Reducing the LRET to a ‘real 20 per cent’

This scenario adjusts the targets in line with current projections for electricity demand in 2020 to achieve a ‘real 20 per cent’ share of generation from renewables. This option is supported by many stakeholders, such as electricity retailers (including EnergyAustralia and Origin Energy), some peak bodies and industry groups (including Major Energy Users, the National Generators Forum, the Energy Supply Association of Australia and the Business Council of Australia). For example, EnergyAustralia’s submission stated:

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There are two broad approaches to implementing a ‘real 20 per cent’ target. The first involves retaining ‘fixed’ legislated targets in gigawatt hours but recalibrating those annual targets based on current projections of electricity demand, and leaving them at the revised levels for the duration of the scheme. Like the current scheme, the targets would remain flat at the level set for 2020 until 2030. Setting fixed targets provides certainty to the renewable energy industry over the amount of new generation that is required each year. However, if electricity demand in 2020 is higher or lower than currently projected, the share of renewables will not correspond to 20 per cent. If demand is lower than forecast, the additional generation from renewables will exacerbate the existing situation of over-capacity in the electricity market and result in further investment that is not required to meet demand for electricity.

Most stakeholders, particularly in the renewable energy industry, supported retaining fixed gigawatt hour targets in legislation. For example, Snowy Hydro stated:

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The second approach is to implement ‘floating targets’ where targets would be regularly updated in line with the most recent projections of electricity demand, ensuring the scheme delivers a 20 per cent share of renewable generation in 2020. Some stakeholders, including the AEMC and the Major Energy Users support this option:

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This approach would result in a degree of uncertainty for the renewable energy industry and liable entities, and there is a risk it may not provide sufficient notice to meet the targets, given the lead time required to build new large-scale projects. Uncertainty over future targets could also mean that retailers purchase higher-cost certificates on the spot market, rather than through PPAs, making it harder for renewable projects to secure finance. However, this approach does provide a mechanism to adjust the targets should market conditions change.

ACIL Allen modelled a ‘real 20 per cent’ scenario for the Panel. The modelling results apply to both a floating and fixed real 20 per cent target, but actual outcomes would differ between the two approaches if electricity demand outcomes varied from the assumptions used in the modelling.

Generation mix

Adjusting the LRET to achieve a ‘real 20 per cent’ share of generation in 2020 would result in a target of 25,200 GWh of additional large-scale renewable generation in 2020, which is

15,800 GWh lower than the current 41,000 GWh target. A further 2,600 MW of wind capacity and 600 MW of new large-scale solar capacity would be developed by 2020 to meet a

‘real 20 per cent’ target. The ACIL Allen modelling suggests that, compared to the current policy, the output from wind capacity that would have come online to meet the 41,000 GWh target is offset by increased generation from existing coal fired and baseload gas generators (Figure 28).

Growth in demand is largely met by new wind capacity with some development of large-scale solar in remote grids in the early 2020s. This allows fossil fuel generators to maintain their current level of output (assuming the current demand forecast for 2020 eventuates) and improves the financial position of incumbent fossil fuel generators. In this scenario there is less mothballed fossil fuel capacity than under current settings with some currently mothballed capacity brought back online sooner than would otherwise have been the case.

Some new fossil fuel capacity is projected to enter the market around 2025, mostly baseload and peaking gas generation with a small amount of new coal capacity being developed in the SWIS.

ACIL Allen estimates that a further $6 billion would be invested in the sector to 2030 (in NPV terms) to meet the lower target, about $8 billion less than under current settings. A majority of the decline in expenditure relates to reduced investment in wind capacity.

Figure 28 Change in generation mix: ‘Real 20 per cent’ – Reference case, 2015 - 2040

Source: ACIL Allen

Electricity prices

Figure 29 illustrates ACIL Allen’s modelled retail electricity prices in a ‘real 20 per cent’ scenario compared to the current policy. The modelling estimates that reducing the target to a

‘real 20 per cent’ will initially result in lower retail electricity prices as the cost of purchasing LGCs and STCs is reduced and wholesale prices remain low due to excess capacity in the market. The modelling forecasts average retail prices to remain fairly constant out to 2040 for all electricity consumers. Industrial customers could expect no change in retail prices, whilst residential and commercial customers could expect an increase in retail price of around one per cent.

Figure 29 Change in average retail electricity prices: ‘Real 20 per cent’ – Reference case, 2015 - 2040

Source: ACIL Allen

Average cumulative household electricity bills would be $24 lower between 2015 and 2020 in NPV terms. By 2020, these initial savings would be outweighed by a subsequent rise in wholesale electricity prices due to less renewable generation in the market compared to the reference case.

The cumulative increase in average household bills from 2015 to 2030 would be $118 in NPV terms.

Modelling by Frontier Economics for the AEMC also suggests that a lower target will result in lower retail electricity prices in the short-term, but this reverses between 2020 and 2025 as a rise in wholesale prices offsets the savings from reducing the target. The Deloitte modelling provides different electricity price outcomes. It projects retail electricity prices to remain lower over the period to 2030 if the target is reduced to a ‘real 20 per cent’ as the increase in wholesale prices is outweighed by the reduction in costs associated with purchasing certificates.

Resource costs

Adjusting the LRET to achieve a ‘real 20 per cent’ share of generation from renewables would reduce the NPV of resource costs associated with large-scale electricity generation by around

$6.5 billion by 2030, compared with the current policy.

Certificate costs

The total cross-subsidy provided to large-scale renewable generation would be around $5 billion over the period 2015 to 2020 and $11 billion over the period 2015 to 2030 (in NPV terms), which is approximately $3.5 billion and $8.5 billion lower than continuing with the current policy, respectively.

CO₂-e emissions

If the target is reduced to a ‘real 20 per cent’, the ACIL Allen modelling estimates that cumulative emissions would be higher by 39 Mt CO₂-e over the period 2015 to 2020, and 190 Mt CO₂-e over the period 2015 to 2030, compared with the current policy.