Solar and windfarm investment is drying up – and Australia needs a wake-up call on the future of the electricity grid

The energy transition is a race and what’s needed are policies that will drag large-scale renewable power into the system faster

Thu 24 Aug 2023

This week should be a wake-up call on the future of the electricity grid, but we seem in danger of collectively drawing the wrong conclusions about which way to go.

The main problem is straightforward – investment in large-scale solar and windfarms has dried up to next-to-nothing just as it is supposed to be moving into overdrive.

According to a report by the Clean Energy Council on Wednesday, in the three months to the end of June investors made financial commitments on only four renewable energy projects. And these projects are not particularly big, adding up to just 348 megawatts of new capacity – a fraction of one coal power plant.

This is not a one-off. The first three months of the year were even worse. It’s the slowest start to a year since the council started recording this data in 2017.

This has obvious ramifications, including putting targets for renewable energy and greenhouse gas emissions reduction in doubt, if not out of reach. It also increases the risk of the electricity grid failing unless decisive steps are taken to address the slump. At the moment, there is little sign that is happening. If anything, the focus is in the opposite direction.

In New South Wales, the Sydney Morning Herald has reported that a “reality check” commissioned by the Minns Labor government advised it to negotiate with the owner of Eraring, Australia’s largest coal plant, to extend its life beyond its planned closure date in two years.

By any measure, this is a ridiculous situation for the state to find itself in. Eraring is 40 years old, ready for decommissioning, and it is expected it will cost hundreds of millions of taxpayers’ dollars to prop it up a little longer.

A broadly similar scenario is playing out in Victoria. In 2021, the Andrews government made a deal to keep the Yallourn brown coal generator open until 2028. This week it announced an agreement to ensure another plant, Loy Yang A, remains available until mid-2035. These deals will cost taxpayers an undisclosed, but presumably substantial, sum.

There is an argument that these decisions are now unavoidable. We obviously can’t shut coal plants before replacement generation is ready, and it’s possible some generators should be kept on the books to be switched on only if needed. In Victoria’s case, it’s at least tied to a goal of 95% renewable energy – and, therefore, no coal – by 2035.

But it’s notable how much political and media discussion is focused on the risks of moving past coal, and not the solutions that can speed up an inevitable transformation needed to address the climate crisis. The idea that renewable energy is not up to doing the job persists no matter what the evidence says, or how often it’s presented.

No one is building new coal power plants in Australia, and most recent problems in the grid were caused by outages at old coal units, not solar or windfarms. The risk of that repeating grows the longer they run.

As challenging as the rollout is, we have the technology to replace them more rapidly. The move to clean energy is faltering due to governments and public agencies, not because the machinery can’t do the job.

The biggest government failure has been well documented. For nearly a decade, the federal Coalition tried to slow or block the shift away from fossil fuels, and made any serious climate policy political poison. It deserves much of the blame for the disorderly transition happening now.

But there are other deeply ingrained problems. They include the idea that the market will drive the shift to a renewables-dominated system just because solar and wind energy generation is cheaper than fossil fuels.

Labor came to power attached to this thinking. It was backed by a report by the consultants RepuTex that suggested the country would reach 82% renewable energy by 2030 if the government offered $20bn in low-cost finance for the private sector to build electricity transmission lines. We now have evidence that this isn’t going to be enough.

The scale of what’s being attempted is massive – a near complete rebuild of the power grid. Just as the existing grid was mostly built and managed by governments before being privatised, the rebuild will need clearer direction from the top to succeed.

The only credible option that can rapidly cut emissions is a system that runs on solar and wind plus back-up – batteries, inter-regional transmission, pumped hydro and, initially at least, some fast-start gas plants. Despite what the Coalition and its backers claim, there is plenty of evidence this mix can provide what is needed, and there are no available or affordable alternatives.

The Albanese government and most states have started down the renewables-plus-firming path to varying degrees, but it’s a messy picture.

What’s missing is a policy that acknowledges that the energy transition is a race – to meet science-based climate targets and ensure there is enough new generation to replace coal plants ASAP, but also to win an increasingly competitive battle for global clean industry investment. Last year’s US Inflation Reduction Act kicked that into overdrive.

What’s needed, badly, is something that drags large-scale renewable energy into the system faster. Options could include a revamped renewable energy target, an expanded safeguard mechanism that effectively puts a carbon price on coal energy, and a front-loaded underwriting program.

It would need to run alongside a plan to streamline the construction of transmissions links, including an evolving assessment of where they should and shouldn’t be built, factoring in cost blowouts and local concerns.

A more concerted effort to improve energy efficiency to cut how much grid electricity we use and limit power bill increases wouldn’t hurt, either.

The climate and economic benefits would be significant. They could include avoiding having to spend wads of cash propping up a dying, polluting industry – a step that, presumably, everyone can get behind.

