Energy-only markets and renewable energy targets: Complementary policy or policy collision?

Abstract

Australia’s 20% Renewable Energy Target (RET) was designed and implemented against a backdrop of several decades of continuous growth in electricity demand. Since the introduction of the policy in 2009 electricity demand has declined continuously. In this article, we analyse how Australia’s National Electricity Market (NEM) has responded to falling demand and significant additional installed capacity as a result of climate change-related policies. We conclude that an energy-only market design, barriers to exit for incumbent plants, and time inconsistency of policy has resulted in investment in new renewable energy projects becoming largely intractable. In our opinion, changing the RET fixed GWh target will not alter this fact. To overcome barriers to exit, we examine three options for complementary public policy in the short-term: direct government intervention; a market-based solution; or regulation. In the long-term, a redesign of the energy-only NEM market seems inevitable.