The Future of Renewable Energy in Australia: A Test for Cooperative Federalism?

Authors


Abstract

In the context of the Australian federal system industry development will be influenced by the policies of each sphere of government. When announcing a set of policies in 1997 to develop the renewable energy industry the Australian federal government acknowledged the need for a cooperative approach between all governments and industry. The objective of this article is to analyse the government policies over the 1997–2007 period to promote the development of the renewable energy industry in Australia. The article highlights a number of factors that have served as barriers to the development of the industry. The research provides important insight into the difficulties associated with establishing cooperative national arrangements in areas of state government responsibility in the Australian federation. The lessons also inform the current debate on the policy initiatives needed to more effectively reduce greenhouse gas emissions from stationary energy from the increased availability of renewable energy.

The Australian federal and state governments have acknowledged through various policy commitments their recognition of the impact of anthropogenic activity on global warming. There is now a common acceptance that increasing greenhouse gas (GHG) emissions contribute to a situation that is being described as a ‘diabolical policy problem’ that will have considerable negative impacts on Australia economically, environmentally and socially (Garnaut 2007; IPCC 2007; ABRCC 2006). The use of fossil fuels in stationary electricity generation and transport contributes to approximately 70% of total GHG emissions in Australia (AGO 2007). Business groups have joined with environmental groups to pressure governments to commit to early action to reduce these emissions; they argue that delays will increase costs, risks to climate, and the likelihood of a disruptive shock to the economy (ABRCC 2007).

In the context of debate about global warming and the search for abatement measures to reduce GHG's from the generation of stationary electricity there has been considerable demand that government policies provide even greater levels of support for renewable energy. Experience in other developed nations shows that without favourable government policy intervention renewable energy providers cannot survive (Beck and Martinot 2004). The experience of other federal systems is that the most effective outcomes have been the result of the combination of coordinated national and sub-national government policies that account for the complex issues associated with the expansion of renewable energy (Beck and Martinot 2004). Within the Australian federal system stationary electricity supply is a state government responsibility. Any attempts by the federal government to effectively introduce national policies or reform initiatives in areas of state responsibility must be with the cooperation of the states and territories. The development of renewable energy is one tangible area where there has been federal policy measures introduced that required the cooperation of the states to expand the contribution of renewable energy to electricity supply systems.

The Australian literature on federalism suggests cooperation between the jurisdictions creates dilemmas in terms of accountability, responsibility and resource allocation issues. The record of federal–state relations provides evidence of administrative inefficiency, policy duplication and blame shifting (Sharman 1989; Wiltshire 1990). New federalism initiatives introduced in the early 1990s were designed to encourage and support cooperation between the jurisdictions through formal arrangements such as the Council of Australian Governments and joint Ministerial Councils within specific portfolios. The federal government has shown a tendency to involve itself in areas of its own choosing using its fiscal superiority through funding arrangements to encourage compliance from the states (Brown 2007; Selway 2001). Experience illustrates that the states and territories can be effective in inhibiting federal government initiatives in areas outside its constitutional responsibility, for example, refusal by the Victorian government to agree to the national water plan (Sinclair 2007); state government indolence in establishing national consistency in public education (Jones 2008); and the procrastination by some states to introduce uniform gun laws in 1996 (Laming 2007).

A general definition of cooperative federalism suggests ‘a willingness (or at least an acceptance) between two levels of government to work together in order to solve problems that are the constitutional responsibility of one or both levels’ (Laming 2007; Sawer 1977). Parkin and Anderson (2007) argue that structural arrangements within the Australian federal system make it sensible for even the most ambitious centralising federal government to pursue a strategy of cooperation and collaboration in achieving its agenda. The trend since federation however, has been for the states to comply with federal intrusion to the point where many commentators question the long term relevance of state governments (Brown 2006; Craven 2005; Wiltshire 2005). The development of renewable energy over the last decade helps to inform the Australian debate on federalism and the cooperation needed between jurisdictions to achieve national policy objectives. In this regard policy measures introduced to expand the contribution of renewable energy to stationary electricity supply provide an example to test cooperation across the federal system.

Australian governments recognise that energy supply is their shared responsibility despite the fact that constitutional demarcation allocates electricity supply to the states and territories (COAG 2001). A number of policy measures were introduced by the federal government in 1997 to increase the percentage of renewable energy sources to electricity supply. While the measures raised the level of development activity in the renewable energy industry they failed to increase the net contribution of renewable energy to the supply of stationary electricity in Australia. This article will discuss the policies that were designed to develop the Australian renewable energy industry and expand its contribution to stationary energy over the 1997–2007 period. This is an especially important time because it provides evidence of a mix of factors that served as barriers to the development of the renewable energy industry. These factors include:

  • • lack of a comprehensive cooperative coordinated approach to dealing with issues impacting on the industry;
  • • ‘short termism’ or the boom/bust disjointed approach to industry development policy;
  • • the fragmented approach by states and territories to energy market reform support for the renewable energy industry; and
  • • the dominance of the prime minister as the ‘driving force in shaping the government's policy agenda’.

The results of these factors impacted negatively on the development of the industry and the reduction of GHG in Australia. Australia continues to be in the top three of the world's largest emitters of GHG on a per capita basis, based largely on the use of inefficient coal fired power stations (UNHDP 2007; CGD 2007). In the context of Australia's commitment to global emissions reduction targets there is a need to improve the effectiveness of policies that reduce GHG emission by increasing the availability of renewable energy in the supply of electricity.

Renewable Energy in Australia

Australia is described as being exceptionally rich in naturally renewable or replenishable resources for energy from sources like solar, geothermal and wind (Garnaut 2007). The most optimistic predictions claim that 60% of Australia's energy needs could be provided by wind and bioenergy by 2040–2050, with only small advances in solar and geothermal technologies needed to supply the remainder (Diesendorf 2007). The 2007 Communiqué of the Renewable Energy Generators Australia (REGA) claimed:

…the renewable energy industry has the technologies available now for large scale deployment at a reasonable cost to ensure that Australia's ongoing energy security needs are met and that the emissions abatement challenge commences immediately (REGA 2007).

