion in funding for low emissions coal technologies, including $2 billion for industrial-scale carbon capture and storage projects under the Carbon Capture and Storage Flagships program.
- State and territory governments have also implemented funding measures to increase the uptake of renewable energy.
Opportunities and risks for investors in Australia’s renewables industry
The RET scheme and supplementary funding programs are likely to result in substantial growth in the Australian renewables sector in the next two decades. Recent economic modelling suggests that renewable energy generation is expected to increase from around 25,000 GWh in 2010 to around 56,000 GWh in 2020, an increase of around 125%. If all proposed projects proceed, an additional $32 billion could be spent, including around $20-25 billion on large-scale renewable energy projects under the RET scheme3.
This is likely to give rise to significant opportunities for companies in the renewables sector looking to invest in Australia. Companies utilising market-ready technologies such as wind and biomass are likely to benefit from improved project feasibility prospects arising as a result of the RET scheme. Companies with technologies at an earlier stage in the innovation life cycle may be able to benefit from investments that are eligible for funding under one of the numerous grants programs.
While the opportunities in the Australian renewables sector are significant, investors need to undertake adequate due diligence to ensure they are aware of existing impediments and risks in the Australian market. These include the following:
- Finance remains difficult. The debt and equity markets continue to be constrained. Project financing is more difficult than it has been for many years.
- Transmission location and capacity present barriers to entry. Many renewable energy projects are in remote locations due to the availability of land or the location of the renewable resource. This may reduce the potential for conflict with incumbent communities, but it creates a significant barrier to entry if transmission lines need to be constructed over any significant distance or if transmission losses are significant. Transmission lines are expensive and their construction requires assessment, approvals and land access processes in addition to the generation facility itself.
- National, state and local assessment and approvals processes can delay projects. In the current economic climate, competition for funding is international and delays in the approval process can materially impact project feasibility. The nearer to population centres (and hence demand), the greater the risk of conflict with local communities and hence the complexity of the assessment and approval of projects. As renewables projects move closer to more densely populated areas, more tensions will emerge between incumbent communities and the developers of renewables projects. In more remote locations, different tensions may arise, including issues concerning the protection of indigenous cultural rights or ecological values.
- All this points to the need for careful project planning to factor in the time and cost required to obtain land access and necessary approvals, including undertaking any required community consultation.
*Lisa Moore, Foreign Legal Consultant, Singapore; Tony Hill, Partner, Sydney; Georgia Knox, Graduate, Sydney