Australian renewable energy policy: Barriers and ...

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1. Introduction. The development of renewable energy in Australia is important ..... Indeed, only 50% of CEFC funds are committed to renewable energy projects ...

Renewable Energy 60 (2013) 711e721

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Australian renewable energy policy: Barriers and challenges Liam Byrnes a, b, *, Colin Brown a, John Foster b, Liam D. Wagner b a b

School of Agriculture and Food Sciences, The University of Queensland, St Lucia, Qld 4072, Australia Energy Economics and Management Group, School of Economics, The University of Queensland, St Lucia, Qld 4072, Australia

a r t i c l e i n f o

a b s t r a c t

Article history: Received 19 March 2013 Accepted 15 June 2013 Available online

Effective policy and regulatory frameworks are paramount to incentivising the deployment of renewable energy to achieve long term reductions in carbon emissions. Australia’s renewable energy policy has taken significant steps towards encouraging the deployment of lower-emission energy generation. Significant policy barriers still exist at the federal and state levels, however, which have reduced the effectiveness of a concerted national effort to deploy renewables. The current policy landscape has favoured mature technologies which present the lowest investment risk at the expense of emerging options which may present greater efficiency and emissions reduction gains. The lack of support for emerging technologies delays their effective deployment and the accumulation of highly skilled human capital, until the medium to long term. This paper outlines the key policy frameworks, incentives and regulatory environment which encompasses the renewable energy sector, and presents a critical analysis of the barriers faced by the industry. Ó 2013 Elsevier Ltd. All rights reserved.

JELS classification: Q42 Q28 Q50 Keywords: Australia Renewable energy Energy policy

1. Introduction The development of renewable energy in Australia is important to address concerns about climate change and energy security [1,2]. The State of the Climate 2012 report concluded that rising CO2 emissions from the burning of fossil fuels have affected global temperatures much more than natural climate variability during the past century [3]. Electricity generation in Australia is the single largest contributor producing 38% of total emissions [4]. The use of fossil fuels in Australia has largely arisen as a result of the abundant resources of coal and gas. However, International and national concerns regarding the environmental impacts of fossil fuel use has led to governments committing to increase the amount of renewable energy used for electricity generation. This paper examines the existing policy frameworks, incentives and regulatory environment as they relate to renewable energy and presents a critical analysis of the barriers faced by the industry. Australian energy policy has been considered extensively in prior literature [5e15]. Following the release of the Energy White Paper in 2012, however, it is important to revisit energy policy, especially as it relates to renewables. The following section outlines background information on the Australian governmental system and how it affects energy, the * Corresponding author. School of Agriculture and Food Sciences, St Lucia, Brisbane, QLD 4072, Australia. Tel.: þ617 3365 1171; fax: þ61 7 3365 1177. E-mail address: [email protected] (L. Byrnes). 0960-1481/$ e see front matter Ó 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.renene.2013.06.024

operation and changing structure of the electricity networks, especially with respect to generation. Key policy frameworks that affect renewable energy development and deployment including carbon pricing, the renewable energy target, feed in tariffs and the Clean Energy Finance Corporation are then considered in Section 3. The next section deals with important policy challenges that remain. This discussion is made in the context of facilitating renewable energy development and considering both the efficacy of existing mechanisms and the further design of policy responses to accelerate the development of the renewables industry without causing socially suboptimal consequences. 2. Background 2.1. The Australian governmental system Australia is a federal parliamentary democracy consisting of Federal, State and local governments, all of which have different, but at times overlapping jurisdictions. Consequently, it can be extremely difficult to achieve united policy structure between the jurisdictions given competing priorities between State and Federal governments. Quiggin [16] highlights these competing priorities and difficulties in achieving a united policy structure in the context of the management of the Australian Murray Darling Basin. Energy policy reflects a combination of constitutional responsibilities, intergovernmental agreements (mainly State and Federal) and

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market agreements. This leads to complex regulatory and policy frameworks as Fig. 1 demonstrates in the electricity context. The complex regulatory and policy framework for electricity resembles the issues raised by Quiggin [16] though in the renewable energy context they are exacerbated by the need to achieve a united policy structure in the context of strong political differences. Different priorities among governments result in an incentive structure that leads to socially suboptimal decisions. State governments generally have limited ability to capture future revenue (compared with their Federal counterpart) and this can result in divergent incentives and motivations for policy amendment and intervention. The complexity leads to conflicting, policy and onerous compliance requirements for electricity market participants and makes it difficult for new participants and technologies to be integrated. In contrast, Germany has a similar governmental structure and has managed to create a well developed renewables industry. While it is likely similar pressures will arise in both contexts, Australia is not part of the European Union which has arguably helped to align German government policy (at different levels) towards the renewable pathway. Furthermore, Germany does not enjoy the abundant natural energy resources (coal, gas, and uranium) that Australia does. These factors together with pressures on governments due to geographical size, population density, remoteness and the contentious political discourse in Australia are likely to have contributed to the marked differences between the two similar governmental systems. 2.2. Australian energy system Australia has three main energy markets (fuels, electricity and gas) that deal with production, wholesale (including import/

