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ECONOMICS LEGISLATION COMMITTEE
06/08/2009
Renewable Energy (Electricity) Amendment Bill 2009

ACTING CHAIR —We are hearing from the renewable energy producers and we have a roundtable. We have Senator Milne and Senator Xenophon appearing by teleconference. We welcome you to these hearings. Would you like to make brief opening statements?

Mr Richards —Thank you for allowing us to present to the committee today. We have a number of renewable energy producers here and suppliers to that industry. Obviously, the 20 per cent renewable energy target is critical to everyone on this side of the desk. Pacific Hydro have been an active participant in the Australian energy market for over 15 years investing in renewable energy, most recently in wind power, but we are also looking at large-scale solar thermal and wave power and also geothermal power.

In the last five years we have invested over $1.7 billion in Latin America, building hydro and wind farms there. With the implementation of the renewable energy target, we would like to make a similar kind of investment in Australia. That is absolutely crucial to us. I think it is also absolutely crucial to the transition of the stationary energy sector at a time when the prices under the CPRS are not robust enough to deliver that transformational change. I am sure there are other people on this side of the room who would like to make a comment in relation to that.

ACTING CHAIR —Yes. Please proceed in whatever order you have decided amongst yourselves.

Mr Nelson —AGL Energy are slightly different from most of the people who are appearing before you today in that we are principally an energy retailer but we also have interests in coal, gas and renewables. We are a strong supporter of the RET legislation. We have already commenced putting in place systems and processes for complying with both the RET and the CPRS. We believe that it is important for us to begin to put those systems and processes in place because an expanded renewable energy target was a policy commitment of both parties prior to the last election. There are already significant costs being imposed upon the community because of the delay in implementing the RET, principally to do with investment certainty. Companies like AGL that are looking to build new plant are unable to look to which plant to build because of the lack of certainty. Thank you.

Mr Troman —Unlike the organisations of my two colleagues who just spoke, IT Power are neither a retailer nor a supplier of equipment. We are a consulting firm. We have a number of clients around Australia, like the fellow from Pacific Hydro said, that are willing to make investment but they are looking for surety and consistency. Expanded renewable energy target legislation is fairly critical to them to achieve that.

Ms Gaffney —I will make a couple of opening remarks. BP Solar fully supports the adoption of the renewable energy target legislation. We believe it is a necessary step, a necessary transitional mechanism, ahead of the adoption of a gross national feed-in tariff. We believe the passage of the renewable energy target legislation is urgently required to enable the large-scale investment in renewable energies to occur and, in tandem, to fill the policy vacuum that exists for the solar PV industry following the demise of the two primary deployment programs for solar PV, the Solar Homes and Communities Plan and our RPGP program in June 2009. Since the termination of both those programs, sales in both the grid and the off-grid market have dramatically reduced and many of our customers have indicated that they will be forced to lay off workers if the renewable energy target legislation is not introduced before October. If this occurs, investment triggered in the last 18 months to meet the significant upsurge in demand will be placed at significant risk.

BP Solar has recommended five amendments in its submission to the committee. These recommendations are key to ensuring the solar PV industry in both the grid and the off-grid market can continue to grow and ultimately play a role in delivering a secure energy future for Australia.

Mr Thornton —Hydro Tasmania is the largest generator of renewable energy in Australia. We own and operate 29 power stations, worth $4.8 billion, throughout Tasmania. We are also a significant developer of new renewable energy projects, both through our existing hydro power and also the wind developer Roaring 40s, which is a joint venture company between Hydro Tasmania and China Light and Power. There is currently a massive amount of pent-up investment in the renewable energy industry which continues to await the safe passage of the RET legislation. While Australia’s renewable energy projects are on hold, countries like China and the United States and those in Europe are charging ahead with clear incentives and long-term policy certainty for their renewable energy sectors.

Significant Hydro Tasmania development opportunities were stimulated by the original MRET. This included accelerated maintenance, refurbishment and modernisation of our hydro assets, as well as the development of Woolnorth and Cathedral Rocks wind farms, totalling 206 megawatts, through Roaring 40s. But there is much more work to do because the future development program is quite precarious. I will just outline briefly what this means for us. Our development pipeline is entirely on hold, awaiting legislative certainty from the renewable energy target. This includes both further modernisation, upgrades and enhancements to existing hydro power stations. It also includes new wind projects through Roaring 40s, which includes a current potential construction pipeline of 1,000 to 1,500 megawatts, potentially worth over $1.5 billion.

Our specific comments with respect to the expanded renewable energy target legislation are these. Firstly, the RET is a proven and effective market measure. It has demonstrated beyond doubt its effectiveness as a policy instrument to encourage the deployment of proven and least cost renewable energy generation. This includes the upgrade and refurbishment of existing renewable energy assets. Fundamentally, the expanded RET design is right. The design elements outlined in the draft legislation are broadly consistent with the existing MRET design, consistent with the 2003 Tambling review and consistent with 18 months of consultation and COAG agreement reached in early 2009. Two simple changes should be considered before it is legislated. Firstly, any delay in legislating the CPRS should result in the immediate decoupling of the RET to unlock immediate and pent-up investment in renewable energy. Secondly, the creation of phantom RECs as a result of the proposed solar PV multiplier should correspond with an increased target in the following year to ensure that the integrity of the target is ultimately retained. Any further changes to the RET design, such as banding, would only further undermine the veracity of the RET and compound the current challenges facing project developers in securing project finance.

RET is a key part of a comprehensive renewable energy policy framework, in itself driving the deployment of proven and least cost renewable energy technologies. Alongside a range of other complementary policies—such as R&D grants and technology demonstration programs—RET can support the ongoing development and deployment of a range of renewable energy options that are at various stages in the technology development cycle. For this reason, we believe RET should be legislated immediately. RET only requires a simple legislative amendment and can be introduced quickly and easily to ensure a seamless transition from the original measure. Any further changes to the RET legislation will simply undermine investment certainty and the very objective of the RET. Any further delay in RET legislation will correspond to a delay in jobs, a delay in investment and ultimately a delay in climate change action. Thank you.

