April 4, 2014

What's Happening in Energy and Resources Law 2014: The Renewable Energy Target

Despite market concerns about its future, the Renewable Energy Target is likely to stay in place in one shape or another for at least the foreseeable future.

The Renewable Energy Target (RET) was introduced as federal legislation in 2000 in the Renewable Energy (Electricity) Act. Its intention was that "electricity retailers and other large electricity buyers will be legally required to source an additional 2% of their electricity from renewable or specified waste-product energy sources by 2010".

It was revised in 2009 to be split into separate incentives for large-scale and small-scale generation, and contain escalating targets for the period 2010-2020. The explanatory memorandum to the 2009 amendment bill says: "The expanded scheme will deliver the Government’s commitment that the equivalent of at least 20 per cent of Australia’s electricity comes from renewable sources by 2020."

How the RET applied in 2013
The structure of the legislation in relation to large-scale generation includes a table of Gigawatt hour (GWh) per annum targets of required renewable generation. However, the actual obligation of acquirers of electric energy (such as retailers) is set as an annual percentage of total electric energy purchases.

The prescribed percentage of renewable energy for a year is intended to be set by regulation (made by the Governor-General on recommendation of the Minister for the Environment). The legislation provides that before the Governor-General makes the regulation prescribing the renewable power percentage for a year, the Minister must consider various factors. However, it also says that a failure by the Minister to take into account those factors does not affect the validity of the regulation.

If a regulation is not made prescribing the renewable power percentage for a year, the renewable power percentage for that year is the percentage for the previous year, adjusted by a factor derived from the table of required renewable generation.

The prescribed renewable power percentage for 2013 was 30.35% (comprised of 10.65% for the large-scale component, and 19.7% for the small-scale component). This was well in excess of the original Government objective of 20% by 2020, and can be principally explained by these factors:

  • the fixed GWh targets of required large-scale generation made assumptions about future energy consumption, and current actual consumption is significantly less than originally assumed;
  • the fixed GWh targets were increased to take account of the crediting of waste coal mine gas as renewable energy; there was an excess of generation of renewable energy certificates in 2012;
  • there has been more small-scale renewable generation than forecast, because of reductions in its cost and because of generous feed-in tariff incentives offered by State Governments; and
  • there were multiplier credits available for small-scale solar installation that meant the number of certificates on issue was greater than the renewable energy actually generated.

2014 RET targets and review of the RET
The renewable power percentage targets for 2014 was prescribed by regulation on 14 March 2014.
The target for 2014 is 20.35% (comprised of 9.87% for the large-scale component, and 10.48% for the small-scale component). As predicted, this is a significant reduction from the 2013 percentage which can be mostly attributed to the excess in renewable production from previous years. Retailers must either acquit the relevant certificates or pay a shortfall charge for liable electric power acquisitions in accordance with this new target.

In February 2014, the Prime Minister also announced a review into the RET, to be headed by Mr Dick Warburton. Pending this review, the Renewable Energy Certificate market may see some changes ahead. We have already seen a dramatic drop in the spot price of Renewable Energy Certificates (such as those from wind farms) in the last few months. The chart below is of large-scale generation certificate weekly closing prices on the Mercari market over the past several years.   

These figures suggest concerns that the target will be wound back or dropped altogether. However, while the Government does not have control of the Senate, it is unlikely to be able to change the RET legislation. It is possible, however, that the report recommends a different methodology for calculating the renewable target percentage in future years. The results of this report are not expected for another six months or so.

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