export), transmission, distribution and retailing of energy products and services. The three energy markets are separated by geography and into Eastern, Western and Northern regions of Australia [4]. Fossil fuels accounted for around 96% of Australia’s primary energy consumption in 2011 [4] and 90% of electricity generation in 2012 [17]. Australia has extensive, energy resources demonstrated economically including black and brown coal (1,255,470 PJ and 384,689 PJ respectively in 2010) uranium (648,480 PJ in 2010), and gas (113,373 PJ of conventional, 35,055 PJ of coal-seam gas). Furthermore, it has been estimated that an additional 258,900 PJ of coal-seam gas, 435,600 PJ of shale gas and 22,000 PJ of tight gas may be economically recoverable (though this is untested) [4,18]. Renewable resources are also extensive with substantial areas of Australia with average wind speed of greater than 7 m per second, tidal energy of greater than or equal to 1 GJ/m2, annual wave energy of greater than or equal to 0.5 TJ/m2 and geothermal energy with greater than 3 km of sediment and/or hotter than 200 Celsius at 5 km, as well as approximately 58 million PJ of solar radiation each year [4,18]. Energy governance reflects the governmental structure with a mixture of federal and state responsibilities, together with intergovernmental arrangements (organised primarily between the Federal government and State/Territory governments through the Council of Australian Governments (COAG) Standing Council on Energy and Resources. Regulation is generally divided into two categories. The first covers electricity and gas where energy markets are regulated by the Australian Energy Market Agreement, which includes the National Electricity Law, National Gas Law and National Energy Retail Law. The second category covers liquid fuels which includes the National Competition Law and other business laws and fuel standards. In addition, State and Territory

Fig. 1. Regulatory environment. Source: [19] adapted from Ref. [20].

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governments are responsible for energy regulation and governance for on-shore resources and those out to 3 nautical miles from the territorial sea. The federal government is responsible for energy resources outside those zones. Due to interconnected energy markets on the east coast of Australia, however, intergovernmental arrangements have been established. The federal government also extensively regulates energy. The Australian Energy Market Operator (AEMO) is responsible for electricity and gas wholesale and retail markets everywhere except Western Australia and the Northern Territory, and the Australian Energy Market Commission (AEMC) is responsible for market development and rules for the national electricity and gas markets. The Australian Energy Regulator regulates the wholesale electricity market, and electricity and gas transmission and distribution networks in the national electricity market. In addition, a range of federal government agencies regulate the behaviour of energy market participants, including competition, fair trading, consumer protection and environmental issues. Fig. 1 outlines the regulatory environment which encompasses the management and operation of electricity in the Eastern States. 2.3. The Australian electricity industry Fig. 2 shows that approximately 90% of Australian electricity is generated from the burning of fossil fuels, primarily coal and gas and oil [4,21]. Coal provides approximately 68% of Australia’s electricity needs [4] which reflects the relatively low cost and abundance of coal reserves along the eastern seaboard where the majority of electricity is generated and consumed [22]. The efficiency of coal power plants varies across Australia depending on the type of coal used and the design of power plant. Brown coal plants (mainly located in Victoria which has the largest known reserves of brown coal in Australia) are substantially less efficient than newer black coal plants in Queensland and New South Wales (which have the largest black coal reserves). Efficiency from coal generators varies from 20% to 40% though new plants with supercritical pulverised fuel boilers have the potential of over 45% efficiency [23]. The efficiency of gas generators generally range from 35%e40% (open cycle) and 55%e60% (combined cycle) [23]. There also appears to be increasing emphasis by government and recognition by industry of the need to increase efficiency. Electricity is generally provided by large centralised, fossil fuel powered, generators from which electricity is transmitted at high voltage through transmission networks, transferred to distribution

Fig. 2. Electricity production by source 2010e2011. Source: [4,24].

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networks and then provided to energy consumers. This centralised supply model developed historically as a result of relatively cheap and abundant fossil fuels and the comparative efficiency and amenity of electricity transmission compared to localised generation. There is no national electricity grid although the National Electricity Market (NEM) which services Queensland, New South Wales, Victoria, Tasmania, and South Australia accounts for approximately 90% of Australia’s electricity demand. The other two electricity markets are: the Wholesale Electricity Market (WEM) which incorporates the South West Interconnected System and the North West Interconnected System which together service Western Australia; and the Darwin Katherine Interconnected System (DKIS) which services the Northern Territory. Together, these networks service all capital cities and most major towns. However, a substantial geographical area falls outside their scope. This electricity supply model is facing major challenges due to changing patterns in demand, aging generation, transmission and distribution infrastructure and the need to respond to environmental challenges including climate change. In order to respond to climate change, and reduce greenhouse gas (GHG) emissions, the Australian Government aims to reduce Australia’s total greenhouse gas emissions by 5% on 2000 levels by 2020 and by 80% on 2000 levels by 2050. Electricity generation is a key component of reducing emissions. There has been a modest shift towards renewable energy (primarily wind) and small household photovoltaic installations in Australia, though as a proportion of Australia’s total electricity production this is limited in scale. Fig. 3 demonstrates this shift in the National Electricity Market (NEM) together with the change in generation mix on the NEM from 2000 to 2012 with a shift away from coal towards gas.

Fig. 3. NEM generation capacity by fuel source. Source: [25].

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This transition is likely to continue over the coming decades if Australia is to achieve its present goal of GHG emissions being 80% of 2000 levels by 2050. Fig. 4 sets out a likely production generation mix in 2050 according to BREE [24] and the Energy White Paper [4]. As can be seen, renewable energy is a major component of future generation requirements. This will require a focus on renewable technologies rather than a reliance on gas as a ‘cleaner’ alternative. To facilitate deployment of renewable energy, policy support and adaptation is required. Federal and State/Territory Governments have already taken steps to achieve greater integration of renewable energy, and overcome market, and non-financial barriers. 3. Policy discussion The transition to renewably sourced electricity will allow Australia to exploit some of the world’s best renewable energy resources including the highest average solar radiation of any continent (approximately 58 million PJ per year [26]), high quality wind resources on the southern coast, and substantial hot-rock geothermal resources. Exploiting these resources will be a major challenge, however, due to generally higher costs than nonrenewably sourced electricity, compatibility with existing transmission and distribution networks, remoteness from key electricity markets and demand centres, technological immaturity and institutional inexperience. To facilitate greater uptake of ‘clean’ energy, the Federal Government developed the ‘Clean Energy Future’ framework aimed at increasing deployment and innovation of renewable energy. The policy framework is underpinned by the desire to efficiently deploy renewable technologies based on market signals, help through the innovation cycle and policy measures to address potential nonprice market barriers. It seeks to increase the competitiveness of renewable energy by addressing issues including, internalising environmental emissions (through pricing carbon) and helping to address issues associated with access to capital funding (through the establishment of a capital fund). These measures generally serve to direct support to lowest cost technologies which favours more established and mature technologies such as on-shore wind. This framework falls within the broader policy discussion regarding the need to capture external costs associated with existing

