Energy White Paper 2012 — what does it mean for the environment? - Utilities

Key Points:

In assessing whether the Energy White Paper's policies have transformed Australia to a clean energy economy, the principal focus will be on the policies of the Carbon Pricing Mechanism and the Renewable Energy Target

In October 2012, the Australian Government published its Energy White Paper,¹ setting out the Government's intended policy framework to guide the transformation of Australia's energy and energy resource sectors. In many respects, the Energy White Paper is concerned with pricing, competition and market regulation. But to what extent are its policies concerned with achieving environmental objectives?

Objectives of the Energy White Paper

The key objectives of the Energy White Paper are:

energy security and reliability, particularly in the face of a growing population and economy;
competitive pricing of energy, as regards both the domestic cost of living and the industrial and commercial use of energy;
aiding the Australian economy by developing energy exports to Asia and other growth markets; and
the transformation to a "clean energy" economy.

Clean energy and the environment

In the Energy White Paper, the transformation to clean energy encompasses three principal components:

low emissions from energy production, combustion and use;
sustainability, using renewable energy sources rather than diminishing energy sources; and
energy efficiency, so that the consumption of energy is sustainable and its impact on the environment minimised.

But clean energy is only one of the issues concerning the environment. There are two other issues, which are only addressed in small part by the Energy White Paper:

ensuring that energy production occurs in a manner that minimises impacts on the environment, importantly avoiding risks to water sources, minimising the impact on flora and fauna, and minimising the impact on residential communities. Coal seam gas (CSG) and wind farm developments are identified as examples of energy production practices where further policy development is required; and
conflicts inherent in Australia's principal energy exports of coal, uranium and natural gas. For example, the tension between Australia's coal export industry and domestic clean energy policies; the use of natural gas, which is a non-renewable fossil fuel but has the potential to play a large role in reducing emissions if used to substitute for existing coal-fired generation; and the conflict between the Government's policy to increase uranium mining and overseas exports and restrictions on the use of uranium for clean energy production domestically.

The Government's methodology

The Energy White Paper outlines four principal measures to assist the transformation to a clean energy economy:

the Carbon Pricing Mechanism, implemented by the Clean Energy Act 2012 (Cth), which commenced on 1 July 2012;
the mandatory renewable energy target imposed under the Renewable Energy (Electricity) Act 2000 (Cth), which commenced in 2001;
direct Government funding of clean energy initiatives, such as the Australian Renewable Energy Agency, the Clean Energy Finance Corporation, and the Clean Technology Innovation Program; and
regulatory reform to promote efficiency in energy market operations, to promote energy productivity, and to overcome issues relating to market entry of renewable energy and new clean energy technologies.

The Clean Energy Act

The Clean Energy Act imposes a carbon price on most greenhouse gas emissions occurring in Australia associated with the production or consumption of energy. Passenger vehicle transport fuels are not expressly the subject of the Clean Energy Act, but already carry an excise significantly higher than the carbon price.

The carbon price is fixed by legislation for the period July 2012–June 2015, and varies post-June 2015 in line with the auction price for carbon units sold by the Government. Domestic offsets and international emissions units will also be eligible for surrender in lieu of Australian carbon units (subject to certain quantitative and qualitative limits).

The Energy White Paper relies on the Clean Energy Act as the principal measure to support Australia's transformation to a clean energy economy. The White Paper does not propose any change to the Act, save for assessments and reviews to be conducted periodically by the Climate Change Authority. The Energy White Paper also recommends monitoring the long-term progress of technologies such as carbon capture and storage (CCS) and large-scale renewables.

Renewable Energy Target

The second key regulatory instrument underpinning the Government's desired transformation to a clean energy economy is the Renewable Energy (Electricity) Act, which established the Renewable Energy Target scheme in 2001.

With an initial target of 45,000 GWh per annum of new renewable energy generation by 2020, in 2011 the Renewable Energy Target was split into separate large-scale and small-scale technology targets, with 41,000 GWh per annum allocated to large-scale generation (wind farms, solar photovoltaic farms and hydro) and the balance to small-scale generation (such as rooftop solar panels).