Mr McAlpine —Vestas is the world’s largest manufacturer of wind turbines. That is our business. We design, manufacture, supply, install and maintain wind turbines in more than 60 countries across the world. In Australia, Melbourne is the home of our Pacific regional headquarters and we employ 200 people across the rest of the country. We have projects in just about all states around Australia and we have a pipeline of development—which we would like to be part of in Australia—that is just ready to go now. As Mr Thornton from Hydro Tasmania set out, we are also big supporters of the RET legislation that sits before the House of Representatives. There are some changes that we would like to see but the main one, as we outlined in the submission, is that it be changed from a bill to an act as soon as possible.

It is hard to overstate the amount of development in Australia that could result from the RET legislation. The pipeline of projects in not just wind but all renewable energy technologies is almost unlimited. For the last two years, almost since the election took place—with this as a key election promise of the government—companies like Vestas have been working away to meet the demand that will result from this target being legislated. Without further ado—and I am happy to take questions—I just underline the comments made by my colleagues earlier and urge the committee to recommend that this bill be passed as soon as possible.

Mr Upson —Infigen Energy are the largest owner of wind farms in Australia and have our headquarters in Sydney. We have over 230 wind turbines operating or under construction in Australia, representing 500 million watts (megawatts) of generation capacity. The actual generation from these wind farms is enough to power over 300,000 Australian homes. Our submission focused on the economic impact of the RET legislation on the electricity market. We highlighted three independent expert studies of the impact of the RET scheme, which forecast a significant reduction in wholesale electricity prices as a result of the RET scheme in excess of the impost that would be borne by the retailers. These three studies forecast that the net result of the RET scheme would actually be downward pressure on electricity prices.

The most interesting part of these three studies is that they were not commissioned by the industry. They were in fact commissioned or written by organisations that do not support the renewable energy target legislation. These studies cannot be considered as cash for comment; they are independent studies by organisations that do not actually favour the scheme.

Our company’s view is that the renewable energy target is an environmentally friendly, economic stimulus package that does not cost the Treasury or the taxpayers one cent. In addition, on the basis of these three studies, independent expert studies that were not sympathetic to the industry say the most likely economic impact will be downward pressure on electricity prices. I would be happy to clarify and expand on this with your questions. Thank you.

Dr Watt —I would like to start by saying that we definitely need a renewable energy target, regardless of whether the CPRS legislation is passed because the renewable energy target is the only way we know for certain that clean green electricity will be provided in Australia. There is no evidence from emissions trading schemes implemented elsewhere that there have been any real appreciable reductions in emissions and there have been windfall profits to the polluters. In Australia, the renewable energy industry currently employs about 10½ thousand people directly. If the target is brought into place with the extension as planned, we expect to have 25,000 to 30,000 jobs by 2020, and even more after that. We feel that the target should be looked at long term. We think we need to go to 30 per cent and 40 per cent and so on with time and that we should not see the 20 per cent target as a ceiling. In the long term, we need to have sustainable energy in Australia and most of that will be renewables.

In terms of the legislation as proposed, we support the solar credit proposal, although we think the 1.5 kilowatt limit is way too low for realistic systems. We think three kilowatts for small systems is a more appropriate size. We think there should be lower credits for systems in the three- to 100-kilowatt size range and then slightly lower multipliers again for the 100 to one-megawatt size range. We think phantom RECs are created by the multiplier and solar credits should be returned every year so that the target is not diluted. We think that heat pumps should not be included under this target, and that consideration should be given to removing solar water heaters as well. They are currently taking up around 30 per cent of RECs.

We think there should be a 15-year time limit on any power plant that generates RECs because that opens the scheme up to new generation, which is the purpose of the target in the first place and 15 years is typically more than enough for power stations to have paid off their investments. We think that the proposal of compensation for trade-exposed industries should be considered very carefully because we see that most of our trading partners have equivalent or higher renewable energy targets in any case, so our industries should not be disadvantaged against our trading partners. We note for instance that large aluminium producing countries such as the US, China and Canada have targets equivalent or higher than Australia. China and the US are looking at 15 per cent. Canada is already much higher with its hydro resource. Russia, the other main producer, is 4½ per cent and possibly will go higher.

ACTING CHAIR —A few of you have mentioned decoupling. Where do each of you stand on the issue of decoupling the RECs from the CPRS?

Mr Troman —I believe that they are two different pieces of legislation. My concern and my expertise allows me to comment only on the RET, and I believe it is imperative that it is passed and moved with a few amendments as soon as possible. I do not think it should be reliant on another piece of legislation which may take much longer to get passed.

Mr Nelson —AGL Energy would echo those comments. We see them as separate pieces of legislation. Admittedly, the issues are very similar for both schemes in the sense that, as a supplier of energy to major commercial and industrial users, we do believe that transitionary assistance is necessary. But we do not see the need for the two pieces of legislation to be coupled in that way, although the issues are similar.

Ms Gaffney —BP Solar maintains support for both the renewable energy target legislation and the CPRS legislation, but we would like to see both legislations delinked. We would hate to see the renewable energy target legislation held up based on the CPRS legislation timetable.

Mr Thornton —Hydro Tasmania also support the implementation of an emissions trading scheme but believe that any delay in legislating that scheme should result in immediate decoupling to allow for immediate legislation of the RET.

Mr Richards —Pacific Hydro strongly support delinking. We would like to see both pieces of legislation passed; but, clearly, if that is not possible then you need to delink it. We understand that the Clean Energy Council has already put forward the appropriate legislative amendments for consideration that would achieve that goal, and we would encourage you to implement that.

Mr McAlpine —Like our colleagues, Vestas Wind Systems also support both bills—the CPRS and the RET. But I do make the point that the RET bill which the committee is currently considering is actually an amendment to an existing act—an act that was passed in 2001 in a scheme that has been in place since then. So I do not think there is any direct relation between the CPRS legislation and the RET. To the point that there has been provision inserted in there linking the two, I think for the sake of getting the RET passed as soon as possible that that link be removed.

Mr Upson —Infigen Energy also support the delinking of the schemes in order to get the RET legislation passed as soon as possible.

Dr Watt —IT Power also think there is no need to link the two. We have a proven renewable energy target mechanism that has worked very well in Australia; it is one of the best in the world. There is really no need to do much to it to extend it. We should have done that very soon after the election because it was a key election promise. The CPRS is another thing altogether. It is a new and untried approach to carbon reduction. It has not necessarily worked very well internationally, and we are yet to see how it will work in Australia. We do not need to be waiting around for that in terms of getting more renewable energy into the Australian electricity system.