Business groups see renewable energy providing the opportunity to diversify the energy mix and increase security of supply (WACCI 2007). By increasing the use of renewable energy, supporters argue, Australia can reduce the impacts of global warming by making considerable reductions in GHG emissions which would help achieve targets set under the Kyoto Protocol and help reduce the impact of climate change in the context of economic growth increasing demands for energy. According to the Australian Bureau of Agriculture and Resource Economics (ABARE) the main drivers of energy consumption in the Australian economy are industry activity in the energy intensive sectors and gross state product in non-energy intensive sectors. Fossil fuels have traditionally made up approximately 95% of the total contribution to energy supply. The annual growth rate for primary energy has been declining from an average of 5% in the 1960s to 2.3% in the 1990s (ABARE 2007a; IEA 2004). This decline is due largely to two main factors: greater energy efficiency through technological improvements and fuel alternatives to coal; and the growth of less energy intensive sectors, such as services, relative to the more moderate growth in sectors such as manufacturing and mining (CSIRO 2006).

The support of business groups for renewable energy took on added impetus in 2006 with the work conducted by the Australian Business Roundtable on Climate Change (ABRCC 2006). Business concerns were over Australia's reliance on fossil fuels as the main source of energy which was seen as economically marginal with the risk of becoming increasingly unviable. Their report, A Business Case for Early Action argued that delays in introducing measures to reduce GHG emissions would increase costs for business and the community in terms of abatement measures and energy costs. According to the report governments had a responsibility to encourage early investment in renewable energy. According to renewable energy industry associations Australia had many examples in the renewables sector of world-class research being unable to find local firms interested or capable of carrying through to commercial success technology developed through publicly funded programs. Such losses were placing Australia further behind other developed nations in terms of research and technology for alternative sources of energy and doing little to reduce GHG emissions from stationary energy supply.

Public opinion polls conducted in 2006 indicated a high level of support by respondents (77%) who would prefer energy to be provided from renewable sources (MacIntosh and Hamilton 2007). However, there was an underlying skepticism:

Although there is sympathy for alternative energy solutions, such as renewable energy, this is tempered by a belief that they are not reliable enough to supply a large proportion of energy need (CSIRO 2006).

As community concern over the high levels of Australia's GHG emissions began to intensify over the past decade it became increasingly evident that renewable energy would need to be part of a paradigm shift that incorporated more sustainable practices involving increased efficiencies in energy use, a reduction in waste and increased recycling. However, the expansion of the renewable energy industry would require more than public acceptance. Increasing the availability and reducing the cost of renewable sources would also require well targeted and coordinated government policy intervention. In Australia government policies and programs that support the energy sector have traditionally consisted of direct and indirect subsidies that benefit both producers and consumers. The complexity of the subsidy arrangements resists precise assessment but accurate estimates claim the level of this support has been in the order of $10 billion annually with the vast majority of these funds directed to support fossil fuel based energy sources (Riedy 2007). Policies cover an array of areas ranging from tax concessions and subsidies through to direct grants for industry and technology development. Research by the Institute for Sustainable Futures in 2007 demonstrated that in 2005–06 less than 4% of government subsidies to the energy sector provided support for renewable energy and energy efficiency (Riedy 2007).

A parliamentary Standing Committee on Industry and Resources report, Renewable Power argued in 2007 that while a number of technological advances had been made, more work needed to be done to reduce costs and encourage the take-up of renewable energy industry in Australia (HRSCIR 2007). According to the report the drivers for renewable energy incorporate a desire by governments to ameliorate the environmental impacts of fossil fuels, the economic benefits of a more distributed method of energy generation, and the increasing demand by consumers for competitively priced renewable energy products. In 1997 renewable energy accounted for approximately 5.9% of primary energy consumption, by 2007 projections indicated that, based on existing policy and technology in a ‘potentially expanding’ energy market, the relative share of renewables would remain in the 5–6% range until 2030 (ABARE 2007a). While expectations for growth have been high the reality has been one of stagnation and decline over the past decade. The main renewable sources would continue to be hydro, wind, biomass and biogas. Table 1 compares the projected growth of renewable energy with the main fossil fuel sources from 2006 to 2030. Under the existing policy instruments wind, solar photovoltaic and biogas would achieve the most significant growth, albeit from a very low base, but fossil sources would remain the dominant fuel type (HRSCIR 2007).

Table 1.  Energy Production in Australia by Fuel
 ProductionAverage Annual Growth
2005–06 PJ2011–12 PJ2019–20 PJ2029–30 PJ2005–06 to 2011–12 %2005–06 to 2029–30 %
  1. Source: ABARE 2007a.

Black Coal8 15610 12911 38913 037 3.72.0
Brown Coal  704   755   817   801 1.20.5
Natural Gas1 742 2 626 4 619 6 135 7.15.4
Hydro   59    64    68    73 1.30.9
Wind    7    18    19    2318.55.4
Biomass  186   245   315   327 4.72.4
Biogas    7    41    40    3833.47.1
Solar    3     3     4     4 2.31.9

In contrast to the volume and range of policies that supported the fossil fuel industry, federal government policies introduced in the 1997–2007 period that encouraged the development of renewable energy were primarily restricted to a small number of industry development policies and the application of a renewable energy target. While the policies were described by the Minister for Industry, Science and Resources as a way of placing renewable energy on a ‘sustainable long-term growth path’, in reality they served to hobble the industry. This is best viewed through a chronological examination of policy development.

The Australian Federal Government's Renewable Energy Industry Policy

Federal government support for the renewable energy industry was first announced by the then Prime Minister, John Howard in the 1997 with the release of Safeguarding the Future: Australia's Response to Climate Change (Statement). The Statement outlined a commitment of $65 million to ‘ensure’ an increase in the contribution of renewable energy to Australia's energy needs. The intention of the policy was to ‘accelerate the uptake of renewable energy in grid-based power applications, and provide an ongoing base for commercially competitive renewable energy’ (Howard 1997). The Howard government committed to working cooperatively with the states and territories to source an additional 2% of their electricity from ‘commercially competitive’ renewable sources by 2010. The prime minister argued that the new policies would replace the ‘random and disjointed’ approaches of the past. Programs introduced by the Statement included supply side measures that would provide direct financial assistance to industry for renewable energy development. The new industry programs would ‘stimulate innovative technologies, employ Australians and export to the world’.

