2016 was a memorable year for the Renewable Energy Target and for the renewables sector more generally. While the role of renewables in the energy mix was never far from the headlines, investment in both small and large-scale renewable installations continued. Both ended the year strongly, with a noticeable uplift in commercial and industrial scale solar, and increased confidence in the large-scale target.
The purpose of the annual administrative report is to account for the performance of the two schemes that make up the Renewable Energy Target and to explain how it is administered in accordance with legislation.
Like all policy instruments, the Renewable Energy Target operates in a context. External factors such as financial market conditions affect the investment decisions of scheme participants. New business models and new technologies, notably battery storage, also create opportunities and occasionally new challenges for the administration of the schemes. This year we have taken a fresh approach to the format of this report to explain the influence of these trends. In particular, as a backdrop to our data, we have included some commentary from a range of players in the sector.
On the other side of the coin, investments incentivised by the scheme, while meeting the objectives of the Renewable Energy (Electricity) Act 2000, occur in the wider context of the electricity market. In 2016, more starkly than in any previous year, questions came to the fore about integration of renewables into the grid, and the alignment of energy and emissions reduction policies. Discussion also commenced about policy options to meet Australia's 2030 emissions reduction target, including incentives for renewables beyond the 2020 Renewable Energy Target.
These weighty questions are beyond the scope of this report. While these matters are debated and analysed, it is especially critical that all parties have access to the facts. In that sense, this report and other data published periodically by the Clean Energy Regulator have added significance.
The Small-scale Renewable Energy Scheme continued the trends observed since 2013 of a gradual decline in numbers of installations coupled with a rise in average system size. This rise reflects strong growth in commercial-sized solar panel systems of between 10 and 100 kilowatt capacity. Overall installation rates were particularly strong in the last quarter of the year, perhaps stimulated by the knowledge that the deeming period would drop from 15 to 14 years from 1 January 2017.
While Australia has the highest penetration of rooftop solar of any country in the world1, the market does not yet appear to have reached saturation. Our postcode data show continued demand for small-scale solar panel systems and solar water heaters in regional and outer metropolitan households and developers frequently include solar as a standard option in new build. New financing models such as solar leasing and the Clean Energy Finance Corporation's Community Housing Program will make rooftop solar accessible to new segments of the community.
By the middle of 2016, we were still concerned that, despite a strong pipeline of potential projects, investment in the Large-scale Renewable Energy Target had not fully recovered from the uncertainty of 2014 and 2015. We commissioned Ernst & Young (EY) to examine market constraints and assess opportunities to secure finance for large-scale renewable energy projects. EY's report, Meeting the Renewable Energy Target: Innovative approaches to financing renewables in Australia, highlighted that Australia had returned to the top 10 most attractive countries in the world to invest in renewables. There were grounds for optimism that the pace of investment would pick up.
Looking back on the last few months of 2016, and with knowledge of announcements in early 2017, it is clear this optimism was justified. As discussed in the annual statement, new build worth over $4 billion according to Bloomberg New Energy Finance2 was committed in 2016, more than in any single previous year. Major institutions have backed new vehicles for funding renewables, retailers have signed up to new power purchase agreements and costs continue to fall, particularly for utility scale solar.
2016 was also a year in which the Clean Energy Regulator faced some new tests in the application of our legislation. Changes in technology, changes in market conditions, and the emergence of business models not anticipated in the drafting of the Renewable Energy (Electricity) Act 2000 and regulations all presented challenges. In addition, some provisions in the legislation that had not previously been applied came into force for the first time.
To give one example, our decision on the application of the liability provisions to a particular power station was referred to the Administrative Appeals Tribunal. The matter hinged on the statutory interpretation of some technical terms that had not previously been a matter of contention. The Tribunal affirmed our decision while commenting 'we doubt the policy makers or the drafters foresaw the circumstances that emerged in this matter'.
Market conditions gave rise to another unprecedented test for our application of the legislation. For their own reasons, two major retailers decided to pay the shortfall charge rather than surrender sufficient large-scale generation certificates to cover their full liability.
Anticipating tightening supply and rising certificate prices, we had expressed a clear position on compliance in our 2015 report and through extensive engagement with liable entities (electricity retailers) in the lead up to the surrender date of 14 February 2017. Attention now turns to the application, for the first time, of the make-good provision. Commonly known as the 'three-year rule', this allows entities to surrender the missing certificates and apply for the shortfall charges to be repaid in certain circumstances.
With only a short runway left to achieve the 2020 target, 2017 will be a critically important year for investment under the scheme. Our judgement remains that the target is achievable. We will monitor developments closely throughout the year and plan to introduce new data products to assist transparency regarding liquidity in the certificate market.
2017 will also be a critically important year to set the scene for the 2020–2030 period and beyond. The public spotlight will again be on the role of renewables in a wider policy context, with the final report of the National Electricity Market Security Review3 due in mid-2017 and the Government's review of climate change policies expected to be complete by the end of the year. We have a role in assisting the Department of Environment and Energy with data and operational expertise where relevant to both these reviews.
These reviews will be profoundly significant for the future of renewables in Australia. It is possible the tenor of public discussion around these reviews may unsettle investor confidence before any policy decisions are made. However, that was not the experience of 2016, and on balance we consider investors are more likely to remain positive.
This is my final report as Chair of the Clean Energy Regulator as my five-year term comes to an end. During that period above baseline renewable generation has increased by 44 per cent. Over 1.2 million households benefited from the small-scale renewable energy scheme. The industry has matured and technology has moved ahead by leaps and bounds. It has been a fascinating and rewarding period to play a part in Australia's transition to a lower emissions economy.
I wish the new Chair every success in leading this institution through the next phase of development.
Chloe Munro Chair Clean Energy Regulator
'From an Asia-Pacific perspective, Australia is certainly going to lead the way in renewable energy deals, driven by the 2020 renewable energy target.'
1 International Energy Agency, Renewable Energy Medium-Term Market Report 2016.
2 Bloomberg New Energy Finance, Clean Energy Investment End of Year 2016, January 2017.
3 The Independent Review into the Future Security of the National Electricity Market, chaired by the Chief Scientist, Dr Alan Finkel AO.