Large-scale Generation Certificate (LGCs)
In Australia’s large-scale renewable market December saw a recovery in the spot with chunky forward market activity the highlight, while January brought news of a major electricity retailer’s decision to pay the penalty for 2016 instead of surrendering certificate; a development which drew a sharp rebuke from the Clean Energy Regulator with further concerns about the precedent set.
Yet this situation overshadowed another troubling series of events in which former Prime Minister Tony Abbott called for the scrapping of the RET and a notable existing cabinet member failed to rebuke him in subsequent days, revealing the fight against the RET from within the Turnbull Government is far from over.
The spot LGC market kicked off December by making up some of the November’s losses in an active start to the month which saw the market reach a high of $87.85 early on. From there the market softened gradually across the remainder of the month to close the year at $86.90, a gain of 19% on the December 2015 close. While the level of spot trade activity ultimately fell, the forward market continued to feature with active trade across the Cal 17 to Cal 19 contracts.
The New Year began with more forward market activity, with the first spot trade coming after a week, and at $87.40, setting a positive tone with a healthy $0.50 improvement on the previous year’s close. In the second half of the month, with the spot at $88.70 the major news arrived that one of the major liable entities would pay the $65 shortfall penalty instead of surrendering circa 1.9m LGCs against its 2016 liability.
The decision was a financial one, made based upon the company’s tax position, and it both immediately impacted on the market and drew the ire of a number of stakeholders, with the Clean Energy Regulator making a particularly critical press release accusing the company of failing ‘to comply with the spirit of the law and undermining the objectives of the scheme’.
Following the announcement the spot market dropped a bit under 1% to $88.00, however in subsequent days buying interest in the spot retreated to $87.00 mark and market activity fell away.
The net impact of the move will be 1.9m fewer LGCs being surrendered against the 2016 obligation, yet the retailer does have up to 3 years to acquire and surrender those LGCs and make-good on its shortfall, thus being refunded the penalty it will pay. This means that at some stage in the next 3 years there will likely be 1.9m extra LGCs surrendered, the big question is when. If the make-good does not happen in 2017, then the modest surplus that was likely to exist after the 2017 compliance year will grow by 1.9m. Should it fail to occur in 2018 then the additional 1.9m LGCs in the system are still unlikely to prevent an effective shortfall in Cal 18.
Aside from the move itself, the implicit concern from the scheme Regulator and others is for the precedent it may set, potentially opening the door for other liable entities to do the same without as much moral backlash. Whether or not this happens and whether or not it results in a further meaningful decrease in the number of LGCs surrendered against the 2016 liability is another matter.
Either way, the additional LGCs in the system will need to be held by someone and at this stage it isn’t clear what reduction in the price may be enough to encourage the additional soak up, though that will depend on whether the volume grows via other non compliance.
Somewhat overshadowed by this controversy was former Prime Minister Tony Abbott’s call for the Turnbull Government to scrap the RET, a little over 6 months after his government made a deal to reduce the target in order to bring a return to bipartisanship on the issue and thus release the noose that had been strangling the large-scale industry for more than 6 years. But like a bull to a red rag, Abbott appears incapable of letting the issue go and has voiced his views in the latest example of what many commentators believe to be a series of challenges or warnings toward Prime Minister Turnbull.
The Energy Minister Josh Frydenberg eventually stated that the Turnbull Government had no plans to change the RET, but not after the Deputy Prime Minister Barnaby Joyce refused to rebut his former leader’s position. It appears that the Trump Presidency in the US has emboldened certain elements in the Coalition party room who’s often publicly voiced criticism of the RET has already been cause for concern for an industry that requires long term certainty to ensure investor confidence. Abbott’s latest attack along with developments in the US will have many participants watching the political space even more keenly than usual for any signs of further change. From the large scale renewable energy industry’s perspective, as well as from the standpoint of those concerned about Australia’s climate change mitigation efforts, these developments are worrying indeed.
Small-scale Technology Certificates (STCs)
By recent standards it was a dramatic conclusion to 2016 and beginning to 2017 in STC market, with a large spike in STC submissions and a flurry of forward activity surrounded by speculation on the potential for a return to surplus in 2017 and the end of a long run of Clearing House deficits.
The last two years in the STC market have been characterised by overestimated targets and minimal market activity owing to the Clearing House remaining in constant deficit. Until the latter part of 2016 it appeared that such a scenario was again highly likely in 2017. Yet STC submissions across the final two months of the year jumped sharply averaging 45% above the Jan-Oct16 monthly average with many suggesting the drop in the deeming period from 15 to 14 years having proved an effective sales pitch to customers.
The 2017 target (Small-scale Technology Percentage or STP) has not yet been announced, however the last non-binding estimate issued in March 2016 was for a reduction in the 2017 target to 9.02% or 15.96m STCs, a drop of circa 1m on the 2016 target. There is yet time for the 2017 STP to be increased however, depending on how much it increases as well as whether the recent jump in STC submissions proves temporary, the genuine belief among some participants is that the Clearing House will return to surplus sometime after Q2, bring an end to the $40 prices that have prevailed across most of the last 2 years.
In reflection of that belief, January saw another spike in forward market activity with large trade volumes in the forward market for Q3 (around the $39.60 mark) and Q4 (around $39.50), with sellers seeking to hedge some of their expected production in case the market softens considerably.
The month also saw several $37 strike STC Put options trade with the buyers of those structures looking for some downside protection in Q3 and Q4 in case prices fell below that level.
STC submissions will be closely observed over the coming months to see whether the increased rates of late last years are maintained (which appears to be the case so far), with the next big development being the release of the 2017 target which will likely come sometime in March.
Marco Stella is Senior Broker, Environmental Markets at TFS Green Australia. The TFS Green Australia team provides project and transactional environmental market brokerage and data services across all domestic and international renewable energy, energy efficiency and carbon markets.
