Large-scale Generation Certificate (LGCs)
The impact of the decision of several liable parties to pay the penalty rather than to surrender LGCs against their 2016 obligation was felt in February, though subsequent volatility left some confusion as to what the actual impact would be. Meanwhile the war on renewable energy from certain quarters within the Coalition party room continued to make headlines, with former Prime Minister Tony Abbot using every available soap box to advocate the axing of the RET. Despite this, the project commitments continue to flow in February with a number of solar projects committed during the month as high electricity prices make the case for renewable energy even more compelling.
January in the LGC market came to an end with the market paused, considering the implications of the news that one of the bigger liable parties would pay the penalty against its 2016 obligation rather than surrender LGCs. The initial response had been for a modest drop in prices (from $88.70 to $88.00, though as the days went by it remained buyers that were hard to come by. By the first trading day in February however, that had changed, with the spot market opening a full $1 lower on the back of a large 50k trade. From there the market tumbled further reaching $84.75 by the end of that day, on its way to low on the 6th of $83.25, a drop of 6% off the level at which the penalty news was received.
If that drop in prices failed to surprise, what followed may have been more likely to, with the spot beginning an almost immediate and relentless recovery which, by the second half of the month had the market back up at$88.25, making up almost all the previous losses. The level could not however be sustained, with the market softening steadily back to trade last for the month at $87.00, despite the bid offer spread implying a lower level.
The spot price’s rollercoaster ride resulted in a large spike in the monthly trade volumes which had been very low in January.
Caught up in an ideological fervour, blind to the scientific consensus on climate change and for the dire need for rapid action or just seeking a political edge that may restore him to the leadership it is not clear, yet former Prime Minister Tony Abbott is at it again. Not content with having stymied investment in large scale renewable energy for over two terms of the federal parliament and then having forced Labor into a deal to shrink the RET to bring an end to the famine, at seemingly every available opportunity he is presented Abbott continues to advocate for the abolition of the RET, in the face of not just environmental groups but in direct contrast to the positions of peak industry bodies such as the Australian Industry Group and the Business Council of Australia.
Thus far Prime Minister Malcolm Turnbull’s leadership has been preserved, yet Abbott’s agitation has proven a painful thorn in his side. In the latter part of February however, Abbott appeared to deal his leadership aspirations a potentially fatal blow by crossing the line between benevolent backbench herald and rank Kevin Rudd-esque saboteur. In the process Abbott appears to have alienated many senior government figures who may have maintained some degree of sympathy for his plight. In doing so Abbott appears to have undermined his chances of persuading his colleagues that the abolition of the RET and all the disastrous economic, environmental and even sovereign risk consequences that would have followed, would be a positive thing for the nation.
February also saw the passage of the final surrender date for 2016 compliance, and while there were a number of other smaller liable parties who opted to pay the penalty rather than surrender LGCs, at 94% compliance the Clean Energy Regulator stated the outcome did not detract from the overall effectiveness of the scheme. The 94% outcome is well below that of recent years which had been above 99%, yet there were some who believed that following January’s news the level of non compliance may have been higher.
It proved another good month for project commitments with several of the major retailers signing Power Purchase Agreements with project developers in yet more signs that industry is embracing renewable technologies. The addition of several hundred megawatts of solar (potentially 300-400MW of generation if all the options are taken up), is healthy progress toward meeting the large-scale target, but it’s the bare minimum that has to happen each and every month over the next two years in order to ensure the scheme does not spend more than one or two compliance period in shortfall.
Another factor that appears likely to result in more project commitments in the near term is the dramatic increase in wholesale power prices that has taken place across the last 6 months in the eastern states. A perfect storm of issues including rising fuel costs, extreme weather and the closing of ageing base load generation has seen wholesale electricity prices skyrocket, with the price for 2018 base load power in the eastern states sitting close to $90/MWh, almost three times the levels seen only 2 years ago.
When you add this to the already inflated LGC pricing, then the short term pricing signal for renewable energy investment could not be stronger. While the short term signal is not necessarily enough to get investors over the line in what is a long term game, it certainly helps to get peoples’ attention.
Hence if Tony Abbott would just keep quiet (and perhaps even if he doesn’t), it appears the flow of large-scale renewable energy investment is set to continue.
Small-scale Technology Certificates (STCs)
February was a quieter month in terms of activity in the STC market, though it did continue to present some intrigue in terms of submissions numbers which remained higher. There was no word on the setting of the 2017 Small-scale Technology Percentage which must be handed down by the end of March. Another interesting factor for 2017 is the impact that climbing wholesale electricity prices will have on the uptake of solar.
The flurry of forward market activity witnessed in December and January was not continued in February with participants on both side of the market in a holding pattern, waiting for a better indication on submissions numbers and on the scheme’s 2017 target. It was highly unlikely that the 2017 Small-scale Technology Percentage (STP) would be announced in February, with the regulator generally waiting until closer to the late March cut-off date for its release mandated in the legislation.
What February did however reveal is that the strong submissions figures seen in late 2016 continued with the average for the month sitting just below 360k. While there were no 400k+ weeks, it appears the market has found a new normal for the time being which sits well above what was seen across most of 2016 and well above the requirement outlined in the last update ot the 2017 non-binding estimate of the target, realease in March last year.
Another issue that may very well prove a factor in STC subpply this year has been the dramatic increase in whoelsale electricity prices over the last few months, which will make investment in solar PV, particularly for businesses considerably more attractive than it was even 6 months ago. The commercial PV market wa salready set for a big year. The recent developments appear destined to ensure it is even bigger.
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.