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Monday, 21 June 2010
Page: 3740

Senator BOSWELL (1:17 PM) —The Renewable Energy (Electricity) Amendment Bill 2010 is a bad bill to fix a bad law based on a bad policy. This second remake of the RET inside a year will go the same way as the first. If, God forbid, the government wins the next election we will be back here quickly for a third try. The centrepiece of this government’s first go at legislating its 20 per cent RET was the bid to increase the opportunities for large-scale wind projects. That effort was limited to an increase from $40 to $65 in the penalty to be paid by liable entities in default of meeting their annual REC target. The penalty is actually in excess of $90 because the $65 is not tax deductible. It was assumed the penalty would ensure that wind farms, which needed a REC price of around $50 or more, would be able to get finance and make a return. It did not work and it was never going to work.

The built-in mutual exclusive was pre-existing generous subsidies for small-scale renewable energy programs. By early last year it was obvious that the creation of RECs from small-scale projects was a runaway bus. Even a cursory look at the subsidy explains why. For the installation of rooftop solar power systems you would get an upfront Commonwealth cash subsidy of $8,000, or around 80 per cent of the cost. From the middle of last year that morphed into an upfront payment of RECs worth about $6,200, which you could sell or exchange to the power generators or the installers. You could then sell the power you generated to state power retailers—and that really increased it again—at two to three times the price of grid power. In the ACT you can put power into the grid at 60c a kilowatt hour and buy it back at 19c. Someone is paying that subsidy—the people who do not have power generators on top of their roofs.

For a rooftop solar hot water system you can get $1,600 upfront plus RECs. RECs from these sources flooded the market and collapsed the price. The price did not get near the $70 that the government said it would; in fact, it went to about $27. The government should have seen that coming. Hundreds of millions of dollars were deliberately thrown into rooftops even though it was inevitable that this was going to undermine wind power and the price of wind power.

The $8,000 cash rebate that the former coalition government instituted in its last budget in 2007 was a program worth $150 million over five years. This government deliberately allowed that to blow out to $700 million before it was stopped. But it was replaced by Commonwealth and state subsidies that were even more generous. The big-end-of-town wind generators were effectively double crossed so that Labor could keep throwing money around where it thought it would have most effect politically. It became part of the stimulus package.

Here we are debating a fix for a problem that we did not have, did not have to have and should not have had—and the fix is flawed as the government’s first attempt. The government’s second attempt to carve room for the big end of renewables splits the target. The so-called liable entities, the big wholesale buyers of electricity charged with the primary responsibility of meeting the target, will have to source 41,000 gigawatt hours of power from large-scale renewable projects by 2020. There is a nominal target of 4,000 gigawatt hours of renewables to come from rooftop systems or small RETs. But it is not a 4,000-gigawatt target; it is an open-ended target. I have not seen any amendments coming through but I hope the coalition does put a cap on this.

The liable entities will not only have to buy 41,000 gigawatt hours from big projects; as a public service they will have to buy every REC created by small-scale systems, however many there are going to be. The government says it has modelling suggesting its policy of an uncapped SRES system will result in the 20 per cent target actually reaching 22 per cent by 2020. I made an agreement that we would go to 20 per cent and already we are talking about 22 per cent. It is impossible to believe it. The numbers might as well have been plucked out of the air. The last time this government modelled its RET it predicted the REC price starting at around $70, but it topped $50 only briefly before collapsing. The government cannot model for six months, let alone for a decade. The entire RET program did not last six months. Part of it lasted weeks. The law this legislation will replace was proclaimed last September. In February, barely six months later, with parts of it in effect only from January, it had to be remade because the outcome was a disaster, an own goal—and I think Senator Milne would agree with me.

There are several seeds for further disasters in this remake. First, liable entities are now trapped in a seller’s market. If they do not buy their designated share of RECs they will pay a penalty in excess of $90 for a megawatt hour they are short. The price they are charged will therefore inevitably get as close to the penalty level as sellers dare. The aluminium industry, in its submission to the government’s discussion paper on the revamped policy, predicted that prices will rise as much under the new version of the RET as they would have under the CPRS if the CPRS also existed. Such is the power of a seller’s market.

That increase might not happen for some time because there will be, according to the government, in excess of 16 million RECs from small-scale generations in the pool. Some industry commentators estimate there will be up to 20 million. At least one industry estimate suggests it will take two or three years before they wash out of the system and the price is able to rise much above the current dollar level of around the high 30s. That is still way too low to attract investment in wind, so anyone who goes into it before the REC price starts to rise will be gambling that the ‘straw in the wind’ policy settings of the government have somehow finally solidified. I wish those investors good luck.