Renewable Energy Action Agenda

The Department of Industry, Science and Resources (DISR) was responsible for the policy measures introduced as a consequence of the Statement. The industry development policies were packaged under a 10 year plan: the Renewable Energy Action Agenda (REAA). Action Agendas were a new industry development initiative providing support for industry introduced by the prime minister through the Investing for Growth strategy that would see policies ‘developed in consultation with specific industry sectors, to ensure that impediments to growth at the sectoral level are removed’ (CoA 1997). Renewable energy became another area of contestable decision-making with the policy advice being sourced from the public sector, industry groups and the political executive (Halligan 2000).

The main aim of the REAA was to ‘grow the market’ and achieve $4 billion in renewable energy industry sales by 2010. This figure represented a significant challenge as industry sales in 2000 were only $330 million, to achieve the target sales would need to increase at a rate of approximately 26% per year. Five strategic directions were identified: market development; industry capability; community commitment; innovation; and the policy framework. Raising community awareness to the benefits of renewable energy was also seen as an essential activity that would counter the view that it was an expensive and uncompetitive source of energy. Programs to promote innovation within the industry were introduced through a Renewable Energy Technology Roadmap which was designed with the intention of encouraging new products, reducing costs and supporting export growth. In announcing the REAA the then federal minister Nick Minchin claimed it was a ‘partnership between the Commonwealth and industry’ and represented a ‘strong commitment to a viable and sustainable renewable energy industry’. The REAA also represented an attempt to coordinate key elements of government activity that impacted on industry development and would require collaboration with state, territory and local governments (DISR 2000).

Mandatory Renewable Energy Target

Three key pieces of legislation were introduced to support a national Mandatory Renewable Energy Target (MRET) as a ‘market-based mechanism’ that would apply to all electricity retailers and wholesale electricity purchasers in grid systems of over 100MW. This was the first mandatory target in the world and set Australia as an innovator in promoting renewable energy (Kent and Mercer 2006). The legislation included the Renewable Energy (Electricity) Act 2000, Renewable Energy (Electricity) (Charge) Act 2000, and the Renewable Energy (Electricity) Regulations 2001. The legislation established:

  • • Targets for the inclusion of renewable energy in electricity generation by the year 2010; and
  • • Legal requirements on electricity retailers and other large electricity buyers to source an additional 2% of their electricity from renewable or specified waste-product energy sources by 2010.

A joint working group established in 1999 consisting of federal government and industry representatives reported details of the phased implementation of the MRET, with a start date of 2001. The expectation was that as a result of the target the total contribution of renewable energy to Australia's electricity supply by 2010 was expected to reach approximately 12.7% (representing approximately 9,500 GWh of renewable generated electricity). The target would remain in place until 2020.

Under MRET renewable energy wholesalers and retailers (liable parties) were required to purchase an increasing share of their electricity from renewable sources. Liable parties demonstrated their compliance through the purchase of Renewable Energy Certificates (REC) from renewable energy providers. Failure to meet their quotas resulted in the imposition of a fee commensurate with the shortfall ($40/MWh). The MRET would be administered by a statutory authority, the Office of the Renewable Energy Regulator (ORER), under the auspice of the Australian Greenhouse Office within the Department of Environment. In reflecting what would prove to be a lack of commitment of the federal government to the long term success of the legislation, the MRET would be reviewed after only two years of operation, where most Acts are reviewed after five years.

In a decision that would ultimately affect the types of renewable energy technologies that would benefit from the REAA the MRET joint working group had agreed not to recommend a ‘portfolio approach’ in favour of a ‘least cost’ approach that would allow the most efficient renewable technologies to be used to achieve the target (RTWG 1999). There was also agreement that the new programs would be reviewed after three years to determine their efficiency and effectiveness. Two amendments to the MRET regulations were introduced in 2004 and 2006. The first included provisions that would improve investment in photovoltaic generators and expand the list of eligible energy sources to include native forest wood waste. The second amendments included the introduction of information gathering powers that were intended to improve monitoring and compliance provisions in the legislation.

Unfortunately there was no attempt to coordinate the implementation of the industry development initiatives of the REAA with the regulatory measures of the MRET or other factors impacting on energy supply at the time, such as the reform of the state energy markets underway since 1995. This lack of coordination would prove to be an important factor contributing to the failure in establishing a coherent approach to developing the renewable energy industry (Bradbrook and Wawryk 2002). Reform of energy market regulations had been part of the National Competition Policy (NCP) process that commenced in the mid 1990s. The reforms had produced considerable changes to electricity systems in the states and territories. Australia was beginning to see the disaggregation of energy supply chains, the establishment of the National Electricity Market (NEM), the opening up of electricity systems to increased levels of competition and, importantly for renewable energy, a reduction in discriminatory barriers to the entry of new participants in the generation or retail supply of electricity. The main focus of the reforms on the NEM comprised primarily of the eastern seaboard states, however, Western Australia and the Northern Territory agreed to undertake similar reforms without being connected to the NEM. By 2001 reform of electricity systems was taking a more prominent place on the political agenda and was to become another contentious source of negotiation and bargaining between the federal government and the states. The development of the renewable energy industry would become embroiled in these negotiations.

Energy Market Reforms

The profile of electricity reform as a national issue was confirmed when the Council of Australian Governments (COAG) established the Ministerial Council on Energy (MCE) in 2001, consisting of all state and territory energy ministers with the federal minister as chair. The hope at the time was that the MCE would ‘provide effective policy leadership to meet the opportunities and challenges facing the energy sector and to oversee the continued development of a national energy policy’ (MCE 2001). The work undertaken by the MCE in advancing the improved access of renewable energy had been slow. Through the NCP process electricity had become another area where the states and territories were ceding some of their own ‘capacity for autonomous action’ by agreeing to establish market type structures and increased competition in an area that had been under their direct control (Parkin and Anderson 2007).

