Australia's Renewable Energy: Market Dynamics and Policy Implications

This report provides an economic analysis of Australia's approach to renewable energy. It examines the current state of the electricity market, government policies aimed at increasing renewable energy supply, and the impact on electricity prices. The report discusses the role of vertical integration among energy retailers and generators in meeting emission targets and ensuring a reliable supply. It also evaluates the economic concepts of supply and demand, externalities, and market concentration within the context of Australia's energy policy. The report concludes with recommendations to promote competition and achieve energy targets through subsidies, ultimately aiming to reduce market manipulation. The report highlights the challenges and opportunities associated with Australia's transition to renewable energy sources.

Running Head: AUSTRALIA’S STAND ON RENEWABLE ENERGY
Australia’s Stand on Renewable Energy
Name of the Student
Name of the University
Author note

1AUSTRALIA’S STAND ON RENEWABLE ENERGY
Table of Contents
Introduction......................................................................................................................................2
Summary of the article discussion...................................................................................................2
Article evaluation with economic theory and concepts...................................................................4
Increased supply and price...........................................................................................................4
External supply contraction.........................................................................................................4
Vertical Integration..........................................................................................................................5
Recommendation.............................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

2AUSTRALIA’S STAND ON RENEWABLE ENERGY
Introduction
Progress of the modern world is impossible without support from energy resources.
Industrial development, transport and communication and in every aspect of life there is need for
energy resources. There are two sources of energy- renewable energy and non-renewable. The
supply of renewable energy is unlimited while non-renewable resources are limited with by the
long time taken for re-creation (Twidell and Weir 2015). Because of massive pressure on
renewable resources, there is a possible threat that it will end in near future. To preserve
exhaustible resources for future generation Australia has shifted its focus on renewable energy
sources for generating powers and in other areas.
Summary of the article discussion
Given the current state of electricity market, focus of government and energy ministry is
to ensure an uninterrupted power supply and brings electricity price at an affordable level. In the
last few years, people in Australia are suffering from a high electricity price with a severe
shortage of power supply (Cludius, Forrest and MacGill 2014). Electricity is an integral part of
daily life. Therefore, problem in the energy market need serious attention and should be solved
permanently. The reliance on renewable energy is expected to achieve the first round reduction
of electricity prices as opined by Prime Minister Turnbull. In the modelling commission,
proposition has been also made to government intervention and prevent the growing
concentration in the electricity market.
A plan is designed to achieve capacity of 6,000 MW renewable energy. This will boost
power supply leading to a sharp decline of electricity prices in the wholesale market. In order to
achieve this goal, capacity of renewable energy has been incentivized with modification of

3AUSTRALIA’S STAND ON RENEWABLE ENERGY
existing clean energy target (theguardian.com 2017). The proposed policy imposes new
restrictions on energy retailers and users of large-scale energy in the coming years of 2020. Both
the uses and retailers need to fulfill the target of reliability and reduction of emission to targeted
low levels. There are chances that the new emission targets and reliability requirement lead to
further market concentration in few states like that in South Australia (Azad et al. 2014). Under
National Energy Guarantee or NEG, the energy retailers need to guarantee two main aspects that
is reliable supply and reduction in emission (abc.net.au 2017) To attain a reliable supply retailers
are required to use only a certain percentage of electricity obtained from sources like gas, coal
and batteries. To achieve targeted reduction of emission the retailers can grab assistances in form
of subsidies and other form of incentives.
In order to achieve the set policy goals under Neg, the energy retailers makes external
contraction of supply. However, this is costly for them. Instead of contracting supply externally,
they chose to involve in vertical integration with the generators. The means of vertical
integration more cost effective as compared to external contraction (Quaschning 2016).
South Australia already has both high degree of vertical integration and market
concentration. The state policy makers are left with three options for intervening in energy
market at the national level.
Restriction regarding the choice of parties that can operate, control or own new generation.
Put restriction on who can be retailers of electricity
Restriction on parties for becoming both an owner, retailers or operate generation.

