This week I have chosen to discuss the current state of international renewable energy investment and the factors that can make a particular market attractive. In looking at respective states of the international and domestic renewable energy sectors, one point is clear: irrespective of whether the current Government is retained or the ALP is elected on July 2, the Government needs to increase the attractiveness of Australia as a global renewable energy investment target.
the past year has been truly remarkable in terms of international renewable energy investment, growth, capacity and technological advances
According to the ‘Renewables 2016 Global Status Report’, published by the global Renewable Energy Policy Network (REN21), the past year has been truly remarkable in terms of international renewable energy investment, growth, capacity and technological advances. Approximately 147 gigawatts (GW) renewable energy capacity was added to existing renewable energy capacity in 2015, making a total of 1849 GW worldwide by the years end – the largest increase to date. Despite falling fossil fuel prices, the strength of the US dollar, the continued weakness of the European economy, and lower per unit costs of wind and solar photovoltaic (PV) systems, global investment in renewables also reached record levels. In 2015, large banks around the world were more active in the renewables and energy efficiency space in terms of the number of banks investing and the size of loans they issued. New investment vehicles including green bonds, crowdfunding and YieldCos have also grown.
2015 also saw continued technological advancement, new developments in energy efficiency, increasing use of smart grid technologies, and significant progress in the hardware and software required to support the integration of renewable energy. In addition, significant progress was made in the development and commercialisation of energy storage. Employment in the renewable energy sector worldwide exceeded 8 million direct and indirect jobs (with the largest numbers of jobs reported in solar PV and biofuels) – a 6% increase from the previous year. The REN21 report also identifies China, Brazil, the US and India as the leading countries in terms of renewable energy employment during 2015.
Moving from an international outlook to a domestic one, focussing on the current status of renewable energy in Australia, a briefing paper published by the Clean Energy Council (CEC) last week entitled ‘Progress and Status of the Renewable Energy Target’ discusses the challenges still facing the renewable energy sector in Australia – despite the appointment of a new Prime Minister who at least has been more supportive of the sector than his predecessor, and despite a very strong united international stance on the need to encourage the continued growth of renewable energy in Paris last December. Overall the paper is positive about the outlook for the renewable energy sector in Australia, however it points to the critical role the Government plays in assisting the sector by reducing the impacts of a number of issues including policy uncertainty in the long term.
The CEC paper discusses the Renewable Energy Target (RET) – an Australian Government scheme to reduce greenhouse gas (GHG) emissions in the electricity sector and encourage the generation of additional electricity from sustainable and renewable sources. Eligible sources include renewable energy power stations, small-scale solar panels, wind and hydropower systems, solar water heaters, and heat pumps. Under this scheme, both large-scale power stations and small-scale renewable energy systems are allowed to create certificates for every Megawatt hour (MWh) of electricity they generate. The certificates are respectively called large-scale generation certificates (LGCs) and small-scale technology certificates (SSTCs), and are generated through the Renewable Energy Certificate (REC) Registry which is an online trading platform operated by the CER.
These LGCs or SSTCs are purchased from electricity generators by electricity retailers, who then sell electricity on to householders and businesses. Retailers have a legal obligation under the RET to surrender a percentage of their certificates to the Government’s Clean Energy Regulator (CER). A domestic trading market is thereby created, which financially incentivises the owners of large-scale renewable energy power stations and small-scale renewable energy systems to meet their renewable energy obligations – a percentage of their electricity that must be derived from renewable sources, set each year by the CER.
The CEC points out that to reach the Australian Government’s RET of 33,000 GWh by 2020, and additional 18,000 GWh of renewable energy generation will be needed in Australia every year between now and 2020. If achieved, this could create $10 billion in new investment and thousands of jobs in rural and regional Australia. According to the CEC, taking into account projects with planning approval currently and those going through the planning approval process, there are enough projects to deliver this 2020 target of 33,000 GWh.
While the CEC report is positive overall regarding the 2020 RET being achievable, it points out a number of challenges faced by the renewable energy sector in Australia:
- The surplus of high emissions intensive and older power stations are still part of the supply mix in Australia
- A major contributing factor to the surplus is the absence of clear long term policy for the electricity generation sector in Australia.
These two factors both reduce the incentive for investors to enter the large or small scale renewable energy generation market in Australia
- The current RET policy runs to 2020 (only four years away) and the entire RET scheme is set to expire in 2030
This creates an uncertainty with on two points- long term certificate prices and how the policy landscape may change post 2020 and out to 2030. When companies are looking to enter a new market they need to look at long term projections as part of their due diligence. Policy stability is essential for those companies, as is a stable regulatory system so they are aware of their obligations at every stage of the process and can plan and budget accordingly.
Any domestic uncertainty with respect to the future of the renewable energy sector in Australia is likely to have flow-on effects to the jobs of those directly and indirectly employed in the Australian renewable energy sector until the sector can see a long term future for itself and can navigate its way towards that future. Uncertainty may also threaten Australia’s ability to reach its emissions reduction target outlined in its Intended Nationally Determined Contribution (INDC) which was submitted to the United Nations in the lead up to Paris last December.
global investors who are looking for sustainable long-term returns on renewable energy investment are less likely to identify Australia as an attractive target
From an international perspective, global investors who are looking for sustainable long-term returns on renewable energy investment are less likely to identify Australia as an attractive target due to the uncertainty of the RET policy post 2020. It is only once the future is clarified that the sector can place itself in a robust position to attract international investment and a more secure future.
In a number of previous articles I have discussed the extent to which renewable energy investment and implementation has increased in a number of countries in their drive to decarbonise their economies. This trend is only going to increase in intensity in coming years and decades, and the Australian Federal Government will need to play its part in ensuring the decarbonisation of the economy. This will require deliberate and courageous action from both policy and regulatory perspectives to ensure that companies wanting to invest in either large or small scale renewable energy have the policy certainty and clarity to do so-otherwise it is difficult to justify such an investment. Quite simply, the Australian Federal Government elected on July 2 needs to increase the attractiveness of Australia as a renewable energy investment target.