Inconsistencies between the state and territory electricity systems on such issues as network connections costs, licensing regimes and project approval processes were proving to be major impediments to the renewable energy industry. Similarly, the complexity and number of rules and regulatory instruments across the different electricity networks continued to serve as barriers to participation for potential renewable energy providers (DITR 2006). Delays with planning approvals from local governments were also proving to be a barrier as local council planning regulations came to terms with new demands of facilities for distributed energy supply. The MCE only began to consider these issues in 2006 as part of the commitment to COAG to examine the policy and technical issues preventing the NEM from opening to the renewable energy sector.

As a sign of frustration at the slow progress of the MCE in advancing electricity market reform COAG established the Energy Reform Implementation Group (ERIG). ERIG's central task was to recommend further reforms to improve the efficiency of the electricity sector and reduce the inconsistencies between the state systems that were hampering the entry of new providers, including renewable energy. While the drive for a greater efficiency through the consistency of a national market had been part of the reform agenda since the establishment of the NCP process, ERIG's conclusion was that by 2006, despite the competition reforms over the previous decade, a state by state approach continued to ‘permeate’ the electricity system (ERIG 2007). New South Wales (NSW), the largest electricity market, was seen as particularly recalcitrant as energy businesses remained in government hands. Such inconsistency had a negative impact on investment decisions within the renewable energy industry. According to ERIG the implementation of consistent measures across all jurisdictions would improve the confidence of investors in renewable energy by increasing ‘competitive neutrality’ and ‘contestability’ into electricity systems. The best solution, according to ERIG, was for the states to commit to the full privatisation of the electricity system, as already achieved by Victoria. Privatisation would remove opportunities for political influence over the sorts of investment and pricing decisions that had served as barriers to the increased uptake of renewable energy. While there was some sympathy with the intentions of the ERIG findings and recommendations, the COAG 2007Communiqué confirmed the status quo where decisions on disaggregation and privatisation of the electricity sector would remain ‘matters for individual governments’ (COAG 2007).

Assessments of the impact of the electricity market on the renewable energy industry, and the assessments of the REAA and the MRET were conducted independently of each other. For example, the MCE senior officer's inquiry into impediments to the uptake of renewable energy did not consider industry development programs or the MRET. Representatives of the renewable energy industry remained frustrated by the approach being taken by governments. They saw little value in examining the impediments to uptake of renewable energy within the electricity market in isolation of consideration of the industry development issues (BCSE, 2006). While there was general support for the establishment of a national electricity scheme to reduce the impediments to market access, there was also recognition that progress would continue to be determined by the rate of change in the slowest most reluctant jurisdictions.

The slow progress of state governments to pursue the full extent of the NCP energy reforms gave Prime Minister Howard an opportunity to reinforce his own agenda for bringing about changes to the electricity sector. Renewable energy and electricity reform became embroiled in two key areas of particular interest, his support for the fossil fuel industry and his position on climate change.

The Prime Minister's Energy Reform Agenda

The Howard government had shown little interest in pursuing its agenda through cooperatively based COAG frameworks and processes (Galligan and Wright 2002). The skill of Prime Minister Howard to control the political agenda and support issues of personal interest has been well documented (Walter and Strangio 2007; Pearse 2007; Singleton 2005). His interest in supporting the coal industry would influence government policy on climate change and renewable energy. In keeping with these interests he established an Energy Committee of Cabinet within the Department of Prime Minister and Cabinet in 2003 to be responsible for developing a strategic plan for Australia's long term energy policy and climate change. Representatives from high energy users and the mining and minerals sectors formed a ‘small cabal’ of industry executives consulted by the prime minister on policy issues that would affect the future of the renewable energy industry (Pearse 2007; Walter and Strangio 2007). Prior to the release of the strategic plan two key government reviews would be used by the prime minister as the basis for his argument against supporting the renewable industry.

Parer Review

The prime minister established the 2002 Independent Review of Energy Market Directions. The Chair of the Review was Senator Warwick Parer, a former Minister for Resources and Energy and coal industry advocate. The task of overseeing the work of the Review was given to the Ministerial Council on Energy; which was to provide information for future decisions on electricity market development. While the Review was concerned primarily with the efficiency of the electricity market, some recommendations dealt with renewable energy. Of particular concern to the industry were the conclusions that:

  • • Arbitrary diversion of investment away from more efficient carbon reducing options and towards renewables will burden the economy with unnecessary costs;
  • • The MRET is a more costly measure to reduce greenhouse gas emissions than it needs to be as it focuses exclusively on renewable energy sources rather than least cost greenhouse gas abatement; and
  • • The government should establish an emissions trading scheme and cease to support a MRET (COAG 2002).

The Review was part of an attempt to move the debate on electricity reform away from renewables as the main solution for reducing GHG emissions. Parer argued that the emphasis should be on reducing the emissions from existing electricity production and not on renewables. In Parer's view, by focusing policy inititiatives too strongly on renewables, Australia would shift investment away from cheaper fuel sources such as coal and gas and ignore the potential to reduce GHG emissions through existing energy supplies. According to Parer the situation was made worse by the need to introduce an increasing number of regulatory measures across the states in order to reduce emissions and support renewables. These factors were combining to make electricity markets more complex and costly than necessary, hence increasingly uncompetitive in the global marketplace. The solution would be to introduce an emissions trading scheme that would provide incentives for a broader range of energy suppliers to lower their emissions to agreed levels. The Review's recommendations worked in favour of the coal industry and other high GHG emitters, as they argued for the removal of government support for renewables, and the removal of opportunities for the states to support renewables by establishing a national scheme. Parer's solutions would eventually see the status quo retained but with increased support for the coal industry.

