FINANCE AND PUBLIC ADMINISTRATION LEGISLATION COMMITTEE - 08/02/2010 - PRIME MINISTER AND CABINET PORTFOLIO - Department of Climate Change

Senator «MILNE» -I would like to start by asking some questions about the renewable energy target. I note, Dr Parkinson, that you say in your review in the annual report:

... the RET will be a key driver of a significant ramp-up in the deployment of renewable energy in Australia.

You also talk about the mission of the department:

To support the government ... through

* advice to the government that is of the highest quality, integrated, objective and well informed
* effective delivery of programs and services-

which I am sure you know by heart. I would like to ask you whether you believe that the current design of the RET is providing that highest quality advice, given that it is not leading to the investment in large-scale renewables across Australia.

Dr Parkinson -We stand by the advice that we have provided. You are right that there are questions in parts of industry about the renewable energy target and the REC prices, if that is where you wanted to go. I think one of the things that we are seeing at the moment is that you have a spot market that is being influenced by a range of factors. In a sense, I suspect, we have a bit of an information gap in parts of the market at the moment; people are not fully cognisant of the extent to which the renewable energy target steps up in the period ahead. So I think what we have is a temporary dip in price that will not be sustained.

Senator «MILNE» -What is your assessment of the likely contribution of solar hot water and heat pumps to the target?

Mr Comley -Over the life of the scheme?

Senator «MILNE» -Yes.

Mr Comley -We have not published updated modelling, but my recollection is that that number is below 10 per cent of the total target.

Senator «MILNE» -And in the short term?

Mr Comley-The short term has been higher than that. There was a very substantial creation of these certificates last year; it would have been above 50 per cent last year. I do not have the precise number in front of me.

Senator «MILNE»-At the moment some people estimate we have up to $20 billion of investment in wind parked at the moment. Certainly the Musselroe wind farm in Tasmania is on hold, with no prospect of an increase in the price of the renewable energy certificates. What is the department's assessment of when we can expect investment in, say, large-scale wind to resume?

Mr Comley-The department, for obvious reasons in terms of commercial sensitivity, do not either forecast precise REC prices or pass comment on specific projects about when we think they would go ahead, but I think there are two things. On the question about what has happened to REC prices, there are two factors that I think are not fully understood by the market. The first is that there was a very large surge in solar and hot water usage last year. Part of that was to do with the stimulus package and also the solar homes and community package-and now the $8,000 rebate has changed. The second thing is that lot of people are focused on the stock of unused renewable energy certificates in the market, because they have built up. Certainly analysis that we have done indicates that that stock is no higher-at lease as a proportion of the target-than in the previous three years. Essentially, as you know, through the renewable energy certificate market, what happens is that through the year the number of certificates builds up as people generate certificates and there is a significant reduction. It appears that once you retire the target for this year and add the retirement for green power, the number of certificates left in the market as a proportion of next year's target is actually lower than it has been for the previous two years. So, to the extent that there are excess RECs in the market, this is no different from what has been the case for the last three years and, as the target ramps up, what is expected to occur is that you will soak up that excess supply of RECs. The final thing I was going to comment on, apart from that market dynamic, is that a review was commissioned to go through the COAG process to look at things such as small-scale generation, and COAG is going to be considering that review and the implications for REC at its first meeting.

Senator Wong-Obviously it was our policy. It is a very significant increase in renewable energy in Australia, a fourfold increase out to 2020. Obviously we want a well-functioning market. The officials have correctly identified a range of factors that have been pointed to by stakeholders and others as contributing-for example, volatility in the REC price. There is not a consistent set of views; there are a range of views. I can say to you that we are very committed to ensuring a well-functioning market, and we will consider carefully the COAG consideration and also continue to have a close dialogue with the relevant stakeholders. But, as I said, there appear to be a range of issues to which people point which might be affecting the increased market.

Senator «MILNE» -In relation to that, what level of investment has there been in solar thermal or geothermal since the increase in the RET?

Mr Comley-There is no active geothermal in Australia. There has been quite a lot of activity. I do not have the figure in front of me but I recall that, just before Christmas, new government grants were allocated to geothermal. Certainly discussions I have with the industry indicate that there is quite a lot of activity. Some of it is limited by the availability of drilling rigs and the funding for those drilling rigs, but geothermal work is continuing. I think most industry proponents, and the modelling that was done for us last year, do not expect that to come online until the middle of this decade.

In terms of solar thermal there is obviously the Solar Flagships program, which I think is going to allocate $1.5 billion to that process. The whole design of the RET, as you know, was going to pick up more of the market-ready technology, so it was more the Solar Flagships that was intended to pick up the large-scale solar thermal.

Senator «MILNE» -That is precisely my point, though: the RET will not bring on investment in geothermal or solar thermal; that is going to be a government grants program-wind technology was the technology that it was expected to bring on, but the price is now too low. Has the department done an assessment of the Greens' proposition that we add the certificates from solar hot water heat pumps and the solar multiplier to the top of the target? Have you actually done any work on an assessment on what the effect of that would be?

Mr Comley -Can I just come back: I think there is a difference between solar thermal and geothermal. Certainly, the modelling we-

Senator «MILNE» -But neither of them will be brought on with the RET.

Mr Comley-That is not what our modelling indicates for geothermal. In fact, the modelling that was done last year for geothermal had around about a quarter of the target made up by geothermal by 2020. So the modelling we had indicated that geothermal, if the way the technology develops as is currently considered by the modellers is accurate, would be cost competitive within a RET framework. Solar thermal is different. Solar thermal does not look like it would be cost competitive within a RET framework, at least to the REC prices that we are talking about.

On your last question, the department has done an analysis of the implications of what the policies put forward by the Greens would mean.

Senator «MILNE» -And?

Mr Comley -We provide that advice to the minister. A lot of that involves a policy shift, which would involve a change of target.

Senator «MILNE» -What would be the impact, though, in terms of the overall program and the price-Minister?

Senator Wong -Could I take that on notice, Senator?

Senator «MILNE» -Yes, all right.

Senator Wong -It might be better for a briefing, if appropriate.

Senator «MILNE» -Just to follow up on this, I notice with the COAG process that there is meant to be a ban on electric storage systems from 2012. In two of the states, South Australia and Queensland, new houses are now no longer able to have the electric storage systems. I wondered what overview the Commonwealth is taking to make sure that this phase-out of electric storage systems will actually take effect from 2012. And what difference do you think it is going to make to the renewable energy certificate price, if everybody has to switch over to solar or-

Mr Comley-I am not sure that the Commonwealth, beyond just the Department of Climate Change, can ensure that states enforce regulations they have put in place.

Senator «MILNE»-Let us assume that all the states do comply within the time frame. What is the likely impact of that, if you are banning electric storage systems and everybody is going out and buying solar systems, heat pumps and whatever?

Mr Comley-I would have to take on notice the extent to which that was already incorporated in the modelling that was prepared last year. I cannot remember exactly when that was announced. I have a feeling they had been announced for some time. If that were the case, they would already be incorporated in the modelling that we have. But I would have to take on notice the precise details of that question.

Senator «MILNE»-Yes, I would like to know whether that was incorporated in the thinking. If not, what happens if all that comes on-stream and the government's rebate is still in the market? What would that do to the REC price?

Dr Parkinson -Happy to take that on notice, Senator.