Thursday, November 14, 2013

Terminate the renewable scheme now

The sun is setting on the carbon tax.  At its current rate, $24 per tonne of CO2, the tax increases the wholesale electricity price by 55 per cent and a Treasury endorsed OECD paper estimates Australia needs a tax of $78 per tonne to meet its emission restraint goals.

Other countries are not following Australia's lead in imposing a cripplingly high carbon tax — they are not even taxing emissions at the European Union's $6 per tonne.  The IPCC's recent grudging acknowledgement that its forecasts of soaring global temperatures have failed to materialise over the past 17 years can only reinforce governments' resistance to penalise their economies in this way.

The carbon tax is not the only such burden carried by Australia's producers and consumers.  Other measures including subsidies from general taxation and renewable energy requirements the cost of which have led to reduced industrial and household demand.

With the discontinuation of the carbon tax, alongside the $2 billion a year in subsidies from the "Clean Energy Finance Corporation", these other measures' effects become more prominent.

Labor's budgetary expenditure on emission restraints was about $4 billion a year.  The Coalition's average annual spending, including $800 million on Direct Action, looks to be under $2 billion.  Doubtless this will be further pared.

Renewable Energy requirements for electricity supply have been around since 2001.  Over the years the mandatory share has been expanded and is scheduled to ramp up to constitute a notional 20 per cent of supply by 2020.  Aside from around 15,000 GWh of (commercial) hydro, this has been defined as a 2020 target of 45,000 GWh of subsidy-reliant electricity.  The target comprises 4,000 GWh for small scale, roof-top solar facilities and 41,000 for larger facilities, overwhelmingly comprising wind farms.

Overall, renewable requirements add about 40 per cent to the wholesale electricity cost.

Wind generation costs are at least $100 per GWh, compared with less than $40 for coal, the predominant electricity supply source.  Wind also involves some increased network and back-up costs.

Roof top solar facilities have fallen in price and now receive less favourable regulatory treatment than previously.  Nonetheless, their electricity generating costs and grid connections that are subsidised by commercially supplied electricity makes roof top solar at least five times more expensive than coal.

Progression to the 45,000 GWh annual target would involve a cost and consumer subsidy to renewables rising year-by-year to $5 billion a year by 2020.  By then the renewable program would have imposed a total cost amounting to some $23 billion.  And, because the subsidy extends for the 15 year life of each facility, (solar roof top installations receive this subsidy up-front) the annual cost will continue to increase after 2020 before gradually tapering off and exhausting itself by 2035.

Changes to the program ostensibly follow advice from the Climate Change Authority (CCA).  Appointed by the Rudd Government and chaired by Bernie Fraser, the authority's legislation was intended to lock-in the program, preventing a future Coalition government from dismantling it.  This built-in restraint could be overcome.

Options for modifying the scheme include:

  • The "Origin Energy" proposal, which reduces the renewables total to a genuine 20 per cent by 2020 as initially intended.  This would imply a maximum of 33,000 GWh of subsidised renewables, reducing the 2020 annual cost to $3.7 billion.
  • A variation of this would allow only the existing and committed projects to proceed as subsidised.  This would mean about 15,000 GWh and an annual cost rising to $1.7 billion by 2020.
  • The full costs could be saved if the program were to be totally abandoned, forcing renewables to immediately compete without subsidy, as their adherents always claimed they would eventually be able to do.

Beneficiaries would argue that terminating the renewable subsidies would constitute "sovereign risk" and adversely affect investment generally.  But we are already seeing previously guaranteed income streams from overseas renewable schemes facing early termination.  No investor can reasonably expect a subsidy to prevail for 15 years and there would be few precedents for a government committing its successors to 24 years of worthless expenditure.

The case for an immediate termination is strengthened by the fact that the original rationalisations for the subsidy program have been undermined.  No longer is it seriously maintained that in a few years' time renewables will, with modest initial support, become competitive with conventional supplies.  And it has also become clear that the world will not undertake carbon dioxide abatement measures comparable to those of Australia hence any domestic measures have a trivial effect.

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