Could there be a second life for Large-scale Generation Certificates once the Renewable Energy Target scheme matures?

Renewable energy relies on the wind, the sun and the subsidies. The first two will last forever. In Australia, the last one is due to run out in 2030. The Renewable Energy Target, administered by the Clean Energy Regulator, sets out a scale of discounts for systems under 100kW and tradable certificates for generation from systems over 100kW.

With the 2030 deadline looming, and the cap for generation fixed at 33,000GWh a year, the market for large-scale generation certificates, or LGCs, has a big green question mark over it.

The value of LGCs is a meaningful input when weighing an investment in clean energy, and that includes commercial and industrial solar systems. As more utility-scale clean energy plants are completed over the next nine years, and the supply of LGCs rises, will they plummet in value?

“If not now then very soon there will be enough annual generation of certificates to meet legislated demand,” says BloombergNEF head of Australian research Leonard Quong. “The message is quite clear: the LRET [Large-scale Renewable Target] is moving from an undersupply period to an oversupply period – and we think prices will reflect that.”

Proof of action

It sounds simple enough, if demand for LGCs was restricted to entities – mainly electricity retailers – that were obliged to purchase them in order to comply with the Large-scale Renewable Target. But the transition to clean energy is quickly shifting from being the professional pursuit of electrical engineers to becoming an oath to the future, where companies and (some) governments have declared ambitions to ditch carbon. To do that with any integrity they have to provide proof of their actions.

The most recent quarterly report from the Clean Energy Regulator shows a big increase in voluntary demand for LGCs used to prove renewable energy usage through the government-run clean energy accreditation scheme, GreenPower, and Climate Active, a carbon-neutral certification scheme run by the Department of Industry, Science, Energy and Resources.

“We are seeing a big increase in voluntary demand,” Clean Energy Regulator executive general manager Mark Williamson tells EcoGeneration. “I don’t think the market has fully understood that. The ACT government cancelled 2.3 million LGCs last year, effectively doing their own GreenPower to say the ACT is 100% renewables.”

When this voluntary demand is added to the legislated 33,000GWh, Williamson says the market remains tight. “The question is, how quickly in the future will voluntary demand continue to rise versus how quickly do more power stations come on and supply rises.”

Liable entities have to either purchase enough LGCs to meet their liability within the statutory target of 33,000GWh a year or they must pay a shortfall charge of $65 for every LGC they do not surrender. The $65 shortfall charge is not tax-effective, however.

Williamson explains what he says is an effective shortage of 16 million LGCs in the market at the moment, where companies have had to pay the shortfall charge. (One LGC is created for each megawatt-hour of eligible clean energy generation, so 33,000GWh is equivalent to 33 million LGCs.) If retailers can get certificates within three years and supply them to the CER to be cancelled they can redeem their shortfall, which Williamson estimates at $1 billion. “They can redeem that $1 billion and make it tax-effective by getting certificates,” he says.

Power ledger

When the Abbott government lowered the target from 41,000GWh to 33,000GWh in 2015 the clean energy market was fairly dead in terms of investment in large-scale renewables. To meet the target, the CER anticipated 6.4GW of large-scale renewables would need to be built a year for there to be enough liquidity for LGCs to be available for retailers to meet their annual targets.

“In the first year, 2016, we needed to get 3GW to financial close,” Williamson says. “That didn’t happen.” As the market slowly recovered, projects worth 1.2GW were financed that year. The following year, however, went “gangbusters”, he says, as did 2018.

As to meeting the target of 33,000GWh a year, Williamson was never in doubt. “We were always going to meet and exceed the target; we’re expecting between 37 and 40GWh this year [2021] and it will go up next year,” he says.

In the years ahead, Quong expects the LGC market will be defined by three forces: sellers of LGCs will be looking for new sources of demand; overall demand for LGCs will rise as companies source clean energy, for example via power purchasing agreements that support construction of new generation, and; supply of LGCs from clean energy plants, especially hydro, will fluctuate year on year. “Some hydro assets will create LGCs in vast quantities if they produce above an annually stepped electricity generation baseline,” he says.

At some point a floor in LGC prices will become evident when there is not a willingness among certificate creators to sell, he says. Instead, they will choose to not create them at all or put them aside to fulfill beneficial contractual agreements.

The demand side

Any prediction of falling LGC prices is a worry for managers weighing up an investment in clean energy plants above 100kW, because they will expect revenue from the sale of LGCs. An easy route around it, of course, is to limit your plant – rooftop PV, probably – to less than 100kW and claim the subsidy as Small-scale Generation Certificates, which come as an entirely predictable one-off incentive.

“That’s likely to continue,” Quong says. “The equation of getting an upfront subsidy for a series of smaller systems rather than one big one onsite – while there are complications around how that can be designed, this is a well-established fact within the installer community, who can help businesses navigate these regulatory waters.”

It comes down to how you may want to account for an investment in clean energy: an annual creation of LGCs may look like a convenient way to decarbonise each year’s business operations; a one-off subsidy will bring forward lower energy bills.

Beyond 2030

Source: TFS Green Australia.

If the outlook for LGCs until the 2030 deadline is wide open to interpretation, what happens beyond then is anyone’s guess. “There is an enormous policy void that somebody is going to have to fill,” Quong says.

Finding a way for companies to be able to account for their decarbonising efforts in a way that is ratified and audited by government is “vital”, he says. “That increasingly is one of the key roles and key facets of LGC and STC creation.” Without them, the clean energy market could find itself in “material trouble”.

Support might also appear in another form, Williamson says. In June the Department of Industry, Science, Energy and Resources released a policy paper on hydrogen certification which called for all large-scale renewables to be eligible for guarantee-of-origin certificates after 2030. “The only way hydrogen will take off is if Australia has world-class guarantee-of-origin schemes,” Williamson says. “We need to have an ongoing ability to trace who’s using renewable energy.”

If this goes ahead, all the generation that currently produces LGCs after 2030 will get a guarantee-of-origin certificate for proving use of renewable energy. “While the price you would expect to be much lower than the LGC price is today … there would still be value,” he says.

If the policy paper becomes law, guarantee-of-origin certificates will support prices, Williamson says, whether it be hydrogen, aluminium or steel, etc. “The policy paper shows the potential for large-scale renewable energy to still get a certificate after 2030,” he says.

Forward LGC prices have been too low, Williamson says. “It won’t be that at the end of 2030 there are a lot of LGCs left over and the price goes to zero – that won’t happen,” he says. “Many were predicting back in 2015, 2016 that once we got to this point the price would be zero. We always disagreed then – and the price is still over $30.”


Source: TFS Green Australia.