Essay Presented in a Report to Government Style: Consider, Analyse and Critically Assess Any Policy Interactions that Exist Between the Renewable Energy Target of 45000 GWh by 2020 and the Emissions Trading Scheme Proposed by the Federal Government

Essay Topic to be Presented in a Report to Goverment Style: Consider, Analyse and Critically Assess Any Policy Interactions that Exist Between the Renewable Energy Target of 45000 GWh by 2020 and the Emissions Trading Scheme Proposed by the Federal Government

Also to develop answer drawing on various renewable energy target and CPRS documents that have been produced by political parties lobby groups academics Garnaut, the treasury DCCEE and other relevant players

This submission is intended to highlight some of the interactions between the Federal level climate change policies, the new Renewable Energy Target (RET) and the Carbon Pollution Reduction Scheme (CPRS). There exist aspects between the two policies that present options for improvement in consideration of the long term effect that is anticipated.
A brief review is presented that details the key players, notably current and former Federal Government and the present National Electricity Market (NEM) that links the respective power plants. Points of contention are considered firstly on an individual basis and then from a closed economic model, subsequently a single political aspect that deals with intergenerational issues is raised.
Given the interactions that have been raised, recommendations will be considered that may influence policy amendments once valuable experience has been gained by the initial dual policy operation period.
Mandatory Renewable Energy Target (MRET), Carbon Pollution Reduction Scheme ( CPRS ) and Government.
To develop an appreciation of alliances that exist between between political and interest groups that have influenced the policy development, a brief explanation of the delayed actions of Australian Government with respect to the Conference of the Parties (COP) will assist in a close understanding of how the two policies are positioned relative to each other.
Initial undertakings by the Howard Government
In anticipation of the third COP, at Kyoto, Japan in late 1997, the Howard Government released the public document “ Safeguarding the Future” that portrayed Australia's stance with participation at Kyoto of minor importance and maintained a working relationship with the fossil fuel industries. It did though, provide a package of $180 million for climate change, the onus however was on the industry to voluntarily reduce their own emissions, hence leaving it open to subjectivity. A committee was assembled in 1998, to write a policy for renewable energy and by May 1999 its first report, provided a 2% target of total national energy that amounted to 9500 GWh by 2010. Financially this attracted $65 million of the $180 million allocated. The Government's reasoning was that Australia had a larger population growth thean other developed countries along with an energy intensive industrial base, and rapid change would cost the economy far greater per capita thaen the European or American equivalent for the same time frame. ( Kent, 2006, 1045-46)
From this the MRET policy draft was delivered, which after scrutiny was enacted by the Commonwealth Government in December 2000 and commenced on 1st April 2001 under The Renewable Eenergy (Electricity) Act 2001. Broadly stated it encompassed 3 objectives:
i/ stimulate electricity generation from natural energy sources; ii/ abatement of emissions; iii/ provide for ecological sustainability of these resources.
Administered by the Commonwealth Office of Renewable Energy Regulator (ORER), it oversees the MRET's function as a driver for promoting the development of new projects that would generate tradeable non-fungible renewable energy certificates (REC). ( Kent, 2006, 1050)
In time though, the format would prove to be far more successful thean what the Howard Government anticipated and concerns were raised that it was harmful to the coal fraternity. ( Diesendorf, 2007 cited by Schiavi, 2009, 4) However public acceptance had been concreted into Australian culture which was displayed by the 2% target of 2010, being achieved during 2006.( Diesendorf et al. 2010, 3665).
Rudd Ggovernment
The Rudd opposition had prior to the election in 2007, along with State Ggovernments commissioned Professor Ross Garnaut to evaluate the consequences of working into the Kyoto Protocol by way of introducing an emissions trading scheme (ETS) ( Lawrence, 2009, 287).
Once elected, the Rudd Government, ratified the Kyoto Protocol, that came into play March 2008. There was intent to improve the existing climate change policy, so the MRET goal post was increased to a higher 12,500 GWh by 2010 as well as yearly increases to furnish 45,850 GWh by 2020, it was then renamed the Renewable Energy Target ( RET) ( Lawrence, 2009, 289).
Carbon Pollution Rreduction Scheme ( CPRS )
As the Howard Government had established voluntary industry emission reductions from 1997, an ETS was never considered. The Government in association with the fossil fuel lobby did well to provide the argument that such an ETS would undermine the Australian economy. ( Kent, 2006, 1048)
During 2006, a drought, a water shortage, Al Gore's visit with his 'An Inconvenient Truth' film and the UK's Stern Report, were to raise significant public awareness. Consequently industry latched onto the notion that there was potential for energy sector investment in contemplation of overseas experience. Given this situation the Howard Government looked at an emissions scheme by May 2007 but even then only 'in principle'.
The National Energy Market ( NEM )
