This quick guide provides a brief background to the Commonwealth’s Renewable Energy Target – what it is, what it costs, how it operates, and whether it is achieving its aims.

What is the Renewable Energy Target?

The Renewable Energy Target is a Commonwealth Government scheme to increase the proportion of electricity generated in Australia from renewable sources, to reduce the emissions of greenhouse gases from electricity generation and to promote the development of a renewable energy industry in Australia. The ‘target’ of the scheme is to generate an additional 20 per cent of electricity from renewable sources by 2020, compared with 1997 levels. (Originally, the target was an additional two per cent by 2010.) The ‘Renewable Energy Target’ also refers to the legislated scheme that provides the mechanism for achieving the target through the creation and trading of renewable energy certificates. This certificate-trading scheme allows generators of renewable energy to earn additional income for the electricity that they generate, above the market price

Alexander St John

English

Analysis and Policy Observatory (APO)

  
RESEARCH PAPER SERIES, 2013–14 14 MAY 2014 
The Renewable Energy Target: a quick guide 
Dr Alexander St John 
Science, Technology, Environment and Resources Section 
This quick guide provides a brief background to the Commonwealth’s renewable energy target (RET)–what it is, 
what it costs, how it operates, and whether it is achieving its aims. 
What is the Renewable Energy Target? 
The Renewable Energy Target is a Commonwealth Government scheme to increase the proportion of electricity 
generated in Australia from renewable sources, to reduce the emissions of greenhouse gases from electricity 
generation and to promote the development of a renewable energy industry in Australia. The ‘target’ of the 
scheme is to generate an additional 20 per cent of electricity from renewable sources by 2020, compared with 
1997 levels. (Originally, the target was an additional two per cent by 2010.) The ‘Renewable Energy Target’ also 
refers to the legislated scheme that provides the mechanism for achieving the target through the creation and 
trading of renewable energy certificates. This certificate-trading scheme allows generators of renewable energy 
to earn additional income for the electricity that they generate, above the market price. 
How does the scheme work? 
To achieve the target, the Commonwealth established a scheme originally known as the mandatory renewable 
energy target (MRET). This scheme, established by the Renewable Energy (Electricity) Act 2000 (the Act), creates 
a demand for electricity generated from renewable sources. Under the scheme, RET-liable entities must 
purchase a specified percentage of their electricity from renewable sources each year; liable entities under the 
RET are large purchasers of electricity such as electricity retailers and large industrial users (these should not be 
confused with liable entities under the carbon price mechanism–entities can be liable under the RET, the CPM or 
both). The RET is currently split into two separate targets: the large-scale RET (or LRET), for large renewable 
electricity developments like wind and solar farms, and the small-scale renewable energy scheme (the SRES) for 
small technology installations like rooftop solar and solar hot water heaters. Liable entities have obligations to 
purchase renewable energy from both schemes. 
To provide certainty, the target is expressed in the Act as a fixed amount of electricity that must be sourced from 
renewable generators each year; the actual targets are 41,000 gigawatt-hours of electricity (GWh) for the LRET 
and a notional target of 4,000 GWh for the SRES. Together, these targets were meant to represent 20 per cent of 
Australia’s electricity usage by 2020, but demand for electricity is falling and the 45,000 GWh target is likely to 
account for substantially more than 20 per cent of Australia’s electricity by 2020. 
As all electricity that is fed into the grid is indistinguishable (that is, it is not possible to tell if electricity in the grid 
has been generated from renewable or conventional sources), it is necessary to have an external mechanism to 
account for the amount of renewable electricity purchased by liable entities. This is done through the trading of 
renewable energy certificates that demonstrate that renewable energy has been generated. This process differs 
slightly between the LRET and the SRES. 
ISSN 2203-5249 
 
 
 