Tambling Review

In contrast to the Parer Review the federal government's review of the MRET in 2003 (the Tambling Review) noted the success of the target measure in accelerating the development of the renewable energy industry. An enthusiastic industry response had seen investment in renewable energy installations provide capacity to meet the 9,500 GWh target by 2006–07, well ahead of expectations. Tambling predicted a stalling of investment from 2007 that would restrict research and development activity, the commercialisation of technology and the development of a local renewable energy industry. In this regard the MRET would not achieve its industry development policy objectives. Tambling recommended the MRET be ‘enhanced to support continued development of the renewable energy industry after 2007’. In addition he argued that targets needed to continue to increase beyond 2010 at a rate ‘equal to the rate before 2010, and to stabilise at 20,000 GWh in 2020’ (AGO 2003).

Tambling supported the view that the renewable energy industry was not operating on a ‘level playing field’ when compared with the advantages enjoyed by the fossil fuel sector. Access to existing state electricity supply infrastructure posed considerable costs for new energy providers and the distributed nature of renewable energy only added to these costs (AGO 2003). With this point Tambling also reinforced the view that the federal government was not taking comprehensive coordinated approach to the development of the industry and recommended an investigation into the ‘impediments to the inclusion of more renewable energy in National Electricity Markets’ (AGO 2003). The state based regulatory impediments to entry had been an issue under the NCP reforms and continued to play a role in restricting the access of renewable energy providers to the electricity systems. It was becoming clearer that more work needed to be done to coordinate government efforts to promote renewable energy. This was further supported by the fact that the issue of the lack of coordination between the financial incentives of the REAA and the regulatory measure of the MRET was not part of the terms of reference for the Tambling Review.

Tambling provided important insights into the nature of government support needed for industry development for renewable energy. The MRET was integral to other elements of the REAA. The assumption had been that the MRET would be a market driver for large scale established energy suppliers. Tambling's conclusion was that without the MRET many emerging renewable sources and technologies would not be competitive. In terms of industry development the MRET alone would not be sufficient to overcome other impediments but it was critical in providing investment security in the early stages of development leading to commercialisation. However, Tambling would argue that assistance of this nature should occur outside the MRET scheme. The way the MRET had been operating meant it failed in terms of providing long term security on investment for many renewable energy projects. Investors required a guarantee of 15 years financial support if they were going to develop new renewable capacity. As the MRET covered the period 2000–2020 the scheme would effectively cease to be a driver at 2005. Tambling argued that to ensure continued investment in renewable energy the MRET targets would need to be increased and extended beyond 2010.

The prime minister rejected Tambling's recommendations to increase and extend the MRET. He used the review's findings to argue that such support for renewables was an unacceptable option as it would ‘raise costs by billions of dollars and put government in the business of favouring certain technologies over others’ (Howard 2004). His approach would be to adopt some of Parer's recommendations and focus on the natural energy advantage available in the ‘traditional’ fossil fuel industries. This was a marked change from earlier statements relating to the REAA that supported the potential contribution of the renewable energy industry and was interpreted as confirmation that the prime minister had conceded to pressure from the fossil fuel industry (Pearse 2007; Hamilton 2007; Miller 2004). He now argued that federal government support for renewable energy would be incorporated into the strategic plan for energy to be outlined in the energy white paper.

Energy White Paper

The federal government's position on energy reform was developed by the prime minister's Energy Committee. The Committee's Energy White Paper (EWP): Securing Australia's Energy Future (2004), was intended to set the national policy agenda on energy for the next decade. The government's advisory committee for the EWP, consisting of fossil fuel producers and high energy users, had used Parer's conclusions regarding renewable energy to shift the policy direction and government support according to a preference for the existing fossil fuels sector (Kent and Mercer 2006; ABC 2004). It was through the measures introduced in the EWP that the prime minister argued sufficient incentives were provided to guarantee the continued development of the renewable energy industry (AGO 2004).

First impressions of the EWP suggested renewable energy would receive a considerable boost in funding. A new $700 million Low Emissions Technology Demonstration Fund (LETDF) was established to support the development of low emissions technologies, including renewable energy. However, closer reading revealed that the majority of these funds, $500 million, were to be used to help clean up the coal industry through investing in the federal government's preferred method of reducing GHG emissions; carbon capture and storage (CCS) technology (Diesendorf 2006). Financial support measures to support renewable energy were supposed to complement the MRET by leveraging additional outcomes in terms of research and technology development; a proposal that seemed to ignore the point that the MRET was no longer effectively providing the necessary market based incentive for the industry. Through the EWP measures the federal government argued it was supporting the critical needs of the renewable energy industry. By introducing a new set of objectives the federal government changed the rules for funding and effectively established the ‘boom/bust’ scenario for the industry. The industry rejected the federal position arguing that it was the size of the market that was crucial for development, not technology, without extending the MRET there would be a limited opportunities for new renewable energy providers (Miller 2004). In addition, the fact that the LETDF program was spread over 15 years only added to the cynicism of the renewable sector, as it was seen as evidence the government was diverting resources to the fossil fuel industry and away from renewable energy (Lovegrove 2004). Evidence of this was provided with the announcement that of the six successful applicants for funds under the program only one related to renewable energy.

The White Paper also reflected the prime minister's rejection of Parer's recommendation for the introduction of an emissions trading scheme as a more effective means of supporting the development of renewable energy industry than the MRET (DPMC 2004). It was at this point that the states and territories began to adopt individual policy measures to support the renewable energy industry. Following the release of the White Paper the state energy ministers agreed to meet outside the Ministerial Council on Energy framework to devise a joint approach to support renewable energy (SMH 2004). The states argued the federal government was failing to adequately support the development of renewable energy. State energy ministers issued a joint communiqué that they would use Tambling's recommendations as a baseline to establish individual renewable energy targets and policy measures to promote the industry, in an attempt to maintain the momentum established by the MRET. These actions by the states were primarily based on concerns over the likely implications resulting from the loss of the MRET. Of particular concern were:

  • • opportunities for regional economic development and employment;
  • • opportunities for the federal government to contribute to the costs of providing distributed electricity supply to regional/remote areas;
  • • the protection of manufacturing facilities already established;
  • • banked up renewable energy projects, such as wind farms, with planning approvals that would not proceed; and
  • • investment in renewable energy technology that would potentially move overseas.