Senator CAMERON —I have a few issues. Dr Watt, I understood the roundtable was for renewable energy producers. You are not a producer, are you? You are a consultant?

Dr Watt —Yes, we are a renewable energy consultant company.

Senator CAMERON —Do you consult for the Gas Industry Alliance? Have you done any work for any of their members?

Dr Watt —No.

Senator CAMERON —I am interested in the issue of heat pumps and why it has suddenly popped out in this situation. Rheem have a submission in place. They argue that heat pumps are recognised as a renewable in Europe. They argue that 65 per cent of the energy produced is from renewables, and they have put in the technical details on that. We had a huge debate about this the other day. The Gas Industry Alliance actually used the bulk of their time hammering heat pumps. I do not want to go into that again because I have other important issues to raise. Why is there this issue about heat pumps?

Dr Watt —This is not necessarily my area of expertise. The AGL people may have more to say about it. What we are seeing happening now—

Senator CAMERON —Please, no!

Dr Watt —is that heat pumps are displacing gas, and so we are seeing an increased uptake of electricity when we should be seeing a decrease in electricity use. If it is a renewable energy target and gas is being replaced by solar, that is one thing; but, if the gas is being replaced by more electricity use, that is a perverse outcome.

Senator CAMERON —But gas is not a renewable.

Dr Watt —Yes. But it is a lower greenhouse option to electricity, and so to replace gas with electricity is a perverse outcome.

Senator CAMERON —Maybe I can move on.

Senator XENOPHON —Chair, can I ask a supplementary, further to what Senator Cameron has just asked—

ACTING CHAIR —Yes, sure.

Senator XENOPHON —if Senator Cameron does not mind?

Senator CAMERON —Yes, go for it.

Senator XENOPHON —Dr Watt, you said that you were critical of the RET including not only heat pumps but also solar hot water heaters. Did I misunderstand you on that? If I did not, why lump solar hot water heaters into the same category as heat pumps?

Dr Watt —I said that it was less of an issue with solar water heaters than with heat pumps. Also, solar water heaters are not an electricity source. They are a heating source and so they are in only as a special consideration. There are now so many other support mechanisms for solar water heaters, including the compulsory turnover of storage electric heaters and significant grants at Commonwealth, state and local government level. So the solar water heater industry does not necessarily need to be supported through this legislation, and we could get more renewable electricity into our networks if they were removed. I am more concerned with the heat pumps, which are increasing electricity use, than with the solar water heaters.

Senator XENOPHON —Finally, by way of a supplementary, can you take on notice and get back to the committee on where—to put it bluntly—you get the best bang for your buck in terms of either abatement or relying on the grid with coal power with respect to solar hot water heaters compared to other renewables? Could you provide some details on that, given your role as a consultant?

Dr Watt —Yes, we could.

Senator XENOPHON —Thank you. Thank you, Senator Cameron.

Mr Nelson —Within the gas industry and I guess the industry more broadly, the issue around heat pumps and solar hot water is really about the level of assistance that they are receiving through capital grants and those types of things. There is a situation where to some extent the industry is experiencing growth beyond what I think people expected previously, and that has had an impact on the front end of the REC curve. It is very hard to distinguish the uncertainty with the RET versus the heat pump issue what the actual impact is. But, with the proposed phase-out of electric hot water in areas where reticulated gas is available from 2010, I think there is some concern in industry that what would ordinarily be happening is receiving additional assistance.

Senator XENOPHON —Thank you.

ACTING CHAIR —Senators and everyone generally, I think it is probably better to let one person continue their line of questioning, because we will come to each of you in turn during this roundtable.

Senator CAMERON —I propose to put a number of propositions to you, so you might want to jot them down, if you can. This is from a submission to this inquiry by the Institute of Public Affairs. I usually go to the Institute of Public Affairs if I am looking for some light relief and some comic approaches! Let us deal with them. Others think they are more important than they are. The IPA says in relation to renewable electricity that it imposes a direct cost on the economy of $1.8 billion annually; it increases consumers’ costs and reduces competitiveness; and it causes far more jobs to be lost than subsidised jobs created. It then goes on to say:

By contrast, the mandatory renewable requirements impose a hidden tax on the consumer, the revenues from which are given to the suppliers of intrinsically uncompetitive renewable energy sources

I suppose they are talking about what you guys are doing. It then cites an analysis of Spain, which says that for every subsidised job created, 2.2 jobs are lost.

It then describes people with interests in wind farms and other high-cost renewables as ‘bootleggers’ and says:

… wind farms and other renewable technologies can make no credible claims of being nurseries for infant industries that will mature into productive activities.

The IPA go on to say that these types of technologies fail to make use of the power of markets to discover the lowest cost way of meeting a goal and ‘Support for an infant industry is often the refuge of the politico-economic scoundrel.’ I do not think that is a very good description of the industries that you represent. I would be interested in any comments. That is on the public record. We even had senators waving about this analysis that has come out of Spain about the disaster there. Basically, this report from the IPA says that the introduction of renewable energy is the reason the Spanish economy is in a crisis. Take it from there.

Mr Richards —Is there anything else they have blamed us for? Cancer?

Senator CAMERON —I think it is a serious issue that you have to deal with in terms of the submissions that are before us.

Mr McAlpine —I tend to hold IPA submissions in the same regard as you do. You may have missed the bit where they went on to compare the RET policy in Australia with the downfall of the Ottoman Empire.

Senator CAMERON —I did not want to go there; I thought that was just a step too far!

Mr McAlpine —I think that puts the rest of it in context. That sort of language—that sort of shabby analysis—really does not help anyone take this debate forward.

Mr Richards —I will not be able to handle all of those, but I will have a crack at the ones I could write down. The Spanish report in particular has since been discredited through the Spanish government and other Spanish—

Senator CAMERON —You can rip it up now, Acting Chair!

ACTING CHAIR —It is simply providing you with a broader base of information, Senator Cameron.

Mr McAlpine —Perhaps we can provide that critique to this committee to provide some perspective.

Senator CAMERON —That would be helpful if you could do that. It would have to be done fairly quickly.

