Aug

20

Clean energy target

August 20, 2009 | 11 Comments | Sam Wylie

The renewable energy target legislation will soon clear the federal parliament and await royal ascent. I am happy to give my ascent right now — 1.5 thumbs up I would say.   When the legislation comes into effect, wholesale electricity buyers will be required to have renewable energy certificates to cover 20% of their electricity purchases, or else pay $65 for each megawatt hour of electricity without a matching certificate.

I like the expansion in electricity supply that will come with the renewable energy target scheme. Our growing economy will demand more electrical energy over time, but the building of fossil fuel power plants will become more politically untenable in coming years. The renewable energy target should result in about an extra 45,000 GWH per annum of new electricity production over the next 10 years.

I also like the effective capping of the price of renewable energy certificates at $65. If RECs cannot be created in sufficient numbers over the next 10 years, so that the price of RECs rises above $65, then wholesale electricity buyers can simply pay the $65 per MWH shortfall charge. There needs to be some ceiling on the price of RECs since electricity buyers should not have to pay more for RECs than the damage they are doing to the environment without RECs.  One MWH of electricity creates about 600 kgs of CO2. So, a certificate price of $65 equates to a CO2 emission price of about $100 per tonne. Nobody can say exactly what the social cost of emitting 1 tonne of CO2 is, but $100 seems high but not completely unreasonable.

Most of the RECs will be created by wind power because it  is a mature technology and relatively cost effective in the production of clean electrical energy.  I wonder whether the scheme will lead to a subsidy of electricity prices in some areas. The areas north of Perth are absolutely ideal for wind power, especially near Geraldton. Wind is constant and strong there and the countryside is near empty. Clean electricity and RECs can be generated there, but only the RECs can be sold to electricity buyers on the Eastern seaboard. The electricity must remain in WA and hence drive down the price.

There are a few things I don’t like about the legislation. First, the REC scheme is not a direct assault on global warming and consequently it is inefficient. A direct approach would recognise that a high concentration of greenhouse gases in the atmosphere is the problem, not the buying of electricity. A direct approach requires that if you want to emit a tonne of CO2 then you need to own the right (emissions trading scheme) to do that. A direct (ETS) scheme gives electricity producers the incentive to switch from coal fired to gas fired power stations. The REC scheme does not do that. It only requires that buyers have a REC for 20% of MWH regardless of how much CO2 was emitted in the generation of the electrical power.

Second, there is scope for the scheme to be used to promote inefficient projects like the installation of expensive solar panels on the roofs of households and schools. The regulations that will make the Act of Parliament operational will specify an amount of RECs that will be created when a solar panel is installed. Going on past sponsoring of solar panel installations, it is likely that the Government will assign an irrational number of RECs to the owners of these panels.

Finally, why is it called a “renewable” energy target?   It should be called a “clean” energy target. “Renewable” is an echo of 1970s paranoia about energy shortages.


Comments

11 Responses to “Clean energy target”

  1. Matt C on August 21st, 2009 3:03 am

    So basically the conclusion is that while the ETS’s price on carbon remains below $100 this is a vastly inefficient way of reducing emissions.

  2. Appu on August 21st, 2009 9:31 am

    Sorry if I missed something, where on the CO2 emissions report can I find the 600kg or equivalent please?

  3. sam wylie on August 21st, 2009 11:21 am

    Appu,
    The figure of 600 grams of CO2 per KWH of electricity production is in Table 4 of the document at: http://www.eia.doe.gov/cneaf/electricity/page/co2_report/co2report.html#table_4
    The table reports that in 1998/9 the average CO2 per KWH was 1.33 pounds across all generation units in the US. That is about 600 grams per Kg.

  4. Sam Wylie on August 21st, 2009 11:39 am

    Matt, the $65 penalty for a wholesale electricity buyer not having a REC puts a ceiling on the price of RECs. The equilibrium price will be below that if there is sufficient supply of RECs. We will find out whether the equilibrium or the ceiling prevails in the long run.

  5. sam wylie on August 21st, 2009 11:42 am

    Matt, the $65 penalty to wholesale electricity buyers for not having a REC puts a ceiling on the price of RECs. The equilibrium price of RECs will be lower than $65 if the supply of RECs is large enough. We will find out whether the price hits the ceiling.

