We have adopted a system to rate the status of each indicator as 'on track', 'within reach' or 'off track'. This takes into account the market context and the possible variations caused by external factors such as the weather.25 We also provide commentary on the trajectory to 2020 for each indicator. In this context, 'acceptable' means consistent with a trajectory that would achieve the target of 33 million megawatt hours in 2020.
Note: Based on publically available information and as estimated by Clean Energy Regulator. Potentially, some of this capacity will not contribute to the achievement of the 33 000 gigawatt hour target as it has been procured by the ACT to satisfy its renewable electricity consumption target.
New renewable energy generation projects must secure a final investment decision before they can proceed to construction. At this stage of development the company usually makes a public announcement. We independently confirm financing status, at which stage the projects are considered 'committed'.
"AN ESTIMATED 6 000 MEGAWATTS IS REQUIRED TO MEET THE TOTAL CUMULATIVE DEMAND FOR LARGESCALE GENERATION CERTIFICATES THROUGH 2020."
While the level of the Large-scale Renewable Energy Target was under review, commercial negotiations to commit new renewable power stations slowed. Since the new target was legislated in mid-2015, market participants (developers, investors, financiers and liable entities) have been reconsidering their business models and risk allocation. These commercial processes take time and have resulted in a modest total capacity of 409 megawatts of new build being committed in 2015. More details on committed projects are in Appendix E.
For 2015 the committed projects indicator has been assessed as 'within reach' because there is still time to commit and construct sufficient new build in future years to meet the 2020 target (see Graph 10). There is evidence that new commitments are in the pipeline. For example in recent months, both private and state-owned energy businesses have announced tenders or finance models for renewable energy or large-scale generation certificates. These businesses include AGL Energy, Alinta Energy, Ergon Energy (Queensland Government) and Synergy (Western Australian Government), and state-owned entities in Victoria, New South Wales and South Australia, and the City of Melbourne. The strong level of interest in the Australian Renewable Energy Agency's (ARENA) large-scale solar competitive round in 2015 also indicates strong prospects for projects to become committed.
In addition to the 409 megawatts committed in 2015, an estimated additional 6 000 megawatts is required to meet the total cumulative demand for large-scale generation certificates through to 202026. Ideally the majority of this additional 6 000 megawatt capacity would be committed in 2016 and 2017 to avoid a shortage of large-scale generation certificates on the path to the 2020 target (see Graph 11).
Note: See Appendix E for a list of large-scale renewable energy projects committed in 2015.
As explained on the
Accreditation page, renewable power stations must be accredited to create a large-scale generation certificate for each megawatt hour of renewable electricity they generate.
We accredit power stations based on their total proposed installed capacity, which may be constructed in phases. Estimates of electricity generated in 2015 from a renewable energy power station accredited in that year assume the most probable generation over a full calendar year.27
Considering the lead time for construction, the projects we accredited in 2015 that delivered the 296 megawatts of capacity in 2015 were likely to have been committed in 2013 and 2014.
While accreditations were modest in 2015 we have concluded that the accredited renewable power stations indicator is 'on track' for 2015 given the uncertainty at the time these projects were committed.
Based on projects committed in 2014 and 2015 that are yet to be accredited, we anticipate approximately 230 megawatts of capacity (which will generate around 630 gigawatt hours annually) will be accredited as renewable power stations in 2016.
Note: The 12 week average price referred above is the average spot price over the last 12 weeks of 2015, up to the final day of 2015 trade.
The market price for large-scale generation certificates at any point in time is known as the spot price and can be volatile, reflecting low trading volumes and sensitivity to changing sentiment about future supply and demand.
A 12 week average large-scale generation certificate spot price is used in this report to illustrate price trends and smooth out market volatility.
Importantly, large-scale generation certificate spot prices do not typically reflect the average cost of certificates purchased for the purpose of acquitting liability. This is because relatively small volumes of large-scale generation certificates are purchased through the spot market compared with alternatives such as agreements where liable entities directly source large-scale generation certificates from renewable power stations. Details of these commercial agreements are confidential.
The large-scale generation certificate spot price was around $33 at the start of 2015 and had been at similar levels for the previous two years. This price was not sufficient to incentivise substantial new build as evidenced in the relatively low levels of committed projects and accredited renewable power stations in 2015.