The development of the renewable energy industry had already been progressing at different rates between the states, reflecting the alternative political commitments and electricity systems. Tasmania was already producing the majority of its electricity from hydro and wind, Western Australia and South Australia had been investing in their natural gas reserves as a source of baseload power and regarded them as cleaner than the coal based systems in Victoria, NSW and Queensland. Each state had commenced considering the most suitable renewable options to fit within their existing electricity systems.

State Government Renewable Energy Policies

At the time of the release of the Energy White Paper many state governments had been considering introducing their own financial and non-financial policy measures to supplement federal initiatives to support the development of renewable energy. Each of the state schemes attempted to supplement the basic elements of the federal MRET and Renewable Energy Action Agenda on the basis that this would increase their impact. State governments recognised the opportunity to promote a new industry and to diversify their energy supply options but were limited in the range of policies they could pursue without stronger federal financial support. While it is constitutionally appropriate for states to establish policy initiatives in this area they have limited scope and resources to have any major impact (Bradbrook and Warwyk 2002). Some of the state based measures included government renewable electricity purchase contracts, energy efficiency programs, advisory services, and the establishment of various plans, statements and/or strategies that created the impression of a strong commitment to renewable energy. By 2007 the policy measures introduced by the Victorian government were the most advanced of all the state initiatives. As a result of what is arguably its ‘early adopter’ approach an examination of the Victorian scheme provides important insight into the capacity of the Australian states to support the development of the renewable energy industry.

The Victorian government had been introducing policy measures to encourage the expansion of the renewable energy industry since 2002. The most significant initiatives stemmed from three key pieces of legislation: first, the Victorian Renewable Energy Act 2006 which established the Victorian Renewable Energy Target (VRET) scheme that mandated Victoria's consumption of electricity from renewable sources to 10% by 2016, a scheme based on and operating in conjunction with the MRET; second, the Electricity Industry (Wind Energy Development) Act 2004, was established to support wind energy developments through removing barriers to connections to electricity grids; and third, the Geothermal Energy Resources Act 2005, established to facilitate and regulate the exploration and extraction of geothermal resources. In addition to the legislation, policy and planning guidelines were introduced that specifically supported the development of wind energy. These non financial measures were designed to primarily encourage demand for renewable energy and streamline approval processes for industry projects in Victoria. According to the Victorian government it's legislation was expected to provide a signal to the industry that there was ‘long term investment certainty for renewable projects’. Other measures designed to increase demand included provision of consumer information and the renewable education programs and demonstration projects for schools.

The financial incentives introduced in Victoria focused primarily on research and development in new technologies. The Renewable Energy Support Fund provided $8 million for targeted innovation by medium scale energy providers (20kw–5MW), to cover up to 20% of capital costs. A Solar Innovation Initiative provided $3 million to encourage solar design and technology development to cover up to 50% of costs in areas such as investigation, design and installation. Demonstration projects that incorporated energy efficiency and renewable energy were also provided in a $4 million ‘smart energy zones’ program. Industry development was also supported through the establishment of the renewable energy industry development package which included a focus on employment initiatives and support for identifying export opportunities. Other measures included government department purchase arrangements of 10% of their electricity from renewable energy, energy rating schemes for new homes, promotion of the GreenPower scheme to encourage householders to purchase electricity from renewable sources (DSE 2006).

While the Victorian measures were representative of those introduced by other states and territories there were subtle differences that tended to reinforce the view that, despite electricity market reforms, states continued to exist as ‘regional markets with limited interconnectedness’ (Henry 2008). Examination of the different approaches taken by the NSW and Victoria, the two largest Australian electricity markets, highlights the complexity in the range and type of policy measures between the jurisdictions. Factors such as exemptions and eligibility for Renewable Energy Certificates (RECs) have a considerable impact on the potential for industry development. Under the Victorian scheme eligible renewable sources must be located in Victoria, whereas under the NSW scheme they can be in any other state that is connected to the National Electricity Market. One of the fundamental differences between the MRET and the NSW and Victorian schemes was the states provision of annual targets. The importance of this element is that it has implications for a number of the other elements of these schemes. The impacts not only relate to the overall abatement achieved but the rate and nature of development of the industry. Annual targets impact on the time needed for transmission augmentation, infrastructure availability, and the processing of approvals and permits. State electricity providers were concerned that annual targets should not increase at a rate faster than the growth in demand within electricity markets. State schemes attempted to overcome what were regarded as the deficiencies of the MRET that focused too heavily on economic efficiency that promoted low cost technologies in the early stages and discouraged emerging technologies that could be more cost effective in the long term.

Among the more substantial issues for the states were the required commitments to new infrastructure development and network access necessitated by renewable energy. In the absence of significant federal funding for improvements to infrastructure the states were slow in establishing a balance between the enthusiasms of the renewable energy industry and containing any threats to the consistency of supply from existing providers. Renewable sources continued to be regarded by state governments as providing only intermittent power which was compounded by the fact that renewable energy facilities tended to be located in regional and remote areas; thereby adding to the infrastructure costs. Despite the industry claims that challenge these assumptions, the state governments continued to call for further research and development before established providers could take increased capacity from renewable sources. The end result was that the states’ argument essentially maintained the status quo as the attributes and intermittent output could create power quality, reliability and cost issues which limit the level of contribution of these technologies on existing state electricity systems.

