Pitfall Boom and bust a lack of policy and market stability

Just as simplicity and clarity can act as a beacon, so can stability. Conversely, lack of stability severely increases risk, risk costs money and that makes renewables less competitive. Even apparently stable policies can lead to a boom—bust cycle through the use of inappropriate caps and sunsets.

Industry rarely trusts government goodwill; it is not bankable. Instead industry looks to policies and legislation, because the contracts that flow from such legislation are bankable. However, three things can undermine confidence in those policies: volume caps, time frames (sunsets) and excessive policy change.

Caps and targets

What starts out as a target must by definition become a cap if that target is successfully reached. Caps are great for limiting problems, but are a nightmare for building solutions. Experience indicates they lock in a boom—bust cycle.

Renewable projects often have a long lifetime (20 years or more), but all of the investment and the main industrial activity occurs at the beginning. In order to maximize the returns on an investment, developers will try to run the project for as long as possible. Thus, to meet a production level, they will try to establish capacity as early as possible in the scheme to yield the maximum return time. Generation schemes with targets/caps that run for less than 20 years will produce a flurry of activity and massive industry growth for the first few years of the scheme. Once capacity meeting the long-term energy cap is in place, a complete halt in activity will ensue.

Even longer-term legislation can fuel a boom—bust cycle. The Australian MRET legislation, which has a ramped target to 2010 and a sustained level to 2020, has resulted in a boom—bust effect which is already well underway. The

Note: Data for 2003 are forecast Source: BTM (2003)

Figure 2.7 The boom—bust cycle has occurred in an extreme form in the UK due to the multiple use of limited targets original target was for a 2 per cent increase in renewable energy generation in the power sector from a 1997 baseline. Given growing energy demand, even this modest target would have had an added ongoing increase; however it was revised to a fixed target of 9500 gigawatt hours (GWh) to provide more certainty. In fact this will mean a renewable market increase of less than 1 per cent by 2010 and a diminishing contribution from renewables as wider energy demand continues to be met by coal.

The renewables eligible under the MRET were very active in the first three years of the scheme, but the end is already in sight. For example, the estimated capacity required from wind is about 1000MW. Installed capacity growth averaged nearly 120 per cent annually in the three years following 1999. The installed wind power capacity at the end of2004 was 380MW, but more than 5800MW of projects have been identified by developers and are at some stage of development, while about half of these had applied for planning approval in mid-2004.

Only the fastest to secure contracts and install will succeed, the rest will be left out. Almost all of the projects installed will be in place within the first five years of the scheme. Thereafter the Australian wind industry hits a wall.

A boom—bust cycle is a terribly inefficient form of industry development and is the complete antithesis of what is required to establish manufacturing. If targets are used they must be dynamic to provide a constant but steady pull on industry.

Sunsets

The second is the problem of sunsets. (This particular business expression makes me think of the sun dropping into the ocean at the end of wonderful day.) It generally refers to how a government, investor or industry winds down a scheme, namely, 'When does it finish?' Perhaps to keep the treasurer happy or to put a fixed cost on an initiative, governments often like to build in a sunset.

This is another example of cross-cutting objectives, where the desire for economic certainty overrides the objectives of industry development or climate mitigation. Given that effective climate mitigation will require a 50-100 year transition to zero-emissions, safe energy provision, what on earth is the point of a scheme that runs to 2010, or 2015? Worse still, a sunset tells investors, 'Don't get too comfortable because we are not in this for the long term.' It may provide the treasurer with apparent certainty of the scheme's economic impact, but this is a mistaken certainty since the prices of renewables and conventional energy change all the time.

One way to achieve exactly the same outcome, but with the ability to provide the basis for ongoing commitments, is to replace sunsets with reviews. The assumption must be one of continuance and stability, subject to the performance of the industry and the evolution of external factors.

The problem here is that, for government, one parliamentary term is about four years, two policy terms is guesswork, 10 years is a long time and 20 years is somebody else's problem. I have sat in meetings with very senior national bureaucrats, responsible for long-term energy planning, who have told me with great gravitas that they are looking 20 years ahead. Twenty years is less than the lifetime of most renewable installations, from a PV panel to a wind farm and it is half the life of many thermal power stations — hardly an adequate time frame to achieve a fundamental sectoral transition.

Excessive policy change

As one does with an associate who keeps breaking commitments or changing arrangements, industries too will lose confidence in government if legislation keeps changing. They may depart to do business with more reliable governments or expect higher returns to cover the risk of doing business in such an environment. Alternatively they may simply go bust! The following excerpt from this book's UK case study provides illumination:

Also detrimental to the development of a thriving renewable business sector in the UK was the stop—go nature of NFFO. Bidding rounds were irregularly spaced, with relatively little indication of when the next round might occur. It is notable that a review undertaken after the second round left a three-year gap between tenders being invited, during which time many of the fledgling businesses collapsed through lack of business, or left the industry due to dissatisfaction with the process.

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Renewable Energy Eco Friendly

Renewable Energy Eco Friendly

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable.

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