Incentive Schemes for Renewable Energy

The success of renewable energy in the electricity sector in individual states differs greatly. This is more a result of policy context than natural potential.This raises a few questions. 1. What instruments do governments use? 2. What has proved to be the most efficient and effective way of support? And finally, we look at what governments really do and what that could mean for investors.

the tree of incentives

Production-based Incentives

Production-based incentives provide an award that is proporitonal to the actual energy generated.

There are 3 main systems:

Minimum Feed-in Tariff: The generator is guaranteed a minimum tariff per kWh for a specified period.
Production Tax Credit: Mostly in the U.S. , the generator receives a tax credit. It can therefore only be used by investors with sufficient tax capacity.
Quota System: awards the generator with certificates that can be sold into a market. No price guarantee. An alternative to this is an exemption from a charge levied on electricity if generated from renewable sources. E.g. climate change levy in the UK

All of those systems come with a number of parameters, such as

Technology Differentiation: Where the tariff pays the same amount for all technologies, some will be benefit from a quasi free-loading effect, whilst others won’t pass the hurdle rate. This happened in the UK before the introduction of banding.
Inflation Adjustment: Some tariffs (e.g. in the U.S.) are increased annually by inflation.
Degression: Some governments have strict mechanisms and measures that govern the reduction in feed-in tariffs. Mostly dependant on the size of new installation during the year.
Own use: What tariff do householders get for electrcity used in-house vs fed into the grid.
Off-take guarantee: Some countries have imposed annual caps on total installation that can qualify (e.g. Spain).
Income Tax Treatment: Do householders have to pay income tax on the revenue from sold electricity?

Investment-based Incentives

Investment-based incentives provide awards for the initial investment, regardless of how much electrcity is generated.

Investment Tax Credits:provide individual investors with the opportunity to offset the investment against their own personal income tax.
VAT exemption: Allow householders not to have to pay VAT on equipment for small generators.
Accelerated Depreciation: In some countries, renewable energy plants can be depreciated for tax purposes in a few years that can be offset against profits elsewhere in the company.
Interest-free loans: Some governmental agenices like the Carbon Trust in the UK provide interest-free loans for the purchase of renewable energy equipment.
Loan Guarantees: To de-risk the investment in renewable assets in emerging markets, export agencies or the European Investment Bank may provide certain guarantees regarding the exchange rate or the loan up to a limit.

Robust Legal Framework

Although not a direct monetary incentive, a robust legal framework has to be in place to attract investors. This includes

Streamlined Planning Process: Has the country implemented a “one-stop-agency” approach or do developers have to submit applications to any number of authorities and interested parties?
Spatial Planning Process:Do local authorities prioritise land-use for renewable energy? If so, applications will much more likely be approved, as the land had been pre-vetted. This reduces time for approval and development costs.
Building Regulation: What are the requirements and approval processes for renewable energy installations in new / old buildings? Also, do building regulations mandate the use of renewable energy, as is the case in some states in Germany, thus forcing investors rather than just attracting – though the result is the same.

The Art of Setting Incentives

What is the most effective and efficient way for the market introduction of renewables? A stable, feed in tariff regime that is sustained over many years. Beyond market introduction, competitive procurement has yielded the lowest tariffs but not all of the lowest bidders are able to implement their projects.

One of the challenges with setting the feed-in tariff at the right level is finding the right moment of reducing the tariff at the right time. Ideally, a feed-in tariff tracks the costs, which have come down dramatically over the past decade. They are however very much a political instrument and do therefore not necessarily follow rational logic. For instance, feed-in tariffs in 2008 in sunny Spain and not-so-sunny Germany were nearly the same, while Greece paid almost 20 cents more per kWh.

Tax credits

Production tax credits in the U.S. are only beneficial to profitable companies, only available for 10 years, and only issued in chunks, i.e. not always available.

Investment Incentives

As with production tax credits, most investment incentives are either tax credits (only available to some) or they do not significantly lower the high capital costs. More importantly, unlike feed-in tariffs, they do not address the uncertainties of the revenue streams.

Legal Framework

Even with the best feed-in tariff on the planet, the introduction of renewables won’t be a success without a robust legal framework. The approval and planning processes must be transparent and streamlined. The responsibilities of grid or utility companies must be clearly defined. Despite favourable feed-in tariffs in Greece, there is no significant installed PV capacity – mainly because of bureacracy.

Eco- Taxes & Exemptions

Rather than incentivising investors, governments can (and do) also use the instrument of taxation. There are many examples such as the Eco-Tax or the Climate Change Levy in the UK where the consumption of fuels or electricity is taxed, some of which is promised to be channelled into renewable energy projects, although most of the income is consumed in other departments of the administration. While such taxes may discourage the use of energy, they do not alter the economics of renewable energy plants, and therefore will have only a very narrow effect on investment decisions regarding renewable energy.

However, where levy exemptions for use of renewables are granted (in the UK), the exemption works like a certificate that can be traded for money. See above for effectiveness. Seems bureaucratic and not available to all.

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