Renewable energy certificate prices hit record highs as market prices in failure

 Large-scale Generation Certificate (LGCs)

Despite the announcement that yet another state government will take it upon itself to encourage further renewable energy investment, a lack of further project commitments has only added to the sense of inevitability of an LGC shortfall in the coming years, with the end of the financial year seeing the spot LGC market push into record territory.

Now, more than ever, the LGC market is aware of the failure to see project commitments match the requirements outlined under the Renewable Energy Target legislation. In truth, it was already evident to many a year ago despite the major parties agreeing to dramatically reduce the size of the Large-scale Renewable Energy Target.

There is some contention as to the aggregate quantity of project commitments in terms of megawatts (MW) that is required in 2016 to avoid a shortfall event in 2018.

These estimates generally range from 3,000MW to 4,500MW. Whilst the differences are significant, they are largely viewed as irrelevant by the market because either figure (or any in between) appears impossibly large.

As it stands, it seems that something more like 1,000-1,500MW is more likely in the most optimistic of predicted outcomes for 2016, assuming some real traction in the second half of the year.

The announcement from the Victorian Government that it will adopt a policy of renewable energy auctions from next year is a significant development, with 1,800MW set to be procured over the next 2 years, which will undoubtedly lift Victoria’s share of total project commitments over that time considerably.

But given the auctions will begin next year, it’s unlikely to impact the short term supply squeeze by contributing to new LGC creation before 2018 compliance.

While the precise details of the policy remain unclear, it seems that the initial 1,800MW will contribute toward meeting the national Renewable Energy Target, whilst the second phase of activity (which will take the project commitments up to a whopping 5,400MW) will apparently not.

Hence with little by way of tangible change on the project front, the spot LGC market broke free of its stable run to push into record territory across June.

The spot market began the month in the high $81s, and it was in the second half of the month that the market’s positivity returned. Proceeding gradually through the $82 over the period of a week or so, the shadow of the financial year end seemed to galvanise interest in the spot market which pushed rapidly through the $84 mark to set a record high closing level at $84.20. In early July the spot continued to rally, sitting in the high $85s at the time of writing.

Overall trading volumes in the spot LGC market were down fractionally in June.

With the gains in the spot market, the forward curve has crept closer to the market’s cap of $92.86. As a result the curve appears to have flattened, particularly into Cal 17 and Cal 18. This is a reflection of the diminishing benefit that exists for buyers in acquiring forwards as they creep towards the market’s cap.

Interestingly, the uncertainty following the election does not appear at this early stage to have impacted the LGC market. Though once the dust settles on both the Lower and Upper House results it is possible that may change.

 Small-scale Technology Certificates (STCs)

With the target for the STC market, the Small-scale Technology Percentage, again appearing to have been slightly overestimated, the Clearing House has remained in deficit across Q2.

The modest spot market activity that has taken place in the market across June occurred at $39.90. The market did however see a number of forward transactions across 2017 which again took place at $39.70.

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.