If the government is successful then the price of power will ramp up far more than it should, because of the seller’s market. That points to the other great unknown in the second remake of the RET in a year: the price impact. The government is at pains to suggest it is minimal, about two per cent from these bills and about four per cent from the RET overall. Others suggest the impact will be far greater. There are suggestions from a variety of sources that power prices in Australia will double or even triple over a decade. Large aspects of this prospect relate to the serial neglect by state governments of their transmission systems. There will also need to be a massive investment in new baseload and peaking power to meet growing consumption. Doubts about the future of a carbon price are so deep that nobody is prepared to punt billions on the construction of coal-fired generators that could turn into white elephants. That leaves gas. Either we will see a big increase in gas-fired baseload and peaking plant in Australia over the next few years or we will see the lights go out.

These factors make it difficult to determine what element of the massive increases in power prices we confront are RET related. Even if only 20 per cent attributed to it—and that is an estimate given to me by one industry player who believes we may see a doubling of prices over the next decade—then that amounts to many hundreds of dollars a year, not Minister Wong’s estimate of a few dollars a year, on household power bills.

There are several factors behind suggestions that the price impact of the RET will be far more substantial than the minister suggests. One is the need to deal with the intermittency of wind. It is accepted that wind has the capacity to work around 30 per cent of the time. That means for 70 per cent of the time it is useless and it means you have to have massive conventional backup to maintain supply. That can come from coal-fired power stations running at full steam and sending the heat up the cooling tower until the wind drops or increases, as the case may be. It can come from open cycle or combined cycle gas generation. Experience from around the world suggests that more than two-thirds of the nameplate capacity of wind farms has to be backed up. It is possible that the amount of gas-fired generation coming on line will be able to handle backing up wind for several years, until its volume really starts to ramp up. But the closer we get to 2020 and many wind farms, the tighter it will get.

The international literature suggests that as you get near to 20 per cent renewables the job of balancing the grid becomes huge. You not only have a need for major backup capacity; you have a much more complex grid. At some of the many far-flung wind farms at any given time there will not be any wind. At some there will be too much and at some too little. If you are lucky, at some it will be just right. If you are very skilful in juggling that massively complex grid you will be able to keep the lights on, but do not fall for any suggestion that you will be saving a lot of greenhouse gases in the process. You will not. The need for the reserve to deal with the fluctuations in wind can negate any saving. This legislation also consolidates other problems with the original RET, and Senator Fisher has enunciated some of them.

The Senate Economics Legislation Committee that examined these bills was told of major concerns in the photovoltaic area. Concerns were expressed about safety and rorting. Other concerns were built around the same sorts of problems that generated not only the home insulation fiasco but also the BER debacle. If you make vast amounts of money available to many thousands of small projects, all going ahead simultaneously, you are begging for accountability problems. Sections of the industry fear a flood of cheap imported products that will not meet performance or safety standards. The Senate was told that hundreds of new installation firms cropped up in the space of just a few weeks last year. Problems relating to poor product and poor installation might already be out there and might have been out there for some time.

The Department of the Environment, Water, Heritage and the Arts said there had been no fires associated with faulty installations. Within days there was confirmation that there had been at least two fires in Melbourne. The department said that there was no evidence that installers were giving away product. A number of witnesses promptly provided evidence to me to the contrary. It appears that the scale and pace of a program has, again, overpowered the ability of the Public Service to manage and monitor it. Even the solar hot water system program hints at chaos. When the government shut down the Home Insulation Program overnight in February, it also shut down the Solar Hot Water Rebate Program. There was no explanation, but the explanation is apparent.

The installation of solar hot water heaters was the primary cause of the collapse in the REC price last year. That was the principal catalyst for these bills. The government had to slow down the flow of RECs from that source, so it shut down the program, cut the rebate and did not allow applications for the new rebate to be presented for months. And the delaying tactic worked. In July last year solar hot water systems created one million RECs. In April they created just 300,000. The plan was to reduce the number of RECs from hot-water systems before the boom dropped on their validity at the end of this year. The fewer there are, the faster they will wash through the pool and the quicker the seller’s market will be able to dominate the LRET. The deeper you dig, the more this program looks like the Home Insulation Program and the BER.

In desperation to spray cash around, the government has thrown accountability and good governance, not to mention the wind industry, to the wolves again. The RET is just another Rudd government policy, financial and administrative, disaster. Initially, it was marked by fundamental policy errors, followed by serial, ad hoc, sneaky changes to try to maintain the charade. Nothing in this legislation addresses the core problem and, as I said at the beginning, if Labor wins the looming election we will be back here for another go at it.