The record level of large scale wind and solar installations is finally bringing down the long-inflated price of renewable energy certificates, which are now at less than half the price they were a year ago.
The price of LGCs – the key currency and mechanism that has supported the renewable energy target – has slumped from near $86/MWh this time last year, and $80/MWh as recently as last June, to a low of $34.50 in January and $40/MWh now.
Analysts say the fall is driven by the record levels of wind and solar farms already completed, and the huge pipeline of projects planned and under construction. This is likely to significantly exceed the 33,000GWh targeted by the RET.
They also point to recent intervention by the Clean Energy Regulator, the body charged with managing the RET and other policies. For much of the past year, analysts say, the CER has been predicting a fall in prices – some say they have effectively been “jaw-boning” the market down.
Others also point to an about face by the CER on the treatment of shortfalls. The legislation allows for retailers to avoid buying up to 10 per cent for their obligation and “carry it forward”, and to pay a penalty price if the shortfall is greater than 10 per cent.
That shortfall penalty is $65/MWh, which effectively means the equivalent of $93/MWh as the expense is not tax deductible. However, it can be reversed if the shortfall is made up within three years.
Some retailers have chosen this as part of their management strategy, reasoning that paying the penalty when the price is high (as it had been for a few years), and then buying cheaper LGCs at a future date, was a smarter and cheaper way of managing their obligation.
When ERM did this in 2017, it was named and shamed by the CER for not acting in the spirit of the act, although it made a lot of money doing so – a net profit of $35 million to $45 million to be realised over the 2019 and 2020 fiscal years, according to CEO John Stretch.
When Alinta did this a year ago, barely a murmur was raised. And last October, the CER issued a statement that actually encouraged retailers and other obligated parties to adopt this strategy.
“Given that the Renewable Energy Target will be clearly exceeded, the Clean Energy Regulator has no objections to the use of shortfall in the expectation that clients would true up these positions with LGCs in a subsequent year, as allowed for under the law,” it said in a statement.
“I think what the regulator is trying to do is to encourage people to defer the obligations from periods from where supply demand balance is tight, to when the surplus is greater,” says Marco Stella, senior broker from TFS Green.
Analysts and traders will be watching closely when data becomes available later this month how many retailers are taking advantage of this, and to what extent. Even government owned Snowy Hydro is expected to pay the shortfall, judging by some recent movements in its holdings, one analyst said.
Certainly, the bet that future prices for LGC will be significantly lower are looking good. The price for calendar 2019 LGCs is $40/MWh, but the price for calendar 2020 LGCs is less than $24/MWh.
This has several important impacts on the market, and the renewables industry in general. A large number of wind and solar projects have already been developed with a zero value of LGCs attributed to their projects, the certificates are just “bundled” in with power purchase agreements that still deliver a cost of electricity below the current market.
Some projects choose to “go merchant”, and sell electricity and LGCs on the spot market, but anyone lending finance to such projects will be crediting little or no value to the LGCs over the long term. That may not be needed in any case, given the falling cost of wind and solar power, and the stubbornly high prices in the wholesale market.
It also makes a nonsense of the scare campaigns led by conservatives, the Intitute of Public Affairs, the Murdoch media, and the Far Right in the Coalition, about the costs of the renewable energy target.
They have produced ridiculous costings of the RET, based on the assumption that the price of all LGCs would be $80/MWh or more all the way out to 2030. Those assumptions ignored the fact that most LGCs were contracted, and not sold at the spot price, and many are contracted at prices of little or no value.
The fact that the spot price is now half the price assumed by the naysers, some 10 years before the expiry of the scheme, and the futures price less than one third, should put paid to that nonsense. But don’t bet on it, because facts don’t count for much in a scare campaign.
Consumers, however – and particularly those who buy “green energy” from their retailers, will be entitled to wonder why and for long long will they be paying inflated prices for doing what they consider to be the right thing. Just another area where some retailers are making off like bandits.
