The panel conducting the review of the Renewable Energy Target (RET) for the Federal Government has released its final report.

The report assesses the operation of the RET and its impact on electricity prices and energy markets, as well as its costs and benefits for the renewable energy sector, the manufacturing sector and Australian households and makes a number of recommendations about the sector’s future.

The RET exists to encourage the additional generation of electricity from renewable sources; reduce greenhouse gas emissions in the electricity sector; and ensure that renewable energy sources are ecologically sustainable and has underpinned investment in large and small scale renewable energy generation, particularly in wind, solar PV and hot water systems.

It was required to be reviewed under a two-yearly review process.

The report is the result of months of extensive consultation with the renewable energy sector and Australian industry. The review received over 24,000 submissions and met with more than 200 stakeholders.

Key Findings

• The RET has encouraged significant new renewable electricity generation, which has almost doubled as a result of the scheme. Installations of small-scale systems have exceeded expectations, with output from these systems already exceeding levels anticipated for 2020. To date, the RET has delivered a modest level of emissions reductions.

• With the renewables industry now established in Australia, the main rationale for the RET hinges on its capacity to contribute towards the Government’s emissions reduction target in a cost effective manner. However, the RET is a high cost approach to reducing emissions because it does not directly target emissions and it only focuses on electricity generation. It promotes activity in renewable energy ahead of alternative, lower cost options for reducing emissions that exist elsewhere in the economy. In the presence of lower cost alternatives, the costs imposed by the RET are not justifiable.

• The economic landscape has changed significantly since the current RET was adopted in 2010. In particular, demand for electricity has been declining and forecasts for electricity demand in 2020 are now much lower. Rather than adding generation capacity to meet growth in electricity demand, the RET is contributing to a large surplus of generation capacity.

• The current RET would require a further $22 billion cross-subsidy to the renewables sector in net present value (NPV) terms over the remainder of the scheme (in addition to the $9.4 billion cross-subsidy provided from 2001 to 2013) and encourage more than $15 billion (in NPV terms) of additional investment in renewable generation capacity to 2020. This investment comes at the expense of investment elsewhere in the economy and the additional generation capacity is not required to meet the demand for electricity.

• Analyses suggest that, overall, the RET is exerting some downward pressure on wholesale electricity prices. This is not surprising given that the RET is increasing the supply of electricity when electricity demand has been falling. Artificially low wholesale electricity prices can distort investment decisions in the electricity market and are unlikely to be sustained in the long term. Over time, all other things being equal, wholesale electricity prices could be expected to rise to better reflect the cost of generating electricity.

• The direct costs of the RET currently increase retail electricity bills for households by around four per cent, but modelling suggests that the net impact of the RET over time is relatively small. The impact on emissions-intensive trade-exposed businesses and other industries is significantly greater. The RET does not generate an increase in wealth in the economy, but leads to a transfer of wealth among participants in the electricity market.

• The Expert Panel has recommended options to the Australian Government for both the Large-scale Renewable Energy Target and the Small-scale Renewable Energy Scheme. The Panel considers the Government should emphasise alternative, lower cost approaches to reducing emissions in the Australian economy. In putting forward its recommendations, the Expert Panel has been mindful of the impacts particular options will have on those who have invested in renewables on the basis of the RET as currently legislated.

Main recommendations

The report suggests that the Renewable Energy Target (RET) should be amended in light of the changing circumstances in Australia’s main electricity markets and the availability of lower cost emission abatement alternatives.

Large-scale Renewable Energy Target

For the Large-scale Renewable Energy Target (LRET) two main reform options are suggested:

1. Closing the LRET to new entrants (‘grandfathering’).

2. Setting an annual target to allocate a share of growth in electricity demand to renewables.

Small-scale Renewable Energy Scheme

The report recommends that the Small-scale Renewable Energy Scheme (SRES) should be amended in one of the following two ways:

1. Abolishing the scheme.

2. Bringing forward the last year of operation of the SRES from 2030 to 2020.

The report also details a number of other recommendations including exemptions, solar PV system installations and funding processes.

The Government will consider the findings of the independent panel’s review in the context of the costs and benefits of the scheme, the impact on electricity prices and markets and sovereign risk issues. The Government will announce its response to the report in the coming weeks.

There are currently 416 renewable energy power stations accredited under the large-scale RET and around 2 million household renewable energy systems installed under the small-scale scheme.

The Australian Government states that it is determined to ensure Australia’s energy market is robust and reliable and that Australian households and businesses continue to have access to affordable power. More details are available in the full report.

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