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27Mar2014

How The Australian Renewable Energy Target Affects Retail Electricity Rates

The Australian Government instituted a plan in 2001 to increase renewable energy production up to 20% of the nation’s energy use by 2020. The primary goal of the Renewable Energy Target (RET) is to increase the development of renewable energy resources as part of an overarching Sustainability and Climate Change Mitigation Strategy. However, in addition to requiring businesses to fund portions of this development, the growth in the renewable energy sector may also be at the expense of the consumer.

This phenomenon is of paramount importance because the RET is part of a long-term strategy to ensure a low cost-low carbon fuel system. Therefore, if the RET leads to a disruption of the energy system or increases in overall energy costs, the economic sustainability of the plan is called into question. Due to the complexity of the national energy system, all downstream affects of the policy must be analyzed to determine whether or not the desired outcomes are taking place.

The basic idea behind the RET plan is to encourage investment into renewable energy project, investment that likely will not occur otherwise. The government achieves this goal by mandating that energy retailers purchase renewable energy credits from renewable energy producers, essentially guaranteeing economic viability for renewable energy projects. The only issue with this idea is that the initial capital cost of many renewable energy options, like wind and solar, tend to be higher than those for traditional fossil resources, like natural gas and coal. However, once the renewable energy is installed, it has significantly lower variable and operational costs.

Unlike natural gas and coal plants, renewable energy production requires little to no variable and operational costs. Whereas a natural gas plant requires regular maintenance and a constant supply of purchased fuel, once a wind farm or solar array is built we must only wait until the next time the wind blows or the sun shines. It is this fact that makes the RET work. By guaranteeing funds for the most difficult time in a renewable energy project’s life, we may lock in long-term viability in energy production from low- or no-carbon sources. However, this is only long-term viability or the producers, not the consumers.

The RET is a systems level policy. For the desired outcome to be achieved, systems level considerations must be taken. It seems that the RET has been designed to ensure low cost production of renewable energy, but does not necessarily guarantee that the savings be passed on the consumers. The energy retailers experience a slight increase in costs due to the mandated purchase of renewable energy credits from the renewable energy suppliers. This results in a marginal increase to household energy bills. However, this cost is then made up in the low cost and carbon free energy supplied to the retailer by the renewable energy producers. It seems that the suppliers have chosen not to pass this savings on to consumers in the same way they pass costs.

The overall effect of the RET appears to be net neutral for all parties from conception to production. At that point, the behavior of energy retailers endangers the entire system. By passing on costs to consumers and not reciprocating the same with savings energy retailers are changing the net affect of the RET policies. Estimates show that consumers are experiencing a net increase of 1-5% on energy bills since the institution of the RET program. However, predictive modeling and policy analysis show that the impact on consumers should be an overall decrease in cost, or at the very least it should have no net increases in energy costs.

The determinant of success of the RET, unless changes are made, comes down to choices made by the energy retailers. Success is virtually guaranteed so long as the energy retailers are willing to take a short-term marginal decrease in profits to ensure long-term sustainability and low-cost energy from renewable sources. If they choose quick money now, the viability of the program wanes. The best policy moving forward may be to ask energy retailers to simply extend their horizons and consider the long-term potential of a renewable energy future, free of carbon and continuous fossil fuel costs. This hedging of future renewable energy production is likely to turn into a profitable business in its own right, as long as companies are willing to invest and represent the true costs of the RET.

The final analysis of the Federal Renewable Energy Target shows that there are downstream affects brought about by the policy. There are price increases and decreases, fluctuations that are likely to stabilize over time. Overall, the success of the program will be determined by the willingness of all parties involved to work together to ensure a sustainable energy future. Regardless of future changes, some may even say the potential benefits of the RET is worth a 1-5% short-term increase in energy costs for consumers. However, there may be a solution that realizes all the potential benefits of the RET while mitigating any additional costs to the consumer.

  • 27 Mar, 2014
  • Kit Man Chan
  • 0 Comments

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