The NEM is an integral part of both schemes, it covers the interconnecting transmission lines, control of generators, monitoring of loads and the electricity pricing, which furnishes the east coast of Australia with reliable electricity. Established in 1998, it enables a complete link between electricity grids in all States from north Queensland through to South Australia. Western Australia and the Northern Territory are separate, due to their distance. Management of the NEM structure is undertaken by the Australian Energy Market Operator ( AEMO) ( AEMO, 2010).
With regard to the RET it provides access to the vastly diversified regional locality of the various renewable energy sources, providing the infrastructure to establish and exploit Australia's natural energy reserves ( Valentine, 2010, 3670). Technically there are some issues associated with remote renewable energy (RE) generation and transmission congestion, yet these are but to be overcome (Roam, 2008, 41 ) (Garnaut, 2011, 154). A second issue; both the RET and the CPRS will shift the order of despatching power stations within this network and so raises the question of renewed transmission congestion within a fossil fuel dedicated network, an issue that cannot be promptly answered without further modelling (Roam, 2008, 54 ) or without closer understanding of policy clashes.
The Ttwo Ppolicy Iintent.
Can the current RET policy, positioned to support entry of renewable energy generation in conjunction with Kyoto Protocol recommendations of “cap and trade” use of the CPRS, achieve distinct objectives as joint instruments or would they achieve results as discreet items? Oikonomou and Jepma suggest that under certain situations best results are obtained by the use of multiple policies to achieve an enhanced outcome to that of a single policy. Given the former Howard Government's delayed action with respect to promoting abatement efforts, it is understandable that the current Government place considerable emphasis in policy formulation to ensure action, with particular bias to problem areas, that of fossil fuel lock-in as well as the barriers to entry of proven new technology ( Oikonomou et al. 2008, 150) ( Wood , 208, 39).
With this in mind, consider Wood's reference to an 'innovation chain' that constitutes policies complimenting each other in achieving a desired result. In quoting Foxon et al. Wood points to three items:
1/ a carbon price upon which values may be reviewed; 2/ support at all phases of technology development; 3/ ensuring that barriers are deposed to allow diffusion and deployment.
(Foxon et al. 2007, cited by Wood, 2008, 32-33)
The intent of the two policies, begins with the RET providing the support and financial certainty to renewable energy investors to provide the much needed infrastructure. The CPRS then places a burden upon fossil fuel, pushing its price up, consequently converging the two energy prices. Once RE pricing is aligned with fossil fuel costs, the RET is meant to be phased out. ( Engineers, 2008, 3-4)
Anticipated Eeffects of Eeach Ppolicy
Wood in his treatise, details a range of effects including political, economic and social that have been analysed in an ex-ante review of the CPRS operation., tThese effects are considered to look at how the two mechanisms will interact. (Wood, 2008, 21-29)
1 Renewable energy is unable to supply the base-load requirement of the NEM, the source is intermittent and cannot be called upon to reliably supply the grid hence a constant base load of the established thermal stations is required. Illustrated with the South Australian experience where 850 MW of wind generation is installed, it is backed up with coal and gas powered electricity. When demand drops and wind energy may supply the most part, it is not physically possible to simply “turn off” the thermal stations. The technical fix has been to channel the excess energy to other parts of the NEM grid. ( Simhauser, 2011, 277-279)
As the RET is purely a support mechanism, the policy cannot ensure demand loads are maintained on RE alone without fossil fuel derived base-load.
2 Fossil fired base supply is very much a reality of the promotion of renewable energy. In as much as the replacement of fossil fuel plants will only be achievable when there is enough diversification of natural energy within the NEM to enable fossil power stations to be shut down; firstly because their base-load ability is no longer required and secondly as they become uneconomic to operate (Wood, 2008, 25-26).
3 Peak demand load generation is provided by gas turbine, it is expensive, has a small cumulative learning period, uses fossil fuel and is subject to the CPRS, albeit at a low level. As the RET brings on additional RE, the RE energy unit cost will fall, the diversification will be such that intermittent generation will not be an issue and as a result will eventually render gas turbines uneconomic. ( AEMO, 2010) (Wood, 2008,26) (Garnaut, 2008, 50)
4 A cap on national emissions will allow a periodic set quantity of emissions into the atmosphere. When RE is able to securely displace gas turbines, the surplus emissions certificates from the gas plants will become available for trade within the coal burning generators ( Wood, 2008, 27).
This situation, would be counter productive to the heavier emission abatement required. Such circumstances may need policy to be reconsidered, were emission permits are set every year in proportions to the amount of renewable energy that is available at the time.
The purpose of the scheme is to increase the cost of energy derived from fossil fuels, to bring about behavioural change in reducing consumption, as well as actively seeking fuel and technological alternatives. The following once again is taken from Wood and discusses the effects that this will have as a single policy.
