Distributional effects of the Australian Renewable Energy Target (RET) through wholesale and retail electricity price impacts

Abstract

The Australian Renewable Energy Target (RET) has spurred considerable investment in renewable electricity generation, notably wind power, over the past decade. This paper considers the distributional implications of the RET for different electricity customers. Using time-series regression, we show that the increasing amount of wind energy fed into the NEM has placed a considerable downward pressure on wholesale electricity prices through the so-called merit order effect. On the other hand, costs of the RET are passed on to consumers in the form of retail electricity price premiums imposed by the retailers who are liable parties under the scheme. Potential complexities for the analysis include the many drivers of wholesale price outcomes, the mix of regulated and competitive retail tariffs on offer in Australia, and the partial RET exemptions given to energy-intensive trade-exposed industries. Nevertheless, our findings highlight likely significant redistributive transfers between different energy user classes under current RET arrangements. In particular, some energy-intensive industries are benefiting from lower wholesale electricity prices whilst being largely exempted from contributing to the costs of the scheme. By contrast, many households are paying significant RET pass-through costs whilst not necessarily benefiting from lower wholesale prices. A more equitable distribution of RET costs and benefits could be achieved by reviewing the scope and extent of industry exemptions from the RET and ensuring regulators apply methodologies to estimate wholesale price components in regulated electricity tariffs that reflect more closely actual market conditions. More generally, these findings support the growing international appreciation that policy makers need to better integrate distributional assessments into policy design and implementation. Highlights • The Australian Renewable Energy Target has complex yet important distributional impacts on different energy user classes • There are likely significant wealth transfers between residential and small business to large energy-intensive industry under the RET • The merit order effects of growing wind deployment under the RET have put downward pressure on wholesale electricity prices providing considerable benefit to energy-intensive industry • The RET is, however, increasing retail electricity costs through additional charges imposed by retailers to cover their costs of compliance • A number of energy-intensive industries have major exemptions from contributing to these costs of the RET • At the same time, many small energy users are not receiving the benefits of lower wholesale prices as pass-through depends on methods for setting regulated retail tariffs in some jurisdictions • Policy makers would benefit from better distributional impact assessments when designing and implementing clean energy policies

A concept to assess the costs and benefits of renewable energy use and distributional effects among actors: The example of Germany

“…His findings suggest that deploying RET leads to a net relief of final energy consumers. The impact of RET on market electricity prices is confirmed by other studies such as Sensfuß et al, 7 Tveten et al, 8 Cludius et al, 9 and Burgos-Paya´n et al 10 They all report an impact of RET on the merit order of the power market. The change in the merit order results in a decrease of the wholesale market price.…”

“…in Germany, France, the Netherlands, Denmark, etc., are not obliged to pay the full RET levy, 11 households enjoy no such privileges and therefore have to shoulder a larger share of the costs than privileged industries. A similar distributional effect is also reported by Farrell and Lyons 12 for Ireland and by Cludius et al 9 for Australia, who state that larger consumers such as industries are more likely to benefit from decreased wholesale market prices than households.…”

Climate Change, Energy Policy and Justice: A Systematic Review

“…In the process, these measures have achieved parity between wholesale solar power and thermal coal-generated power (Campbell et al 2014). Rooftop photovoltaic systems have also shifted peak demand (Cludius et al 2014). Photovoltaic systems generate the most power in the afternoon when temperatures are the hottest, thus lessening electricity demand for cooling.…”

Geographic attribution of an electricity system renewable energy target: Local economic, social and environmental tradeoffs

“…The European Union (EU) famously enacted its EU 20-20-20 policy in 2007, which, among other targets, requires 20% of its total energy supply to come from renewable resources by the year 2020 [2]. In 2001, the Australian government implemented the world's first nationally mandated RET of 20% by 2020 [3].…”