RECs could lower price of electricity, and cut emissions in industry

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Allowing renewable energy certificates to be used in the safeguard mechanism could lower electricity costs, and provide cheap abatement for industry. Easy!

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“Life is never fair, and perhaps it is good thing for most of us that it is not”

Oscar Wilde

If RECs could be used for industry abatement

We estimate that allowing RECs (renewable energy certificates) to be used to satisfy emission obligations under the ALP’s proposed tightening of the safeguard mechanism could lower electricity prices by $15/MWh to $40/MWh, and falling.

It could also set the cost of abatement at around $15 per tonne for about 47 million tonnes of abatement, around 2/3 of the maximum amount required under the Safeguard mechanism even if there was no EITE exemption.

Doing this would spur another wave of investment in electricity and greatly assist with decarbonising the Australian economy, still one of the most per capita carbon intensive economies in the world, at the most efficient cost.

Explanation

The Clean Energy Regulator states that under the known build for large-scale wind and solar farms, about 40 million RECs will be created each year by 2020, compared to the scheme target of 33 million.

So that’s roughly a 7 million surplus, worth zero under the current scheme design. ITK calculates that about a further 40 TWh of renewable energy is required to get to a 50% renewable energy 2030 target. Those 40 TWh also qualify as RECs, although their notional value is zero.

That produces a total surplus of 47TWh.

REC creation
Figure 1: REC creation compared to safeguard liability. Source CER, ITK

Let’s assume, at the stroke of a legislative pen, that that surplus was available to meet obligations under the emissions safeguard mechanism, that is the broader industry requirement outside of the electricity industry for liable business to reduce their emissions by 45% by 2030.

The price of those certificates would be set by supply and demand. But let’s assume, for the time being, it was roughly the price of ACCUs today, call it $15 a certificate.

Finally, let’s assume that all the calculations about the LCOE (levellised cost of energy) of wind and solar are broadly correct and that the required price for such energy is around A$55.MWh at current exchange rates, and that there are no MLF (marginal loss factor) worries, and a reliable long term PPA (power purchase agreement).

Then we can calculate that subtracting a $15 REC value from $55 gets us to $40/MWh required price under the PPA and that price will continue to fall as the LCOE for wind and solar falls as forecast under learning rate assumptions.

Figure 2: Split of LCOE between REC and electricity price. Source ITK

Relatively tight abatement targets could be set, that is less EITE exemption, because Government can be readily confident about the cost of abatement.

In fact, although it’s more than a bit bolshie, the Government could set the price of the RECs administratively. If the REC price is set by market it will be set in competition with ACCUs, international credits and the return on investment of actually reducing emissions. In this way the REC price itself has natural limits.

Anyone who actually thinks about the problem of decarbonizing and how to do it, and works on the assumption it has to be done, knows that the cheapest form of large scale abatement is through decarbonizing the electricity sector.

Effectively what this linkage would end up achieving is passing on some of the electricity investment costs to facilities covered  under the safeguards scheme. All electricity consumers big and small would get the benefit of the wealth transfer from carbon emitters to them.

ALP Safeguard plan

Essentially this plan requires all companies emitting more than 25,000 tCO2 other than facilities in the electricity sector by 45% by 2030. There are about 250 such facilities.

The exact emissions from these companies requires filtering a list of emitters to remove electricity facilities. An alternative more broad brush approach is to assume that the Safeguard Plan captures all Stationary energy and all industrial process emissions. In this calculation there is no EITE exemption.

Looked at this way about a 74 mt emissions reduction is the target.

Figure 3: Maximum safeguard liability no EITE. Source: CER, ITK

As we see it  this is very much a maximum reduction scenario because some part of the emissions will fall below the 25kt threshold and because EITE facilities will not have to bear the full reduction, possibly not even half.

To satisfy their obligation emitters can:

  • Reduce emissions;
  • Purchase ACCUs [Australian Carbon Credit Units] basically tree planting allowances plus some mine mouth, fugitive gas capture and generate plants.
  • Purchase international carbon credits.

Note that none of the detail of this is specified and will probably take at least a year to work out. The complaint has been mostly that ACCU prices are likely to skyrocket, although they show no signs of doing so, and that international carbon units are already expensive and will become more so as the world decarbonizes.

RECs apparently have no value, but they have a price

According to the Clean Energy Regulator [CER] 2018 Statement to Parliament tabled on April 4, 201o the REC target will be well and truly met. Specifically generation is expected to step up from 22 TWh in 2018, to 30 TWh n 2019 and 40 TWh in 2020. The LRET is 33 TWh. So by 2020 there will be a 7 TWh surplus.

That won’t be the end of the matter because, in ITK’s view new projects will continue to be announced. Under the current legislation those projects can still create RECs and sell into the market.

Certificates created in excess of the target could be expected to have a zero value if that was all there was to it.

Liable entities can elect to pay a short fall provision in any given year, then buy the certificates back within a three year window and have the short fall payment refunded.

As I read the CER statement there was a 7% shortfall of the 2017 target and a 14% shortfall in the 2018 target. That’s around 4800 GWh or 48 million certificates. The spot REC price is $38 but lets say $20 a certificate for about $1 bn of value to be purchased in the market.

However, the point is the 7 million and growing surplus of renewable energy certificates that in theory have no value. Even in 2023 certificates have a quote around $9. That offers a credible line of cheap abatement, and lower electricity costs.

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