Renewable certificate prices fall despite looming shortfall | RenewEconomy

Renewable certificate prices fall despite looming shortfall

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Renewable certificate prices fall despite looming shortfall, as some suggest retailers may choose to pay penalty price rather than make new investments.

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Renewable Energy Market Report – 31st March 2017

Large-scale Generation Certificate (LGCs)

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In a month with plenty of headline capturing news – including the Turnbull Government’s Snowy pumped hydro proposal, which would pave the way for considerable increases in renewable energy deployment in the future – the LGC market lost ground. Late in the piece the 2017 Renewable Power Percentage was released.

Having ended February at $87.00 the spot market opened March at $86.25 and the sharp declines continued across the early part of the month as buyers became hard to find. Having reached a low of $83.80 mid month, the market then traded across the rest of the month within the $84-$85.25 range, ultimately closing at $85.00, down 2.3% on February’s close.


Trade volumes across the month were down on February but at 415k were remain high by recent standards.


The forward LGC market was active across the month with Cal 17s particularly well frequented. Interestingly, buying interest in the Cal 18 vintage became increasingly hard to come by while the Cal 19 vintage also lost considerable ground, closing at $71. Given the lack of activity in some of the forward vintages, options transactions were popular during the month with a number of Cal 18 Put Spread and Collar transactions taking place.

The exact reasoning behind the drop in buying interest in the later forward vintages is up for debate. As it stands, the scheme still appears set to be short in 2018 and will very likely remain that way for the 2019 compliance period as well. Whilst project commitments have increased considerably and the price of wind and solar remain incredibly appealing when compared to current LGC and wholesale electricity pricing, the catch-up that would be required over the next 12-18 months is so enormous as to appear impossible.

Potential explanations for the waning buying interest include concerns about the risk of more liable entities opting to pay the penalty instead of surrendering LGCs (with one of the big three retailers really needing to be amongst such an move for it to have a material impact the supply/demand balance in 2018) along with the ongoing and seemingly ever present risk of regulatory change, given the publicly voiced positions of former Prime Minister Abbott and a number of his supporters. There is, of course, also the possibility that the lack of buyers for a given vintage is simply coincidental and will change as participants again shift their minds toward later compliance years.

It was a huge month for the electricity (and gas!) sectors in terms of media coverage with a number of genuinely exceptional events taking place. Top amongst them was the South Australian Government’s ‘intervention’ and who could forget one of the most intriguing press conferences of all time in which that state’s Premier Jay Weatherill gatecrashed the federal Energy Minister Josh Frydenberg’s press conference by launching a scathing critique of the Turnbull Goverment’s approach to the recent energy issues.

Yet perhaps most important of all was Prime Minister Minister Turnbull’s announcement of his plans to expand the Snowy Mountains hydro scheme to increase its capacity to act as a source of stored energy (like a battery) by pumping water back up to higher ground at times when power is cheap and allowing it to flow when it is not. The announcement was immensely significant for more than just the photo opportunities it afforded the PM. Should it eventuate, the move will facilitate the deployment of a very large amount of renewable energy capacity by acting as a (potentially) cost effectively battery. In doing so, it will also deprive those (including many members of the Turnbull Government) who have sought to slow the rollout of renewable energy by undermining the recent energy security arguments that have been levelled against further investment. And that is one of the very few arguments left available to those in that camp.

Late March also saw the release of the 2017 Renewable Power Percentage, which at 14.22% is expected to be equivalent to 26m LGCs surrendered for this year’s obligation.

Small-scale Technology Certificates (STCs)

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For several months, it has appeared that something was brewing in the STC market. In late March, the release of the Small-scale Technology Percentage surprised almost everyone with its outcome and in the blink of an eye brought a fairly dormant market back to life. 

Unlike during its early years, recent times in the STC market had been characterised by the consistent use of the Clearing House and minimal market activity as the annual target setting process delivered either accurate or overestimated targets. Late in 2017 however an uptick in STC submissions took place, with considerable debate surrounding why. Some believed it was just a reflection of the marketing by PV installers of the reduction of the deeming period from 15 to 14 years and that early in the New Year the numbers would fall. Others believed there was something more to it.

The target setting process involves the Clean Energy Regulator (CER) commissioning a number of consultants late in the previous year to forecast small-scale system installations (and hence STC production) for the following year. The CER then uses those forecasts to devise the STP. In late March the CER released the 2017 STP at 7.01%, expected to be equivalent to around 13m STCs for the year. The 2016 STP had been 9.65%, equivalent to just under 17m. The drop from year to year surprised almost everyone in the market for there were few who expected a major reduction year on year to take place.

In the CER’s defence, after the outside forecasts were completed and whilst the target setting process was much advanced, a number of extraordinary things took place which will likely impact STC creation considerably over the year ahead. Firstly, the wholesale price of electricity on the East Coast soared as shortages of gas (and soaring gas prices), extreme temperatures and weather, as well as the anticipated shutdown of Hazelwood formed the perfect storm, with significant price increases now on the way for business and consumers and plenty of media coverage to boot.

The Victorian Government then announced a near doubling of its feed in tariff from 1st July, the result of a long period of work to more accurately value power exported from solar PV systems. Given the significant jump in the wholesale price that has coincided with it, the move seems both prescient and more than justified, and Victoria may just prove the first of several states to make such a change.

Across March the STC market had been inching along with minimal activity taking place. Following the release of the 2017 STP, that changed immediately. The 2017 STP requires approximately 250k STCs to be created per week. The current weekly average for 2017 is 360k. Should that figure persist across the year, then the market will be oversupplied to the tune of 6m STCs by year end. In practice this means an extended period in which the Clearing House will not be an option for STC creators.


Activity in the forward STC market erupted immediately following the STP release, with prices in Q3 and Q4 (essentially Aug17-Jan18) softening on large trade volumes, first to the mid $38s, then to $38.00 and eventually into the high $37s, as sellers sought to provide themselves with some degree of pricing certainty with which to run their businesses.

It was not just the back end of the year though that was affected. Q2 (May17-July17) also saw some considerable price drops, opening first at $39.40 before softening to $39.10. There was also plenty of activity in Q1 2018 with prices a little more volatile, with activity taking place between $37.95 and $38.60.

As it stands there are unlikely to be sufficient STCs available for Q1 surrender (28th April), hence the Clearing House will go back into deficit this month for a time. The two big questions which arise are; i) how long for?, and ii) will it clear again in July or be the last time this year (or indeed until Q1 or Q2 of 2018)? The answer to these questions will be found in STC supply. At the current rate of STC creation, it appears unlikely that the next Clearing House deficit will last beyond the second half of May and it remains to be seen as to whether a deficit will occur in Q2 (28th July) with a surplus of STCs already appearing likely.

Once again, assuming the current level of STC creation is maintained (and there are arguments being made that creation could both increase and decrease), Q3 and Q4 will be well oversupplied preventing any use of the Clearing House again until sometime next year, assuming that the target for 2018 is accurately estimated and allowing time for the surplus to be gradually eroded quarter by quarter.

However this pans out, it’s clear that 2017 will be a busy year in the STC market after several years of hiatus.

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.

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1 Comment
  1. George Darroch 3 years ago

    Increase the penalty.

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