The RET Needs Bipartisanship- Contract Based Alternatives Don’t

Tony Abbott has already killed the Howard government’s RET scheme. No new large scale energy projects directly justified by the RET have been committed to since the start of 2013. In addition, since the Abbott government was elected, the price of large-scale renewable energy certificates had nearly halved to $26.00 per MWh by 11 Aug 14.  To make things worse, the RET is not going to be resurrected by a change of government or action by the Senate.

The RET is dead because what has happened over the last 18 months has been a stark reminder to potential investors of the risks associated with long term investments justified by schemes, like the RET, that depend on strong and durable bipartisan support over a number of election cycles. The key word here is bipartisan. Neither replacing the current government with an RET friendly government or using the Senate to block changes to the RET is not going to bring back the bipartisan support that the RET (or carbon tax, or ETS) needs to justify long term investments.

Bipartisanship is needed because, for schemes like the RET, governments can change policy to the detriment without being required to compensate investors for the effect of the changes.whose investment is damaged as a result of that change.

Another key problem is that, by their nature, schemes like the RET have to be federal schemes.  Other levels of government or independent organizations cannot fill the gap with RET’s of their own.

What sort of schemes are we looking for?

What we are looking for are schemes that allow investors to invest with confidence during one term of government without having to fear what happens after a change of government.  Two types of scheme fit this requirement:

  1. Contract based schemes that use contracts to protect investors from policy changes.  Governments that want to change contracts to the investor’s detriment would be legally required to compensate for losses.  The ACT government’s renewable auction program is an example of a successful contract based scheme.  in this case, the contract is in the form of a price guarantee.
  2. Upfront subsidy based schemes that overcome the risk of a change of government by paying the subsidy at the start of the project.  For example, ongoing investment in rooftop solar is being driven by a mix of upfront subsidies from the SRET scheme that reduce the investment required by the home owner, the feed in tariff contract and a consumer desire to minimize the effects of growing power prices.

Subsidies and contracts can be run by any level of government to drive investment in renewables.

How do contract based schemes work?

Contracts are a basic tool of a whole raft of business’s.  The are supported by a whole raft of laws, precedents and procedures.  Where appropriate they can harness market forces to use competitive tendering to minimize power costs.

The competitive tendering process starts with the preparation and issuing of an “invitation to tender”.  The tender may contain detailed specifications for things like technology, location, preferred suppliers and…..  Potential contractors then submit tenders. The process is finalised by the selection of the successful tender, negotiation of the final contract details and finally the signing of the contract.

Depending on circumstances, the actual contract might be expressed as a guaranteed price for a specified amount of power and/or hours for which the plant is available to produce or…. Final contracts may also include clauses re the responsibilities of various parties, contract duration, penalties for non-compliance etc..

Unlike the RET, contract based schemes:

  1. Do not depend on bipartisan support to provide investor certainty.

  2. Can be run independently by different levels of government, retailers and others even when the federal government is not supportive. The ACT renewable auction scheme is a living example of this.

  3. Allow the market forces operating during the competitive tendering process to help minimize costs and provide the best systems.

  4. Provide long term certainty to investors. This will encourage investors to make competitive and innovative bids.

  5. Allow governments to use the invitations to tender to provide more control over both what happens when and important things such as the technological and geographical mix.

  6. Make it easy for the public to see when commitment to renewable energy investment is falling behind plan. By contrast, it has taken quite some time to realise that RET was no longer driving investment in renewables.

The RET has been killed despite it being one of the few emission trading schemes in the world that was actually working.

If we choose we can spend a lot of time and energy fighting to revive a corpse that is not going to be resurrected.

Alternatively loom for more robust alternatives that do not depend on bipartisan support that is no longer there.

Among other things, it is time to start applauding the ACT renewable energy scheme and encouraging others to look hard at contract and/or upfront subsidy based schemes.

5 thoughts on “The RET Needs Bipartisanship- Contract Based Alternatives Don’t”

  1. The Bazilian reverse auction has yielded some impressive results.

    Following the launch of reverse auctions for power projects, which also includes fossil-fuel based technologies, the cost of wind energy dropped drastically. From $150 per MWh under the feed-in tariff regime, the tariff dropped to $53 per MWh in 2011 auctions. During the auctions in 2009, 2010 and 2011, a total of 6.73 GW of wind energy capacity has been contracted.

    The quantity of the bids is also impressive:

    Project developers have offered to sell electricity from a total of 1,034 projects with a cumulative capacity of almost 26,300 MW. These include 626 wind energy projects with total capacity of about 15,350 MW, 400 solar power projects with total capacity of 10,790 MW, and eight projects of biogas/municipal solid waste-based power with total capacity of about 150 MW.

  2. In the meantime, Austin in Texas has passed laws making solar the default generation source

    Last week, the Austin city council voted in favor of a resolution that would increase the city’s rooftop and utility-scale solar targets by 800 megawatts over the coming years.

    It creates a plan that would build a small paradise for distributed energy companies, including a utility-scale solar target of 600 megawatts by 2017, a rooftop solar target of 200 megawatts by 2020, explicit language enabling third-party solar ownership, a floor price for the value-of-solar tariff, and a mandatory strategy to procure 200 megawatts of fast-response storage.

    The plan builds upon earlier climate goals created and revised since 2010. After Austin Energy signed a power-purchase agreement for 150 megawatts of solar at 5 cents per kilowatt-hour in May, city officials asked if they should require more solar that could provide a hedge against natural gas prices.

    A task force convened by the city council took a look at the potential savings offered by solar PV and decided to sharply increase goals. The resolution was written by councilman Chris Riley and championed by energy experts and environmental groups alike.

    “The 2014 Task Force found that solar energy represents a cost-competitive means of securing clean peak power hedging against the volatility of fuel-dependent thermal resources, and recommended that solar energy generation should be the new default generation resource through 2024.”

    What I like about the contract approach is that it allows states, local councils etc. to get on with things without depending on Abbott’s approval.

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