The (shrinking) Australian Renewable Energy Target

The Renewable Energy Target (RET) was in the spotlight this week, as Australia became the first country ever to reduce a renewable energy target (we can add this to the similarly dubious claim of being the only country to repeal a carbon price). Apologies to the rest of the world, Australia isn’t being a very good global citizen right now.

I thought it might be nice to have a bit of a chat about the RET as it currently stands (before all my knowledge on the topic becomes redundant), and what this week’s changes might mean…

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Image: Flickr

What is the RET?

The RET is a target to increase renewable energy generation in Australia (obviously!). It has actually been around for a while, introduced by the Renewable Energy (Electricity) (REE) Act 2000, with a target of 9,500 GWh of additional renewable electricity generation in 2010. Known as the Mandatory Renewable Energy Target (MRET), it began operation in 2001.

That doesn’t sounds like the RET I’ve been hearing about…

That’s because it was expanded in 2009 to what is currently legislated. It also was split into the Large-scale Renewable Energy Target (LRET) and the Small-scale Renewable Energy Scheme (SRES) in 2010 to separate incentives for large scale and small scale projects. This was to address the issue of a larger than expected number of certificates from small-scale solar systems depressing REC prices and discouraging investment in large-scale projects.

How does it work? (and what is a REC??)

The target is achieved by legislating that purchasers of wholesale electricity must also purchase a certain number of Renewable Energy Certificates (RECs).  These purchasers, also known as liable entities, are generally energy retailers – the ones that send you your energy bills. According to the RET legislation, liable entities must purchase a certain number of RECs in proportion with the amount of electricity they purchase. RECs are a way of accounting for the renewable energy produced and consumed – purchasing a REC essentially gives you bragging rights to say you have purchased certified renewable energy.

For the LRET, these certificates are called Large-scale Generation Certificates (LGCs), and are created for each MWh of renewable energy from eligible renewable sources such as wind, solar, and hydroelectric power stations. The LRET has a legislated target for the amount of renewable energy to be produced annually under the scheme, which is indexed each year to 41,000 GWh of renewable energy in 2020. This target was equivalent to 20% of Australia’s predicted energy demand in 2020, but was legislated as a specific amount rather than a proportion in order to provide certainty for investment in infrastructure.

The SRES creates a financial incentive for the installation of small scale renewable energy generation technologies.  This includes solar water heaters, heat pumps, solar panel systems, small-scale wind systems, and small-scale hydro systems.  These projects create Small-scale Technology Certificates (STCs), equivalent to 1 MWh of electricity generated by a small-scale system, or displaced by the installation of a solar water heater or heat pump. There is no legislated target for the production of renewable energy under the SRES.

These certificates (LCGs and STCs) must be purchased by electricity retailers to cover a certain percentage of electricity that they buy. For 2015, this percentage was set at 11.11% for the LRET and 11.71% for the SRES, and each year these have increased to work towards the 2020 target. These percentages add up to more than the current renewable energy proportion in Australia because some industry purchasers of electricity are exempt from the scheme.

So why reduce the target?

The current legislation specifies that the RET is reviewed every 2 years. In 2014, two reviews were undertaken:

  • The Climate Change Authority review. The Climate Change Authority is Australia’s independent government agency responsible for providing advice on climate change policy. The review recommended that the RET remain at the current target, but rephased by a few years due to the slow-down in investment that has occurred because of policy uncertainty.
  • The ‘Expert Panel’ review, also known as the Warburton review. This review recommended that the RET be reduced, providing several options for amending the target. This was on the basis that the RET had largely achieved its aims (having doubled renewable generation) and was no longer necessary. It also implied that the RET acting a a subsidy for renewable energy generation and at the same time reducing wholesale electricity prices were negative outcomes.

Um, aren’t renewable subsidies and reduced prices good things?

I would have thought so.
Electricity demand has been dropping due to energy efficiency initiatives, rooftop solar installations and industry closures. This meant that the legislated 41,000GWh was looking like it would be more like 2628% of Australia’s electricity (depending on the modelling you look at). At the same time, the RET was legislating that more renewable energy had to be produced, resulting in depressed wholesale electricity prices. So while this might be good for consumers and the renewable energy industry, its not so great for the people who make lots of money from their old fossil fuel generation assets.

How is all of this relevant to me?

The RET impacts on the average Australian consumer in a number of ways:

  1. It adds about 4% to your energy bills. Energy retailers pass along the cost of purchasing RECs to consumers. For most people this isn’t separated out as a line item in the bill, but when I did some work for my university it was about 0.49 cents per kWh for the LRET and 0.83 cents per kWh for the SRES.
  2. It makes your solar panels cheaper. When installing solar panels, the rights to the STCs can be sold, meaning that you can make extra money from your solar panels. Of course, this essentially also means you are selling your clean energy bragging rights, but it does increase the overall generation of renewable energy still.
  3. It impacts the economics of the electricity market. As mentioned before, modelling shows that the RET will reduce the wholesale electricity prices (compared to a scenario where it is not in place). This is due to the mandated production of more energy as demand falls but also because renewable sources have lower ongoing production costs (compared to fossil fuels which must be continually mined).
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This graph shows the impact of the RET on electricity prices compared to other contributing factors Source: RET review, from 2013 AEMC data

So what now?

Both major political parties agreed on Monday to cut the LRET from 41,000 GWh to 33,000 GWh (cue sad faces from all the greenies). This means that when the government introduces legislation to change the target it will pass. The brighter side is that hopefully this will give the industry some certainty and increase investment in renewables in Australia again.
Related resources:

  • The Clean Energy Regulator administers the RET, and they have a whole bunch of information on how it works if you want to get a bit more technical. It’s the reference for anything without a link in this post.

4 thoughts on “The (shrinking) Australian Renewable Energy Target

  1. This is a very clear and accessible explanation of the RET. I found the graph particularly useful in understanding the effect of the RET on energy prices.
    As an owner of 4.5 kw of small scale solar based electricity production I now have a clear understanding of how my individual actions fit in to the whole scheme of things!

  2. Very clear explanation of what RET and REE is. I like the idea of RET, hence I keep educating myself of what it is all about. Thanks for an excellent write up!

  3. Hi and thank you for the informative article.
    Once thing that struck me was that the target of 33,000 GWh is solely around the large scale RET. i have read separately that the Small Scale scheme is uncapped.
    I’m trying to work out how this plays out in practical terms and in terms of actual total GWh for the large and small scales schemes combined.
    Liable entities are obliged to buy a nominated percentage
    e.g. “For 2015, this percentage was set at 11.11% for the LRET and 11.71% for the SRES,”
    So SRES volume is similar to LRET and the LRET percentage must keep increasing to hit the LRET target.
    Do you have any ideas around what the likely ballpark for the total
    GWh from the two schemes combined when we get to 2020?

    It seems clear that this will be much more than 33,000 GWh and so it seems to me, unless i am mistaken, that the oeverall renewable production when you combine the two separate schemes is fare larger then 33,000 GWh alone. Still of course entirely opposed to the cut from 41,000 GWh.

  4. Good read, I really like the information provided in this article, And I really like the way you have explained each and everything so well, Very well done with the article. hope that you will continue to do posting. thanks

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