Distributional Effects of the Australian Renewable Energy Target (RET) through Wholesale and Retail Electricity Price Impacts

Johanna Cludius (), Sam Forrest and Iain MacGill
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Johanna Cludius: School of Economics, Australian School of Business, the University of New South Wales
Sam Forrest: Centre for Energy and Environmental Markets, the University of New South Wales
Iain MacGill: School of Electrical Engineering and Telecommunications and Centre for Energy and Environmental Markets, the University of New South Wales

No 2013-33, Discussion Papers from School of Economics, The University of New South Wales

Abstract: The Australian Renewable Energy Target (RET) has spurred considerable investment in renewable electricity generation, notably wind power, over the past decade. This paper considers the distributional implications of the RET for different electricity customers. Using time-series regression, we show that the increasing amount of wind energy fed into the NEM has placed a considerable downward pressure on wholesale electricity prices through the so-called merit order effect. On the other hand, costs of the RET are passed on to consumers in the form of retail electricity price premiums imposed by the retailers who are liable parties under the scheme. Potential complexities for the analysis include the many drivers of wholesale price outcomes, the mix of regulated and competitive retail tariffs on offer in Australia, and the partial RET exemptions given to energy-intensive trade-exposed industries. Nevertheless, our findings highlight likely significant redistributive transfers between different energy user classes under current RET arrangements. In particular, some energy-intensive industries are benefiting from lower wholesale electricity prices whilst being largely exempted from contributing to the costs of the scheme. By contrast, many households are paying significant RET pass-through costs whilst not necessarily benefiting from lower wholesale prices. A more equitable distribution of RET costs and benefits could be achieved by reviewing the scope and extent of industry exemptions from the RET and ensuring regulators apply methodologies to estimate wholesale price components in regulated electricity tariffs that reflect more closely actual market conditions. More generally, these findings support the growing international appreciation that policy makers need to better integrate distributional assessments into policy design and implementation.

Keywords: Renewable energy; Electricity market; Distributional effects (search for similar items in EconPapers)
Pages: 26 pages
Date: 2013-12
New Economics Papers: this item is included in nep-ene and nep-reg
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