4AUSTRALIA’S STAND ON RENEWABLE ENERGY
Article evaluation with economic theory and concepts
Increased supply and price
The high electricity price has become a major problem in citizens of many Australia
state. Price in the market is determined from the forces of demand and supply (Rader 2014).
Demand in the market cannot be restricted. Therefore, supply side solution should be adapted to
control price. With increasing reliance on renewable energy, the energy ministry aims at raising
supply in the market and reduce electricity price.
Figure 1: Increased supply and expected price reduction
(Source: as created by Author)
External supply contraction
In any economic activity, externality implies external cost or benefit of the activity that
are imposed on a third party not involved directly or indirectly. The new frontier of energy

5AUSTRALIA’S STAND ON RENEWABLE ENERGY
emission target requires the supplier to achieve a certain amount of reduction in emission. In
order to achieve the policy goal under national energy guarantee, suppliers chose to restrict their
supply externally (Weitemeyer et al. 2015). The reduction in supply creates supply shortage in
the market leading to an unreasonably high price. This is the reason why vertical integration of
retailer with generators is considered as a cost effective means of achieving reliable supply and
emission targets.
Figure 2: Supply contraction and increased price in electricity market
(Source: As created by Author)
Vertical Integration
Vertical integration is the alternative strategy that energy suppliers adapts to fulfill their
emission targets. In economics, integration refers to the strategy of where one establishes relation
with other firms either in the same industry or with firms operating in different stages of

6AUSTRALIA’S STAND ON RENEWABLE ENERGY
production. The former is called horizontal integration while later is called vertical integration.
Different inputs are required to produce final goods. One firm integrate with suppliers of inputs,
it becomes easier for them to access inputs and produce more goods (Cowen and Tabarrok
2015). The clean energy target requires energy retailers to produce energy with a minimal
emission. When retailers vertically integrate with generators then emission target can be
achieved without contracting their supply much.
Recommendation
Policy based on renewable energy target helps to reduce the pressure on electricity prices
by increasing supply in the market. However, the emission and reliability target imposed under
this policy leads to market concentration. When retailers vertically integrate with generators then
this strengthens the position of large retailers. Concentration in the market gives power to few
retailers to manipulate market outcome. Such concentration should be restricted. Instead,
government should encourage competition and help the retailers to achieve their energy target
with providing subsidies whenever needed.
Conclusion
The report discusses Australia’s stand on renewable energy resources. In order to
maintain an uninterrupted power supply and control price, Australian government is increasingly
focusing on power generation using renewable sources. The new energy frontier requires energy
retailers to maintain a reliable supply within the set emission target. The new policy aims at
relaxing government intervention to reduce market concentration. However, the suppliers to
achieve their policy goal either contract their supply or integrate vertically. The stand on
renewable energy is expected to solve problem in energy frontier.

7AUSTRALIA’S STAND ON RENEWABLE ENERGY
References
ABC News. (2017). What is the National Energy Guarantee and what does it mean for
consumers?. [online] Available at: http://www.abc.net.au/news/2017-10-17/explainer-energy-
policy-what-is-the-coalitions-new-plan/9057158 [Accessed 9 Jan. 2018].
Azad, A.K., Khan, M.M.K., Ahasan, T. and Ahmed, S.F., 2014. Energy scenario: production,
consumption and prospect of renewable energy in Australia. Journal of Power and Energy
Engineering, 2(04), p.19.
Cludius, J., Forrest, S. and MacGill, I., 2014. Distributional effects of the Australian Renewable
Energy Target (RET) through wholesale and retail electricity price impacts. Energy Policy, 71,
pp.40-51.
Cowen, T. and Tabarrok, A., 2015. Modern Principles of Microeconomics. Palgrave Macmillan.
Murphy, K. (2017). Renewables will drive 'steep decline' in wholesale electricity price in
Australia – report. [online] the Guardian. Available at:
https://www.theguardian.com/environment/2017/nov/22/renewables-will-drive-steep-decline-in-
wholesale-electricity-price-in-australia-report [Accessed 9 Jan. 2018].
Quaschning, V., 2016. Understanding renewable energy systems. Routledge.
Rader, T., 2014. Theory of microeconomics. Academic Press.
Twidell, J. and Weir, T., 2015. Renewable energy resources. Routledge.
Weitemeyer, S., Kleinhans, D., Vogt, T. and Agert, C., 2015. Integration of Renewable Energy
Sources in future power systems: The role of storage. Renewable Energy, 75, pp.14-20.