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

ACTING CHAIR —We will resume. Would you like to make an opening statement, Dr MacGill?

Dr MacGill —Yes, I would. Many thanks for the opportunity to appear before you today. I am one of the Joint Directors of the University of New South Wales Centre for Energy and Environmental Markets, an interdisciplinary research centre which, as its name suggests, works on questions of energy and environmental market design and the policy frameworks within which those markets reside. We work in collaboration. We bring together researchers not only from engineering—which is my background—and power systems but also from the Australian School of Business, the faculty of law, the faculty of science and the faculty of arts and social sciences.

The first thing I would like to say is that the government is to be congratulated on its commitment to bringing in a significantly expanded renewable energy target. These types of deployment policies have a really important role to play in transitioning our energy systems. They are a critical step in getting ideas out of the research lab and good ideas from the research lab from being demonstrated into commercial markets, which is a very important role to play. They are, of course, a choice and no doubt a part of the discussion you have been hearing over the last two days has been the question of whether they are an appropriate choice or whether there are other better choices for policy.

I will focus on emissions trading in the context of the Carbon Pollution Reduction Scheme. There is a body of theory around emissions trading that says it is the first best policy and anything else is taking a backwards step. Perhaps there are a few market failures somewhere that need to be addressed. But what you tend to find in practice is that energy markets, which are a critical sector targeted by these policies, seem to exhibit every form of market failure possible.

Renewable policies and renewable deployment policies can correct market failures, particularly in terms of investment and building up industry capacity for, let us say, future emissions reductions. But the other thing they do is provide policy insurance, because if we look at emissions trading, it is probably still best described as an experimental policy approach. We have a few examples around the world and, to date, none of them have worked particularly well. If you do want to see progress on sustainable energy, we have a set of policies which have significant demonstrated success in renewable deployment policies. The idea of giving those up on the basis of what is still an experimental policy approach is a very high-risk strategy. What if emissions trading does not work or does not work as we expect it will? So they have got a very important insurance role. They do have their limitations as well. They are just part of what a comprehensive and coherent policy framework has to look like.

No doubt you have had people coming before you and talking about solar hot water, PV multipliers, the role of this target for emerging technologies which are still in the development phase and so on. Part of what we are really seeing there is the absence of a coherent and comprehensive policy framework for renewables, so in some ways the expanded renewable energy target looks like the only game in town; of course people want to be part of it. What it does mean is that it is being asked by some parties to do things that it is not a very appropriate design for. We will come back to solar hot water in that regard.

One thing to flag is that the Australian mandatory renewable energy target was the first national scheme of this tradeable certificate type in the world and, I think, in many ways has performed admirably with a modest target but with fairly low costs of achieving it compared to some of the mechanisms out there. However, if you go to Europe the experience with tradeable green certificates or quota systems is pretty mixed. The European discussion on renewable energy policy says that these schemes do not work very well, that they exhibit poor effectiveness in that targets may not be achieved, and that they are inefficient—they cost far more than other approaches. The Australian experience is an exception to that but, given that we are now talking about a much more significant target and, I think it is fair to say, a more stressed electricity industry to deliver this target, we do not want to underestimate the risks involved in this approach.

I want to pick up on the governance challenge. At one level these schemes appear to be quite simple to implement, because you just establish a target and set up a market. Then the market participants go do the hard work of deciding what gets built where, which was the question that Senator Joyce brought up before. Governments do not have to make those decisions. What we tend to find in practice is that these are nothing like natural markets at all. They do not naturally emerge. They are designer markets. You are no doubt now exploring those issues. Poor design choices mean poor outcomes, so we do have to get them right. What we have seen with governance in the mandatory renewable energy target here in Australia is, again, a mixed story. It is still unclear why solar hot water was included. A similar set of issues arose with pre-1997 hydro generation.

It was not that problems that emerged there—windfall profits and all the complexities of trying to put solar hot water into a renewable electricity scheme—were not seen. If you go back to the original working papers in 1998 and the example of old hydro, they saw the problems. What happened, though, was that the governance process was not able to resolve them. Poor design choices made it into the scheme. They did not mean the scheme did not work at all—it still did—but they did impact on its effectiveness.

