TMEC CEO Opinion Piece: Renewable Energy Target Scheme

Taking a Look at the BigPicture on the Renewable Energy Target Scheme – Opinion Piece by Jeremy Kouw, CEO of the Tasmanian Minerals and Energy Council

The debate within the Tasmanian media around the Renewable Energy Target (RET) scheme may be enhanced with a view of some facts, allowing more considered discussion than what is being fuelled by rhetorical and aspirational statements.

The original objective of the RET was to increase Australia’s use of renewable based energy to a total of 20% by 2020. The scheme provides a subsidy to all new producers of energy from renewable sources including solar panels on the roof of homes right up to large scale wind farms. The funding for this subsidy was to come from the all energy users in the country. Sounds good so far?

But there is a problem in the RET scheme’s design for large energy users who are typically price takers in global commodity markets. Increased costs, such as paying into the RET scheme, cannot be passed onto customers. Therefore big energy users have to find offsets to remain competitive. This leads to capital re-investment being scaled back, lower cost inputs are sought, or worse, jobs are lost, all to offset the RET and other cost impost. The bottom line is that Energy Intensive Trade Exposed businesses have their viability put at risk by this scheme, even after the current partial exemption is applied and if the resulting pressure on these businesses bottom lines remains for long enough, eventually the business close.

It should also be remembered that large energy users, like Tasmania’s Big Picture businesses are disproportionally exposed to rises in energy costs more generally since their energy intensity is so high. Delivered energy for these businesses typically makes up between 25% to 35% of their total operating costs. So put simply, if energy costs increase for whatever reason, there is no place to hide, no way to pass these costs on, and given their exposure the impact is always significant. So in this context, the RET adds to the challenges associated with the dramatic increase of electricity transmission charges, which over the last five years have more than doubled for every business in Tasmania.

While it is somewhat speculative, Australia’s high direct and indirect energy costs have most likely been one of the factors which have resulted in the closure of two mainland Aluminium smelters, with the loss of over 3000 jobs over the last two years.

Tasmanian Big Picture businesses already predominantly source their daily energy from renewable hydro and wind. With closure of any one of these businesses, the electricity load disappears, the revenue generated by Tas Hydro and Tas Networks disappears, but the gap created in the global commodity market is quickly filled by another international producer. If that international commodity producer’s energy source happens to be based on fossil fuels, the net effect for the environment is an increase in emissions. This creates a significant risk of emissions leakage which is a diabolical problem. Who wins? Certainly not the environment and not the Tasmanian economy and its people.

The Big Picture businesses have made a submission which has supported the retention of the RET scheme, but with some features modified. Given the potential impact to the energy intensive, trade exposed businesses outlined above, why would they do so?

The Big Picture businesses acknowledge that investment in Tasmania’s renewable energy sector has been enhanced by the existence of the scheme. We also understand the renewable energy assets in Tasmania are a “badge of honour” for most Tasmanians in a carbon constrained world. We do not underestimate the importance placed on this.

Our submission also proposed Energy Intensive Trade Exposed industries be fully exempt from the scheme. Since the inception of the scheme in 2001 and if no changes occur with the scheme these businesses will continue to pay a significant cost of many tens of millions of dollars each year. It is time for Tasmania’s struggling manufacturing and mining sector to stop the ongoing subsidisation of the renewable energy sector.

In fact, we believe the case for further renewable energy investment in Tasmania needs scrutiny. Projections indicate Tasmania has sufficient installed generation capacity to meet its current needs with modest growth until 2035. What then is the business case to invest in more wind farms? Perhaps some people see merit in borrowing a few billion dollars to build more wind farms together with a second interconnector to transport the power over to Victoria and into the National Energy Market. The business case should point out just how much electricity has to be sold and at what price to cover the cost of borrowings, let alone to see nett revenue flow in to the State’s economy. Does Tasmania have a balance sheet to support this level of debt? Are there sufficient new investments flowing into Tasmania to protect the State’s finances?

Renewable energy is a wonderful thing. There is no coal mine or gas field in the world which is refilled every winter, to allow the product to be resold. Tasmania is very fortunate to have a resource which if utilised prudently, can serve the state well for many generations to come.

Perhaps the priority for Tasmania is not to launch into building more capacity in an already oversupplied generation market, incurring further debt, but rather to consolidate what it has, and make sure the highest possible return for the State’s economy is leveraged from the existing renewable energy assets. Full exemption for the Energy Intensive Trade Exposed businesses from the RET would provide some needed relief to these challenged resource based commodity businesses, allowing them a chance to continue investing and employing Tasmanians. Yes the pot for investing in Renewable Energy Projects will be smaller, but perhaps with falling demand for electricity across the State and Nation, building new capacity may not be in the best interest, particularly given that on current projections Australia will exceed the original renewable target of 20%!