• Energy Research

Deregulated energy markets were founded on the Merchant Power Producer, a stand-alone generator that sold its production to the spot and short-term forward markets, underpinned by long-dated project finance. The initial enthusiasm that existed for investment in existing and new merchant power plant capacity shortly after power system deregulation has progressively dissipated, following an excess entry result. In this article, we demonstrate why this has become a global trend. Using debt-sizing parameters typically used by project banks, we model a benchmark plant, then re-simulate its performance using live energy market price data and find that such financings are no longer feasible in the absence of long-term Power Purchase Agreements.

Abstract: Premium residential solar feed-in tariffs have come under considerable scrutiny in Australia over the past 12 months following a sharp rise in the uptake of subsidised PV units and subsidy cost blow-outs. Using New South Wales data, Nelson, Simshauser and Kelley (2011) demonstrated that the inherent design of premium ‘gross’ feed-in tariffs are regressive in nature and required reform. Since the publication of that article in Economic Analysis & Policy (September 2011 edition), feed-in tariff policies have been substantially wound back in all Australian jurisdictions except Queensland. In this article, we examine the ‘net’ feed-in tariff in Queensland and similarly find it to be a regressive form of taxation. We also examine the so-called ‘merit order effect’ – a purported ‘economic benefit’ arising from premium feed-in tariffs. However, the evidence is clear that merit order effects must, by definition, be transient and above all, are not welfare enhancing.

In 2001, Australia introduced legislation requiring investment in new renewable electricity generating capacity. The legislation was significantly expanded in 2009 to give effect to a 20% Renewable Energy Target (RET). Importantly, the policy was introduced with bipartisan support and is consistent with global policy trends. In this article, we examine the history of the policy and establish that the ‘stop/start’ nature of renewable policy development has resulted in investors withholding new capital until greater certainty is provided. We utilise the methodology from Simshauser and Nelson (2012) to examine whether capital market efficiency losses would occur under certain policy scenarios. The results show that electricity costs would increase by between $51 million and $119 million if the large-scale RET is abandoned even after accounting for avoided renewable costs. Our conclusions are clear: we find that policymakers should be guided by a high level public policy principle in relation to large-scale renewable energy policy: constant review is not reform.