Mr Richards —Of course. Certainly there is a cost on consumers because of the renewable energy target. Remember, though, that, while renewable energy is more expensive, the increased cost is only applied to a very small part of the total energy mix. In the first year of the scheme, the increased costs will be applied to just one per cent of electricity generated in the marketplace, going up to 10 per cent by 2020. Perhaps our colleagues from AGL, who deal with the front line of customer costs, could delve into that a bit deeper than I later on. The Clean Energy Council has done a jobs report looking specifically at what the renewable energy target and other policies would do within the stationary energy industry. The net result of that was that there would be 28,000 more jobs. That is taking into consideration some of the job losses in other sectors as a result of this, particularly because if you build a wind farm you do not need to build, for example, a new coal fired power station. So there was a net gain of 28,000 jobs over the next decade.

Senator CAMERON —You say that considers job losses in other areas, but those will not necessarily happen. If you do not build a new power station, it is jobs not created, not jobs lost.

Mr Richards —It is the avoided jobs; that is right. I think that is a similar approach to what others have taken. Clearly, job growth in those industries, be they minerals or whatever, will continue to grow; it just may not be as strong as they first thought based on a business case that they had thought of 10 years ago. Overall, jobs will certainly grow. The thing about the way the renewable energy target has been set is that it actually deals with growth in demand of energy. You would probably see a lot of coal fired power stations, if it were just the RET alone, continue to operate. We avoid building new ones, which I think is something that we need to do. Progressively, as the CPRS comes in, you will start to see some of the coal fired power stations potentially turn off as we move to natural gas and other things which will naturally supplement increasing renewable energy.

Mr Nelson —To talk a little bit more about renewables versus alternatives to renewables, one of the things that is missed in the current energy debate is where costs of underlying fuels like coal and gas are going to go. We are already seeing coal contracts for existing power stations being renegotiated at significantly higher prices than they have been in the past. The one key advantage of renewables over, say, coal or gas is that, once the asset is built, the fuel cost is zero. There is sun, there is wind: the fuel cost to the operator is zero. So it is a certain cost in the sense that when you build it you know what energy you are likely to get out of it and you know that the fuel cost is effectively zero. It is very different for proponents of new gas and coal fired generators, where for those fuel costs they are increasingly going to be looking towards international export market parity. So it is just worth keeping in the back of the mind that with renewables you are getting certainty of fuel costs.

Mr Thornton —Just to pick up on the comments criticising the renewable energy target specifically as being anticompetitive and not based on market principles, the very merits of the RET are in fact that it is market driven. It places a liability on electricity retailers and allows them to then find the least cost way to meet that liability. When the MRET was first introduced there was a lot of analysis and forecasts about which technologies were least cost at that point in time and which may be over the coming years. In reality, that has turned out to be quite different because the market forces have changed, the dynamics and costs of various technologies have changed. But all the while it allows the market to determine which technology is least cost, and it is that technology that is ultimately deployed.

Dr Watt —I have a few pointers. The number of jobs in Europe now as a result of some of the stimulation of the renewable energy industry is higher than the fossil fuel jobs. That is where we need to be in Australia as well.

The incubator support for technology like photovoltaics has seen the costs drop by, on average, eight per cent a year over the last 30 years, to the point where that technology is now cost effective in diesel grids almost everywhere and in main grids in large chunks of the world and is expected to be cost-effective in Australia within a decade. So it is not as if incubating these technologies does not result in the endgame that you want to achieve.

In Spain, they were faced with significant cost increases by their heavy reliance on imported fuels for their power supply. Their renewable energy industry has allowed them to be much more self-supportive and to create a whole new set of jobs for their industries.

In terms of support for renewables, I note that industries such as coal continue to get significant taxpayer support in this country. Even the last budget in New South Wales had $20 million to subsidise coal transport from the mines because, even after 100 years, they cannot support themselves. So talking about supporting new industries in the short term compared to continuing support for fossil fuels is actually the issue.

Senator CAMERON —Thank you for that. Senator Joyce yesterday made the comment in the context of one of the debates that was going on that we do not have the capacity to run the manufacturing industry on wind power. I was not aware that we were going to rely on wind power to be our baseload situation. I do not think anybody is arguing that wind power will run the manufacturing industry, but that is one of his glib comments designed for the front page of the Australian, I suppose. How do you deal with this argument of baseload and how do we get a proper mix between our existing coal fired industry and the emerging renewables? What is your view on that?

Mr Richards —It is a good question, and it is raised in front of our industry quite often. I think the renewable energy target is a necessary part of that transition. One of the beauties of a renewable energy target such as what we are contemplating is that it will throw up a whole lot of new technologies, new ideas and new ways of doing things with old technologies such as wind farms, which would then allow that to become more prevalent as a baseload or to have a greater impact on the marketplace. If you were painting a picture of what the future market could look like, it may be 10 or 15 per cent wind power, there should be more geothermal and a combination of a large-scale solar thermal, gas and existing coal, potentially with carbon capture and storage attached to it. They would all be part of a mix.

Australia has probably one of the most robust national electricity markets that we have seen and it is very capable of managing variability in supply simply because it manages variability in demand from consumers on a daily basis. It is a matter of the people who have been running the market getting a better understanding of the new supply-side dynamic that is coming into place and for us as generators and operators to be cognisant of what is going on in the marketplace ourselves and also adjusting our technologies. There are some exciting things happening in Europe and the United States around gas-wind hybrid plants, for example, which allow a wind farm and a gas plant to operate harmoniously in a market environment. So one of the beauties of a renewable energy target like this is that it will throw up some very welcome but maybe unintended consequences which are beneficial to the nation.

Mr Troman —I would like to add to the answers on that question. Ten years ago, it was considered by people who were anti-renewables that you could not have more than a few per cent in isolated diesel grids. We have blown that out of the water by a long shot. We are achieving 70 per cent penetration of renewables. All it took was a change in thinking. My belief is that a change in thinking with the main grid will see similar results. The problem is not so much whether it is wind; it is more to do with an intermittent supply rather than a continuous supply. With a little bit of lateral thinking, modelling is already indicating that we will easily hit 50 per cent of intermittent resources built into the grid to help that problem. The manufacturing sector does not care where the electricity comes from; it cares that it is reliable.

Senator CAMERON —You do not have to go there. That is Senator Joyce. That is his little grab for the media. It is not serious really.

Mr Troman —Certainly, with a little bit of rethinking about how we actually run our grids, there are no problems at all with having high levels of penetration of wind or whatever else into it.

