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Australia – Reeling Out The RET Review.

14 September, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Environment 

 

WHAT YOU NEED TO KNOW

 

  • The Expert Panel appointed by the Government to review the Renewable Energy Target has now released its 2014 Renewable Energy Target Scheme Review Report.
  • The Report recommends that the Renewable Energy Target be amended. Significantly, the Expert Panel recommends that the Government adopt:

 

 

One of two options for the Large-scale Renewable Energy Target:

 

  • Option 1 – close the scheme to new entrants and grandfather it for existing and already committed entrants; or
  • Option 2 – modify the scheme to increase only in proportion with growth in electricity demand.

 

One of two options for the Small-scale Renewable Energy Scheme

 

  •  Option 1 – termination of the scheme upon announcement; or
  •  Option 2 – bringing forward the last year of the scheme from 2030 to 2020.
  • The Government will need to enact legislation amending the Renewable Energy (Electricity) Act 2000 (Cth) if it wishes to adopt one or more of these options or make any other significant change to the Renewable Energy Target. Without a working majority in the current Senate, this could present the Government with a significant challenge, and result in ongoing regulatory uncertainty over the two years leading up to the next Federal election, due in late 2016.

 

WHAT YOU NEED TO DO

 

  • Stakeholders with existing agreements for renewable energy projects or services (eg power purchase agreements), should review these agreements to determine whether the continued operation of those agreements (or the risk allocation under them) may be affected by any Renewable Energy Target amendment legislation.
  • Retailers and large load customers need to carefully assess the security and likely pricing of their Largescale Renewable Energy Target certificate supply sources over the 2016-2020 period. These stakeholders face significant regulatory risk if the Government announces a position to significantly change the Renewable Energy Target, but is then unable to enact legislation to do so over the next two years. Faced with this regulatory uncertainty, new sources for supply of certificates are unlikely to be developed in time to meet the currently scheduled increases in the Large-scale Renewable Energy Target which will continue absent any legislative change.
  • All interested stakeholders should watch this space as we continue to track the Government’s response and any draft legislation issued by the Government.

 

Background

 

The Renewable Energy Target (RET) in its current form is governed by the Renewable Energy
(Electricity) Act 2000 (Cth). The RET essentially comprises two parts:

 

  • The Large-scale Renewable Energy Target (LRET) – which covers large-scale renewable energy projects and aims to deliver the 2020 target of 41,000 GWh of Australia’s energy through renewable resources. Retailers and other wholesale purchasers of electricity are expected to meet the current LRET by purchasing a volume of Large-scale Generation Certificates (LGCs) (issued by accredited large scale renewable electricity generators) which equates to a target proportion of their total wholesale electricity purchases. If they fall short, they must then pay a penalty of AUD65/MWh for each MWh equivalent of their shortfall in LGC purchases each year. This penalty is not tax deductible.
  • The Small-scale Renewable Energy Scheme (SRES) – which provides a financial benefit for individuals wishing to purchase eligible small-scale renewable energy systems of no more than 100 KW capacity (eg eligible solar photovoltaic panels). This scheme was initially intended to deliver approximately 4,000 GWh of small-scale energy through small scale renewable sources.

 

 

However by 2013, approximately 6,400 GWh had been delivered. The LRET of 41,000 GWh per annum set for 2020 to 2030 (together with the 4,000 GWh of expected SRES generation) was originally based on historic estimates of national electricity consumption and intended to represent 20% of annual national electricity consumption by 2020.

 

However, due to falling demand for electricity and higher than expected uptake of SRES roof top
generation, the LRET of 41,000 GWh per annum from 2020 to 2030 is now likely to represent a significantly larger percentage of Australia’s energy consumption in 2020 (closer to 27%, based on current demand forecasts for 2020). This, together with significant increases in retail electricity prices over the past few years, led to the Government (in February 2014):

 

  • releasing the RET Review Terms of Reference; and
  • appointing the Expert Panel, chaired by former Reserve Bank board member, Mr Dick Warburton AO LVO, to review and report on (among other things) the extent to which the continuation of the LRET may result in continued upward pressure in retail electricity prices.