electricity supply, particularly environmental emissions and other non-market barriers. However, the reality for any government in attempting to capture all external costs and to address non-market barriers is limited by political considerations, institutional experience, and the perceived need to make trade-offs between affordability, jobs, existing industries. Cost is a major hurdle for renewable technologies due to high up-front capital costs per unit of electricity compared to traditional generators. Cost issues are exacerbated because historically many environmental costs and risks associated with the use of fossil fuel generators have been externalised by generators such that those costs are not borne (or not fully borne) by energy users. The development and deployment of renewable energy in Australia faces barriers that also exist internationally, including: - Administrative hurdles such as lengthy, regulatory approval and permit procedures [27e29]; - Non-transparency and costly procedures for grid connection [29,30]; - Policy instability with sudden policy changes and stop-and-go situations [29,31,32]; - Lack of social acceptance [29,33]; - Cost competitiveness; - Government support for existing electricity sources, institutional familiarity and acceptance, and (praxis of the hegemony). The historically low cost of electricity from non-renewable generators is in part due to environmental costs such as emissions (both from the generators themselves and also from the production chain), or land use being externalised. This has resulted in non-renewables having low private costs but high social costs and renewables having comparatively high private costs but low social costs. Investment and project funding is provided with respect to private costs and this puts renewables at a disadvantage. Specific measures introduced to increase competitiveness of renewable energy (and thereby reduce emissions), include establishing Australian Renewable Energy Agency (ARENA). ARENA is an independent authority with $3 billion in funding guaranteed in legislation until 2020 that aims to provide financial assistance for

Fig. 4. Electricity generation/production technology shares to 2050. Source: [4,24].

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the research, development, demonstration, deployment and commercialisation of renewable energy and related technologies, and the storage and sharing of knowledge and information about renewable energy technologies. ARENA as an entity has bipartisan political support, though the extent, timing and nature of its funding does not. The May 2013 federal government budget saw some ARENA funding deferred until 2021e2022 with $370m of funding deferred to future years. ARENA has two key areas for investment, firstly, commercialisation of new technologies, or research projects aimed at facilitating renewable energy use in Australia. The framework also provides funding for Carbon Capture and Storage (CCS). The amount allocated for CCS was originally over $1.6b though this was also reduced in the May 2013 federal budget by $500m. Pricing carbon which is designed to internalise environmental costs associated with emissions; the Renewable Energy Target which aims to increase the penetration of renewable generators; and the Clean Energy Finance Corporation which is designed to provide capital assistance. In addition, other measures such as feed-in tariffs and direct subsidies for domestic solar PV have been introduced. These have led to reasonable uptake in medium to large-scale wind generation, and small-scale PV largely the result of feed-in-tariffs (FITs) and direct subsidies. However, medium to large scale solar and other technologies of all types are yet to provide a substantial share of electricity generated. The key policy measures to facilitate renewable energy integration in Australia are divided into two categories (innovation and deployment) which are discussed below. 3.1. Innovation 3.1.1. The clean energy finance corporation The Australian Government will invest $10 billion to create the Clean Energy Finance Corporation (CEFC) which will leverage private sector financing for renewable energy and clean technology projects. Funding will be provided at the rate of $2 billion per year on 1 July from 2013 to 2017 though these amounts will roll over to be available in future years if not invested in one year. The CEFC is available for projects that are commercial propositions that are too advanced along the technological innovation chain to qualify for ARENA funding. The CEFC is independent from Government and run by a Board of experts in banking, investment management, clean energy and low emissions technologies. Investment decisions will be based on case-by-case analysis of projects at arm’s length from Government. The CEFC was created to identify suitable projects and remove barriers that would otherwise prevent the financing of large scale renewable energy projects. It is mandated to assist with the commercialisation and deployment of renewable energy and enabling technologies, commercialisation and deployment of energy efficiency and low emissions technologies and the transformation of existing manufacturing businesses to focus on making the inputs for these sectors [34]. The future of the CEFC is uncertain due to the pending federal election, and the opposition’s intention to shut down the fund. It is unclear whether this uncertainty will affect the CEFC’s operation, but among a range of different policy measures taken, it does increase policy uncertainty. The Australian banking system tends to take a conservative approach to the provision of business finance which can mean that less certain and less mature technologies can struggle to obtain capital funding. The CFEC is designed to help overcome this barrier through the provision of targeted finance. However, under the current regime different renewable technologies will have to compete with other, more mature and familiar technologies such as wind. The inclusion of low emissions technologies is likely to lead to substantial investment in gas which has fewer emissions than