In the lead up to the new target being legislated the large-scale generation certificate spot price rose to over $40 and continued to rise to over $70 as shown in Graph 12. At the end of 2015 the large-scale generation certificate spot price was $72, which was above the non-tax deductible shortfall charge of $65 but below the post-tax equivalent shortfall cost of close to $93.28 The rising price indicates that demand for existing certificates is increasing and signals that the market expects new build is necessary to meet the target. Liable entities can avoid unfavourable price peaks by investing in renewable power stations and negotiating agreements for large-scale generation certificates.
The average large-scale generation certificate spot price over the 52 weeks of 2015 was $54.
This indicator has been assessed as 'on track' as the last quarter provides a strong price signal for parties to commit to the scale of new generation required.
Ideally, the large-scale generation certificate spot price in 2016 will be at a similar level to the end of 2015 so it continues to incentivise the market to commit and build new projects.
A surplus of certificates provides a buffer for liable entities to avoid incurring shortfall charges, as it allows time for new renewable projects to be committed, constructed and commence generation to provide a supply of large-scale generation certificates.
Approximately 16.529 million large-scale generation certificates were validated in 2015. Following the 15 February 2016 deadline for liable entities to acquit their liability for the 2015 calendar year, a surplus of approximately 18 million large-scale generation certificates was held in REC Registry accounts. Accordingly this indicator has been rated as 'on track'.
A moderate amount of surplus supply or liquidity is a normal aspect of environmental certificate markets and is necessary for the market to function efficiently. We estimate that the surplus supply of large-scale generation certificates in 2016 to 2018 will diminish further, as demand for large-scale generation certificates outstrips supply owing to the time required to commit new projects and for those projects to reach full generation (Graph 13).
Note: This is based on the trajectory described on the
Tracking progress page.
Holdings of large-scale generation certificates are concentrated in relatively few hands. This means that as the surplus reduces there may not be sufficient liquidity in the market in future years for liable entities to meet their obligations through spot purchases. It would be prudent for liable entities to take steps to secure sufficient forward deliveries of large-scale generation certificates to acquit their future Large-scale Renewable Energy Target liability.
Since 2011 when the Large-scale Renewable Energy Target commenced, liable entities have had an almost perfect compliance record for surrendering large-scale generation certificates.
In 2015, a total of 99.4 per cent of large-scale generation certificate liability was acquitted on time. As there was only a small amount of large-scale generation certificate shortfall, this indicator is rated 'on track' for 2015.
"2015 LARGE SCALE CERTIFICATE SHORTFALL WAS IMMATERIAL."
Although the level of large-scale generation certificate shortfall was not material, we observed that it had increased slightly from 2014, and that some electricity retailers may have taken a commercial decision to pay a shortfall charge rather than obtain large-scale generation certificates to acquit their liability. As mentioned in the previous indicator, there were more than sufficient certificates in the market for all liable entities to secure certificates to surrender against their liability for the 2015 calendar year.
Paying the renewable energy shortfall charge, rather than surrendering certificates, is non-compliance with the Large-scale Renewable Energy Target. Shortfall charges are paid into consolidated revenue and do not incentivise new renewable projects. Failure to surrender sufficient certificates to cover an entity's liability is non-compliance with the Large-scale Renewable Energy Target.
For 2016 we expect those with a shortfall charge in 2015 to consider options to return to compliance.
25 A portion of generation is sourced from hydro-electricity above baseline generation (see the
http://www-authoring.cleanenergyregulator.gov.au/About/Pages/Accountability%20and%20reporting/Administrative%20Reports/The%20Renewable%20Energy%20Target%202015%20Administrative%20Report/Renewable-power-stations.aspx page), the availability of which is affected by rainfall.
26 Between 2016 and 2020 the 6 000 megawatts will be delivered through a mix of approximately 25 per cent solar and 75 per cent wind. If there is materially less than 3 000 megawatt capacity committed in 2016, the difference will need to be made up in 2017 with a higher proportion of solar because it is quicker to build.
27 The conversion from megawatt capacity to megawatt hours is based on capacity factors supplied by each plant on accreditation.
28 The shortfall charge for the Large-scale Renewable Energy Target is fixed at $65 per megawatt hour. Costs incurred by purchasing and surrendering certificates are tax deductible, while the payment of the shortfall charge is not. Paying the shortfall charge is equivalent to paying a 'tax-incorporated' price of around $93, if an entity was paying the full corporate tax rate of 30 per cent.
29 For further information on large-scale generation certificates validated in 2015 see the
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