1 Introducing a cost on emissions at point of source, will increase the short run marginal cost of the produced energy. Ultimately this cost will be built into the value that is supplied to the NEM. This spot price will filter down through wholesaler, distributor and finally consumer. The distributor is guided by the Australian Energy Regulator who controls the price of energy to the consumer and may place market pressure upstream such that generator profits are reduced ( Wood, 2008, 21 & 27). ( DCC, 2009 , 9)
2 The base-load coal plants have cumulative experience coupled with technologically proven equipment. New technology entrants, particularly gas turbine, come in at a considerable higher price, the advert of the CPRS will take away from the profitability of these contemporary gas turbine efficient plants with the possibility that closure may be unavoidable (Wood, 2008, 8-9).
3 Taking into account the previous two points, brown coal emissions particularly need to be addressed. The CPRS relies on a format where the levy paid is in proportion to the emission intensity, however the low cost of brown coal allows such plants to loose profits on an already high rent, yet operate economically. ( Wood, 2008, 22)
4 The CPRS will change energy costs dependent on fuel type, this price is provided to the NEM, that despatches a schedule for electricity production starting from the lowest priced utility. The market mechanism will provide a baseis for the NEM, quite independent of fuel type selecting a generator that uses cleaner fuel, in time this will lead generators to consider alternate energy forms (Wood, 2008, 21). It will also change the use of the transmission grid, that may require review so enable support of the the rearrangement of electrical supply from RE plants and gas turbines to populated regional loads ( Roam, 2008, 40-41).
5 Profit/ loss of fossil fuel generators, will play into investors desiring to go overseas where emissions restraints do not hinder operation. Australia then acquires a “carbon leakage” a phrase coined to indicate that the carbon tax displaces private enterprise and investment, effectively shifting emission across borders rather thean reducing them. (Garnaut, 2011, 83)
Subjective interaction of these individual aspects
Consider the effect of these discreet policy outcomes once the CPRS is under-way.
1 CPRS will produce “carbon leakage” of investment from Australia, to other countries that do not have such restrictions. In retrospect the RET provides support and incentive to invest in the Australian economy. Investors in either arena have different motives, it is unlikely that lost investment from the fossil sector will be channelled into the renewable energy. Garnaut, argues that this transitional leakage will persist until the rest of the world is operating an ETS at the same level as Australia, providing compensation to companies from the CPRS revenue overcomes this difficulty (Garnaut, 2011, 84).
2 CPRS will bias peak demand gas turbines, even though gas is technologically more efficient with lower emissions. The RET will push renewable energy prices down. The two policies ultimately go against expansion of gas turbine technology. Wood poses the opportunity for new generation entrants would achieve a more viable economic outcome if their portfolio of equipment had renewable generation so as to take advantage of the RET scheme (Wood, 2008, 29-30)
3 CPRS will shift scheduling plants for certain loads, as more renewable equipment comes online the NEM has a wider choice of low priced alternatives. Contemporary transmission lines as much as they provide diverse access to the grid, may not be able to undertake considerable energy flow change within the system. Although access for RE is assured, how much capacity will be available for expanding regions, for example, South Australia is about to embark on a doubling of wind capacity, from 850 MW to 1700MW which will require new lines to feed the NEM. Currently this is a limited 450 MW (Simshauser, 2011, 280) Another point, capacity improvement will hasten the opportunity to use RE for base load in place of coal and so begin with displacing thermal plant.
Direct Economic interactions between policies
Markets will see considerable movement as the two policies go about finding an equilibrium position for energy prices presented to the NEM, Wood has correlated three (3) influences that will operate simultaneously to influence equilibrium (Wood, 2008, 27-28):.
.i/ Renewable energy will in time displace marginal fossil generation. With a constant volume of CPRS certificates, the displaced fossil generation will reduce certificate scarcity, so reducing certificate price. RET will push CPRS permit price down.
.ii/ Displaced high priced marginal generators that set the spot price, will reduce the margin that is available to the incumbent coal plants. RET reducers coal profits.
.iii/ CPRS will then place an additional cost burden on the fossil plants, this will add an administration cost as the CPRS value will merely be passed downstream to the consumer. CPRS adds financial burden to coal plants.
In citing del Rio Gonzalez's literature survey, Wood explains that the outcome is complex with essentially an ambiguous result, yet provides no subjective answers (del Rio Gonzalez, 2007, cited by Wood, 2008, 27-28). Garnaut, points out in his 2008 discussion paper, that the effect of the RET may possibly lower the carbon price, which fits in with Wood's first point of the RET displacing marginal generators. Garnaut, then highlights that under such market pushed carbon pricing the CPRS may not be able to achieve the intended change (Garnaut, 2008, 51).