Mr Thornton —I might just talk about the benefits of an increasingly diverse and distributed portfolio of technologies, complemented by the hydro energy that is currently in Australia—and that is obviously highly reactive and can complement other technologies, as can gas and the other existing technologies. So I think a portfolio of technologies goes a long way to ensuring a secure energy supply in Australia.

Mr McAlpine —I want to add to that by saying that we should not pretend that this is some sort of dangerous experiment that Australia is preparing to embark upon. In the last calendar year, 2008, there was more renewable energy capacity added worldwide than there was thermal energy capacity for the first time. This is a global trend. This is not something that Australia is testing out while the rest of the world sits back and waits. This is big business overseas and it is about time Australia got a slice of that investment.

Senator MILNE —The first question I would like to ask is in relation to this issue that keeps bobbing up. Senator Boswell was going into it at length yesterday, providing spreadsheets and so on about the fact that the renewable energy target will increase costs and therefore this exemption to other industries was justified. I have heard from you, Mr Upson, that three of the reports that came out show that there will be downward pressure on the pool price to the extent that the impost will not make that difference and therefore there is no justification for the exemption for EITE and we should get rid of it altogether. I am interested in your comment on that.

Mr Upson —It is an important thing. The media tends to focus on the long-range marginal costs of building electricity-generating plants. Today, the cost of renewable energy and wind energy is roughly twice that of a coal fired power station assuming you do not have to pay the external cost including carbon pollution. But that is not how the electricity market works. The electricity price changes every five minutes in the wholesale market. Generators tend to bid to their short-run marginal costs, their incremental costs of generating the next kilowatt hour of electricity.

This is the real advantage of renewable energies: the short-run marginal costs are near zero because basically you are just paying for the maintenance of the wind turbine, for example, and the fuel is free. So when you build this new renewable energy-generating plant—and the renewable energy target will facilitate building a lot of electricity-generating facilities—the result is that you have these low-cost, incremental-cost generators bidding very low into the market. Every market is a supply and demand market and if you add to the supply and you keep the demand the same between the two cases, the inevitable outcome is that you are going to reduce the cost.

In the case of the wholesale electricity market where you have peak price events, these renewable generators will shave the peak off these peak events and that is why it even magnifies the reduction in pool pricing. At least that is what these three studies have shown—three of the four studies that we are aware of. I think that is important. Yes, there is an impost on the retailers. Those are the figures that are quoted all the time: this is the impost and this is the cost to the industry—and that is true. That is one facet of the renewable energy target. However, there is a whole other side of the coin which is what the impact on the wholesale pool price is going to be, and three out of four of these studies say that the net result is going to be a downward pressure on wholesale prices which could very well be in excess of the impost on the retailers.

Senator MILNE —One of those reports has not been made public, has it?

Mr Upson —One of them was commissioned by the National Generators Forum and I do not believe that one is public.

Senator MILNE —Chair, would you be able to ask the National Generators Forum for that report? I would be really interested in seeing what it had to say—to see if it confirmed what the others have been saying about this downward pressure on the pool price.

ACTING CHAIR —Yes, we can do that.

Senator MILNE —My next questions are about a gross feed-in tariff and banding. As you would all be aware, the Greens have legislation for a gross feed-in tariff and the Senate inquiry we had into that was overwhelmingly of the view that you could have a renewable energy target which was designed for the technologies which are now rolled out or existing technologies that are currently relatively price competitive. It could work with a RET, but a gross feed-in tariff is the way to bring on technologies like solar thermal, geothermal, wave et cetera. I would like your comment on that vis-a-vis banding, because it seems to me the only real advocate of banding has been the Australian Geothermal Energy Association. I have not heard support for it from anyone else, so I am just interested in people’s views as to whether the gross feed-in tariff is still the preferred option to bring on the technologies which would not benefit immediately from the RET.

Mr Nelson —AGL is one of the few companies that has projects right across the spectrum of renewables and gas-fired generation. One of the things which we like about the RET is that it is market based and the lowest cost technologies get up. It does not mean that we are not looking at other technologies. In fact, we are looking at a geothermal site very close to our Torrens Island power station that already exists in South Australia. We see that the RET drives R&D towards demonstration with a view that if you can reduce your costs over time then you will be able to compete, so we would not support banding. We would support the amalgamation of state based feed-in tariffs into a national feed-in tariff though.

Mr Richards —Particularly when you are talking about future technology that is yet to be proven, putting banding into the RET would be like holding out a section of the national electricity market for carbon capture and storage and having it quarantined. It is almost impossible to manage. Like AGL, Pacific Hydro has interests in a whole range of other renewable energy technologies, including conventional geothermal, of which there is over 10,000 megawatts installed around the world. In our view, that technology does not need a band; it needs a power line built to it, which is another discussion.

We are against banding. If you have specific issues you need to tackle for specific technologies then certainly do it in the way in which you are describing, Senator Milne. It is something that the current federal government is doing with Solar Flagships and the like. The previous government also did it with other special programs for the specific technologies they wanted to bring through. That is the right way to go about it.

Ms Gaffney —Senator, to answer your first question, with regards to carve outs, we cannot support technology carve outs as proposed by some organisations for emerging technologies. Our view is that the commercialisation path for those technologies, geothermal, solar thermal et cetera should be advanced through appropriate and targeted policy mechanisms so that in time they can operate under a renewable energy target framework or indeed a CPRS in the longer term.

With regards to gross feed in tariffs, BP Solar certainly has been advocating and lobbying hard for the adoption of a gross feed in tariff across all of Australia’s jurisdictions with the inclusion of the commercial and industrial sectors. We are currently in a policy vacuum in the solar PV industry and the only level of support that we have at this time is the state based net feed in tariffs. The state based net feed in tariffs, as we have long advocated, provide an insufficient financial signal to deliver solar PV into the marketplace. The fact that solar PV systems are not being rolled out today clearly demonstrates that point. Gross feed in tariffs have now been adopted in more than 45 countries and over 18 states and provinces around the world. Indeed eight states in the US are considering feed in tariffs. Feed in tariffs have been proven as the cheapest and the fastest way of deploying solar PV into the marketplace and we would certainly want to see a gross national feed in tariff in place before the solar credit scheme winds up by the year 2015.

