As the Federal Government sets its emissions reduction targets for beyond 2020, those in charge of administering the Renewable Energy Target and the Emissions Reduction Fund legislation are confident industry can integrate with renewables and accelerate carbon abatement.
Energy Source and Distribution talks with Clean Energy Regulator chair and CEO Chloe Munro about renewed investor confidence, responding to changes in technology and price points, and letting the market decide.
In the wake of parliament greenlighting the Renewable Energy Target (RET) legislation, it’s business as usual for the Clean Energy Regulator. In fact, the independent statutory authority in charge of administering climate change policy and encouraging businesses to reduce carbon emissions never stopped, despite the noticeable pause in investment.
The target was always there and, for the Clean Energy Regulator’s chair and chief executive officer Chloe Munro, one issue has always remained on the agenda.
“We already publish a lot of information about the RET and our other schemes, and one of the themes that came through the debate around some of the more contentious issues in the target was the importance of transparency,” she says.
“That’s why we’re taking on the new role of publishing the annual statement and why the proposed wind farm commissioner will also have a publication role.
“This focus on transparency applies across all of the schemes we administer. Increasing the access to and the usability of the data we hold is going to be very important both for our clients who participate in these schemes, and for interested observers and stakeholders more generally.”
Years ago, Chloe says she would never have seen herself as a regulator. Amongst a backdrop of unprecedented industry upheaval, however, it’s an interesting time to be involved with the energy sector.
“I really do feel very passionate about what we are here to achieve,” she says.
“What’s more, the industries we work with are passionate about it as well. Everyone is focused on progress and innovation. We are engaged with those markets and our clients.”
It’s an important position to have, seeing the nature of the Clean Energy Regulator is to administer schemes that are fundamentally market-based. Chloe’s professional background – an even split between government and private enterprise, particularly in infrastructure and markets – is somewhat of an anomaly in the sector’s top tier. However, her work across a wide range of sectors, including as director of Hydro Tasmania, chairman of AquaSure, commissioner and chair of the National Water Commission, and an executive director at Telstra, has certainly given her a deep understanding of how to deal with clients and markets. As a result, the Clean Energy Regulator has a strong reputation for understanding the imperatives its clients face.
“Because we focus on making it easy for our clients to meet their obligations, we get high compliance and our decisions are respected. So even if it’s not necessarily an outcome the client wanted, they trust us to have made the right decision under the legislation,” she says.
“I think that focus has really paid off for us and demonstrated that we are an effective regulator. It means that the objectives for the schemes we administer can be achieved.”
ES&D: How was the Clean Energy Regulator involved in discussions the two major parties had while negotiating aspects of the RET legislation?
Chloe: We’re a statutory body so we don’t get directly involved in political negotiations. However, we do work hand-in-hand with the Department of the Environment, which has the lead on policy advice. We work with them to provide advice on the implementation of potential changes to the legislation, which is based on our extensive knowledge of the renewables industry and of how the scheme operates in practice.
In this case, it did include advice on how we could extend our current suite of reports to address some of the concerns that were being raised as a result of the RET Review. And, I should mention, the annual statement doesn’t require any legislative change in itself, it’s already within our remit.
ES&D: Here’s the million dollar question: how can government and industry progress towards reaching the RET target by 2020?
Chloe: The beauty of the RET is it allows the market to decide how the target will be met. The way it is designed provides incentives for the most economically competitive new renewable power stations to be developed. Of course, that’s why the larger share of the large-scale scheme is currently taken up with wind generation. What we expect to see is the mix change over time, and new technologies move down the cost curve. But as I say, that’s very much for the market to decide.
The RET isn’t the only instrument by which the government incentivises renewables. ARENA, through its investment plan, is supporting the whole innovation chain and the technologies of the future. Some of those technologies aren’t competitive now, but will be in the future. This is another way the mix will change in time; through the support of government programs.
ES&D: Will allowing the market to play a significant role in reducing carbon emissions allow the flexibility needed to move forward in a rapidly changing and often unpredictable energy landscape?
Chloe: Yes, I think the sector is rapidly changing. Certainly there is a lot of medium-term unpredictability around demand profile and how quickly these new technologies will be taken up. But at any point, under the RET it’s possible to make an investment decision that is the most competitive combination to install at that moment. For example, what we have already seen in the small-scale scheme is an increase over time in the average size of the solar PV units that have been installed, because the relative cost has come down and it’s been more economic to install a bigger unit. That’s a good example of how the RET allows, in this case customers, to respond to changes in technology and changes in the price points.
ES&D: What impact will the RET have on electricity prices?
Chloe: This is a question that was extensively modeled for the Expert Panel review. Based on those numbers the impact of the newly legislated target compared to today’s prices should be negligible. But it’s one of those things we’ll consider as part of our annual statement. What we will be looking at principally is whether the new build is on track to meet the target, and that’s because there are some concerns that because of depressed electricity demand, it will be difficult for developers to secure Power Purchase Agreements (PPAs). In that case, it’s possible not enough new capacity would be installed to meet the target.
Now, if that was the case, and there was a shortage of large-scale generation certificates in the market, retailers would meet their obligations by paying the penalty price which is higher, so there is some concern about that. It wouldn’t automatically flow through to prices, and that’s because the retail electricity market itself is so competitive. So there are a number of ‘ifs’ along that chain, but we will be monitoring the forward indicators.