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coal but is a reasonably mature and scalable technology that benefits from growing institutional experience and understanding. Indeed, only 50% of CEFC funds are committed to renewable energy projects (including hybrids). It is unclear what the CEFC has invested in to date, as the first of the quarterly investment reports outlining the type, nature and value of investments made is yet to be released. However, projects could relate to energy derived from geothermal, hydro, ocean (tidal and wave), solar, wind energy or bioenergy. The projects include but are not limited to electricity, thermal energy and fuel for transport from the above sources. They also include hybrids although to qualify, the technology must have an emissions intensity of less than 50% of the existing (non-hybrid) system. The CEFC is structured in a fashion similar to a large venture capital fund, and it remains to be seen whether financing issues traditionally associated with renewable energy development and commercialisation will persist. That is, it is unclear what types of renewable energy projects will obtain funding and whether that funding will be confined to more mature renewable technologies because they may be perceived as less risky. In Australia, hydro and onshore wind are substantially more mature and developed than solar (especially medium to large scale solar), geothermal, wave and tidal power. Investment in more mature technologies may be regarded by the CEFC as more viable notwithstanding that investment in less mature technologies is precisely the type of investment that may increase viability and accelerate renewable energy deployment. Further, deep grid connection costs, uncertainty of returns, intermittent supply/voltage variation and resulting network reinforcement, network stability issues, distributed generation, smart and micro-grids are all associated with renewable technologies. Low emission technologies such as gas do not have to contend with many of these issues and consequently, renewable technologies may be relegated down the investment pecking order. This effect would be more acute for renewable technologies that are less mature than others. It remains to be seen how effective the CEFC will be. The underlying economic rationale is sound, and there is evidence that as deployment rates increase, there is downward pressure on capital costs over time [35]. Nevertheless, in its current form it is likely to have a greater impact on more mature renewable technologies such as onshore wind. There remains a risk that this will be at the expense of less mature technologies that would receive greater benefit from CEFC assistance. The lack of government and industry coordination regarding grid connection costs, intermittency of power and the focus on project returns with limited consideration of network benefits, and matching supply/demand may be too simplistic. A renewable generator that provides electricity during peak periods may be more ‘valuable’ from a network perspective, but less ‘valuable’ when viewed as an individual project separate from its role in the electricity network. 3.2. Deployment 3.2.1. The Renewable Energy Target (RET) The RET requires 20% of electricity generated to be sourced from renewable sources by 2020. There has been a RET in some form since 2001 (originally called the Mandatory Renewable Energy Target (MRET)). From 2001 to 2012, Australia’s renewable electricity capacity increased from 10,650 MW to 19,700 MW [17]. Despite the increase in capacity, as at 2012, renewable energy as a proportion of total electricity remains only around 10 per cent in 2012 with little change from 2001 penetration levels, largely due to growth in electricity demand which was met by both nonrenewable and renewable electricity generation [17]. Buckman &

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Diesendorf [14] considered the MRET and concluded that the scheme had only succeeded in stimulating the least cost renewable energy technologies and the big losers under the scheme were solar photovoltaic and solar thermal (with the exception of small scale solar water heating). The authors were critical that certificates were available (sometimes at multiples of the actual energy supplied) for solar hot water heaters and other small residential generation though this was phased out from 1 July 2012. Under the RET, certificates are divided into STCs and LGCs (small and large scale certificates respectively). The effectiveness of the RET in stimulating renewable energy deployment is undermined by regulatory intervention that allow “eligible waste coal mine gas (WCMG) power stations” to apply for accreditation under the Large-scale Renewable Energy Target (LRET). The eligibility period is limited to 1 July 2012e31 December 2020 and is said to reflect the Government’s policy to provide transitional assistance for existing waste coal mine gas fuelled power stations that would be affected by the cessation of the NSW Greenhouse Gas Reduction Scheme on commencement of a carbon price.” Making WCMGs eligible for LRETs undermines the effectiveness of the RET, by misrepresenting the amount of renewable energy produced thereby falsely attributing renewable energy generation to clearly non-renewable sources, and impacting the tradable price of the certificates. Providing LRETs to non-renewable technologies effectively acts as a subsidy to the cost of that technology and reduces incentives for investment in alternatives. Indeed, in the final report of its review of the RET, the Climate Change Authority concluded that there is no strong rationale for new WCMG to be eligible, especially given the impact of carbon pricing though it curiously recommended maintaining support for existing WCMG [36]. The RET aims to achieve its 20% target by producing 45,000 GWh in 2020, the bulk of which will be provided by LRETs including WCMGs. The RET aims for 41,000 GWh to be sourced from LRETs with the remainder from small scale systems (though there is no limit on the size of small-scale systems’ contribution). Such a target leaves open the possibility that if electricity demand and supply increase, the target will not actually equate to 20% of electricity generated unless regular modelling is performed to adjust the target [14]. Further, there are a number of emissions intensive trade exposed industries that qualify for partial exemption from participating in the RET. These concessions alleviate cost pressures for non-renewable electricity thereby imposing a further cost barrier to renewable energy integration. It is imperative that when analysis is performed and the target either confirmed or revised, there should be an appropriate balance between governmental priorities of protecting trade exposed industries and jobs, and providing incentives to adapt electricity needs. The existing RET system provides credits per MWh of electricity produced. This system favours more established and cheaper technology options such as wind and hydro. Less mature, more expensive technologies such as solar are unlikely to obtain as much benefit from the RET in the absence of additional support mechanisms such as feed-in-tariffs, direct capital subsidies or banding/distinguishing between different technology types when determining certificate eligibility and supply. Buckman & Diesendorf [14] identified concerns similar to these. Developing policy that encourages more competitive, cheaper renewable technologies is beneficial because it can help shift technologies along the learning curve and become competitive without support. It can also help institutions to adapt to different technical characteristics (such as intermittent supply). However, it simultaneously crowds out other renewable technologies and discourages investment in them due to comparatively higher cost notwithstanding that there is more potential for cost reduction and growth in the future. A portfolio of different renewable technologies that can exploit local conditions and environments is needed

