The Post-CPRS World – Or, What’s going on with Renewable Energy Now?

And now for something completely different.

I am delighted to be hosting my first guest post, by Keith Weeks (a pseudonym), a mechanical engineer with 5 years experience in renewable energy projects and dealing with Government. It arose from a conversation we had where I admitted I was unclear about the many recent changes in government policy around renewables. S/he volunteered to write something up for all our benefit, so here it is:

It seems to me renewables are in the news less of late. Most likely because the brinksmanship from either side has diminished now that the incompetent Rudd Government decided to shelve that dog of a policy until 2013.

Every now and then though, an article trickles in, discussing some arcane attribute of policy or some minor breakthrough on a small project. Here’s a good example from The Age.

It’s worth a read, if for no other reason than to see how badly the media handle technical topics.

For starters, there’s the old furphy that these minutiae of policy wrangling are bringing in the bulldozers and causing solar panel manufacturers to open and close. What is closer to the truth is that any company that has a hope of playing seriously in the renewables sector has all their potential projects mapped out, probably to Design Phase. Further, they know the economic settings that are required to make them work: costs of electricity, value of RECs (renewable energy certificates), subsidies on infrastructure. But coupled with that is the level of certainty that exists in any one of those variables.

At the moment, that certainty is very, very low.

In lieu of a proper Emissions Trading Scheme, the Renewable Energy Targets (there’s been some name changes recently. Most people know it as the Mandatory Renewable Energy Target) is the best policy in place for doing something about stationary electricity generation emissions. As distinct from transport emissions.

The RET sets a benchmark for energy retailers on the proportion of their electricity sold each year. It’s a straight line from about 10% in 2010, to 20% by 2020. This guarantees that 20% of all electricity sold and generated in Australia will come from renewable sources. This effectively means a cross subsidy to industry (by forcing retailers to buy green power) of about $20 billion over the life of the program.

This does not, however, guarantee in any way that our emissions will decrease. As an extreme example, if renewable penetration goes up to 20%, and energy use goes up by 20%, we have zero emissions reduction.

So as a means of supporting industry the RET is probably effective, but in some very specific ways.

Coming back to the certainty aspect, the details of the RET have been fiddled frequently of late. In June last year, the Rudd Government pulled the pin on their $8k subsidy of domestic solar (good idea) and replaced it with an exaggerated REC value for domestic solar instead.

There are good and bad aspects of this. The old $8k subsidy was pretty lazy and coarse. Everyone, everywhere, got the same money to put solar panels on their roof. An installation in Innamincka (the desert) got the same subsidy as someone in southern Tassie. Further, this type of subsidy is regularly shown to be the most expensive way to fund renewables available. There are no economies of scale, and none of the engineering benefits of making bigger parts; big inverters and transformers are more efficient than small ones. But, there are some difficult to quantify benefits of getting panels on roofs; mostly associated with the education aspect, making environmental issues more obvious and the ability to focus home owners’ minds on energy efficiency. Gross Feed In Tarrifs negate a lot of this benefit, but that’s an economics rant for another day.

The new scheme gives residential generators five times as many Renewable Energy Certificates as they are truly entitled to (NB I’ll do a separate post on the mechanics of RECs if anyone wants it). There is a nub of a good idea in here, in that this encourages home owners in good generating areas slightly more than people in bad generating areas. This adds a little efficiency to the Government spending.

However, in this case, it meant the market was flooded with certificates and the value crashed pretty significantly. Lots of people jumped up and down complaining about this and, probably correctly, the Government has intervened, passing new legislation that separates out the domestic generated credits. What this means is that now the actual amount of renewable energy generation in 2020 will be 20%, plus whatever domestic generation comes on line between now and then.

The myth comes from the influence of RECs on whether a project gets the red light or the green light. Because there is uncertainty in the REC value, making an investment decision purely on this basis would be very foolish. It comes back to the certainty argument.

This has a few flow on effects on the renewables market in general. Firstly it means that only projects with very high economic certainty will get a run. At the moment though, the only technology that can claim economic certainty is wind. This is due in part to the massive research and roll-out effort that has been occurring in Europe for about the last 15 years.

The question then becomes, how can Government encourage investment certainty?

By changing the economy.

I haven’t met anyone in the renewables field yet who doesn’t think we need a price on carbon. Pricing carbon (either through a trading scheme or a straight tax on carbon, I’m agnostic as to which is better) provides the certainty to encourage long term investment in renewables.

Make no mistake; it’s a big change to introduce to an economy. But I’ve known for 15 years that the change was coming, so any big company who didn’t build this risk into their future estimates deserves to suffer.

Legislation provides the trickle down certainty that is required for innovation. Certainty encourages investment by big players. Money will flow into universities and research institutions. Investment arms of well resourced engineering companies will swing into action and start crunching numbers, finding the most effective, but poorly demonstrated technologies. More cash will flow in from green venture capitalists, further accelerating the development.

But underpinning it all, is certainty.

Coming back to the article then; the changes to the RET were necessary, but were also fixing something that was broken by Labor. But are the changes going to make any significant difference to the renewable energy sector? Very unlikely, for all the reasons listed above.

Remember this though. If everyone voluntarily bought Greenpower, we wouldn’t even be talking about it.

Tammi here again: just thought this was a perfect opportunity to throw in a shameless plug for my dear husband Stuart’s solar hot water business – he’s focused on the DIY market, and he’s affordable. So if you’re in the market for solar hot water, look no further than Solarvox. 😉