 
The LRET 
Like other generators, large-scale renewable electricity generators feed electricity into the grid, and receive the 
market price for that electricity (this factsheet explains how the eastern National Electricity Market works). That 
electricity is then ‘grid electricity’ and is delivered to customers through electricity networks, along with 
electricity produced from non-renewable sources. Under the LRET scheme, accredited generators of large-scale 
renewable electricity are also awarded certificates (large-scale generation certificates, LGCs) by the Clean Energy 
Regulator (CER) at the rate of one certificate per megawatt-hour of renewable electricity produced. RET-liable 
entities have an obligation to buy a certain number of these certificates; the revenue that large-scale generators 
earn from selling these certificates supplements the revenue that they can earn by selling the electricity they 
generate through the normal electricity market mechanisms.  
RET-liable entities must purchase a certain percentage (called the renewable power percentage, RPP) of their 
electricity from renewable sources each year, and prove this by surrendering the requisite number of LGCs to 
the CER. The RPP is set each year by the CER, taking into account yearly interim targets set in legislation. In 2014, 
the RPP is 9.87%, which means that liable entities must surrender enough certificates to cover 9.87% of their 
electricity purchases, excepting purchases that are partially exempted for electricity used in emissions-intensive, 
trade exposed (EITE) activities.  
Certificates are commonly traded through brokers on spot markets, or through long-term contracts between 
generators and liable entities. In 2013, the volume-weighted average price for an LGC was $35.24 (per 
megawatt-hour). Should a liable entity fail to surrender enough certificates to cover their electricity purchases, 
they must pay a shortfall charge of $65 per megawatt-hour for each certificate not surrendered. This effectively 
caps the price of an LGC (and hence the LRET).  
The SRES 
The SRES is very similar to the LRET. Liable entities have an obligation to purchase small-scale technology 
certificates (STCs, which are awarded for generation from technologies like rooftop solar, small-scale wind, solar 
hot water heaters), in the same way as LGCs. The amount of STCs that must be purchased is given by the small-
scale technology percentage, which is also determined by the CER, based on the number of STCs likely to be 
created in the next year. However, there are a number of differences between the SRES and the LRET: 
• for small-scale systems, certificates are deemed, that is to say that a person that installs complying 
technology is awarded upfront enough certificates to cover the expected generation of their technology over 
its lifetime–up to fifteen years. Large-scale systems are awarded LGCs only as they actually generate 
electricity, whereas small-scale technology is awarded certificates for the energy they are expected to 
generate in the future. As STCs are provided upfront, this makes it possible for householders to assign their 
STCs to the company that installs their small scale system, in return for a lower upfront installation cost 
• STCs can be traded either through a secondary market, or via the STC Clearing House. STCs sold through the 
Clearing House are sold for $40, which is effectively a price cap. STCs are also sold on the open market at a 
discount to this. The STC Clearing House makes it easier for individuals to sell their STCs, compared to 
negotiating a contract with a liable entity or certificate trader. LGCs are effectively only sold on contract or 
spot markets 
• whilst the target for the LRET is legislated and relatively predictable, the SRES target is notional and varies 
from year to year. For example, in 2013 the small-scale technology percentage (STP) was 19.70%, for 2014 it 
will be 10.48%. This is because the STP is based on the number of certificates which are expected to be 
created in the next year, whereas the RPP (for LGCs) rises predictably each year towards the legislated target. 
Where did the RET come from and how has it evolved? 
In 1997, the Howard Government released its broad climate change strategy: Safeguarding the Future: 
Australia's Response to Climate Change. Amongst other measures, the strategy sought to promote renewable 
energy through a program of ‘Mandatory Targets for the Uptake of Renewable Energy in Power Supplies’. In 
2000, this was legislated as the Mandatory Renewable Energy Target, which created an obligation for large 
electricity purchasers to source an additional two per cent (or 9,500 GWh) of their electricity from renewable 
sources by 2010. See the original Bills Digest for further information. 
In 2003, a review of the MRET (the Tambling Report) found that after 2007 the MRET would no longer encourage 
investment in renewable energy. In light of this, in 2006 Victoria launched its own mandatory Victorian 
Renewable Energy Target (10 per cent of energy consumed to come from renewable sources by 2010, later 
 
 
The Renewable Energy Target: a quick guide 2 
 
extended to 2016). New South Wales also considered instituting its own scheme at the same time, and other 
states also considered their own programs. 
Before the 2007 federal election, the Australian Labor Party committed to an expanded renewable energy target 
of 20 per cent by 2020. (The Coalition had committed to a ‘Clean Energy Target’ of about half this amount of 
‘low-emissions’ power generation). Once elected, the Rudd Government referred the design of an expanded 
national RET to the Council of Australian Governments, with the intention of absorbing separate state schemes. 
Legislation for the expanded RET was passed in 2009, as the Renewable Energy (Electricity) Amendment Act 
2009. This amendment increased the target from 9,500 GWh by 2010 to 45,000 GWh by 2020 and introduced a 
‘solar credits’ multiplier, to provide an additional incentive for the installation of solar photovoltaic systems. The 
amending legislation also allowed emissions-intensive trade-exposed industries to be partially exempted from 
their liabilities under the RET. (See the original Bills Digest). 
However, the solar credits mechanism, which provided small solar installations with up to five times more 
certificates that they would otherwise be entitled to, proved problematic. These ‘phantom’ certificates were 
tradeable, and soon crowded out the market, reducing incentives for investment in large-scale technologies like 
wind farms. To remedy this, the RET was split into two separate targets: the LRET, consisting of 41,000 GWh, and 
the SRES, with a notional, but uncapped, target of 4,000 GWh. The split in the schemes commenced broadly on 
28 June 2010. (See the original Bills Digest.) 
Under the Act, the RET must be reviewed by the Climate Change Authority every two years; the review must 
examine the operation of the Act, its associated regulations and the environmental and economic impact of the 
scheme. The last review was undertaken in 2012; the review concluded that the RET did not require significant 
changes, and that there was no compelling evidence to alter the quantity or nature of the target. However, the 
Authority did flag that the uncapped nature of the SRES could prove problematic, and suggested policy measures 
to alleviate this. The Authority also noted that biennial reviews were damaging to investor confidence, and 
recommended that the RET should be reviewed every four years instead.  
Since being elected in 2013, the Abbott Government has commenced its own review of the RET. The terms of 
reference for the review are wide-ranging and consider whether the targets are appropriate and cost-effective. 
However, this is not the review that must be carried out by law, under the current Act. That review must be 
conducted by the Climate Change Authority, and the Authority has reportedly indicated that its RET review will 
be complete in late 2014, assuming it is not abolished before then. 
What does the scheme cost? 
There has been a considerable amount of commentary in the last few months about the impact of the RET on 
electricity prices, but little data has surfaced to quantify this impact. So what does the RET actually cost? The 
Australian Electricity Market Commission published a breakdown of the price of electricity components in its 
2013 Residential Electricity Price Trends report, published in December 2013. The cost imposed directly by the 
RET to the average household (which varies from state to state) is tabulated below, in cents per kilowatt-hour: 
Table 1 – Direct cost of Renewable Energy Target certificates to average household (in cents per kilowatt-hour) 
for 2012-13 (actual)  
  