Dr Watt —The carve outs have been used internationally in a number of schemes, for instance in the UK, and they have not really worked very well. So in theory you would think that they might be useful but the evidence is that they do not work nearly as well as feed in tariffs have done which is why the transition internationally towards feed in tariffs. Secondly, in Australia we have had no support for the intermediate scale of renewable energy systems. We have had support at the residential side and we have support through MRET for large systems connecting into the transmission network, but we have not had support for the intermediate commercial size of system which is where you get the economies of volume for renewables that has been so important internationally. Looking at the commercial market alone, it produces something like 22 per cent of Australia’s electricity now and that is expected to be 32 per cent in the next 10 or so years. That market is not catered for by the RET or by any of other bits and pieces of legislation that we have seen and yet you can see it is such a critically important area. For that sector a feed in tariff would be very useful.

Senator MILNE —Thank you very much.

Senator XENOPHON —One of the criticisms made by the Australian Geothermal Energy Association yesterday was that unlike wind energy, which is intermittent, geothermal power had the potential to provide baseload electricity so that it could eventually displace coal fired generation. The criticism of that association was that by taking a short-term, low-cost approach Australia would be incurring a long-term, high-cost penalty. Could I get some comments from the panel in relation to that and should you try to distinguish in the construction or the design of the RET between that renewable energy that can provide baseload power as distinct from wind which has an important role but is not a baseload source?

Mr Nelson —As the retailer in the room I think it is probably best for me to explain that the way we look at contracting energy is to look to physical generation but we will also look to swap contracts and cap contracts for peak demand. When it comes to the renewable technologies our portfolio is diverse enough to allow us to include a range of technologies. We do see that geothermal longer term does provide a firmer source for things like swap contracts but, that said, wind is the cheapest technology available today that we see for major commercial scale deployment. We think that the existing capital grant programs like the REDP and the Solar Flagships program are the best way of bringing forward technologies at that stage.

Senator XENOPHON —Are we putting enough into that so you can bring forward solar and geothermal for large-scale baseload power?

Mr Nelson —I would say that the capital programs that the Commonwealth has are fair. There are several billion dollars for clean coal, for Solar Flagships and for renewable energy. We would say that geothermal will develop longer term through investments made by companies like AGL and Torrens Energy, but at the moment we think that the lowest cost solution for deploying renewables is to let the RET pick those lowest cost technologies.

Senator XENOPHON —Yesterday, the Australian Industry Greenhouse Network were critical and said that gas was being sidelined. I know it is not a renewable but it is much cleaner than coal. What do you say about that? Do you think that gas has been sidelined? Do you have a particular view on the role of gas? Do you think that we should be putting a greater emphasis on gas as a transitional fuel while we get extra capacity from renewables?

Mr Nelson —To give you an example, we have several thousand megawatts of both renewable and gas fired generation under development. Do we see gas being crowded out? We see gas energy being crowded out relative to no RET being in place. Do we see gas capacity? No, because gas provides a great way for dealing with those peak demand periods.

Senator XENOPHON —Thank you.

Senator BOSWELL —Listening to the debate, it seems to me that on supply and demand you cannot mount any argument against that. There will be increased amounts of electricity going into the pool and that will lower the cost. But it seems a little unfair that by subsidising renewable energy to the tune of the RET value at the time, you are going to get a decided advantage to take on the gas companies and coal generated electricity and gas generated electricity. You are going to attack them by the virtual subsidy that is given to you. Would anyone like to comment on that? Am I on the wrong track? I might ask Tim that because he has a bit of everything.

Mr Nelson —Yes, we are unique in that way. I think the role of renewables will change over time to the point I think Andrew made before. The one thing that has not been spoken about today is the impact of renewables on volatility in the market. We are likely to see the market become more volatile due to the intermittent nature of renewables as they exist today. That will mitigate to some extent the price impacts that were spoken about before in terms of a depressing impact on wholesale prices. AGL believe it is very important that we are upfront about the fact that costs will rise. There may be some impacts in a depressing way on the wholesale price, but without a doubt electricity prices are going up. If we want to contrast the impact of RET with, say, the CPRS, the impact on the final consumer’s bill will be about half by 2020 relative to a $20 carbon price. You are looking at something in the order of around $10 a megawatt hour for RET and something like $20—

Senator BOSWELL —Can you give me that as a percentage price increase?

Mr Nelson —Currently a residential customer would be paying something in the order of $150 a megawatt hour, which is a very rough average across the states. So you are looking at $10 on top of $150, so 15 per cent—no, sorry, less than that.

Mr Richards —Not forgetting too that energy is only half of the customer’s final bill. Half the bill is currently about paying for the transmission and distribution network. So it is a $10 increase on half the bill—

Mr Nelson —On  $150—sorry my maths was right out before.

Senator BOSWELL —It is about 7 ½ per cent, is it?

Mr Nelson —Yes.

Senator BOSWELL —Tim, it just seems unfair that you are attacking a gas-fired power station—or, for that matter, a coal-fired power station—and you are going to reduce their profits by putting in wind power, a photovoltaic cell or whatever, but you are doing that by virtue of you getting a fairly hefty subsidy. Would you agree with that?

Mr Nelson —Not necessarily, because of that volatility. AGL would take a different view from that mentioned before around prices going down significantly in the wholesale market. We think that at times when the wind is blowing very strongly and you have quite a lot of renewables being dispatched there will be a downward pressure on prices, but at times when the wind does not blow and you have to bring gas-fired capacity into the market, particularly at times when there is quite a rapid change in that mix, you are going to see increased volatility. So we do not see the impact on underlying prices as going too far down or too—

Senator BOSWELL —So you would disagree with Senator Milne, who says we are going to get a great price reduction by having these renewables powering into the market.

Mr Nelson —I think it is fair to say that there will not be a significant downward impact on wholesale prices due to the RET, yes.

Mr Upson —Just to clarify, Senator Boswell, I think it is very important that you keep in mind that the renewable energy target scheme is going to be just one impact on electricity prices. There will be a lot of other impacts on electricity prices. Certainly the CPRS scheme is going to have a major impact on electricity prices, as will the increase in demand over the next few years, the weather patterns and, as Tim was saying, the peak demands on the system. I am not saying—and these studies, by the way, are not saying—that electricity prices are going to go down if you pass the RET scheme; what the industry studies are saying is that the net impact of the RET scheme is going to have downward pressure. The CPRS is going to take it up, and maybe increased demand is going to take it up. So these studies are not saying that prices are going to go down; they are saying there is going to be downward pressure. They are forecasting that the net impact of the RET scheme could likely be downward pressure on the wholesale pool price.

