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How the Renewable Energy Target works

How the Renewable Energy Target works

Australia generates renewable energy at both a large and small scale. The Renewable Energy Target is an Australian Government scheme that provides a financial incentive for companies, households and businesses to invest in both.

Companies are encouraged to invest in new large-scale renewable energy power stations—including solar farms, wind farms, hydro or waste power stations—through the Large-scale Renewable Energy Target. This scheme delivers the renewable electricity needed to meet the target of an additional 33 000 gigawatt hours generated from renewable energy sources in 2020.

Households and businesses are encouraged to install small-scale systems—including solar panel systems, solar water heaters, small-scale wind or hydro systems, and air source heat pumps16—through the Small-scale Renewable Energy Scheme. This scheme delivers additional electricity from renewable energy sources or displaces electricity (this is electricity that is no longer required from the grid).

SPOTLIGHT...
What is a watt?

Electricity is often measured in watts and watt hours.

A watt is a unit of power. Power is the rate at which energy is produced or consumed at a point in time.

A watt hour is a unit of energy, used to measure the amount of electricity generated or consumed over a specified time. For example, one watt hour is the amount of electricity generated or consumed during one hour.

When reporting on the Small-scale Renewable Energy Scheme, we generally use kilowatts and kilowatt hours. One kilowatt is 1000 watts and one kilowatt hour is 1000 watt hours. For example, a three kilowatt household solar panel system, operating under optimum conditions for one hour, should produce three kilowatt hours of electricity.

When reporting on the Large-scale Renewable Energy Target, we generally use megawatts and megawatt hours. One megawatt is 1000 kilowatts and one megawatt hour is 1000 kilowatt hours. For example, a three megawatt large-scale renewable energy power station, such as a landfill gas power station, operating at full capacity for one hour will produce three megawatt hours of electricity.

The Renewable Energy Target for 2020 is expressed as 33 000 gigawatt hours, which is 33 million megawatt hours.

In both the small and large-scale schemes, you can obtain one certificate for every megawatt hour of generation or displacement.

A market for renewable energy certificates

The Renewable Energy Target provides an incentive for additional generation of electricity from renewable sources through the creation of tradable renewable energy certificates.

Each certificate represents a megawatt hour of renewable source electricity generated or a megawatt hour of electricity displaced.

Creating demand

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Under the large-scale scheme, large wholesale purchasers of electricity must source certificates to meet their renewable energy obligations. These are known as 'liable entities' and are mainly electricity retailers17. They are responsible for driving demand in the market for renewable energy certificates.

The number of certificates each electricity retailer needs to source and then surrender each year is in proportion to the amount of electricity they acquire to use or sell.

One option is to enter into a power purchase agreement with a renewable energy power station, where an electricity retailer secures a future supply of certificates from a large-scale renewable energy power station for a set period of time. See Spotlight...Power purchase agreements for more information.

2016 fast facts

About 50 per cent of surrendered certificates come from Australia's three biggest retailers.

This can also assist in providing the necessary financing for such large-scale projects. Electricity retailers can also directly invest in developing large-scale renewable energy power stations, to generate certificates to meet their obligations under the scheme.

In this way, electricity retailers support more electricity coming from renewable sources, and play an integral part in achieving the 2020 Renewable Energy Target.

SPOTLIGHT...
Extra demand for renewable energy certificates

Most demand for large-scale generation certificates comes from electricity retailers meeting their Renewable Energy Target obligations. However, demand for certificates also comes from other sources.

For example, some facilities that consume a significant amount of electricity are required to source and surrender large-scale generation certificates to partially offset their consumption with renewable energy. An example is desalination plant operators, who surrender certificates to meet state requirements to offset the emissions from their electricity consumption.

Some retailers and organisations also voluntarily surrender certificates, in particular for GreenPower, a state and territory accredited program that enables electricity providers to purchase certificates on behalf of households or businesses.

Certificates accepted for voluntary surrender are permanently removed from the market and cannot be transferred to another party or used to acquit a mandatory surrender liability under the Renewable Energy (Electricity) Act 2000.

This creates additional demand from organisations sourcing large-scale generation certificates from the same market as electricity retailers.

As a result, to meet the full demand from the market and still achieve the target, there must be more than 33 000 gigawatt hours of renewable source electricity generated in 2020. Depending on total demand, this could be as high as 37 000 gigawatt hours.

 

Encouraging supply

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The Renewable Energy Target encourages investment in large-scale renewable energy power stations and small-scale systems, which supply the certificates needed to meet demand.

Large-scale supply

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One of the functions of the Clean Energy Regulator is to accredit large-scale renewable energy power stations. A power station may be eligible for accreditation under the Large-scale Renewable Energy Target if it meets all the eligibility requirements outlined in the Renewable Energy (Electricity) Act 2000. This includes ensuring that:

  • some, or all of the electricity the power station generates is from an eligible renewable energy source, and
  • the power station complies with all Commonwealth, state, territory and ocal government planning and approval laws.

