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Cutting Renewables Could Increase Electricity Bills

Originally published on RenewEconomy

A new report from global research house Bloomberg New Energy Finance has punctured the rhetoric from incumbent fossil fuel generators, saying that cutting the renewable energy target would lead to an increase in electricity bills for consumers, not a reduction.

Two of the biggest utilities in Australia – Origin Energy and EnergyAustralia – have led a chorus of opposition to the current fixed 41,000GWh renewable energy target.

They and other state-owned power generators have argued that the renewable target will force up costs to consumers, a tack that has apparently won the support of state-based conservative governments, and the federal Coalition, which has agreed to force another review of the RET to investigate those claims.

However, renewable energy groups, and the CCA, have pointed out that the biggest danger from the RET is to the revenues of coal and gas-fired generators.

This has been supported by BNEF’s analysis, which says that reducing the RET may cut the headline costs of the scheme – i.e. the amount and price of renewable energy certificates – but it would lead to an increase in electricity prices because wholesale electricity prices would rebound because of reduced competition.

“Our analysis indicates that a reduction of the Renewable Energy Target is unlikely to result in a cost reduction to the end consumer,” BNEF Australia head Kobad Bhavnagri, said in emailed comments toRenewEconomy.

“By contrast, it could actually put upward pressure on retail electricity prices. This is because the savings from reducing the target are outweighed by the costs.

“Having less renewables in the generating mix is likely to lead to higher wholesale electricity prices, because there will be less competition and fossil fuel generators can sell the power they produce for more. The total cost of higher wholesale electricity prices are likely to outweigh the savings from building less renewables.”

The BNEF analysis (see table at bottom of story), suggests that reducing the RET to a target of around 27,000GWh, as Origin and EnergyAustralia are pushing for, would mean that investment in renewables in Australia would be cut in half – from around $23.8 billion to $12.2 billion.

This would mean around 2,800MW less wind energy, and around 2,700MW less solar PV built out to 2020.

It says the headline costs of the scheme would fall, because the price of renewable energy certificates (RECs) would decline by around 9 per cent. However, this was likely to be offset by increased cost of financing caused by yet another change in government policy.

And because the wholesale price would rise, the overall cost of electricity bills to consumers would increase by $1.3 billion, even though the “headline” cost of the scheme (the RECs) would fall by $1.9 billion.

“Reducing the Renewable Energy Target will, in isolation, bring down the headline cost of the policy,” BNEF writes in its report.

“But having less renewables in the generating mix is likely to lead to higher wholesale electricity prices, because there will be less competition and fossil fuel generators can sell the power they produce for more.

“The total cost of higher wholesale electricity prices are likely to outweigh the savings from building less renewables.”

It notes that renewables like wind and solar power place downward pressure on wholesale electricity prices because once they are built they produce power at practically zero cost.

“This is changing the dynamics of energy markets around the world and cutting the revenue and profits of coal- and gas-fired power stations,” it notes.

“Logically, that is one of the chief reasons why owners of fossil-fuel power assets around the world are beginning to oppose policies that lead to more renewables – it places significant pressure on their business models.”

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Written By

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.

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