In addition to the Renewable Energy Target, there have been other state and federal schemes to promote the development of renewable energy and renewable energy technology. The Energy White Paper criticises the premium feed-in tariffs that various state Governments introduced to support the installation of rooftop solar panels, citing them as an example of a measure that imposed unsustainable costs across the community, generating undesirable boom–bust cycles and advantaging one sector of consumers (those with a separate dwelling house who could afford the initial capital cost) over others. New South Wales and Queensland, particularly, have terminated further access to such schemes.

The Energy White Paper predicts that the Renewable Energy Target will provide an estimated subsidy of about $20 billion for renewable energy in the period from 2012–20.

However, the Energy White Paper does not mention the key issue that faces the Government in respect of the Renewable Energy Target, that is, whether the existing target of 41,000 GWh per annum of large-scale renewable energy continues to be appropriate, or whether it should be re-cast having regard to the reduced energy demand and reduced rate of increase in energy demand.

When the original policy setting was announced, the 2020 Renewable Energy Target of 45,000 GWhpa of additional renewable energy (encompassing both large-scale and small-scale generation) represented 20% of the demand for electricity forecast for 2020.

However, in recent years, the total grid electricity demand has increased at a lower rate than originally assumed, and has actually decreased in more recent years.

This reduction in actual demand means that the renewable power percentage prescribed for 2013 comprises over 30% of power purchases (the 2013 prescribed percentage for compliance is 19.7% for small-scale technology certificates and 10.65% for large-scale generation certificates, together totalling a renewable energy percentage of 30.35% for 2013).

The target renewable energy trajectory for 2012 was set in 2001, based on two important assumptions:

that the required renewable energy percentage could be fully met from additional generation stock that was going to be required anyway to meet increases in energy demand over time; and
that existing non-renewable generation stock could still be fully utilised to meet the original demand for which it was built.

However, with the renewable energy target trajectory now well in excess of the rate of growth of electricity demand, the renewable energy target is likely to cause the introduction of additional generation stock that is not otherwise required to meet the electricity demand. Ultimately, not only will consumers pay for the premium cost of renewable energy over non-renewable sources (which was an intended consequence of the Renewable Energy Target), but in 2013 consumers may also be required to pay for investment in additional generation capacity that is not yet required to meet energy demand (which was not a forecast consequence of the scheme in 2001).

One alternative would be to re-cast the Renewable Energy Target as a percentage target rather than a GWhpa target, with the legislated percentage escalating over the next seven years to the original policy setting of 20% in 2020.

Opponents of this approach say that a percentage target would give less certainty to developers of projects, because it would introduce energy demand fluctuations into the target. This would give rise to greater risks for projects and make them unbankable or expensive.

However, in the 12 years of operation of the Renewable Energy Target, it has been clear that large-scale renewable energy developers in Australia have taken little or no market risk on renewable energy certificate demand anyway, even while it has been fixed as a GWhpa target rather than a percentage. Instead, developers have insisted on contracting an off-take commitment with energy retailers to ensure the sale of the project's renewable energy certificates. If this trend continues, a fixed GWhpa target cannot be said to provide greater certainty to developers. Nor will greater certainty be provided for retailers of new renewable energy sources because retailers have no assurance that their market share of energy demand will remain constant over time.

Further supporting a move to a target prescribed in percentage terms, it might be argued that the current uncertainty about the GWhpa target trajectory and whether it is sustainable through to 2020 and beyond is actually inhibiting retailers from contracting for renewable energy certificates at the present time. If the targets were legislated in percentage terms, and not subject to annual ministerial discretion, there may actually be greater certainty against which to contract for new renewable energy generation sources.

Although the Energy White Paper does not address these issues with the Renewable Energy Target, the Target has since been the subject of review by the Australian Climate Change Authority. In December 2012, the Authority concluded that a change to the large-scale Renewable Energy Target in quantity terms (from the current 2020 target of 41,000 GWhpa) risks damaging investor confidence in the scheme, and that a change to a percentage-based target posed possibly greater risks of such damage. The Authority recommended that the Renewable Energy Target remain unchanged.

