The Renewable Energy Target (RET) has arguably been one of Australia’s most successful Federal policies supporting infrastructure investment and reducing the environmental impact of the nation’s electricity sector.
Renewable Energy Target history
The RET was established in 2001 by the then Howard Government, with an initial aim of doubling the amount of non-hydroelectric renewable electricity generated in Australia by 2010, which was sitting around 2 per cent of the overall market.
The scheme has experienced a few tweaks since its introduction, not least of which was an increase in the target to 20 per cent by 2020, by the Rudd Labor Government.
The scheme as worked primarily as designed. Under the scheme, renewable electricity generators are issued renewable energy certificates in line with their level of output. In return, an obligation is placed on electricity retailers to purchase an amount of these certificates, determined each year, and surrender them to the Clean Energy Regulator.
A market is established which allows renewable generators to receive a second source of income by selling the renewable energy certificates, in addition to the sale of electricity. Consumers effectively cover the cost as retailers pass costs on via electricity tariffs.
This process has worked extremely well, with the Clean Energy Regulator reporting above 99 per cent scheme compliance to date.
However, we are now just three years away from the target’s 2020 deadline and 2017 is shaping up to be a moment of truth for the scheme.
In recent weeks, there have been reports of retailers actively planning not to follow the intention of the scheme. Some retailers, including ERM Power and Alinta Energy, are seeking to use an alternate means of compliance under the legislation that established the RET.
Rather than purchasing renewable energy certificates, the retailers will instead pay the Clean Energy Regulator a short-fall charge. This is a financial penalty (set at $65 per certificate) that a retailer can pay in lieu of surrendering certificates to the regulator.
The fees collected via the short-fall charge unfortunately go no way to supporting investment in renewables. The funds simply go into “consolidated revenues” and absorbed into the wider Federal Government finances.
There have been fears that companies would opt to use the short-fall charge for a few years. There has been potential there wouldn’t be enough certificates in available in the market to ensure companies could meet their obligations, due to slow investment in the sector.
However, as it currently stands, there is a surplus of certificates in the market.
For the 2016 compliance year, the RET Legislation established an annual target of 21.43 million certificates.
The Renewable Energy Certificate Registry currently lists more than 32.5 million certificates as registered and available for compliance purposes.
So, it raises the question, if there are so many surplus certificates in the market, why are companies opting to avoid purchasing them?
The answer is a financial one.
The Long Game
Large-scale Generation Certificates, issued to wind farms, and large-scale solar farms, are currently trading at almost $90 each. With the fact that the cost of certificates being deductible as a cost of doing business, this price has roughly the same impact on a company’s bottom line as paying the short-fall charge.
The price is high, because of forecasts, such as those of Bloomberg New Energy Finance, that suggest that there will be a shortage of certificates available in the market in the short-term. In the long term, however, certificate prices are expected to fall to better reflect the cost of renewable energy generation, rather than the scarcity of certificate supply.
Renewable Energy Certificate broker Mercari currently forecasts LGC prices to potentially fall by approximately 10 per cent over the next couple of years. With a high likelihood that LGC prices will fall, the gamble being made by retailers is a fairly safe one.
Electricity retailers are afforded a three-year ‘make-good’ window by the Clean Energy Regulator. If a retailer fronts up within three-years, with sufficient certificates to meet their compliance, they can exchange those certificates in return for a refund of their penalty fees.
Companies can effectively use the Clean Energy Regulator as a hedge. If certificates prices fall in future years, companies will come out ahead, pocketing the difference between cheaper certificate prices and the cost of the penalty fees.
The Clean Energy Regulator, which historically hasn’t commented on the performance of the scheme, has been more outspoken about this current situation. It clearly as some concerns for the impacts that retailer decisions may have on investor certainty and the revenues received by renewable energy generators.
Recognising that the business decisions being made by retailers goes against the “spirit of the law”.
“We view the intentional failure to surrender certificates as a failure to comply with the spirit of the law and an undermining of the objectives of the scheme. Prices charged to customers include a component to pay for additional renewable energy generation. We believe many customers would be disappointed to know that this money has not been used for the intended purpose,” Clean Energy Regulator Chair Chloe Munro said.
Ultimately, there is a reputational aspect to the retailer’s decision. Clean Energy Council Chief Executive Kane Thornton suggested that environmental conscious customers of such retailers may consider moving to a different retailer, knowing the fees they are paying are not directly supporting renewable energy projects.
“While it might be in the private interest of the developer, it is at distinct odds with the law and the public interest. Other major retailers are taking steps to ensure they purchase certificates from the spot market or enter into long term contracts with renewable energy project developers.” Mr Thornton said
“There are no excuses for this decision and I expect ERM Power customers will be surprised and disappointed to learn of it,”.
There are less than two weeks to go before the Clean Energy Regulator closes the compliance window for the 2016 year. We are yet to discover how much of an impact retailer decisions will have on demand for renewable energy certificates in the short-term.
It provides a new form of uncertainty for a sector on the cusp of driving significant changes to where and how we source our energy.