for Australia to achieve significant penetration of renewable energy. An RET that distinguishes between different types of technologies based on their maturity and penetration and allocating certificates accordingly so that they are weighted to encourage the next desirable entrant(s) may be more effective in developing a portfolio of renewable technologies while achieving increased renewable energy capacity. 3.2.2. The carbon price As part of steps to reduce GHG emissions, a national carbon price has existed from 1 July 2012. For 3 years carbon will be priced at a fixed (indexed) rate commencing at $23, and increasing to $25.40 in 2014. From 2015, the carbon price will be linked to the European Emissions Trading Scheme. During the 3 year period, the amount of emissions will be unlimited. After 3 years the government will cap emissions (the cap to be determined on advice from the Climate Change Authority). The annual cap will be set with the aim of reducing Australia’s total greenhouse gas emissions by 5% on 2000 levels by 2020, and 80% reduction on 2000 levels by 2050 and will therefore get tighter as reduction targets increase. The rationale for the carbon price is to support the development of an effective global response to climate change in a way that encourages investment in clean energy, while supporting jobs, competitiveness and economic growth and reducing pollution [37]. The legislation requires the 500 heaviest emitters to purchase carbon credits per tonne of emissions. Trade exposed industries and coal fired power stations are eligible for free credits to sustain competitiveness (and jobs) whilst international competitors are not subject to carbon pricing. The extent of this support is substantial. An amount of $9.2b has been allocated to the ‘Jobs and Competitiveness Program’ to support emissions intensive trade exposed industries. Emissions intensive and trade exposed industries such as steel and alumina receive free carbon unit allocations starting at 94.5% of their carbon emissions (meaning they will only have to pay 5.5% or $1.265 for every tonne emitted in the first year). In the case of the steel industry, further direct assistance is provided through the ‘Steel Transformation Plan’ which provides $300m to support innovation. Lower levels of support are available for industries with lower emissions intensity and trade exposure, starting at 66% of their emissions. LNG projects also receive a free allocation of carbon units representing 50% of the expected carbon emissions while coal fired generators receive free carbon credits, and highly polluting plants will be progressively closed at a cost of $5.5b over the period 2011e2017. The coal industry receives other direct support through the $1.3b Coal sector Jobs Package, which is to assist coal mines to implement carbon abatement technologies (principally coal seam gas sequestration). The quantity of free carbon units allocated will gradually reduce over time. Significantly, in its May 2013 budget, the federal government signalled that it had revised the budget forecast for revenues from carbon pricing (based on change in forecast price from $29 to $12.10) due to the low European carbon permit price. This has meant that the original industry compensation package is expected to $3.9b lower to reflect the lower carbon price. Similar to CEFC, the opposition government has signalled its intention to remove the carbon pricing scheme if it gains office. The problem with pricing carbon in the manner legislated is that the nature of government intervention means that the external (environmental) costs that are intended to be internalised are not, or not fully. Emissions intensive trade exposed industries source their electricity (almost exclusively) from non-renewable generators. The cost of this electricity will be minimally impacted by the carbon price. Governments must balance social concerns regarding jobs and competitiveness with their desire to internalise environmental costs. Providing substantial concessions to particular industries (at the expense of others) redistributes wealth across the

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economy and is an attempt to balance competing policy priorities. However, it undermines the potential economic and social and environmental contributions of new and emerging industries (such as the renewables industry) through profits, taxes, job creation and reduced emissions. Providing support through free credits and direct subsidies undermines the effectiveness of pricing carbon by artificially lowering the cost of electricity and distorting the market in which renewable technologies must compete. Further, government support for increased efficiency from existing generators shifts the onus from the generator itself to the taxpayer and distorts the electricity price as efficiency improvement costs are socialised and do not form part of the cost of production. Much of the assistance provided to the energy industry is not transparent. For example, eligible coal powered generators enjoy access to short term Federal government finance, and refinancing if alternate market finance is not economically available. It is difficult to ascertain how much (if any) of this support has been provided, for how long, and on what terms. Ultimately, the scale of support for non-renewables is unsurprising. After considering the Australian energy regulatory framework, Effendi & Courvisanos [7] concluded that industry and other affiliated special interest groups seem to have a significant impact on policy direction. They noted a range of measures need to be taken including the phasing out of fossil fuel subsidies to help the renewable energy industry overcome the challenges posed by the incumbent power of fossil fuel industries. Reidy & Diesendorf [38] estimated that $6.54 billion/annum in financial subsidies for fossil fuel production and consumption were provided. Further, it was estimated that in 2005e2006 subsidies in the energy sector amounted to $10b annually while only 4% went to support renewable energy and energy efficiency [39]. This is not a uniquely Australian context, see for example Neuhoff [40]. The Australian Federal Government expressly denied providing subsidies for the production of fossil fuels that encourage the inefficient or wasteful consumption of fossil fuels and noted that the ability to deduct business expenses does not in itself constitute a subsidy. Instead, it is said to be a normal and necessary step in determining business profit and therefore tax liabilities. The rationale is that particular tax treatments recognise the different risk factors and project circumstances applicable [4]. These subsidies pose substantial challenges to the development of renewable energy in Australia and mean that renewables must compete on an unequal playing field. Irrespective of the type of government intervention, policy makers must be careful to recognise any market distortions, especially when the renewables industry is trying to be stimulated using market and price signals. It remains to be seen how effectively the carbon pricing scheme will stimulate the renewables industry. It attempts to balance social and strategic interests with environmental concerns. Carbon pricing has the potential to internalise costs associated with nonrenewable electricity generation and thereby increase the cost competitiveness of renewable energy and so is an important step in the development of the renewables industry. However, governments risk undermining policy goals if they do not carefully balance the competing policy objectives of supporting and protecting existing industries and jobs with capturing a previously externalised environmental cost. 3.2.3. Feed in tariffs While there is no Federal Feed-in Tariff (FIT), FIT mechanisms vary between States and Territories across Australia as State governments set retail electricity prices either expressly, or require them to fall within a pre-defined range. FITs were a popular mechanism over the previous decade and applied to small systems (generally 5e10 kW) though in certain locations were available for systems up to 100 kW. The tariff rate also changed over time,

