Revised Renewable Energy Target to provide greater investment certainty

WHAT YOU NEED TO KNOW

• The Renewable Energy (Electricity) Amendment Bill 2015 was passed by the Senate, without amendment, on 23 June 2015.
• The Renewable Energy (Electricity) Amendment Bill 2015 sees Australia's Large-Scale Renewable Energy Target reduced from 45,000 GWh to 33,000 GWh in 2020 and the abolition of periodic reviews of the Renewable Energy (Electricity) Act 2000 (Cth).
• The changes to be made under the Renewable Energy (Electricity) Amendment Bill 2015 should provide greater investment certainty in Australia's renewable energy industry. The extent to which this translates to investors finding it easier to secure electricity off-takers and project funding for new projects remains to be seen.
• The Renewable Energy (Electricity) Amendment Bill 2015 will commence the day after it receives Royal Assent.

WHAT YOU NEED TO DO

• If you are looking to invest in Australia's renewable energy industry, now is the time to re-engage with retailers and large industrial customers on the negotiation of any offtake and power purchase agreements required to assist with the securing of project funding.

Introduction

On 23 June 2015, the Australian Senate passed the Renewable Energy (Electricity) Amendment Bill 2015 (Bill) which will see Australia's Large-Scale Renewable Energy Target (LRET) reduced from 41,000 GWh to 33,000 GWh in 2020.

The Bill will commence the day after it receives Royal Assent.

Background

Australia's Renewable Energy Scheme (RET Scheme) is set out under the Renewable Energy (Electricity) Act 2000 (Cth) (REE Act). The RET Scheme has three primary aims:

• to establish a mandatory renewable energy target for Australia to be achieved in 2020 which, includes both the LRET component and a Small-Scale Renewable Energy Target (SRET) component;
• incentivise eligible large-scale voluntary participants who wish to invest in, or generate renewable energy, to lower their consumption of main grid electricity, by allowing for the production of large-scale generation certificates (LGCs); and
• impose obligations on participants who are required by law to surrender LGCs to offset the generation of emissions intensive energy, and meet compliance obligations (ie the obligation on retailers to purchase a volume of LGCs, issued by accredited large-scale renewable electricity generators, which equates to a target proportion of their total wholesale electricity purchases or pay a (non-tax deductible) $65/MWh penalty to the Federal Government for each MWh equivalent of their shortfall in LGC purchases each year).

In 2014, an independent expert panel (Panel), chaired by Mr Dick Warburton, undertook a review of the operation, costs and benefits of the RET Scheme.

The Panel found that since commencement of the RET Scheme there had been a number of changes in the economic landscape (in particular falling electricity prices and falling electricity demand growth) which have led to questions about whether the objectives of the RET Scheme remain appropriate. The Panel's recommendations, following its review, were that the RET Scheme should be amended to provide greater investment certainty and the LRET of 41,000 GWh of renewable generation in 2020 (predicted to be about 27% of Australia's electricity demand in 2020) should be scaled back.

On 18 May 2015, the Federal Government and Labor opposition announced that they had reached a bipartisan deal to reduce the LRET to 33,000 GWh in 2020.

To implement this change, and make other consequential amendments to the RET Scheme, the Bill was introduced and has now been passed (without amendment) by the Senate.

Changes to be made by the Bill

Our alert of 27 May 2015 provides an overview of the key changes proposed by the Bill and the amendments to the REE Act, the Renewable Energy (Electricity) Regulations 2001 (REE Regulations) and Climate Change Authority Act 2011 (CCA Act).

In summary, the Bill will make the following key changes to the RET Scheme:

• amend the REE Act to reduce the legislative annual targets for large-scale renewable sourced electricity for each year from 2016 until 2030 to provide a smooth transition to achieving an LRET of 33,000 GWh in 2020 (with this level to be maintained until 2030); and
• repeal the requirement for periodic reviews of the operation of the REE Act.

In addition to these key changes, the Bill will also:

• remove the separate adjustment to the 2016 to 2020 targets to re-allocate surplus certificates (from prior to the commencement of the separate LRET and SRET in 2011) and the existing 850 MW allocation of non-renewable generation using waste coal mine gas, as these adjustments have now been incorporated into the targets set out in the revised table appearing in section 40 of the REE Act (as amended);
• increase the rate of exemption from LRET liability for electricity used in undertaking emissions-intensive and trade exposed activities to 100%; and
• amend the REE Regulations to reinstate native forest wood waste as an eligible renewable source under the same conditions that existed prior to its removal from eligibility in 2011 (which includes a requirement that the biomass arise from a harvesting activity where the primary purpose is not energy production – referred to as a "high-value process").

Upon its introduction into the Senate, a number of amendments were proposed to the Bill by the Greens (and supported by Labor) which sort to remove the native forest wood waste element from the Bill. The Greens' concern was that the inclusion of native forest wood waste would encourage native forest logging for the purposes of electricity generation.

The amendments were unsuccessful after the Federal Government secured the majority support for the Bill by reaching a deal with four crossbenchers to establish a wind farm commissioner.

Wind farm commissioner

Although the specific details about the functions of the wind farm commissioner are yet to be confirmed, early indications are that the role of the wind farm commissioner will be to:

• handle complaints, and assist with the resolution of community issues, in respect of wind farms; and
• publish sound monitoring data and information about the hours that turbines operate and the noise they generate.

The Federal Government has also agreed to create an independent scientific committee to provide research and advice to the Minister for the Environment on the impact on human health of audible noise (including low frequency) and infrasound from wind turbines.

The Federal Government has not yet confirmed a timeline for the establishment of either the wind farm commissioner or independent scientific committee.

What does a revised LRET mean for industry

Although the Bill sees the LRET cut by around 8,000 GWh, the new LRET of 33,000 GWh still represents approximately 23.5% of Australia's projected 2020 electricity demand.¹ To reach the new LRET, an additional 18,000 GWh of renewable electricity generation is needed over the next five years. This represents several multiples of the renewable generation that has historically been built over the past decade.

The ambitious LRET, coupled with the scrapping of the periodic reviews of the REE Act, is intended to ensure:

• there will be greater certainty for investors who are looking to participate in Australia's renewable energy industry; and
• a continuing demand for LGCs from electricity retailers that are required to purchase LGCs issued by accredited large-scale renewable energy generators, to meet their liability under the REE Act.

However the annual electricity demand growth in Australia is predicted to continue to decline and, despite any temporary rise in demand growth driven by liquefied natural gas projects in Queensland, Australia currently has, and is predicted to continue to have, an oversupply of electricity generation capacity until 2020.

Participants who act at the earliest opportunity to secure power purchase agreements, grid connection agreement and obtain all required approvals for their projects are more likely to secure early financing for their projects and capitalise on Australia's renewable energy market.

What you need to do

If you are looking to invest in Australia's renewable energy industry, now is the time to re-engage with retailers and large industrial customers on the negotiation of any offtake and power purchase agreements required to assist with the securing of project funding.

_{Based on the predicted annual electricity demand in 2020 of 245,300 GWh (see the Renewable Energy Targe Scheme Report of the Expert Panel, dated August 2014, available here) and taking into account the pre-existing (ie pre-RET Scheme) renewable generation of approximately 15,000 GWh and the small-scale renewable energy contribution of approximately 4,000 GWh.}