Industry Response

Industry response to the government policy measures has been mixed. Data presented in Table 2 provides some evidence of the contribution of the various federal and state policies to the growth in the production of the renewable energy industry over the period 1997–2006. The figures provide an indicator of the affects of the measures on the growth through production of the various sources of renewable energy across the different states. As can be seen there are considerable differences between the states in terms of both sources of energy and rates of growth; in the majority of cases the production tends to have stalled and in some cases declined. Wind provides the main source of growth but this is primarily confined to Victoria, Western Australia and South Australia, reflecting their stronger policy support. While aggregated national figures tend to be commonly used to support the argument for expansion of approximately 1.4% across the industry between 2000 and 2006, they tend to hide the focus and location of the growth and thereby the opportunity to consider effectiveness of the various policy measures. This growth also needs to be considered in the context of overall energy supply, more particularly in comparison to the growth in production of fossil fuels over the same period. These sources grew at significantly higher rates, for example: black coal, 19%; natural gas, 21.6%; LPG, 16.4%; and even uranium, 2.9% (ABS 2008a).

Table 2.  Australian Production of Renewable Energy by Fuel Type, 1997–2006
FuelNSWVICWAQLDTASSA
  1. Sources: ABARE 2007b; ABS 2008b; DSE 2008, ESIPC 2007, SEDO 2008.

Wind GWh      
1997–98 0.255.0   
1998–99 0.255.8   
1999–00 0.256.5   
2000–01 0.2520.7   
2001–03 25.2563.4   
2002–03 71.2569.0     37 
2003–04 142.2576.2     95102
2004–05 263.23248.3    226344
2005–06 260.97489.9     78764
Bagass kt      
1997–98  580 14711 050  
1998–99  961 13410 317  
1999–00  891 139 9 981  
2000–01  764 139 9 359  
2001–02  139 8 833  
2002–03  658 139 9 111  
2003–04  650 139 9 742  
2004–05  665 139 9 728  
2005–06  686 10210 572  
Solar GWhPrimarily hot water systems    
1997–98  17842303   114    10 44
1998–99  18142308   117    11 44
1999–00  18142311   117    11 44
2000–01  17843304   113    12 45
2001–02  18543317   120    12 47
2002–03  18549327   120    11 51
2003–04  17746302   114    11 51
2004–05  17846287   114    11 51
2005–06  15848259   114    11 54
Hydro GWh      
1997–984 0561 024200   600 9 725 
1998–994 8051 152206   896 9 908 
1999–005 030748207   92610 045 
2000–015 157512202   86810 081 
2001–024 274625212   59410 213 
2002–034 868761207   354 9 997 
2003–044 8111 064206   562 9 898 
2004–054 434854212   528 9 620 
2005–065 621817163   552 9 236 
Woodwaste kt      
1997–982 0062 154715   506   764838
1998–992 0402 088719   510   732840
1999–002 0272 067723   502   724830
2000–011 9692 049724   505   717824
2001–021 2572 003770   501   784551
2002–031 1251 995782   622   804588
2003–041 1042 196750   660   810577
2004–051 0982 093605   679   798528
2005–061 0191 940469   681   741500

The figures in Table 2 support the view that wind became the most adaptable source under the MRET and subsidy schemes as it is a well developed renewable technology. Table 3 provides further evidence the dominance of wind particularly when compared to the different levels of investment in the main sources of renewable energy between 1997 and 2006. Table 4 illustrates how the production capacity of wind varies across the states.

Table 3.  Australian Capital Investment in Renewable Energy for the Period 1997–2006
TechnologyCapacity added 1997–2006 MWIndicative capital cost per MWTotal estimated investment ($m)
  1. Source: BCSE 2007.

Wind  649$1.7 m1,103
Hydro  128$1.6 m  205
Bioenergy  262$2.0 m  524
Total1,038 1,831
Table 4.  Australian Installed Wind Capacity by State, 2006
StateMW
  1. Source: Riedy and Lewis 2007.

South Australia388
Western Australia199
Victoria134
Tasmania 67
NSW 17
Queensland 12
Total817

According to Diesendorf the production capacity of the wind energy industry in the Australian market nearly doubled by 2005 (Diesendorf 2007). The Australian trend was not unusual as wind had been the fastest growing source of renewable generation in the world since the mid 1980s and was predicted to grow by 10.6% per year by 2030, contributing approximately 3% of the global electricity (HRSCIR 2007). While there is some expectation that wind will continue to expand there is uncertainty over the rate of growth. In Australia wind has become something of a special case, particularly since 2006, as in some respect it became a victim of its own success and considerable political interference. Commentators argue the Howard government recognised the threat that wind posed to the coal industry and made a number of political interventions to stop projects proceeding (Diesendorf 2007). Others have raised questions over the compatibility of wind power with environmental objectives. Large scale wind farms reinforce interconnected grid systems which rely on remote generation that require transmission over long distances (Kinrade 2007). Community response to such systems has been mixed with some vehemently opposing construction on environmental grounds. A number of local governments refused to approve developments through their planning processes based on community resistance and environmental considerations. However, it was the drop in the price of RECs, as a result of the MRET reaching its GWh target in 2006 that had the most substantial negative impact on all renewable sources, particularly wind, and ensured that industry investment had peaked; many proposed and even approved projects failed to proceed. It would only be the targets set by states such as Victoria, Western Australia and South Australia that had helped to ensure some projects could be completed.

Industry submissions to the 2007 parliamentary inquiry of renewable energy, Renewable Power (HRSCIR 2007), provide an important insight into whether government policies had actually become the main constraint on the development of the emerging technologies. Many submissions argued that government assistance with technological development was seen as an issue for sources such a biomass, wave and geothermal. Policy measures in this area were seen to be insufficient to ensure that Australia would keep pace with developments in other countries. This failing would have implications for cost reductions as it was likely to force Australia to be an adopter and purchaser of these technologies thereby increasing reliance and restricting industry development even further. Research by the Climate Institute argued that the emerging technologies had the potential to reduce GHG emissions by up to 80% and should represent an area of priority for government investment to complement any future emissions trading scheme. Promising energy sources such as bioelectricity, geothermal and wave technologies were seen as potential providers of ‘base load’ power and, when combined with wind and solar, could compete with coal as the primary source of stationary energy in the Australian context. In this regard the Renewable Energy Technology Roadmap produced by the federal government had been a ‘useful planning exercise’ but without further commitment to market development through a renewable energy target such support would continue to produce limited results.