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ranging between 8c per kWh to 60c per kWh depending on the jurisdiction and size of the system. However, most FITs have been progressively reduced and/or phased out for new participants with limited exceptions (such as in some very remote areas of Australia). FITs appear to have played an important role in encouraging the use of small systems (typically household PV). Until the start of 2010, rooftop PV in the NEM did not have any material impact on electricity demand, but the number of installations increased substantially in 2010 and 2011 with an estimated capacity of 1450 MW by February 2012. This increase was likely due to FITs, system price reductions and increasing electricity tariffs making it more viable [41]. With limited exception, all FITs operate at a net metered rate which substantially reduces the value of the tariff if the rate paid is a premium to the retail electricity price. FITs have been widely criticised due to the way they socialise costs associated with the connection of renewables to the network (such as network reinforcement), whilst only providing direct (monetary) benefits to the owners of the installed technologies [9,42]. Nelson & Simshauser [9] argued that Queensland FITs had an adverse impact on individual welfare because they imposed costs across the network due to the need for network reinforcement and upgrades, rather than on the people who receive the FITs, and therefore should be abandoned in favour of other measures. However, this analysis was of a static nature and assessed the impact on a single time step not over the long term. This overlooks the benefits of declining capital costs of solar PV over-time. The price of the FIT(s) should decrease as deployment cost and penetration increase. Generally, only some home owners have the capacity to afford and install household scale renewables which can disadvantage people who cannot afford them or are prevented from installing due to their living arrangements (e.g. renting). This imposes additional networks costs that are borne by people who have not caused them and (generally) have a lesser capacity to pay and who spend a higher proportion of their income on energy. Australian FITs have focused the renewables industry on small-scale technologies at the expense of medium to large-scale generation. This focus creates issues regarding equity, network stability, and efficiency, reduces incentives for distribution businesses to adapt their network structure and operation to new and emerging technologies and approaches (such as higher penetration of distributed generation) due to the differences between existing centralised operational approaches and micro-distributed generation. FITs that cover medium to large scale projects and that are adjusted depending on technology maturity and deployment may provide a more efficient and practical way to accelerate the development of renewables in Australia through increased investment certainty regarding potential revenues resulting in reducing technology process and more effective (and fair) grid integration. It may also facilitate greater network protection through islanding, and taking advantage of micro-grids at times of network interruption and instability. With limited exceptions, renewable energy requires government support for further development. A FIT system that is reviewed regularly to ensure that market distortions are not excessive, that artificial markets are not created, and that FITs are reduced once technology maturity and integration increases can help provide investment certainty and encourage increases in renewable energy capacity. 4. Policy challenges 4.1. Grid connection costs Grid connection costs are a significant barrier to the development of the renewable energy industry and can substantially

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increase the capital expenditure required for a project. There is no national standard for grid connection in Australia. New generators have to pay the costs associated with connecting the generator to the grid which can range from shallow, to deep depending on the condition and capacity of the network. Connection challenges are rarely technical, but predominantly concern the allocation of costs especially if connection costs constitute a significant share of the project cost [30]. The Australian distribution network is predominantly unidirectional, with significant use of Single Wire Earth Return (SWER) lines that cover vast distances and service relatively sparse populations (outside capital cities). The Australian regime is a mixture of different rules depending on the jurisdiction in which the connection happens. These characteristics can result in both a disincentive to invest, and a first mover disadvantage. A generator that reinforces the network when connecting may bear all the costs whilst subsequent generators who take advantage of the reinforced network do not. A possible solution to the ‘first mover’ disadvantage is a requirement that other generators who wish to take advantage of network upgrades must pay a proportion of the upgrade costs already paid. This would allow some of the capital costs to be recovered by the first mover. The Federal Government has recognised the importance of connection costs in determining the least-cost and most efficient combination of generation and network investment noting that investment should be firmly based on market and technologyneutral locational signals [4]. However, this may be difficult when some technologies create challenges for connection and grid management. For example, intermittent supply and distributed generation can contribute to localised network and congestion can place stress and costs on distribution networks that have not been developed to handle large two-way power flows. These problems are currently being managed case by case, by distribution businesses [4]. Connection costs are likely to become more important in the future if Australia’s electricity supply system continues to transition towards renewable energy resulting in greater use of intermittent technologies, distributed generation and Smart Grids. The Smart Grid project in Newcastle, New South Wales is Australia’s first commercial scale smart grid designed to gather information about the costs and benefits of smart grids to inform decisions by government, electricity providers, technology suppliers and consumers across Australia. The Federal government has committed up to $100m to the project, which could potentially provide valuable insight into alternate electricity supply models. The Australian regime requires a compromise between optimal resource location and grid quality and proximity. Consequently, projects may be developed in sub-optimal locations, purely because the existing regulation operates as a disincentive to grid connection. These types of issues are not uniquely Australian. The German government took measures to stimulate the development of offshore wind, by adopting a two pronged approach, firstly imposing only very shallow connection costs (to overcome the barrier), and secondly increasing the feed in tariff premium [30]. However, to date, Australian governments have been reluctant to arbitrarily impose fixed connection costs. This may in part be due to institutional reluctance, government ownership of many of the distribution network businesses in Australia, and fairness issues for electricity producers, consumers and other stakeholders. The extent grid connection costs should be socialised across the network as opposed to borne by the connecting generator needs to be closely examined and is presently being considered by governments, electricity market operators and market participants. High connection costs act as a barrier to connection, especially for medium scale projects where they can form a relatively large