 

 

After reviewing over 24,000 submissions and consulting with over 200 stakeholders, the Expert
Panel submitted its 2014 Renewable Energy Target Scheme Review Report (Report) to the Government on 15 August 2014, with its public release on 27 August 2014.

 

The Government has not yet released its position on the recommendations made in the Report.

 

Revising The LRET

 

Significantly, the Expert Panel has recommended two options for the LRET in the Report:

 

  • close the LRET scheme to new entrants and grandfather it for existing and already committed entrants; or
  • modify the LRET to increase only in proportion with future growth in electricity demand.

 

Option 1 – Close And “Grandfather” LRET This Option Essentially Involves the following:

 

  • Allowing the LRET to continue to operate for:

 

    • existing accredited renewable energy power stations;
    • renewable power stations already under construction; and
    • renewable power stations to be constructed, where it can be demonstrated that there is full financial and contractual commitment to the project (eg final investment decision, engineering and procurement contract), within one month of the announcement of this approach.
    • Closing the LRET to all new renewable energy power stations (except those referred to above).
    • The Clean Energy Regulator (CER) setting targets annually based on estimated output from the “grandfathered” power stations described above (who would still be entitled to accreditation under the continuing “grandfathered” LRET scheme).
    • The last year of the operation of the LRET scheme being 2030.

 

 

The Report also states that implementing this option would involve consideration of an appropriate certificate price to support existing projects, and consideration of whether further mechanisms would be required to ensure certificate price stability. 

 

Option 2 – LRET To Increase Only In Proportion To Growth In Demand

 

This option involves setting the target annually by reference to a set proportion (for example, 50%) of any growth in electricity demand each year up to 2020. This would operate as follows:

 

  • The target being set annually (each year up to 2020) by the CER taking the target from the previous year and increasing it by an amount equivalent to 50% of the projected growth in national electricity demand over the next year.
  • Where national electricity demand is projected to remain flat or fall over the next year, then the target is held at the previous year’s level.
  • From 2021 onwards, the target is fixed at the 2020 level until 2030, the last year of the operation of the LRET.

 

Based on current electricity demand forecasts, the Report found that this approach would achieve a 20% share of renewables in electricity generation by 2020.

 

Another Option – A “Real 20%”

 

While the Report recognised that the original 20% target of 45,000 GWh by 2020 had been distorted by forecasts that did not take a downturn in the energy market into account, the Expert Panel expressed concern that adopting a revised “real 20%” target would involve fixing yet another target in legislation based on electricity demand forecasts which are inherently uncertain. Specifically, if demand was lower than forecast, the LRET would continue to add generation capacity surplus to the requirements of the market.

 

Accordingly, the Expert Panel recommended Option 2 above as a means of ensuring that targets only increase with the increase in demand year on year up to 2020.

 

Revising The SRES

 

The Expert Panel recommended two options for the SRES in the Report:

 

  • Abolition – closing the SRES immediately upon announcement. Those who have contracted for the installation of a small-scale system before the closure announcement would continue to be entitled to receive the certificates they would have done, and wholesale purchasers of electricity will still be required to acquire and surrender their proportionate share of those certificates or pay the statutory penalty.
  • Bringing forward the phase-out of the SRES – bringing forward the end date of the SRES to 2020 (from 2030), as well as:
    • reducing the period small-scale certificates may be created (for rooftop solar PV systems) from 15 years to 10 years and in each year from 2016 onwards further
    • reduce the period for which certificates may be created;
    • reducing the system size eligibility for rooftop solar PV systems from no more than 100 KW to no more than 10 KW; and
    • reducing the period small-scale certificates may be created for solar and heat pump water heaters, by one year, each year, commencing in 2016.

