Large-scale Generation Certificate (LGCs)
It was yet another strong month for the LGC market with spot prices rising despite a number of attacks on the growing deployment of renewable energy. Yet September also brought another milestone for the market with the ARENA funding grants announced, with project commitments set to follow.
The spot LGC market began the month in the mid $87s and it was all one way traffic from there. Though very gradual and often on below average trade volumes, the spot strengthened to reach the $88 mark by mid month and, after a pause, pushed promptly through the $89 level late in the piece.
Spot trade volumes were up on the previous month and it was also a busier period in the forwards with plenty of large volume transactions taking place across the Cal 16, 17 and 18s.
For the most part the curve retained its profile with Cal 16 and Cal 17 preserving a circa 2% escalation above the spot (occasionally higher in Cal 16), while the Cal 18 continued to sit in backwardation below the spot price, reflecting the greater uncertainty that time brings and the current scarcity level pricing that is prevailing.
Yet September was an important month in the renewable energy market for other reasons. The announcement of the winners of the ARENA grants process was an event of significance for the renewable energy industry and likely the start of something bigger for the market. The $100m round of funding was expected to deliver circa 200MW of large scale solar projects. In the end, because of the falling costs and improvements to efficiency of roll out, a total of 480MW were awarded grants.
While these projects represent a healthy step toward the achievement of the enormous commitment task, there is plenty more work to do. Yet the passage of the ARENA process is important for another reason; namely that project developers and potential buyers alike had been in a holding pattern awaiting its outcome. Now that it is past, both sides of the longer term market will be able to look beyond this initial tranche of projects to the next phase, with more commitments hopefully to come over the coming 6 months.
The month also yielded a major instance of attacks on the deployment of renewable from members of the Turnbull Government. In this case, an unfortunate and opportunistic use of the South Australian weather event which caused unprecedented damage to the state’s transmission infrastructure and saw the entire state’s power go out. The attacks which followed reveal
With LGC prices so close to penalty, there are only 2 possible ways that the market will soften. The first is via the rapid commitment of a staggering number of renewable projects to be rolled out immediately. Such an outcome is simply not going to happen in time to impact Cal 17 compliance and will more than likely fail to do so for Cal 18 as well.
The second option is one of regulatory change. In this side of the ledger, the potential risk seemed to lie in a scenario in which Turnbull Government MPs agitate for a change to the target on the basis that penalty pricing is hurting electricity customers and that a change to the target (with a reduction in the short term, and possibly an increase later on) was needed to avoid such an unnecessary impost. While there are mixed views as to whether such an outcome would occur under a Turnbull Prime Ministership (or at all were he to change), the attack on renewable energy now seems to have shifted to the issue of energy security. While at this stage, for Turnbull and his Energy Minister at least, it is more about berating the states like Victoria, South Australia and Queensland for the adoption of their own more ambitious targets, than about changing the national Renewable Energy Target (RET), there clearly remain others within the Government (and the parliament more broadly) that continue to harbour desires to see further changes to the RET. Whether or not their interests gain momentum will be closely watched by market participants for the potential change that such an ascendency could bring.
Small-scale Technology Certificates (STCs)
There has been little to crow about in the STC market in 2016 with overall activity levels extremely low and the Clearing House in deficit across the year. Yet September changed that with a massive spike in forward market activity and the most sustained increase in STC submissions for the year so far.
While the STC market remained in deficit across September, the month yielded a significant spike in forward market activity implying some participants believe a change to the status quo may be around the corner. STC submissions also climbed during the month.
The trade activity began in the latter part of 2017 where numerous large volume deals for Q3 and Q4 were agreed at $39.75. The activity then spilled over into 2018, again with large volume transactions from Jan18-July18 taking place at $39.30, the lower pricing reflecting the fact the 2018 compliance is two Small-scale Technology Percentages (STPs) away.
Perhaps the most interesting transactions though were a number of trades across the entirety of 2017 at $39.70. The spike in activity has many participants wondering whether the small-scale solar market is once again on the boil, owing to a substantial reduction in PV module pricing and a pick-up in the commercial market. Indeed STC submission numbers climbed across September with the strongest run of submissions in a month this year.
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.