ES&D: How does the Clean Energy Regulator get the balance right in terms of supporting interest in the Australian energy sector while also working to meet a meaningful carbon reduction target?
Chloe: We do think very carefully about how we allocate our resources, which is principally staff, but also our investment in IT. We think very carefully about how we make that allocation between the different legislative schemes we administer. But in fact, what we’re finding is the Emissions Reduction Fund, which is the main instrument in carbon reduction, and the RET have a great deal in common in the way they operate. So, we’re finding more efficient ways to operate by having the same teams work across both schemes. There is also quite a lot of cross over in our client base, so the better we understand our clients, the better we can service those across the whole frontier we work on – and that includes the National Greenhouse Energy Reporting Scheme as well, which is very important.
In the end, we are all working towards a common objective, which is why the Clean Energy Regulator describes its purpose as accelerating carbon abatement for Australia. We’re thinking, ‘what’s going to have the best effect for meeting that objective’, while achieving all of those obligations that are in the legislation and operating them in accordance with the principles that are in each of those separate schemes.
ES&D: Are you seeing an increase in investor confidence in the renewables space, now the RET legislation has been passed?
Chloe: Yes, we’ve already seen a couple of announcements that projects will go ahead. So there are clear early signs investor confidence is returning. The other thing is the certificate price has already recovered to a level where a business case should stack up for many of the projects in the pipeline. However, as I mentioned earlier, it does hinge on the ability of developers to secure PPAs with retailers, or else the willingness of financiers to take merchant risk. There is a lot of discussion in the industry about the pace at which this will pick up.
ES&D: Native timber harvesting has been a controversial element of the legislation. Were you surprised it garnered so much attention from the media and environmental groups?
Chloe: Timber harvesting is still a very controversial issue for people whose livelihoods depend on it as well as for people who are concerned with the environmental integrity of our native forests. So it’s not surprising it’s had a lot of attention. But when you consider the RET as a whole, it’s not going to be a driver of growth. It’s worth pointing out there are a broad range of sources under biomass, which currently contributes about 8 per cent of renewable generation. The biggest single source of biomass is bagasse created after sugarcane harvesting. Wood waste is only a very small proportion of the biomass that currently contributes to the RET, and native forest wood waste is a really niche component of the overall mix. There may be some native timber harvesting operations where it is economically attractive to use the waste in that way, but it’s not going to be a significant component of the RET going forwards.
ES&D: Looking at the RET as a whole, what generation sources will be the major drivers of growth?
Chloe: Definitely wind is not only still competitive, but the costs are also coming down as wind farm design becomes more efficient. In the pipeline of projects that have planning consent, and if they are financed will probably come on stream, wind is still dominant. But utility scale solar PV is coming up the curve, and solar farms will definitely contribute an increasing proportion of large-scale generation moving forward. Whether the other more prospective sources will come up to scale in time, to contribute to the 2020 target is questionable – but certainly people are looking at solar thermal and wave power. Geothermal has proven to be very difficult in practice but there is still research going on into that and other technologies. As storage is getting cheaper, intermittent sources become a more viable proposition. This will have an effect on the mix as well.
ES&D: What opportunities exist under the Emissions Reduction Fund?
Chloe: In general it provides very broad opportunities, in both the land sector and now in the commercial and industrial sector as well. Companies can earn Australian carbon credit units by undertaking projects that reduce emissions. Specifically for the energy sector some of the new methods may well be interesting, For example the industrial electricity and fuel efficiency method could be taken up by generators, as it is designed to provide incentives to reduce emissions associated with the consumption of electricity and fossil fuels. The aggregated small energy users method will create opportunities for energy retailers to undertake projects that can reduce emissions associated with the consumption of grid electricity, or natural gas, by a large group of their customers. So that’s quite interesting. Both of those methods are very flexible, and they are quite neutral in terms of the technologies that are used or the approaches that are used to produce abatement.
There is also a method that we expect to available very soon called the facilities method that will be available broadly across industry. It credits activities that reduce the emissions intensity of production so it could apply to the energy sector or to their customers. While some of those methods could be of interest to participants in the energy sector, many of them will be taken up by their customers. Because they have an energy efficiency focus that does mean there is another reason energy demand might reduce inside the economy. I think that puts the challenge back to the industry in terms of how they facilitate their service offering to their customers. I see this as a great opportunity for the energy industry to get on board.
ES&D: Integrating renewables is going to be a major part of the conversation for the energy sector moving towards, and beyond, 2020. What’s your message to the sector on climate change policy?
Chloe: Many people will disagree with this – climate change policy and the operations of energy markets are intimately connected: they can’t just operate in parallel tracks in separate universes. Often we hear from the energy sector, ‘well it’s difficult to integrate renewables and the energy sector shouldn’t have to change to accommodate the requirements of climate change policy’. But that’s not the reality. The reality is the energy sector with or without the RET does have to adapt pretty quickly to the expectations that emissions will reduce across the economy.
The Government is in the process of setting its targets for beyond 2020. Consumers are very clear that many of them favour low emissions sources of energy, they expect the industry to do it and industry has to respond. More importantly, however, there are big opportunities and the schemes we administer will be most effective if the energy industry is actively engaged in pursuing those same objectives and responding to opportunities available to them. They know far better than we do what is required to integrate renewables, what the opportunities are, and what their customer really wantfrom them.