Industry views expressed through the submissions to the parliamentary inquiry were unanimous in arguing that the main constraint on development was the decision not to extend the MRET. This effectively removed investment security for the renewable energy industry in those states without their own renewable energy targets (Auswind 2007). Industry recommendations for government action emerging from the submissions emphasised the need for the extension of the MRET or some form of clean energy target and the establishment of an emissions trading scheme. Targets in individual states, while helpful in the short term, would not provide the industry with the critical mass to establish viable market share. According to industry groups the most appropriate market based target scheme would need to have national application. Without Federal support the industry argued it faced a bleak future:

Without the further development of market entry incentives, Australia risks falling behind in the global challenge to provide more energy with fewer greenhouse gas emissions. The Australian renewable and low emissions energy industries will be impeded in efforts to continue developing new technologies and launch them into the national and global markets (REGA 2007).

The parliamentary inquiry provided an important opportunity for the federal government to undertake a more comprehensive examination of the industry response to the existing policy measures than previously conducted and to consider recommendations for the future development. However, the Inquiry's terms of reference, from the Federal Minister for Industry, Tourism and Resources, restricted its assessment to examining the ‘relative state of development of selected renewable energy sectors in Australia’. The Inquiry produced no recommendations and was selective in presenting data for its final report that emphasised the federal position of the need for further research and development before the industry could compete with fossil fuel as a source of stationary power.

Summary and Conclusions

The stalling of the development of the renewable energy industry provides evidence of the impact of government policies in the Australian context. Over the 1997–2007 decade the lack of coordination between the federal and state governments resulted in a mixture of renewable energy targets and uneven development of the renewable energy industry. Policy measures introduced by the federal government to increase the percentage of energy supply from renewable sources through a market based mechanism (MRET) provided challenges for state electricity systems to accommodate the improvements that were required.

The experience of the renewable energy industry highlights how the political environment shapes the policy measures that determine future development. Without political support the industry could not compete with the fossil fuel industry. State and territory governments were happy to leave the development of policy initiatives to support the renewable energy industry to the federal government. However, following the refusal of the prime minister to ‘increase and extend’ the MRET the states were forced to consider how to respond to the needs of the emerging industry. By 2007 most states and territories were making slow progress on their commitments. Despite the delays the industry welcomed the support, in some instances the state support was more attractive than that available from the federal scheme, but only within individual states; this placed a limit on market size. Research and development funds from state governments provided some incentive for innovation but were limited when compared with federal initiatives.

Despite an extensive program of electricity market reform, policies that restricted market access in favour of existing fossil fuel energy sources provided an intransigent range of barriers to the uptake of renewable energy. The complexity established by these state based policies was a major factor contributing to the difficulties experienced by project proponents in issues ranging from project approvals through to accessing state electricity networks. The states have been slow to act on undertaking work to reduce the impediments to network access. The complexity again highlights the inherent difficulties of coordination in the Australian federal system as it presents considerable barriers to establishing national coordinated policy settings, governance and institutional arrangements and other actions to improve the framework for planning and network investment and to streamline regulation to improve the expansion of renewable energy.

While the states have indicated their agreement to cooperate with possible future federal targets the challenge will be establishing an operational framework on how these targets will be achieved. Importantly, any discussion on governance and compliance arrangements, including international sanctions, is yet to be part of the renewable energy target debate. A fundamental criticism of the state schemes is that they have not been coordinated with each other or with the federal scheme. This failing has worked in the favour of the state based electricity providers as they attempt to manage the dual difficulties of energy reform and the increasing pressure to expand the access of renewables to existing energy supplies. Differences between the state and federal approaches contributed to industry apprehension and lack of confidence in future investment.

This study demonstrates that there is still a long road to travel in removing the impediments to growth for the Australian renewable energy industry. The good news is that governments have started to enact legislative measures in this area. What is not clear is the process by which future agreement for coordinated and collaborative action between governments will be reached. Given the long term nature of the problems being faced and the recognised need for immediate mitigation measures a process that can deliver the necessary reforms needs to be considered. The Productivity Commission argues that in dealing with the significant issues associated with climate change ‘…collective and cooperative action, especially on broad policy frameworks, will be particularly important because of the extensive cross-jurisdictional elements’ (PC 2006). Since the High Court confirmed the federal government's control over Corporations law in 2006 it has the constitutional power to do much of the policy and program development for the renewable energy industry, but issues such as subsidiarity, differences between jurisdictional objectives and the need to accommodate regional differences will continue to be a critical test of cooperative federal policy initiatives.

In November 2007, following the federal election, the newly elected Prime Minister, Kevin Rudd, announced a cooperative approach to the development of renewable energy. His proposals included the expansion of the MRET to 20% by 2020, a $150 million Energy Innovation Fund (EIF) for research in renewable energy and a new set of policy measures under the $500 million Renewable Energy Fund (REF) to ‘develop, commercialise and deploy renewable energy in Australia’ (ALP 2007). The announcements included a commitment to collaboration with the states and territories through the COAG process to a national approach, overriding existing individual state schemes, to develop the renewable energy industry.

In its first Budget announcements in May 2008 the Rudd government was showing signs of delaying implementation of a number of its election commitments to support the renewable energy industry. For example the failure to allocate any funding from the REF to renewable energy projects until 2009/2010, allocation of the majority of the EIF ($100m) to a single project – the Solar Institute, and the imposition of a means test on eligibility for a rebate for residential solar photovoltaic systems. In addition the introduction of the expanded MRET was delayed until 2009.

The lessons from the 1997–2007 period illustrate the test for Australian governments is to establish a collaborative policy framework to more effectively expand the renewable energy industry and assist in compliance with possible international obligations. Without intergovernmental cooperation there will be no success. A current influential view within the federal government is that it is ‘imperative that all governments work together to deliver future prosperity’ (Henry 2008). The policy measures introduced in 1997 promised a cooperative approach and provided important opportunities for the Australian renewable energy industry. The implementation of these measures was somewhat disappointing both in terms of policy outcomes and the future contribution of the industry to the reduction of GHG emissions from the stationary energy sector.

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