  6. M on August 21st, 2009 11:55 am

    Lots of points to make.
    Sam, in Australia that figure is over 800 kgs per MWh.  In Victoria it is closer to 1.2 tonnes per MWh.
    This legisaltion has nothing repeat nothing to do with climate change or emissions.  It is an expansion of the existing target that has been around since the Howard era.  It is about subsidizing the renewable energy industry and trying to get it established in Australia, this industry will be crucial post 2030 when the path towards zero emissions begins in earnest.  If the goal was to reduce emissions in the short-medium term this is a fairly bad way to go about it.
    I think the policy is a good idea and should help drive the technology costs down over time, however it’s not necessarily well implemented.
    REC multipliers for roof-top solar makes economist nauseous.  Roof-top PV should be supported by a feed-in tariff, not a multiplier to RECs (since if the 12% of target left to be met was 100% solar PV you’d end up on about 11% actual renewable energy).
    Coal mine waste gas.  Not renewable.  Good technology, should be developed.  Not renewable.
    A massive flood of wind power isn’t desirable.  Put simply its non-scheduled, most wind generates at a capacity factor of 35%.  Wind can only ever be a partial contributor to our power needs, its simply not reliable.  Wind coupled with lots of hydro is great (but we don’t and never will have much hydro here, NZ is another story).  Lots of wind generation does not lower prices, it just increases volatility (since the backup peaking generators have to make their money sometime).  Plus almost all of the components, technology and companies involved are from OS (lots of money to the spainish and danes, which is what they deserve since they did the hard yards first).
    Exempting industries is contentious.  Aluminum is the big one at 15% of electricity consumption, but once you start including all the energy intensives that starts adding up to a large fraction of total demand (close to 50% in somewhere like Tas).
    Big problem is that there is no certainty that any form of baseload renewable will be able to compete with wind on price within the timeframe.  For the long term future, base-load renewable or some sort of highly efficient, cheap, large energy storage is necessary to adapt to a zero emissions world.
     

  7. Matt C on August 21st, 2009 12:43 pm

    Sure Sam, but by definition the REC price can’t fall below the ETS carbon price in MWh terms. So where are the benefits here?
    M is right this is just picking winners.

  8. Sam Wylie on August 21st, 2009 12:45 pm

    M, I agree with most of what you say. Do you have a reference for the 800 kg/MWH? That would be very useful.

  9. M on August 21st, 2009 6:22 pm

     
    Sam the best reference on Australian carbon intensity is the EITE compensation section of the CPRS white paper I think.  However it varies a great deal between states.  Vic is probably 1.3 t CO2e/MWh. NSW/QLD are more like 1.05. Tas is only 0.13.  However remember that Tas is a net importer from VIC of a bit of its energy 10-20%.
    http://www.energytoday.com.au/contentid70.html
     

  10. Ian Westmore on August 22nd, 2009 5:53 pm

    When the legislation comes into effect, wholesale electricity buyers will be required to have renewable energy certificates to cover 20% of their electricity purchases
    With RECs being issued for 5x the renewable energy produced, the 20% target will actually be somewhere between 4-20%, the final figure being determined by the alternative energy mix. Like so much of the Government’s CC legislation, the fudge factor is very high.
    Wind can only ever be a partial contributor to our power needs, its simply not reliable. Wind coupled with lots of hydro is great (but we don’t and never will have much hydro here,
    So why not use wind generated power to overcome the country’s hydro limitation, an unreliable water supply, by pumping the water used during peak periods back uphill during the off-peak. 

    Also, while wind may not be reliable in any given area, there will usually be lots of wind somewhere across this vast continent. With the greater efficiency of high-voltage DC transmission, drawing power from even remote areas to the major population/energy consumption areas is becoming economically feasible.

  11. Kevin Cox on August 23rd, 2009 9:22 am

    I thought the myth of needing base load power had well and truly blown away. You do not want too much base lower power because we do things like put power into the ground in the wee hours of the morning. If there is a lot of variable wind power or solar power then we will find ways of coping with the variability in the same way we find ways of coping with the non variability of base load power.
    These arguments about technologies and picking winners etc are not the issue because the simple fact is that we have to stop burning coal and gas sometime or other and the alternatives, by the time we have enough generating capacity, will be cheaper than burning expensive fuels. It is called the technology learning effect and for photovoltaics it is likely to be about 50% reduction in capital costs per unit of output for each doubling of capacity and for solar thermal and geothermal about 20% reduction in capital costs.
    A better more direct approach is to fund non polluting energy sources with zero interest loans that get paid back from the profits from the production of energy. So called renewables are immediately profitable if we get rid of interest charges and repayments come from earnings.
    This also removes the need to allow people to pay for the privilege of polluting be it RECs, Emissions Permits, or putting a price on Carbon. I am troubled by the idea of allowing people to do things that are bad for us all simply by paying money especially as there are other ways of addressing the problem.