Since the original, we had the Tambling review a couple of years after the mandatory renewable energy target began. We then had the design process for the Victorian scheme. One of the unfortunate things we see now with the proposed legislation as it stands is that in many ways governance appears to be going backwards. We have not solved very obvious problems that emerged with the scheme before it was even implemented back in 2001. And we appear to be introducing some new problems, whether it be opening up the eligibility for solar hot water or the proposal to allow large, electricity-intensive industries not to contribute to paying for the scheme. I will come back to that point. That is particularly problematic.

One point is with regard to the proposed target. It is a significant target—I do not think there is any doubt about that—but there are good reasons that you could argue for a larger target. One of those is that if you look around the world the emissions intensity—the tonnes of CO2 per megawatt hour for electricity in Australia is almost double the emissions intensity of the electricity industries of developed countries and still significantly more than electricity industries averaged over the world. So in some ways, if you accept the view that climate change is a problem and is now causing damage and imposing costs around the world, what we are really seeing is an implicit subsidy from the rest of the world to Australian electricity consumers, because our low-cost electricity is based on one of the highest-emitting electricity industries in the world. There is a subsidy there. The way to see the expanded renewable energy target is not as an imposition; it is a partial removal of a subsidy that should be removed.

In terms of treatment of solar hot water heaters, it is unclear what they are doing there. It is a renewable electricity target. That is the stated intention of the scheme’s 20 per cent target. They have added a huge amount of complexity, they do not generate renewable electricity and they raise all of these other questions, whether they be the issue of heat pumps—which you have no doubt had discussions about—or, more generally, the question of policy support for other things like other solar-thermal technologies and so on. This is not to say that solar hot water is a poor technology; in some contexts it is an excellent technology. It is just not the right technology to sit within an expanded renewable energy target on the basis of electricity.

Another issue, I think, is unrestricted eligibility of pre-1997 projects that were included or built under the mandatory renewable energy target. They will continue to earn RECs until 2030. As we saw in the Victorian scheme design, that is problematic. It reduces the effectiveness of the scheme and creates the potential for windfall profits. We have ways of addressing that such as the use of sunset clauses so that projects can only earn renewable energy certificates for a period of years. That will also help us address issues of promising but still emerging renewable technologies such as hot rock, which might be coming into play later than some of the early technologies. With the deeming arrangements and the multiplier for small solar PV installations, I think the first point to make is that this multiplier is no substitute for a well-thought-out, coherent and comprehensive policy framework. It is a sort of jimmy fix and it is not going to do as well as a more coherent and thought-through policy approach. That also applies for other distributed technologies.

Finally, on the proposal to exclude favoured large electricity consumers from contributing to the costs of the expanded renewable energy target, the first thing to note—as was noted in the Tambling review of the mandatory renewable energy target, where this was also on the table—is that any such exclusion would also undermine the scheme’s basic principle that mandatory renewable energy target liabilities accrue to electricity users in proportion to the quantity of their usage. More generally, it comes back to the other point that low energy and electricity costs here in Australia are coming from an electricity industry with far higher emissions per megawatt hour than almost all other electricity industries in the world. On that basis, it currently represents a subsidy from the rest of the world to those producers here, and that needs to be addressed. I think I took a little more than five minutes, but thank you very much.

ACTING CHAIR —You talk about ETSs around the world not working particularly well. Do you want to say more about that, perhaps regarding the European Union? I cannot think of too many others. There is the New Zealand one.

Senator BOSWELL —There are only two, aren’t there? There is the EU one and—

ACTING CHAIR —New Zealand.

Senator BOSWELL —No, New Zealand is not it.

ACTING CHAIR —Yes, New Zealand has a small ETS.

Dr MacGill —It is following a rocky road to implementation in New Zealand. There is also the New South Wales GGAS scheme and the RGGI scheme—the regional greenhouse gas inititative—in the north-eastern United States as well.

ACTING CHAIR —Some local state schemes.

Dr MacGill —Yes. But you are right, the EU is the big scheme. The experience so far has been very mixed. Certainly the first three years were a debacle, it is generally accepted. They set the targets too high. Significant amounts of money changed hands from energy consumers to, in large part, large polluters and it is very unclear how significant emissions reductions were. They are working to fix up that scheme, but it does highlight the fact that these schemes do not inherently work well; we have to make them work well.

