What’s next for the Renewable Energy Target – resolving Australia’s integration of energy and climate change policy?*

Abstract

Australian climate change policy and its integration with Australia's electricity markets have been fraught for at least two decades. The only enduring policy has been the Commonwealth Renewable Energy Target (RET). Despite the relative success of the RET in driving investment and reducing emissions, state governments have now pivoted towards contracts-for-difference (Cfds). In this article, we outline the issues associated with policy discontinuity and the large-scale RET and review its effectiveness as an emissions reduction tool and driver of electricity sector abatement. We find that the RET has been relatively successful across the key criteria of cost and emissions reductions and is a better policy instrument than contracts-for-difference, which are increasingly being adopted by state governments. Building on the work of Nelson et al. ( 2020), we propose a new approach, which would allow for continued use of Cfds but utilising the RET's policy architecture.

Emissions and prices are anti-correlated in Australia

“…The annual average MEF for each region has also been plotted. As can be seen in all plots, there is a significant anti-correlation between the average MEF in a 30-minute time period and the average energy spot price, as was found in [10]. The anti-correlation is most distinct in the early hours of the day, up to 6am, where the spot price is at its minimum values and the MEF is at its maximum values.…”

“…Calculating the MEF for the Australian National Electricity Market (NEM) in 2019, [10] found that emissions intensity and price were anti-correlated. In an industry report, [6] extended these findings to calculate the MEF by time-of-day for South Australia across the last decade.…”

Renewable entry costs, project finance and the role of revenue quality in Australia's National Electricity Market

“…Nelson and Simshauser (2013) identify a dependant relationship when applied to gas plant, whereby PPAs are noted as necessary for entry under a project finance -primarily due to revenue volatility over the 10-year sample period. The same dependence for VRE plant is repeatedly referred to in existing literature, albeit not explicitly quantified (Mills and Taylor, 1994;Kann, 2009;Grubb and Newbery, 2018;Steffen, 2018;Nelson, Nolan and Gilmore, 2022).…”

“…As with other energy markets, the NEM is transitioning towards rising levels of VRE Pollitt and Anaya, 2016;de Atholia, Flannigan and Lai, 2020;Simshauser and Gilmore, 2022). However, over the past decade investors in Australian VRE projects have been forced to contend with considerable policy uncertainty (Nelson et al, 2018;Nelson et al, 2022). Policy uncertainty is naturally internalised by market participants, and may result in investment hesitation, entry lags and elevated costs for VRE projects due to fear of capital loss.…”

“…Australia's National Electricity Market (NEM) experienced a renewable investment supercycle -135 VRE projects totalling 16,000MW worth more than $26.5 billion was committed during 2016-2021, with the market share of coal-fired generation falling rapidly (Simshauser and Gilmore, 2022). What makes this renewable investment supercycle all the more striking is that it followed a two-decade long climate change policy war between Australia's two main political parties (Simshauser and Tiernan, 2019;Nelson, Nolan and Gilmore, 2022). However, while it would seem that a united position on climate change policy in Australia may have finally been achieved following the 2021 Glasgow Conference of Parties, the success of any ongoing transition in our view remains dependent on underlying VRE entry costs, as policymakers aim to limit potentially adverse short term pricing impacts on consumers.…”