Last week the Coalition announced it would scrap the Clean Energy Finance Corporation (CEFC) if it forms government.

As the main renewable energy investment measure included in the Clean Energy Future package, the CEFC is intended to fill a gap in Australia’s climate change and energy policy. Scrapping the CEFC would be a substantial setback to the emerging renewable industry.

By itself, Australia’s carbon price legislation will do little to deliver new renewable energy capacity. Instead, the carbon price is expected to shift the electricity sector from coal to gas generation.

As my Melbourne Energy Institute colleague Patrick Hearps explains:

“Analyses from the Australian Energy Market Operator (AEMO) and Melbourne Energy Institute numbers show that if carbon costs around $25-70/tonne the electricity sector will switch from coal to gas-fired power, and would not drive any extra investment in renewables beyond the Mandatory Renewable Energy Target”.

Developing a renewable energy industry is crucial to achieving decarbonisation throughout the economy. The Clean Energy Finance Corporation will help address the carbon price’s limited ability to encourage large-scale renewables in the near future.

What the CEFC will do

The Clean Energy Finance Corporation (CEFC) is modelled on the UK’s recently instituted Green Investment Bank. From 2015, the CEFC will have $10 billion to invest in renewable energy, energy efficiency, enabling infrastructure and “low emissions” technology. Half of the fund is quarantined for renewable energy.

The body is slated to be independent of government (similar to the status of the Reserve Bank). Creating a renewable energy investment program at arm’s length from government is a sensible move, providing insulation from the political cycle, political interference and the uncertainty that has plagued many renewable programs to date.

The CEFC can make investments that are currently beyond the capacity of the private sector. This bridges an important gap in the renewable energy market. Given the carbon price will benefit gas, and the Large-Scale Renewable Energy Target will likely target wind energy, the CEFC can focus on bridging the “valley of death” between the commercialisation and deployment of less-mature technologies.

Is the CEFC enough?

The CEFC has to deliver commercial returns. This could be a potential barrier preventing investment in immature technologies and new players such as concentrating solar thermal. Such technologies have excellent prospects for getting cheaper but are currently capital intensive.

To meet the energy needs and challenges of the future, we need a suite of technologies. If the commercial imperative makes the scope of the CEFC too narrow, additional policy mechanisms and levers may be needed.

Nothing in the government’s Clean Energy Future legislation prevents other mechanisms being implemented. Other mechanisms such a well-designed national feed-in tariff (FiT) scheme.

The FiT mechanism has delivered around 80% of the world’s installed renewable energy (non hydro) capacity.

When managed properly, FiTs can get renewable energies to a stage where the premium tariffs can be reduced year-on-year until they are no longer necessary. In Germany, Europe’s strongest economy, FiTs have expanded photovoltaic electricity generation.

The cumulative installed capacity of photovoltaics in Germany increased from 2,900 megawatts in 2006 to over 17,000 megawatts in 2010.

Additional policies can speed things up

Implementing additional policies such as feed-in tariffs could quicken the pace of renewable energy deployment – essential to matching the challenge of climate change – by driving important cost reductions through economies of scale and learning effects.

Critics of the measure say national renewable energy FiTs cost too much. But should the predicted cost reductions and developments come to fruition, these technologies will become the cheapest way to abate carbon.

If these technologies become competitive with (or even cheaper than) traditional fossil generators, there is no longer a marginal cost of abatement.

The cost of such schemes could also be offset by reductions they deliver in the wholesale price of electricity, through the “merit order effect”. By offsetting fossil fuel generation, renewable energy can bring down the overall price of power.

This well-documented effect would occur as a result of any new renewable generation. With the brown coal generators arguing that “too much renewable energy too quickly would reduce wholesale electricity prices and adversely affect existing generators”, it is imperative that any mechanism to facilitate renewables is administered by an authority kept at arm’s length from government.

The CEFC will provide incentives for the renewable energy industry, and help address a limitation of carbon pricing. Some renewable energy technologies may even require additional measures on top of this.

Whatever the case, scrapping (or even threatening to scrap) the CEFC – currently the main renewable energy deployment policy – would stifle the development of the emerging renewable energy industry in Australia at a decisive point in its development.