Qld NSW ACT SA Vic Tas WA NT National 
20
12
-1
3 Cost of RET  1.39 1.39 1.39 1.39 1.39 1.00 1.39 1.08 1.38 
Electricity total cost  23.71 27.86 20.78 31.27 27.66 28.98 25.00 23.19 27.11 
% of cost due to RET 5.9% 5.0% 6.7% 4.4% 5.0% 3.5% 5.6% 4.7% 5.1% 
Source: Parliamentary Library estimates, compiled from Australian Energy Market Commission data (note that the AEMC has included 
supply and consumption charges in its cost of electricity estimate). 
The AEMC estimates that the RET will be responsible for between 3.6-5.2% of the average household’s electricity 
bill in 2013-14. In comparison, the 2013-14 cost of wholesale electricity (nationally) will be 5.26 c/kWh (which is 
18.8% of the retail cost that consumers pay), maintenance and development of electricity networks 14.4 c/kWh 
(51.5% of the retail cost) and the carbon price 2.53 c/kWh (9.1%). The AEMC estimates that the total cost of the 
RET will decrease to 0.9 c/kWh (3.1%) in 2014-15 and 0.89c/kWh (3.1%) in 2016-17. However, if the carbon price 
mechanism is repealed, analysts expect the cost of renewable energy certificates to increase significantly, which 
would change these predictions. 
 
 
The Renewable Energy Target: a quick guide 3 
 
However, although the cost of certificates increases the retail cost of electricity, the RET also has a slight 
downward effect on cost. In Australia’s National Electricity Market, generators bid to supply grid power at a 
certain time for a certain cost. The Australian Energy Market Operator then ‘dispatches’ generation capacity into 
the market, with the lowest cost generator first, until demand is satisfied. As renewable generators often have 
near-zero operating costs, they can bid into the market at very low prices and can displace higher-cost peak 
generation (like gas or oil generators, who would generally bid to at least cover their fuel costs). This has the 
effect of lowering the overall wholesale electricity price, and is called the merit-order effect.  
For the last review of the RET in 2012, SKM MMA modelled the impact of the RET on wholesale electricity prices, 
and a key finding was that ‘in the current over-supplied electricity market environment, the greater the RET 
target, and the greater the renewable generation, the lower the wholesale market prices.’ MMA estimated that 
wholesale prices would be 15-25% higher in 2020 in the absence of the RET. However, this reduction in the 
wholesale price might not be completely passed on to consumers. Both MMA’s modelling, and more recent 
peer-reviewed modelling conducted by the University of New South Wales (UNSW), suggest that once the cost 
of certificates and the reduction in the wholesale price of electricity are combined, power prices are slightly 
higher than they would be in the absence of a RET. MMA estimated that the cost to residential consumers was in 
the order of an extra $15 per year, and UNSW estimated the net cost at around 0.2-0.5c per kilowatt hour, 
depending on how much of the wholesale price reduction was passed through to consumers. UNSW’s modelling 
shows that emissions-intensive, trade-exposed industries are the big winners from the RET, as they receive the 
benefit of reduced wholesale electricity prices, but are substantially exempt from paying for it through 
certificates. 
Is it working? 
Although it is not possible to attribute results to any one program, figures from the Bureau of Resources and 
Energy Economics shows that, since the introduction of the RET, all forms of renewable electricity generation 
have increased, but wind power has increased most (see figure 1). Since 1997 renewable sources, excluding 
hydro power, have increased from 0.55% of electricity generated in Australia to 3.90% in 2011-12. Hydropower 
has been variable, mainly due to decreased rainfall during the mid-2000s.  
 
Figure 1 - Electricity generated by renewable sources 1999-2012 [Source data: Bureau of Resources and Energy 
Economics, Australian Energy Statistics 2013, CC/BY3.0] 
 
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The Renewable Energy Target: a quick guide 4 


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