Senator BOSWELL —Just to give me some idea, take a food-processing factory that is using a fair amount of power. How much will the RET prices go up for food processing? How much will the RET push the prices up above the CPRS?

Mr Thornton —Senator, I am not in a position to answer your full question, but I would refer you to the modelling that was commissioned by the Department of Climate Change.

Senator BOSWELL —Yes, I have looked at that modelling and I am across it. But Mr Nelson said that price to a household will go up by about 7½ per cent because of RET. Is that—

Mr Nelson —In isolation—so if you stripped out all of the other impacts on the energy market at the moment. It is very difficult to say where longer term prices are going to go. If you look through what is driving underlying electricity prices up, for instance, at the moment it is mainly network capital expenditure. The impacts of CPRS and RET are actually very minor relative to the impacts of current capital network expenditure upgrade. In the context of the uncertainty around gas prices in the longer term due to the proposals for LNG export off Gladstone and the fact that some coal contracts for existing power stations are being renegotiated, we would see that the impact of CPRS and RET in the medium term is relatively modest compared to some of those underlying factors.

Senator BOSWELL —Using the government figures, I think it is about 34 per cent by 2015 or something like that. But I am interested in something else. You have given us the price to householders—that 7½ per cent we worked out. Would that be a similar price to factories or food processors?

Mr Nelson —It depends what their demand shape is—whether or not it is fairly constant or variable. Also, it is highly likely that, if they are a significant user of energy, they are going to be paying a lower overall price, so rather than paying $150 they might be paying $100, just as a hypothetical example. So the actual dollar impact is the same, but the proportion is higher because of the lower base that it is coming from.

Mr Richards —One thing I think we need to make really well understood is that, within the renewable energy market, because it is an open market and highly competitive—we will walk out of this room and start competing against each other once it is legislated—as the underlying energy price goes up for a variety of reasons, we cannot just overlay the penalty price for RET on top of that and get a big margin. I wish we could as investors but the reality of the market will mean that, as the base energy price comes up, the RET component comes down. We are set at the market ceiling—what the market will bear; what the market will pay—for our product. So Hydro Tasmania will be competing with me for a lower cost and we will be competing with AGL for the lowest cost renewable energy to be put into the marketplace. So the RET price gets squeezed at the top as energy prices come up underneath it.

Senator BOSWELL —But you will produce a certificate and—

Mr Richards —Yes, we will get a premium on top.

Senator BOSWELL —Do you write it out or does the government?

Mr Richards —It is the renewable energy regulator who regulates the market.

Senator BOSWELL —And he will give you a certificate?

Mr Richards —Yes.

Senator BOSWELL —And what will that certificate be worth? I think it is worth 52 bucks now.

Mr Richards —It is $37 at the moment. It will be worth anywhere between zero and $65.

Senator BOSWELL —But it cannot go above $65?

Mr Richards —Tax effective, I think it can go above $65. The history of the renewable energy market has not seen the price go above about $52. It is currently about $37.

Senator BOSWELL —So that $52 becomes a subsidy for your industry?

Mr Richards —It is a premium, yes.

Senator BOSWELL —A premium subsidy.

Ms Gaffney —In the case of solar PV, we would actually contend that mechanisms such as gross feed-in tariffs actually correct a market failure. So if the market actually worked today, we would contend that solar PV would be economic. That is to do with the fact that solar PV is a peak energy technology. It produces most energy in the middle of the afternoon when in fact the wholesale prices and the trades done in the national electricity market are also at their highest. Today’s solar PV investor actually gets rewarded with a flat, averaged retail tariff. So the price signal that they get back for investing in solar PV systems is actually mooted. In fact, the marketplace itself is not working perfectly. So in the solar PV instance it is all about correcting a market failure; it is not necessarily a subsidy as such.

Senator BOSWELL —Your power hits its peak at four o’clock or something like that?

Ms Gaffney —Yes, at three.

Senator BOSWELL —And you are not getting the return on that power as at four o’clock?

Ms Gaffney —That is right.

Senator BOSWELL —What is your return based on—a day, a week or a month?

Ms Gaffney —It depends on the retailer and the contractual arrangements that you as an investor have with that retailer. But, typically, today, in most markets of Australia you are actually getting a flat, averaged retail tariff, which does not reflect the trades that are done in the national electricity market which are significantly higher. In fact, the peak price is somewhere in the order of billions of dollars higher over the course of an entire year right across the marketplace.

Senator BOSWELL —And a feed-in tariff would correct that?

Ms Gaffney —Absolutely. It corrects that failure and it also corrects the failure of the fact that we avoid transmission losses, because you actually have the mini-power system sited right where the energy is actually needed. So in industrial estates, you are actually providing power right when it is needed, in the middle of the afternoon typically in those locations. There are network augmentation benefits by actually providing additional power and augmenting the network. And the industry development component of course is extremely important, and we have seen this kick-started in the last two years through the very generous Solar Homes and Communities Plan rebate program.

Mr Thornton —I guess the same principle applies to larger-scale least-cost renewable technologies. To date, the market failure that has impeded the electricity market is such that the competing technologies—fossil fuel generation—do not currently pay for the pollution associated with that generation. At some point in the future, when a price of carbon is introduced and an emissions trading scheme internalises that price on carbon, in our view, there will no longer be the necessity for a renewable energy target because it will be more competitive and effective to invest in renewable energy with zero emissions than fossil fuel generation, taking into account the cost of that carbon.

Senator BOSWELL —Thank you.

Mr Troman —Senator, if I am following your line of questioning, it seems to be moving towards asking what is the justification for a subsidy or a premium for the RE industry and then the non-RE industry misses out. I do not know of any thermal power station that did not get subsidies to be built.

Senator BOSWELL —That was not my question. My question was that it seems to be unfair that you guys can go in on a market and get the benefit of going into that market, because you do not pay for the cost of energy. You are getting into that market because you are getting the benefit of a renewable energy certificate, which is worth about 50 bucks. It seems that people are subsidising renewable energy to undermine the gas-fired generators.

