A new Grattan Institute report argues that the federal government should scrap the solar feed-in tariff and abolish the renewable energy target and instead initiate a tender process for renewable energy through a $150-$200 million fund.
Instead, it has proposed that the federal government should initiate long-term contracts with project developers to buy electricity at prices that facilitate the commercial viability of low-emissions technologies.
These contracts could be awarded through a series of six-monthly reverse auctions held over 10 years that could result in at least 5% of electricity generated through low-emissions sources, the report states.
The report’s author Tony Wood noted that contracts would have two key parts including a “contract-for-difference” or a CFD between the actual price of carbon and a forward price to which the government could commit. This, he argues, would reduce the carbon policy risk.
The second component would be to put a premium on the wholesale electricity prices, which can be determined by a competitive bidding process and paid on the electricity generated. This would reduce the technology risk associated with an early mover.
The report argues that in the absence of carbon pricing, schemes such as the renewable energy target and the solar feed-in tariffs have worked well, delivering significant abatement at reasonable costs. These schemes have contributed to “learning by doing” with regards to the technologies that have been deployed, mostly wind energy
However, once the effective and free emissions trading scheme is in place, as envisioned through the federal carbon pricing plan, the need for these subsidies should abate. The report advocates the niggling policy issue of what to do with the existing contractual and commercial commitments made under the plan could be addressed through grandfathering these arrangements.
The Grattan proposal addresses the key deficiency of the current government’s carbon pricing scheme, where the development of renewable energy essentially depends on the government to initiate action.
“The carbon price is inherently uncertain because it depends on the decisions of the governments, and the track record is not good,” Wood said.
“As a result, carbon will be under-priced and investment in low-emissions technologies will remain critically inadequate.
“Our proposal has a cost but if we do nothing, the cost will be much higher as the emissions reduction task gets harder in years to come,” he said.
The Grattan report noted even though the Coalition’s direct action plan will put a price on carbon indirectly, the plan is vague as it is not clear how the lowest cost technologies will be deployed if they were still in early stages of commercial development.
This article first appeared in ILN's sister publication EnergyNewsBulletin.net.