Bioenergy offers a diverse range of potentially valuable energy, environmental and wider societal benefits in a world of growing energy security, climate change and regional economic challenges. However, the ability of bioenergy to deliver on this potential hinges on the market and on wider regulatory and policy arrangements in place to formally value these benefits.
The National Electricity Market
In all states and territories except Western Australia and the Northern Territory, the National Electricity Market (NEM) provides a commercial framework for connection to the grid and for electricity pricing. The Federal Government’s expanded Renewable Energy Target (RET) has environmental and industry development objectives, while the proposed Carbon Pollution Reduction Scheme (CPRS) is intended to formally price greenhouse emissions.
A key question for the bioenergy industry, then, is how successfully these markets and associated frameworks value the benefits that renewable energy projects can offer.
The formal objective of the NEM is the efficient provision of electricity to meet the long-term interests of consumers with respect to price, quality, reliability and security of supply. However, electricity prices vary over time and by location in response to changing consumer, network and generator behaviour.
For example, wind energy is typically highly variable and only partially predictable. It doesn’t necessarily blow at times of higher prices. As wind penetrations increase we may, indeed, see an increasing influence of wind on spot prices – for example, in South Australia wind penetration is now well above 10 per cent as shown in Figure 1.
Bioenergy projects that can reliably operate at times of higher prices – i.e. when reasonably well correlated with daylight hours on working days – can receive typically higher spot prices. They also have more straightforward opportunities to manage price risks through derivative markets.
Furthermore, bioenergy projects are often located in regions with existing network infrastructure of suitable scale for the project size.
Achieving sustainability objectives
The NEM appears to have performed reasonably well to date in securely and reasonably efficiently supplying growing demand, although prices are rising due to a range of (non-climate policy) drivers, particularly network spending.
However, the NEM also generates over 30 per cent of Australian greenhouse emissions. This is not surprising. The NEM has no formal environmental and wider sustainability objectives, and electricity prices don’t currently incorporate environmental values. This was a conscious design choice.
If governments wish to see NEM emissions fall, they must implement ‘external’ policies that will change decision making accordingly. Such policies are not an imposition on market participants who therefore deserve ‘compensation’ – they are an obligation under the NEM design.
The CPRS
The proposed CPRS is intended to be the primary means of transitioning the Australian electricity industry towards a lower-carbon future. However, as the government itself acknowledges, the CPRS is unlikely to have major impacts to 2020 beyond changing new investment to lower emission options. As such, it may provide little incentive for renewable energy in the coming decade.
The expanded renewable energy target
This leaves RET as the likely key driver for renewable energy to 2020. Like the CPRS, the scheme is a ‘designer’ market – in this case a market for Renewable Energy Certificates (RECs) rather than greenhouse emissions.
Designer markets succeed or fail on the quality of governance and as with the CPRS, governance for RET to date has been far from assured.
The claim is that the expanded RET will ensure that 20 per cent of Australia’s electricity comes from renewable sources by 2020. However the reality is that a number of poor design choices has significantly reduced the investment opportunity for renewable energy project developers, including the inclusion of solar hot water and the REC multiplier for small generators.
Impacts for bioenergy
All of these issues create uncertainty in the amount of renewable generation that the scheme will support, let alone the potential role that bioenergy might play. The varied projections for renewable generation investment to 2020 have limited consensus on which technologies will be deployed where and when.
Most suggest wind will be the big winner with only a limited role for bioenergy. However, similar modelling exercises when MRET was introduced in 2001 projected bioenergy would provide far more renewable generation than wind in 2010. This didn’t happen for reasons that probably include a failure to appreciate the complexity – technical, regulatory, commercial and social – of bioenergy projects, as well as widespread drought, environmental controversies and rapid improvements in wind technology. What surprises might be in store for the coming decade?
The NEM doesn’t provide support for renewable energy but does commercially value dispatchable renewable generation such as bioenergy above intermittent sources such as wind. Unfortunately, the proposed CPRS appears to have been explicitly designed to provide only modest support for renewables in the short to medium term. For bioenergy and all renewable electricity generation projects, the current RET arrangements do not inspire investment confidence. Bioenergy faces some particular challenges but so do all of the other renewable options.
Most importantly, policy incentives through appropriate NEM arrangements, the RET and a carbon price are all important, but successful bioenergy deployment will require more. It requires a coherent and comprehensive policy framework that appropriately addresses all of the key challenges in bringing bioenergy projects to market; research and development capabilities, demonstration opportunities, appropriate planning frameworks, tax and finance.
Dr Iain MacGill is a senior lecturer in the School of Electrical Engineering and Telecommunications at the University of New South Wales, and Joint Director (Engineering) for the University’s Centre for Energy and Environmental Markets.
