Abbott Imperils Renewables in Australia With Policy Review

Aug 28, 2014 9:23 pm ET

(Updates to add background on legislation roadmap beginning in sixth paragraph.)

Aug. 29 (Bloomberg) -- A government-appointed panel gave Australian Prime Minister Tony Abbott two options to cut emissions more cheaply: either scrap or weaken its main clean- energy program.

Accepting either would imperil A$20 billion ($19 billion) of existing projects and shut the door on new investment.

“Essentially, this says Australia is closed for business for renewable energy,” Kobad Bhavnagri, an analyst for Bloomberg New Energy Finance in Sydney, said by phone after the government released the panel’s recommendations yesterday.

The review covered Australia’s mandatory Renewable Energy Target, which requires electricity retailers to buy renewable certificates from wind and solar farms or generate clean power themselves.

It concluded the program’s costs were “not justifiable.” It recommended either winding it down by closing the program to new entrants or modifying it so the share renewables hold as a fuel for making electricity doesn’t exceed 20 percent by 2020.

While Australia’s government has indicated it wants to see the target reduced, it has yet to confirm what parts of the report it will support. Any changes would need to be legislated, and a bloc of Senators whose support would be needed have indicated they oppose changing the target.

Policy Review

The findings of the panel contribute to unease within the renewable energy industry about the commitment of the world’s largest polluter per capita to clean energy. Abbott has also eliminated Australia’s levy on carbon dioxide and sought to dismantle institutions set up to help the country limit the pollutants blamed for climate change.

Abbott’s government was required to review the program this year as part of a bi-annual process. To lead the study, it appointed Dick Warburton, a former Reserve Bank of Australia board member skeptical about the causes of global warming.

At issue was whether the program’s goal of generating 41 terawatt-hours of clean electricity by 2020 is the most cost- effective way of reducing emissions. The government wants to limit power prices to help bolster the economy. Complicating that is Australia’s declining electricity demand, meaning costlier renewable sources may account for a greater proportion of overall generation than originally intended.

Subsidy Cost

“We have a long-term commitment to renewable energy in Australia, but it’s about finding balance,” Environment Minister Greg Hunt told Sky News television yesterday. “What was intended to be a 20 percent renewable energy target, because of the collapse in some areas of manufacturing, is now inadvertently by law heading toward being 26 percent. That could come with some very high penalties.”

The panel’s report said meeting the renewables target in its current form would cost the nation A$22 billion in cross- subsidies. Australia spends about 5.6 percent of total government revenue, or about $20 billion a year, in post-tax subsidies for oil, natural gas and coal, according to a study by the International Monetary Fund.

“This investment comes at the expense of investment elsewhere,” the government review said. “It is not required to meet the demand for electricity.”

While renewables currently add about 4 percent to retail electricity bills, their impact “over time is relatively small” as the cost of fossil fuel power converges with renewables, the report found.

Fossil Fuels

Even before its conclusion, the report contributed to the suspension of plans by Solar Systems Pty Ltd. for a 100-megawatt photovoltaic plant in Victoria state.

“If the goal posts keep moving on business, global investors move on to more stable environments,” said Chris Judd, head of the Australia unit of Senvion SE, the third- biggest supplier of offshore wind turbines. “This will be at the peril of a cleaner economy and environment for Australia.”

Paring back renewables would lock Australia into using carbon-heavy fossil fuels. Australia relies on coal for 69 percent of its electricity generation, making it the fifth most- dependent in the world, according to the World Coal Association.

Scrapping the renewables policy by closing the program to new entrants would destroy the value of renewable-energy certificates, BNEF’s Bhavnagri said in a report this week. Solar and wind farms rely on revenue from selling those certificates to meet costs. Without that, projects could default on debt payments and get stranded, he said.

Visible Payout

The second option to modify the program to limit renewables to 20 percent of the electricity mix would set yearly targets for electricity retailers. That proposal is “untenable” because it would give investors only one year of visibility into demand for certificates. That’s not enough for investors for some projects, which may take four years to build.

“It would be like trying to build an aluminum smelter but only knowing what incremental demand would be for one year out,” Bhavnagri said.

Infigen, Meridian Energy Ltd., AGL Energy Ltd., Acciona SA and Ratchaburi Electricity Generating Holding Pcl are among the biggest renewable energy investors in Australia, according to BNEF. National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd., Eksport Kredit Fonden and Westpac Banking Corp. are among Australia’s largest creditors for renewable energy, New Energy Finance said.

The Australian Mines and Metals Association welcomed the review’s findings, saying it addressed concerns that the program reduced Australia’s competitiveness as an attractive place to invest.

Reaction

“There is a strong argument to scrap the RET altogether,” said the group, whose members include Chevron Corp. and Exxon Mobil Corp. “It is vitally important the RET has minimal impact on the rapid development of our nation’s $200 billion LNG sector.”

Environmental groups weren’t so happy. If the recommendations are adopted, investors will flee the renewables market, and Australia will further erode its credibility in international global warming talks, said Erwin Jackson, deputy chief executive officer of The Climate Institute, an environmental research group.

“They’ll destroy the industry,” Jackson said by phone from Melbourne. “Both options are effectively asking renewable energy investors if they’d like to be kneecapped quickly or slowly.”

--With assistance from Jason Scott in Canberra.