Australia’s renewable energy sector is a tale of two markets with very different fates, according to a new report published by the Clean Energy Regulator that shows a rooftop solar industry that is setting new records while the large-scale market dramatically grinds to a halt.
The story has been detailed in the first edition of a new quarterly report on developments in Australia’s environmental markets, published by the regulator. It paints a mixed picture for the renewable energy industry as it heads to a new period of policy uncertainty.
Over the last two years, investment in large-scale renewable energy projects has undergone a strong recovery, as the construction of new projects ramped up to meet the Federal government’s target of reaching 20 per cent renewable energy by 2020.
However, a lack of policy certainty, and with the federal government having no mechanism to support large-scale renewable energy investment beyond 2020, the large-scale market has encountered some significant headwinds which have be exacerbated by additional difficulties faced by projects regarding grid connections.
In its new report, the regulator shows the early signs of a dramatic fall in new large-scale renewables investment, recording the lowest level of new capacity commitments since mid-2016, when the industry was trying to recover from the hostile prime ministership of Tony Abbott.
The Regulator said that it sees a further 1,500MW of advanced projects, that would be supported by corporate power purchase agreements, but the trend largely confirms fears that have been expressed previously by the Clean Energy Council.
However, the story in the rooftop solar market is very much a positive one. Falling system costs and surging electricity prices have underpinned a surge in small-scale installations, that the regulator projects could reach 2,250MW in 2019 and set a new annual record for Australia.
The number of rooftop solar installations will also hit its highest level since 2012, with almost 300,000 homes and businesses getting solar installed. There has been a steady three-year trend of increasing installation numbers and households and businesses also opting to install bigger systems.
The Clean Energy Regulator has oversight of both the federal Renewable Energy Target and the Emissions Reduction Fund, which sees the regulator responsible for administrating a range of environmental commodities, including the issuance of Large-scale Generation Certificates (LGCs), Small-scale Technology Certificates (STCs) and Australian Carbon Credit Units (ACCUs).
Updated projections of Australia’s greenhouse gas emissions published by the Department of the Environment and Energy show that the Morrison government will rely on strong investment in the renewables sector, driven largely by State government targets, to deliver reductions in greenhouse gas emissions, with renewables projected to represent around 50 per cent of the electricity supply by 2030.
But the recent fall in investment could put this forecast into question.
While the Regulator believes that enough renewable energy capacity has been built, or is under construction, to ensure the 2020 target will be met, there is a chance that the market may be short of certificates for the 2019 compliance year, and is a likely contributor to the recovery in LGC prices, that have reached $48 per LGC, after reaching a low of around $30 earlier in the year.
The new report from the CER also provides insights into the emerging market for carbon abatement in Australia, mostly underpinned by the Emissions Reduction Fund.
In February, the Morrison government allocated an additional $2 billion to purchase around 100 million tonnes of abatement through to 2030. The government, however, has struggled to find abatement to purchase, due to a reluctance to pay much more than $15 per tonne for abatement under the program.
After a series of comparatively successful auctions in the early years of the scheme, the government appears to have exhausted the supply of cheap carbon abatement. The most recent auction, held in June this year, was a disaster for the Morrison government, netting just 59,000 tonnes of abatement.
The Emissions Reduction Fund, to be rebranded as the Climate Solutions Fund, represents the bulk of federal government action to reduce emissions, with the government purchasing emissions reductions under the scheme.
The Regulator blamed the timing of the auction, which closely followed the federal election held in May, for the lacklustre result, saying it had “temporarily suppressed” the supply of abatement available to purchase.
“We have a statutory duty to purchase abatement at the lowest cost,” the Regulator said in the carbon market report released today
“In practice, this means we will buy up the long run supply curve and the price is likely to rise somewhat over time as it did at auction nine. However, it is not the role of the agency to buy up the short run supply curve, when it appears that abatement supply is temporarily suppressed.”
“But it is not my job to buy up the short-run supply curve. I won’t chase small amounts of abatement at high prices when supply has been temporarily suppressed. The election period was in the middle of the auction process and it looks like this reduced quantities that were bid into the auction,” CEO and Chair of the CER David Parker told RenewEconomy.
However, carbon market insiders have also told RenewEconomy that ample supply of abatement is available to the regulator, but it will need to meet the price necessary to make the projects viable, which could be as much as $20 per tonne.
Market advisory firm Reputex warned as much back in March, before the auction was held, that the Clean Energy Regulator’s approach to the Emissions Reductions Fund auctions would lead to a ‘collapse’ in the amount of abatement purchased as the Regulator would be scraping the bottom of the barrel of cheap abatement.
Unless the Regulator changes its stance, and becomes open to paying higher prices for carbon abatement, serious questions remain over the ability of the Morrison government to deliver on the 100 million tonnes of carbon abatement expected of the Climate Solutions Fund.
While Australia currently lacks a dedicated carbon pricing mechanism, there is a small and emerging market for carbon abatement, that has grown to become a multi-billion market for environmental units.
The Regulator estimates that the annual value of the market in these units was $2.75 billion in the 12 months to October 2019 and represented around 50 million tonnes in carbon abatement.
With the Large-scale Renewable Energy Target effectively peaking in 2020, there has been some question about the future of the market that is set to continue operating through to the end of 2030.
While the large-scale target is unlikely to support additional investment beyond 2020, it may become an alternative market for emissions abatement. The CER has started to observe a ‘convergence’ between the market for carbon abatement (ACCUs) and the market for large-scale renewable energy certificates (LGCs).
The regulator expects the price of ACCUs, which currently trade around $16 per ACCU, and LGCs to converge in a post-2020 market.
In the long term, the regulator expects that LGCs could transition into an alternative source of emissions offsets, as LGCs have helped incentivise investment in renewable energy projects that are displacing fossil fuel generators.