Australia's carbon shift
The new carbon price aims to boost investment in Australia’s renewable energy sector. But will its true potential be hampered by political and regulatory uncertainty? Jomo Owusu reports.
Australia’s carbon price mechanism came into effect on 1 July 2012. Placing a price on carbon is the core element of the Australian Government’s emissions reduction policy. It is designed to help reduce Australia’s greenhouse gas emissions by 5% by the year 2020, based on year 2000 levels.
The Government estimates the combination of the carbon price mechanism and the existing renewable energy target (RET) will deliver around AU$20b (US$20.7b or €16b) in renewable energy investment by 2020.
Long time coming
The carbon pricing mechanism came at a critical time for Australia’s renewable energy sector. Policy uncertainty, including the demise of the Carbon Pollution Reduction Scheme and the collapse in the Renewable Energy Certificate (REC) price, had seriously affected the viability of many large-scale renewable energy projects.
Our Renewable Energy Country Attractiveness Indices report, which ranks national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies, shows that Australia rose from 16th to 12th over the past year.
While much of this shift can be attributed to European countries falling down the index, it is also partly due to renewed confidence as a result of the carbon pricing mechanism and new funding incentives surrounding renewable energy.
While industry has welcomed the carbon price, uncertainty remains and threatens to undermine long-term investment in the renewable energy sector.
Australia’s political opposition has “promised” to retract the legislation should it come into office (Australia’s next federal election is set for 2013). The scheme’s ability to support renewable energy development is under question. Coupled with recent regulatory uncertainty with respect to the RET, the new era of renewable energy in Australia could prove to be a false dawn.
Under the carbon pricing mechanism, the price of carbon is fixed for an initial three years (see inset box) before transitioning into an emissions trading scheme (ETS) in 2015, when the price of carbon will be linked to the European Union Emissions Trading Scheme.
A key concern for investors is the possibility that the transition to an ETS linked to European prices may see the carbon price fall, taking away Australia’s impetus to change from a carbon-intensive to a non-carbon-intensive economy.
In our discussions with clients, it is clear that the RET will be the primary driver for investment in the renewable energy sector. It is crucial that the Government provide certainty to investors by resisting the temptation to tinker with the RET or any of the supporting regulations.
Opportunities in wind, solar
Despite the uncertainty, it seems clear that Australia is undergoing a “carbon transformation” that can only encourage investment in renewable energy.
Onshore wind remains the most attractive technology, although “not in my backyard” protests have led to restrictive planning regulations in Victoria, which may creep into other states. More certainty from government and streamlined planning processes are needed to maintain investor confidence in the sector.
Projects involving solar photovoltaics (PV) are also becoming more popular with investors and big carbon emitters, such as mining companies. These companies are keen to ease the cost of energy because it has already increased since scheme was introduced on 1 July.
A move toward natural gas is also expected, with major utilities such as Origin Energy investing heavily in what is seen as a transition technology.
The carbon pricing mechanism, though largely well received, remains controversial. While the fate of the carbon pricing mechanism in its current form remains doubtful, it is certain that Australia is planning for a carbon-constrained future.
With bipartisan support for a 5% cut in emissions by 2020 as well as the RET, carbon policy will remain a key area of economic reform in Australia for the foreseeable future, providing hope to investors that a new era of growth in renewable energy investment is just around the corner.
Key features of Australia’s carbon scheme:
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|Our Renewable Energy Country Attractiveness Indices – updated quarterly – provide scores for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies. Read the latest issue here.|