percentage of up-front capital costs. As suggested by Swider et al. [30], the level of costs payable should be adjusted with reference to the maturity and penetration of technologies as has happened in Germany see. 4.2. Regulatory and policy uncertainty Regulatory and policy uncertainty is a substantial barrier that must be addressed. The regulatory structure poses a substantial barrier to renewable energy development [27e29]. In a recent analysis of Queensland, administrative hurdles and delays in project approvals, high capital costs, insufficient financial incentives, infrastructure deficiencies, shortfalls in technology, technical workforce capacity and high levels of complex multi-tiered regulation were identified as barriers to renewable energy development [10]. Streamlining legislative processes, both within and across jurisdictions is essential for renewable energy supply and investment projects. Conflicting political priorities operate to undermine the effectiveness of existing policy. For example, following the change of government in the Queensland election in March 2012, almost all state renewable energy funding was cancelled with the exception of the solar feed-in-tariff which was substantially decreased. This decision appears to have been made with little, if any industry consultation, and will obviously impact the renewables industry which had relied on the measures in place. Government support measures (at all levels of government) have constantly changed, been refined and adjusted. At the federal level, the (opposition) coalition government has developed an alternate plan and committed to removing carbon pricing and replacing it with an alternate policy if it wins the next federal election scheduled for 14 September 2013. Compounding this issue is the problem of short term policy horizons which can cause difficulty in setting policy frameworks to effectively achieve longer term policy goals and encourage greater confidence by market participants allowing them to plan and respond more efficiently [43,44]. Participants in the renewable energy industry that rely on government support for viability are likely to be severely discounting the value of the support provided to reflect the risk (perceived or otherwise) that the support will dissolve. Because the renewable energy industry is developing, it is particularly vulnerable to policy shock compared to other industries with more established access to capital and institutional experience. Commercial viability of a range of technologies in Australia (e.g. solar) still largely depends on regulatory intervention and is likely to continue to do so, at least until institutional experience increases, support for non-renewable energy is addressed, technology maturity increases, connection costs are addressed and deployment is accelerated. It is therefore important from both a planning and a financing perspective that policy and regulatory certainty be enhanced, so industry participants can rely on measures when planning projects over the project timeframe. Key stakeholders should be involved in any reviews of regulation and policy, both for input, but also to identify issues that may result, particularly adaptation timeframes and proposals to remove support. This process should be integrated into intergovernmental co-operation and co-ordination mechanisms to ensure policy changes are made cognisant of their potential consequences. 4.3. Network effect and social/institutional acceptance A key challenge facing renewables, particularly technologies other than wind/hydro is similar to a ‘network effect’. Because the use of large scale renewable technologies is a relatively new phenomenon, particularly in Australia, institutions, and consumers face

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the choice between two competing networks, renewables, and non-renewables. One network they are familiar with and its inputs and issues are predictable; the other, due to its immaturity, is somewhat unknown. Businesses that have traditionally been involved in coal/gas electricity generation are more likely to stay with technologies and skills with which they are familiar. The literature indicates that where markets fail to give consumers the correct incentives to join a network instead of another (for example because a range of costs are externalised) the success of the network is likely to be determined by consumers’ expectations about which network will prevail and by choices made in the past [45e47]. Once renewables provide a significant proportion of electricity generated, consumers, institutions (such as banks) will be more willing and supportive of them. Further, solutions to issues unique to renewable technologies (such as voltage variation, and intermittency of supply) are likely to be developed. Social acceptance is an important component in the development of the renewables industry. The “not in my backyard” phenomena exists, particularly with respect to wind farms that have at times been vehemently opposed. A number of examples internationally, and fewer in Australia, have demonstrated that community participation in deployment facilitates social acceptance and support. As renewable energy begins to have a larger role in electrification, and stakeholders become more familiar with the technologies it is likely that institutional development and social acceptance will accelerate. 4.4. Rural/not grid connected communities Smaller regional or community scale projects face additional barriers due to their low population density and significant distance from major supply and demand centres. The distances covered by Australian distribution and transmission networks result in losses in the order of 11%, the majority of which are thermal in nature [21]. Rural networks generally use overhead power lines and cost effective conductors such as galvanised steel which are characterised by high losses, although underground power lines are becoming the preferred option for new installations or where the existing overhead power lines may be susceptible to faults [21]. These can make network maintenance and development challenging due to the low population density and large geographical area covered. The Australian Electricity Market Operator (AEMO) which operates the NEM has identified that it requires $4b to $9b network investment supporting $35b to $120b in new electricity generation investment over the next 20 years [48]. Renewable energy can be used to either substitute or supplement existing electricity supply. The Northern Territory Government aims to replace diesel generation in remote areas with renewable or low emission technologies and has identified solar as the most suited renewable technology across the Territory. In Queensland, renewable energy (wind, solar and geothermal) has been incorporated into a small number of remote communities [49]. Partnerships between governments and industry, and direct support for the integration of renewables in rural electrification are necessary to facilitate the transition from diesel generation. Renewable generation can both improve reliability (especially during extreme weather events that can cut road access for months at a time) and potentially provide a more viable alternative. Efficient use of renewables will reduce the need to rely on diesel in remote communities (typically subsidised by government) and reduce emissions. 5. Conclusion Australia has taken significant steps towards the development of the renewable energy industry. Nevertheless, substantial regulatory