As to the reason why things went wrong in Europe, and I would say also some of the other schemes we have seen, one possibility is just that we are learning about how to do it. We will get better at that and we will fix them up as we go. But another possibility is that these schemes, by their inherent nature, are basically impossible to govern well; that the governance processes that we have are basically unable to deliver effective, efficient and equitable schemes; that the processes are inevitably too easy for large stakeholders to distort. Now, that is an open question.

We obviously have hopes that Australia can lead the way in implementing an effective scheme. Again, it comes back to the point: why would you give up a set of policies that have proven success? If you go to Europe, the very successful policy for transforming the electricity industry there towards lower emissions has been renewable energy targets, not the EU emissions trading scheme.

ACTING CHAIR —Okay. The EU system is a fairly small one though, isn’t it? It is not as comprehensive as is proposed for Australia?

Dr MacGill —It certainly covers a lot more emissions in aggregate. In terms of sectors it covers a more limited number of sectors. My recollection is that it covers between 40 and 50 per cent of EU emissions. The CPRS here is looking to have a much higher coverage.

ACTING CHAIR —Yes, indeed. You talked about the expanded MRET being the only game in town, but you said the government appears to be going backwards. For the record, why do you say this?

Dr MacGill —Just to clarify, it is obviously not the only game in town; there is demonstration funding and other approaches out there. But in terms of market deployment, I imagine that part of what we are seeing with the number of technologies that wish to get into the expanded renewable energy target—whether it is waste coal methane or solar hot water or others—may well be because they do not see a coherent and comprehensive set of policies that is there for their particular technology. These are a range of very workwhile technologies. The question is not: are they worth supporting or not? The question is: how might you best support them? But if you do not see those other policies there, obviously you look to get into the game that is going.

In terms of the governance, one of the challenges we always face with these schemes is that you are trying to transfer risk in decision making to market participants, saying: ‘Here is the market. Now you go off and make decisions. If you choose a poor technology or you don’t implement your project well, you wear the risk.’ What happens, of course, when you transfer risk over to market participants is that they quite naturally are focused on investor certainty, on what sort of certainty can be established, and one thing that seems to emerge is that you are not allowed to change the rules of the system. The problem there is that if you make some early mistakes it can be quite hard to fix them up because you have established this market, people are making decisions in this market and now you are proposing to change the rules. The problem is we are making mistakes.

Senator BOSWELL —Just to cut to the chase, what are you suggesting—that we have a stronger RET and no CPRS? Is that your suggestion? That is the cut-through line: you do not want a CPRS and you think you can get there by renewable energy. Am I correct?

Dr MacGill —No. I think that an economy-wide or fairly economy-wide carbon price is a key part of an effective and efficient set of policies for climate and energy. But it does need to be done well. If we do emissions trading poorly, not only will it not take us forward in the way that we would like, it can actually work against the objectives we are seeking to achieve. So it is going to need to be done well. What I would argue is that we certainly need a suite of other policies there, and some are renewable deployment policies such as the expanded renewable energy target. But that is not the only set of renewable policies we need. We also need a very comprehensive set of energy efficiency policies.

ACTING CHAIR —That is fair enough. Are you implying that you perhaps do not need an ETS and that something like a carbon tax might be a more effective way of dealing with putting a price on carbon in an economy like ours?

Dr MacGill —No doubt this committee has been exploring these issues. There is an ongoing debate about carbon taxes versus emissions trading, and they do have their obvious strengths and weaknesses, but I think one key issue that we really need to address there is the question of governance. There is a theoretical set of which might be more efficient, but we need to think about schemes that we can actually get through. We have seen problems with governance on both those, whether it is energy taxes in Europe and the United States, which did not go well, or the emissions trading schemes that have been implemented particularly in the EU. So, in my view, certainly in the longer term you need to price carbon. You can price it in a number of ways. I think there would be potentially very useful outcomes from a well-implemented emissions trading scheme or carbon tax. Unfortunately, there is not too much evidence yet of those sorts of schemes or taxes being put into place. Given that, when we do have a set of policies which do have some demonstrated success in driving change, they are policies that deserve support.

ACTING CHAIR —Do you support decoupling of the RETs from the CPRS?

Dr MacGill —You mean decoupling in terms of the energy-intensive trade-exposed industries?

ACTING CHAIR —That is one dimension of it, but in general terms the renewables, for example, supported decoupling of the renewable energy targets from the CPRS. Some people find it confusing; some people think that more can be achieved just with renewable energy targets.