Political Tangibility
Both policies present different avenues to recede from exhaustible fossil fuel use, linked to detrimental environmental effects as well as climate change ( Garnaut, 2011, 3-18). It has been presented how the Howard Government worked to minimise the influence of the MRET or the embodiment of an ETS. Consideration should be given to the current level of government participation in the development of carbon capture and storage (CCS), with working projects on Barrow Island ( Garnaut, 2011, 123 ) and the Otway Basin in South Australia (Otway Fact Sheet: 2011). Wood cites the CPRS Green Paper that considers CCS as the means that will reduce emissions from thermal power plants to bring them in line with the CPRS (CPRS Green Paper cited by Wood, 2008, 46-47).

The Government stands by a non-proven and uncertain technical solution as the remedy to long term fossil derived energy production. The RET on the other hand supports well proven technology from around the world that can be implemented today so as to move away from fossil use. In this regard the two policies oppose each other within the political sphere (Wood, 2008, 47). Little has been mentioned of the resultant outcome of such gaseous sequestration, with respect to the possibility of storage failure and an eminent escape of today's emissions in our children's world. Politically, it provides impetus for a world class technological breakthrough, yet logically it shields the unquestionable issue of failure. ( Wood, 2008, 46)
1 The negative externality of carbon leakage, would do well to follow Garnaut's suggested path of transitional compensation in preventing investment leaving Australia.
2 The issue of displacing peak demand gas plant because of marginal economic operation and advert of competition brought on by the RET, may be tackled in the same way that Waste Coal Mine Gas ( WCMG) was included in the RET. WCMG is mainly methane from coal mining it too is an undesired greenhouse gas, however it is a harness-able product, therefore it was taken on under the RET as an “eligible energy source” (Valentine, 2010, 3671). Gas turbines, would be placed within the RET policy in a similar vain, yet would still need to oblige the CPRS that will provide the incentive to continually review emissions.
3 The NEM has provided the means to achieve diverse use of natural resources, that the RET is promoting, yet capacity issues relate to its inherent design based on fossil fuel generation. Allocation of CPRS revenue to upgrade the sections of most influence, in place of increasing consumer energy rates, would warrant consideration.
4 Direct economic interaction, portray that the RET will reduce the value of the CPRS permit price. The schemes are not fungible and unlike the NSW GGAS that had detrimental influences on the abatement process, yet its dedicated policy design stopped any amendments being implemented that could have remedied the failure (Passey et al. 2008, 3016), the Federal level policies do not indicate any such influence on each other. This but leaves the opportunity to allow observance of the operation and respond if signals of failure present themselves.

The influences of the MRET and the CPRS on each other have been reviewed from individual perspectives as well with direct interactions. The two policies will not provide an immediate response to the energy price equilibrium as many influences play into how they will evolve in time, this then will influence firstly how effective the achievement of 45,850 GWh will be under the RET and secondly the efficiency of the CPRS to curb emissions with respect to world standing. Additionally, other issues were discussed that were seen to play into the policy agenda including the loss of enterprises overseas in an effort to avoid the carbon tax, remedied by the transitionary payment of compensation till global uptake of similar policies provide a level playing field. Gas turbines that today constitute peak load are negatively influenced by both policy formats, precedence was used in the recommendations to shelter them under the RET policy, so as to maintain their positive contribution in relation to that of the coal fuelled generators. Continual renewable energy growth in vast diversified regional areas of Australia is proving to necessitate an sectional upgrades of the transmission line network. Improvements to remove anticipated congestion zones and projected branches of the system, would be financed from the revenue that will be available from the CPRS, rather thaen burden the sceptical consumer by an additional energy charge.

Finally, the development of CCS has been highlighted as an accepted technical solution by Government to aid the incumbent generators in perpetuating fossil fuel usage. It is then pointed out that this politically forgoes any intergenerational concerns, as well as indicating no acknowledgement of the growing technology base in renewable energy.

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