On 21 March 2013, Greg Combet, Minister for Climate Change, Industry and Innovation, announced that the Australian Government agreed with the Climate Change Authority's recommendation² to leave the large-scale generation Renewable Energy Target unchanged as a fixed GWhpa target, on the basis of regulatory certainty and also because it was considered that changing the target would not result in a material reduction to household energy bills.

This leaves the Renewable Energy Target more certain while the current Government remains in power, but its future is less certain if the Government were to change. As the Shadow Minister for Climate Action, Greg Hunt, has stated: "the Coalition supports a 20% Renewable Energy Target ... We approach the findings of the recent RET review with an open mind, but reaffirm our commitment to the 20% target".³ This suggests that the Coalition would be disposed to an approach that defined the target in percentage terms rather than in GWhpa terms.

The structure of the Renewable Energy (Electricity) Act, giving the Minister the last say by allowing for the annual percentage target to be prescribed by regulation,⁴ and providing that the prescribed percentage is valid notwithstanding that the Minister may have failed to consider all of the relevant considerations in section 39(3), increases this uncertainty and means that having legislated GWhpa targets is of only some assistance in creating a certain investment environment.

There is a default formula in the legislation if a regulation prescribing the annual percentage is not made, or is made but disallowed.⁵ If all future regulations of the prescribed percentage for large-scale generation were disallowed by Parliament, the current percentage prescribed for 2013 (10.65%) would survive and increase annually by the formula in section 39(2), leading to an annual percentage for large-scale generation of 31% in 2020.

As another hypothetical example of the operation of the formula in section 39(2), if the regulations prescribing the renewable energy percentages for 2012 and 2013 were repealed, leaving the regulated percentage of 5.62% for 2011 in place, and no further regulations were made, the regulated percentage for 2011 would survive and the formula in section 39(2) would increase the annual percentage for large-scale generation to only 22.16% in 2020.

Direct Government funding of clean energy

The Energy White Paper confirms the Australian Government's policy of direct Government funding to assist a transition to a clean energy economy, including:

the Clean Energy Finance Corporation, to which $10 billion of funding has been provided to support the commercialisation and deployment of renewable energy, energy efficiency and low-emissions technologies, including supply chain businesses that provide inputs in such projects;
the Australian Renewable Energy Agency (ARENA), which is managing $3.2 billion in funding to support renewable energy research and development, demonstration, commercialisation and deployment;
$1.2 billion in the Clean Technology Program to support the development and early stage commercialisation of clean technologies across industry; and
$2 billion in support for the research, development and demonstration of carbon capture and storage technology, including the CCS Flagships program.

Of these, the support of early stage technologies, research and development is much more understandable than commercialisation assistance to mature renewable energy and low-emissions technologies, which are likely to already have the economic benefits of the Carbon Price Mechanism and the Renewable Energy Target.

Other regulatory issues

The Energy White Paper acknowledges that current electricity pricing (where most consumers are subject to a flat tariff that does not vary by time of use) does not reflect the true cost of generating and supplying electricity at various times of the day, and so fails to provide a financial incentive for more efficient behaviour by consumers. As a result, some consumers are likely to be paying more than they otherwise should for electricity and are effectively cross-subsidising those who are driving the growth in peak demand.

There is an economic case for giving discounts for off-peak use of the network, similarly to how long-distance telephone charges have been calculated in Australia for many years. At present, off-peak charges for power usage are only available for separately metered and switched supplies, such as some hot water services. There is a case for metering all power supplies (not just hot water services) by time of use and discounting charges for off-peak usage.