Senator CAMERON —If you do not believe in global warming, you cannot get to the basis of this. That is the problem.

Senator BOSWELL —Senator Cameron has just joined the Greens.

Mr Nelson —Where AGL come from in this debate is that we need investment certainty. We have got as much in the way of gas-fired generation as renewable generation ready to go. Without the certainty of this legislation, we cannot build either. Longer term, that really does compromise the security of energy supply. As a retailer, our primary goal is to make sure that our customers have a reliable and globally competitively priced energy supply.

Mr Richards —Some people may see it as unfair. So be it. I guess that is just the price that is to be paid to ensure we can commence the transition of the stationary energy sector. We do need to change the way we do things. We do need to clean up coal. We do need to get more gas and more renewable energy. It is not going to be for free, but it is that transition period that you need to pay for, in the way that you have paid for every other transition period that has been required through history.

Mr McAlpine —Senator, the word you keep using is ‘unfair’. A lot of us would see it as unfair for thermal power stations to be able to compete in the market without having to pay for the cost of their pollution. Carbon pollution is real and it is proven. It is about time that Australia adopted a carbon price that reflects the cost of that pollution.

Senator BOSWELL —The Parliament of Australia will make that decision in time. That decision will be made by the representatives of the people. Whether they follow your line or not will be—

Senator CAMERON —Where is Malcolm on it today? Is he okay today?

ACTING CHAIR —You will have to wait and see.

Senator BOSWELL —He is not my leader.

ACTING CHAIR —I have a general question. One of the issues that has been raised with me is the treatment of waste coalmine gas. You are renewable energy people. Under these proposals there is no incentive for coalmines to use their waste gas for renewable energy rather than simply flaring or burning it off and creating more greenhouse gas. Would you be in favour of regarding waste coalmine gas as a renewable?

Mr Richards —Our primary approach to that at the moment is that that would require a technology review before the legislation is put in place, which we fear would only slow down the legislative process. So we are not in favour of it. We understand that COAG has announced a technology review at a later time. We would encourage it. That would be the time to review that type of technology. Also, looking at coalmine methane, if it were just about building new stuff then so be it, but I understand that some of the people who are agitating for this change want all of their existing assets, some of which were built before the original MRET was in place, to be included in the scheme. That would be a single-purpose change to legislation that everybody else would have to comply with, which I think would open up a can of worms for every other participant in the marketplace.

Senator BOSWELL —I do not think these people were ever covered by the MRET. They were covered by a New South Wales form of—

Mr Richards —The NGAC scheme.

Senator BOSWELL —Yes.

Mr Richards —Some of these projects were built before the NGAC scheme was even in place.

Dr Watt —Senator Eggleston, I would be very much against adding any fossil fuel power into a renewable energy target. I think the fossil fuel industry gets a huge amount of support in Australia. I would also point out to Senator Boswell that the fossil fuel industry in Australia gets far more subsidies than the renewable energy industry gets, in a whole lot of direct and indirect ways. The coal and central generating capacity that is installed in Australia to date has been hugely cross-subsidised by taxpayers in the past and that is why it is so difficult for new renewable generators to compete with that established industry. The signals from carbon prices will start to impact on coalmine methane and make it a viable option, and I think it is being used already in an increasing way. But if there is a need for support that should be looked at separately from the renewable energy target, because it is not a renewable energy source.

Mr McAlpine —Senator Eggleston, I do not think even the proponents of that technology or the owners of those facilities would claim that it is renewable. This is the renewable energy target. It is not the clean energy target. It is not the cleaner energy target. If it is not renewable it should not be in as an eligible technology.

ACTING CHAIR —Okay. There is the proposal from COAG to have a technology review. Suppose that came out in favour—where would you stand then? I understand where you would stand, Mr McAlpine, but what about others: would you accept methane?

Mr McAlpine —A hypothetical question.

ACTING CHAIR —It is hypothetical, but it is an interesting question.

Mr Thornton —Fundamentally, we would have a concern with any dilution of the renewable energy target as it stands at present, be that further dilution of the target itself or additional technologies becoming eligible. Fundamentally, wherever that occurs it further undermines the investment certainty that we need to deliver the projects that Australia needs.

Mr Upson —As has been pointed out, the waste coalmine methane is covered by the New South Wales greenhouse gas scheme. I think it is a fair argument to say that it is more appropriately dealt with in the CPRS than in the renewable energy target scheme.

ACTING CHAIR —Okay. Thank you very much. Senator Boswell, we are going to have to wrap up soon because we have reached our concluding time.

Senator BOSWELL —Can I ask for an opinion on the recycling done by people putting out their bins every week. They are being excluded from the CPRS. What is your view on that recycling of cardboard et cetera? Do you think that should be included in the RET?

Mr Nelson —AGL does have landfill gas assets. We supported the inclusion of landfill as a covered sector. There are some real issues there, albeit much smaller in magnitude than the ones we are talking about today with regard to the RET, that we would like to talk further about in relation to how those assets transition out of the GGAS into the CPRS. But, yes, broadly we think it is a sector which should be covered under the CPRS.

Mr Richards —We do not have a view, Senator—but it looks like the technology review is going to be a lot of fun!

Senator BOSWELL —I do not know when that will be.

Mr McAlpine —Senator, the point I would make is that you could make a case for all kinds of new technologies but, as you do that, that takes time and delays this bill even further—and as you delay the bill you just reduce the business case for all of the other investments that could take place under the bill. This bill goes to the House of Representatives for debate and vote next week and, hopefully, will come up to the Senate fairly soon. Hopefully, it will be passed in the Senate as soon as possible so that we can get on with creating the jobs, building the projects and providing the clean renewable energy that Australia needs.

Senator MILNE —I am afraid I have to go. Could I put a question on notice for the renewable energy roundtable?

ACTING CHAIR —Yes, of course, and then we will have to conclude.

Senator MILNE —Okay. I want to know the likely impact of the RET on remote renewables? We have had a blow to that with the end of the existing program. I wonder if there are any particular comments the roundtable would like to make in relation to that?

Mr Troman —I am happy to take that one on with the help of my colleagues, if we are in agreement.

Senator MILNE —Thank you.

ACTING CHAIR —We have a reporting date of the 12th, so you will have to get the answers back to the secretariat very quickly—by tomorrow night or Monday at the latest. Thank you very much for appearing.

[2.37 pm]