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and market barriers persist. Sections 3e5 above highlight some of the key measures, their effectiveness, and barriers that persist. Notwithstanding Australia’s extensive energy resources, both nonrenewable and renewable, when these resources are considered together with its size, government structure, political differences, and population characteristics it is at a cross-roads. It can continue business as usual and take advantage of extensive fossil fuel resources ignoring the risks of climate change, or it can continue (and accelerate) down the pathway towards a cleaner, renewable energy future. Support for conventional fossil fuel sourced electricity, grid connection costs, availability of capital, social/institutional acceptance, regulatory and policy uncertainty, and different levels of support required by different renewable technologies all frustrate the development of the renewables industry in Australia. Australia has very substantial renewable energy assets, particularly solar energy, and is well placed to exploit those assets. However, to do so requires a re-think of existing policies that have tended to limit investment in renewables generally, and instead have directed investment in renewables towards particular technologies at the expense of others. Further, it is very difficult for emerging technologies to properly compete on price when the price of electricity is distorted by government support for conventional generation, greater integration of other non-renewable sources such as gas. A balanced policy framework that aims to help Australia transition to a cleaner, lower emission future will of course not focus entirely on renewables at the expense of efficiency improvements and integration of more efficient fossil fuel technologies such as gas. However, at present, the framework is not balanced and tends to ignore or downplay preferential treatment for existing fossil fuel technologies, and favours lower cost more mature renewable technologies (e.g. onshore wind) and fossil fuel generators (e.g. gas). Gas is likely to play a major transitionary role in replacing coal generation and significant investment is already directed towards it. However, renewables also require significant investment. Current policies are designed to encourage the development of the renewables industry on a market basis but tend to downplay the inherent distortions associated with energy in Australia arising from preferential tax treatments for some fossil fuel industries, institutional structure and experience and other non-market barriers. The effectiveness of existing policy is limited by a focus on developing least cost energy options at the expense of emerging technologies. ARENA, the RET and the CEFC are designed to help the development of a renewable energy industry in Australia. However, funding uncertainty with respect to ARENA, the RETs propensity to encourage least cost renewable technologies which may in particular cases for wind be commercially viable without support, together with the risk that the CEFC will focus on more mature technologies possibly at the expense of those that would receive greater benefit, all conspire to undermine the development of an effective, viable industry in Australia. Questions regarding the “value” of individual projects as opposed to their value as part of the electricity network, together with a limited ability to offset the actual costs of electricity in a particular location (because most electricity tariffs socialise that cost to some extent) are likely to make industry participants proceed cautiously. These factors are exacerbated by policy uncertainty resulting from disagreements between federal and state governments, and between political opponents. Australia needs bipartisan support at all levels of government at least in relation to a core group of policies that help to sustain momentum for the development of the renewables industry. Support and momentum can be difficult to maintain in circumstances where technological maturity, and commercial viability may be in the mid to long term but

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political realities generally require action in the short to mid-term. It is unrealistic to expect that governments with different priorities and philosophies can act in a wholly united way. However, policies must be given time to become effective and be adaptable. Major barriers to renewable energy must be addressed through policy that focuses on short, medium and long-term priorities and is flexible enough to cater for innovative approaches (such as increased use of distributed generation in electricity networks). Unless steps are taken to address barriers to renewable energy development, Australia will miss the opportunity to exploit its abundant renewable resources and enjoy the resulting social, environmental and economic benefits. List of acronyms

AEMO

Australian Electricity Market Operator which operates the NEM ARENA the Australian Renewable Energy Agency BREE the Australian Bureau of Resources and Energy Economics CEFC Clean Energy Finance Corporation DKIS Darwin Katherine Interconnected System FITs Feed In Tariffs GHG Greenhouse Gas GJ Gigajoule GWh Gigawatt hour Household PV household photo-voltaic solar panels kW Kilowatt kWh Kilowatt hour LGCs Large-scale Generation Certificates (which are provided under the RET scheme) LNG Liquefied Natural Gas LRET Large-scale Renewable Energy Target MRET Mandatory Renewable Energy Target MW Megawatt MWh Megawatt hour NEM National Electricity Market PJ petajoule RET Renewable Energy Target STCs Small-scale Technology Certificates (which are provided under the RET scheme) SWER line Single Wire Earth Return line TJ Terajoule WEM Wholesale Electricity Market which incorporates the South West Interconnected System and the North West Interconnected System in which together service Western Australia WCMG Waste Coal Mine Gas References [1] IEA. Renewable energy coming of age. The Journal of the International Energy Agency, Spring 2012 2012. [2] IEA. Contribution of renewables to energy security. International Energy Agency; 2007. [3] CSIRO, BOM. State of the climate 2012. Australia: Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Bureau of Meteorology (BOM); 2012. [4] Australian-Government. Energy white paper 2012. Canberra, ACT: E.a.T. Department of Resources; 2012. [5] Zahedi A. Australian renewable energy progress. Renewable and Sustainable Energy Reviews 2010;14:2208e13. [6] Reidy C. Energy and transport subsidies in Australia: 2007 update, prepared for Greenpeace Australia Pacific. Sydney: Institute for Sustainable Futures; 2007. [7] Effendi P, Courvisanos J. Political aspects of innovation: examining renewable energy in Australia. Renewable Energy 2012;38:245e52. [8] Ekren O, Ekren BY, Ozerderm B. Break-even analysis and size optimization of a PV/wind hybrid energy conversion system with battery storage e a case study. Applied Energy 2009;86:1043e54.

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