The Energy White Paper omits to refer to a related issue, namely, the appropriate network pricing for consumers who use the grid as a standby for their distributed generation, or to consume energy only during the night while exporting energy throughout the day from their rooftop solar panels. Current network consumer tariffs are largely usage based (payment per quantity), whereas the majority of network costs are actually fixed (the cost of building and maintaining the infrastructure to support those few peak hours). A customer who consumes from the grid for only for a few hours of evening peak per day, with the balance from his or her distributed generation, pays much less in energy charges than a customer who draws all of his or her energy from the grid all day and night, yet both impose similar capacity costs on the system. It may be necessary for network charges to more closely match the fixed nature of network costs and be less based on flat quantities consumed.

Both of these energy pricing issues would be at least partly addressed by the roll-out of so-called "smart meters" — meters that record usage by time of use rather than solely by quantity, and by network and energy pricing that affords discounts for off-peak use. The Energy White Paper's recommendation on smart meters is a single line comment: "Finding the right deployment model — with appropriate consumer protections — is essential", and the White Paper later notes that the Council of Australian Governments (COAG) Standing Council on Energy and Resources (SCER) (effectively, a committee of state and federal ministers) is developing a framework to guide the deployment and use of smart meters for electric power networks.

Other regulatory issues that will have an environmental impact which the Energy White Paper notes require addressing include:

harmonised or consistent regulatory regimes for CCS, and geothermal technologies (currently being considered by the SCER);
the scheduled reviews of the Renewable Energy Target, its structure and regulation (subsequently recommended by the Climate Change Authority to be four-yearly rather than two-yearly);
the Climate Change Authority's advice on pollution caps and targets under the Clean Energy Act;
standards, processes and investments for the connection of renewable energy generation technologies into the power grid, which are the subject of various reviews by the Australian Energy Market Commission;
integrating energy and environmental policies to deliver efficient investment decisions, including the integrated mapping of water and energy resources and ensuring that water access for generation purposes is consistent with National Water Initiatives that promote access and water trading;
improving the effectiveness and efficiency of project approvals and resource development planning. In this respect, the Energy White Paper refers to current review processes relating to the Environment Protection and Biodiversity Conservation Act 1999 (Cth), reducing regulatory burdens and integrated climate change planning without introducing further initiatives; and
effectively managing resource use and co-development pressures. The Energy White Paper simply notes in this regard that there is room for improvement by some energy and resources projects (particularly CSG and wind farm developments) in operational frameworks, information flows and community engagement, and that the federal Government has a role in the provision of data to support the management of multiple resource use.

How will we know whether the policy has been successful?

In assessing whether the Energy White Paper's policies have been successful in transforming Australia to a clean energy economy, the principal focus will be on the existing policies of the Carbon Pricing Mechanism and the Renewable Energy Target, and whether their goals are met at an acceptable cost.

It will be necessary to look at the changes to the generation mix, energy consumption, emissions intensity, and energy prices paid by industry and consumers as a result of the implementation of these policies.

It is also important to consider the following factors:

the role that domestic energy exports play in a global transition to a clean economy;
whether energy pricing is equitable for Australian consumers and whether it reflects the costs and demands that consumers put on the system;
whether water usage for energy purposes is sustainable, equitable and priced appropriately;
whether the 'right winners' are chosen to benefit from the direct funding of technologies, and whether value for money is derived from these projects; and
whether an appropriate balance between energy production and the impact on the surrounding environment, including communities, flora and fauna, is achieved.

This article was first published in the Australian Environment Review, Volume 28 No 4, June 2013

Footnotes

¹Department of Resources, Energy and Tourism, Energy White Paper 2012: Australia's Energy Transformation, 2012, available at www.ret.gov.au.

²This recommendation was based on the results of modelling conducted as part of the Climate Change Authority's review.

³Speech to the Urban Development Institute of Australia, 7 March 2013, available at www.greghunt.com.au.

⁴Renewable Energy (Electricity) Act 2000 (Cth), section 39.

⁵Renewable Energy (Electricity) Act, section 39(2). This formula calculates the renewable power percentage for the year by multiplying the renewable power percentage for the previous year by the required GWh of renewable source electricity for the year, and dividing this by the required GWh of renewable source electricity for the previous year.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

Australia: Energy White Paper 2012 — what does it mean for the environment?