 

Legislative Hurdles

 

The Government has yet to announce its position in response to the Report. However, all indications to date are that the Government is not in favour of the RET continuing in its current form and is considering a change to the RET. Legislation will be required if the Government elects to adopt any of the Report’s recommendations or to make any other significant changes to the RET.

 

The difficulty for the Government in introducing any legislation to close or amend the RET, is that:

 

  • the Government does not have a sufficient majority in the Senate to pass legislation;
  • the Labour Party and the Australian Greens have vocally opposed any revision to the current RET; and
  • the Palmer United Party (PUP) has vocally opposed any change to the RET before the next Federal election, due in late 2016.

 

 

So as things currently stand, the Government requires the support of the three PUP Senators to pass any legislation before the next Federal election. Unless these Senators change their publicly stated position, the Government will be unable to pass any legislation before the next Federal election.

 

Key issues For Stakeholders

 

Stakeholders in existing large scale renewable energy generation projects Stakeholders with existing agreements for large scale renewable energy projects, such as power purchase agreements (PPAs) or project funding related agreements, should carefully examine these agreements to assess the extent to which the LRET amendment options proposed by the Expert Panel could impact on the continued operation of their agreements or the risk allocation under them.

 

For example PPAs will typically have price review or change of law clauses which could be triggered by the RET changes proposed by the Expert Panel (should they become legislated). Similarly, funding commitments under equity and debt funding agreements for existing development projects may also be affected by change in law or similar provisions which expressly or implicitly cover significant changes to the LRET.

 

Stakeholders in large scale renewable energy generation projects which have not yet
commenced construction, but have already achieved a level of contractual “commitment”
Stakeholders in these projects will need to consider whether they are in a position to establish a basis on which their project may be considered “committed”, to achieve the potential benefit of being “grandfathered” under the Expert Panel’s Option 1. At the same time they will need to retain flexibility to refrain from significant expenditure on construction pending the position on any legislative change becoming clearer.

 

Stakeholders in the small scale solar PV sector The business model of solar PV installation businesses (and their partners) usually rely on accessing and creating a revenue stream from the SRES certificates created from the units they sell.

 

These stakeholders will need to carefully review the key agreements under which they operate to
determine whether:

 

  • they may be able to “grandfather” solar PV sale contracts under the closure of the SRES scheme as proposed by the Expert Panel (preserving the value of these contracts); or
  • the Expert Panel’s other SRES recommendations for Option 2 (or any other legislative scaling back of the SRES scheme) might impact on their risks and revenue streams under their business agreements and their standard contract terms for solar PV units.

 

 

Exposure of retailers and large load customers to LGC supply certainty and price risk
Retailers and large load customers are particularly exposed to the regulatory uncertainty that will
eventuate if the Government adopts an LRET scale back or closure position, but is unable to enact
legislation to implement it in the next two years leading up to the 2016 election.
This is because RET targets will continue to escalate each year (absent any legislative change).

 

However, the new renewable generation projects necessary to supply increasing volumes of LGCs to meet the escalating LRET targets may not proceed in the meantime, due to the regulatory uncertainty over the future of the LRET.

 

Retailers and large load customers could then be faced with significant LGC supply shortages in 2016 to 2020. These stakeholders should therefore carefully assess the security and pricing of the LGC supply sources available to them over the medium term, taking steps to secure (or be in a position to readily secure) sufficient LGCs at reasonable prices over the medium term so as to minimise the risk of being exposed to a $65/MWh penalty (non-tax deductible) for each MWh equivalent of their shortfall in LGC purchases in future years.

 

Next Steps

 

Interested stakeholders should watch this space as we continue to track the Government’s response and any legislative amendments to the RET.

 

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For further information, please contact:

 

Peter Limbers, Partner, Ashurst 
peter.limbers@ashurst.com

 

Ashurst Environment Practice Profile in Australia 

             

 

 

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