Renewable energy rules lose traction

Bookmark and Share Economics & Deregulation, Deregulation Unit, Energy and Climate Change | Alan Moran
Australian Financial Review 1st February, 2012

Energy policy in Organisation for Economic Co-operation and Development countries is spurred by concerns that gas and oil are becoming scarcer and that fossil fuel emissions must be curtailed.

This view is being punctured by technology allowing massive new resources to be developed from shale and coal seam gas. Waiting in the wings for a technology breakthrough is methane hydrate, natural gas that is locked in ice, which is the world's largest source of hydrocarbons.

These developments have not prevented energy policies being dominated by carbon taxes and their uglier sibling, renewable energy requirements. The former put a price on carbon either through direct taxes such as those introduced by the Gillard government or indirectly, as with the European Union's cap-and-trade approach.

Renewable energy requirements mandate a share of renewables such as wind and solar within total electricity supply and sometimes also stipulate generous feed-in tariffs for solar. Governments also subsidise low carbon emissions through their budgets.

But the legislative steamroller of carbon taxes and regulations preventing low-cost energy is crumbling. Spain was among the first to fall. The former socialist government had already started dismantling the web of renewable energy subsidies, and the new conservative government has accelerated this.

In an ominous portent for local superannuation funds that have invested heavily in supposedly assured returns offered by wind farms, Spanish subsidies have been cut on new and existing facilities.

Now Germany is waking up. A recent survey shows one-fifth of its companies considered shifting to other countries because of high power costs arising from renewable energy obligations. Subsidies to solar power were more than $10 billion last year. The Finance Minister is calling for subsidies to be phased out, and the Environment Minister has agreed to a scaling back.

Removing the renewable energy subsidies should be straightforward for the Australian government. Now that the carbon tax is in place, the subsidies are superfluous imposts on the consumer, costing $3 billion a year by conservative estimates.

The opposition's $3.2 billion "direct action" scheme is its greenhouse policy centrepiece. Aimed at getting the best emission reductions per dollar of spending, it also makes high-cost renewable energy schemes redundant.

Savings are available by cutting superfluous policy and relying on the carbon tax or its Coalition counterpart. But this assumes the political parties' plans are based on achieving the goals set rather than being simply political exercises.