Dr MacGill —I apologise; I have not had a chance to read the submissions that have been made. I have had a chance to quickly look at some. I have certainly seen and heard some discussion on decoupling in terms of the legislative process with the energy-intensive trade-exposed.

ACTING CHAIR —Such as aluminium.

Dr MacGill —In my view the expanded renewable energy target should not be providing an exclusion for energy-intensive trade-exposed industries to not contribute fully in proportion to their electricity consumption.

Senator CAMERON —We have had a submission from the Institute of Public Affairs. In that submission the author, Dr Moran, points to the Spanish experiment, as he describes it, and he points to work by Gabriel Calzada Alvarez. Are you familiar with that?

Dr MacGill —I have not read the study. I have seen commentary on it.

Senator CAMERON —What Alvarez is claiming—and what, certainly, the IPA is claiming—is that the outcome of the supposed experiment in renewables has meant that Spain has gone from an average unemployment rate to 18.1 per cent and that the renewable sector was a significant factor in pushing unemployment to 18.1 per cent. Do any of the critiques you have read agree with that? I just cannot understand why the renewable industry would turn the Spanish economy into a shambles.

Dr MacGill —They certainly have had very ambitious renewable energy targets, as seen with wind and, in recent years, PV, and there is no doubt that the direct costs involved with these technologies mean that they cost more than some of the other options they may have. There are obviously a range of issues going on in the Spanish electricity industry; there is also the EU emissions trading scheme, which has created the potential for very significant windfall profits in Spain from nuclear and old hydro plant.

Without having read the report and with no particular expertise in the Spanish economy, what we see is that a housing bubble appears to have been a very significant component of the troubles they are facing there. But, yes, there is no doubt that a dollar spent in one particular area is a dollar that is not available to spend in another. On the question of job creation and so on, I would only note that there are other parties in Spain, including some of the provincial governments, who take a very different view and say that these schemes have been excellent for job creation.

Senator CAMERON —Do you expect there would be job creation in Australia from the CPRS and RET?

Dr MacGill —Firstly, do you mean job creation in new, more sustainable aspects of the energy industry?

Senator CAMERON —And maintenance of jobs in existing industries because we are able to reduce the CO2 emissions and keep them feasible, across the economy in general.

Dr MacGill —Obviously there are two issues that come up here. One is direct employment. When you build a lot of renewables there are people involved in building and operating them and so on. There are some studies out there which suggest that many renewable technologies have more jobs in them per megawatt hour delivered than conventional options. In terms of energy efficiency, which we would hope to see very significant progress in, it is very evident that there is good job creation because of the nature of the things involved, such putting in insulation or doing audits and looking at the way we build houses and buildings and so on. Of course, there is expense involved in that and that is money that is not available elsewhere, so it is a complex equation. If you look at the challenge we face to move towards a more sustainable energy future, inherently it has to involve jobs and economic development to make that happen.

Senator CAMERON —The other argument being put forward by the IPA is that the power of the market is the way to discover the lowest way of meeting our goal. Has your analysis demonstrated that the market can deliver this on its own—that is, reducing CO2 emissions?

Dr MacGill —There is the market in theory and then there is the market in practice. Just to go back to the example of how emissions trading has performed in practice, what it has been able to achieve has been fairly questionable. Having said that, competitive pressures within markets can be an extremely valuable source of innovation and drive. We want to create vibrant industries where people are out there finding new ways to make money and helping us save the climate as well. One of the challenges we face, though, is that you can get competitive advantage by doing a very good job within a market, but with the designer markets we see with emissions trading or with the expanded renewable energy target a lot of the competitive advantage can potentially come from getting into the design process and basically having the rules work to your advantage. We are probably at the moment seeing a lot more innovation in folks coming to Canberra and arguing as to why they cannot change and how they cannot survive higher energy prices than we are seeing folks working out how to innovate to actually get their emissions down and make money out of it. In some ways, that is the most perverse outcome that we have seen from the CPRS. It really appears to have distracted us from ‘let’s get emissions down’ and has become ‘let’s go off and claim a victim status in Canberra’.

ACTING CHAIR —Thank you very much, Dr MacGill, for appearing.

Dr MacGill —Thank you very much for the opportunity.

[4.09 pm]