Accredited large-scale renewable energy power stations can create large-scale generation certificates for each megawatt hour of renewable source electricity they generate above their 1997 baseline. Power stations with baselines typically include those using hydro, bagasse and landfill gas as their eligible renewable energy sources.

These certificates can be sold to electricity retailers who need them to comply with their obligations under the scheme.

SPOTLIGHT...
Power purchase agreements

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A power purchase agreement is typically a contract between an electricity retailer and the developer of a large-scale renewable energy power station, to source the electricity or large-scale generation certificates created by that power station.

Parties can sign a power purchase agreement before the power station is built, as a way to underpin and secure financial backing for the project, or at a later stage.

Contracted large-scale generation certificate prices are generally much lower than the current spot price. Recent public statements suggest that some 'bundled' prices for both electricity and certificates ranged from $65 to $85 per megawatt hour, while the spot price of certificates alone finished 2016 at $86.75.

Small-scale supply

Individuals and businesses who have installed eligible small-scale systems, such as solar panel systems, can create small-scale technology certificates.

To be eligible, small-scale systems18 must:

  • use approved components where relevant, such as the Clean Energy Council list of approved components for solar panel systems or the components listed in the register of solar hot water heaters
  • meet Australian and New Zealand standards
  • for solar panel systems, use a Clean Energy Council accredited designer and installer, and meet the Clean Energy Council design and install guidelines
  • comply with all local, state, territory and federal requirements, including electrical safety
  • be classified as a small generation or displacement unit (for example, wind, hydro, solar panels/solar water heaters or air source heat pumps), and
  • not exceed the capacity limits for a small-scale system.

Small-scale technology certificates are created upfront for small-scale systems based on location, size, installation date and the deeming period.

Individuals and businesses can create and trade their own certificates. However, most assign their right to do so to registered agents in return for a discount on the system they are installing.

Administering the scheme

Our role as Clean Energy Regulator is to administer the scheme. This includes providing the supporting structure for the Renewable Energy Target, making recommendations on renewable energy certificate requirements, providing the secure system for registering and trading certificates, validating renewable energy certificates, reporting to the public and Parliament, engaging with market participants and undertaking education and compliance activities to help ensure the efficiency and integrity of the market.

2016 fast facts

The renewable power percentage for 2016 was 12.75 per cent and for 2017 is 14.22 per cent. The small-scale technology percentage for 2016 was 9.68 per cent and for 2017 is 7.01 per cent.

Setting the certificate surrender requirement

The amount of certificates that electricity retailers need to surrender is determined each year by the renewable power percentage (for large-scale generation certificates) and the small-scale technology percentage (for small-scale technology certificates). The percentages are set in regulation under the Renewable Energy (Electricity) Act 2000 each year19.

See Spotlight...Setting market demand for renewable energy certificates for more information.

SPOTLIGHT...
Setting market demand for renewable energy certificates

An annual Large-scale Renewable Energy Target is set under the Renewable Energy (Electricity) Act 2000 rising to 33 000 gigawatt hours in 2020. This creates demand for certificates in the large-scale scheme each year to 2030. In the Small-scale Renewable Energy Scheme, the goal is to keep demand in equilibrium with supply.

Each year we engage consultants to forecast several estimates for the future year. These include the total electricity to be consumed and total exemptions for emissions-intensive trade-exposed entities. Based on their reports, we estimate the target for the year.

Each electricity retailer is responsible for a proportion of the large and small-scale targets.

The targets are converted into percentages based on the total amount of electricity that is expected to be acquired in the coming year. Electricity retailers use the percentages to determine their liability.

The percentages calculated are:

  • the renewable power percentage for the large-scale scheme, and
  • the small-scale technology percentage for the small-scale scheme.

The Minister for the Environment and Energy sets these percentages in regulation each year before 31 March of the calendar year. Electricity retailers then apply this percentage to the amount of electricity they actually acquire from the grid to determine the number of certificates they are required to surrender to us to meet their obligations.

As we use estimates, the percentages must be adjusted each year. The adjustments account for the difference between the estimated values used to set the percentages in previous years and the final figures, once known in future years. Hence, rolling adjustments each year are required.

Providing the secure system for trading certificates

The secure system, known as the REC Registry, enables the renewable energy certificate market to operate. Market participants use the REC Registry for all certificate transactions including creating and transferring certificates to another party and surrendering certificates to meet their obligations.

As a tradable commodity, renewable energy certificates attract a price on the secondary market. Financial institutions, brokers, traders, registered agents and electricity retailers are involved in buying and selling certificates in this market.

Small-scale system owners and registered agents also have the option to sell small-scale technology certificates through the Clearing House, which is accessible via the REC Registry, at a fixed price of $40 (excluding GST).

We provide the REC Registry as the framework for transferring and banking renewable energy certificates, but do not facilitate or regulate market trading in any other way. This includes large-scale generation certificate prices, which are market-driven, and reflect factors such as supply and demand.

SPOTLIGHT...
The Clearing House for small-scale technology certificates

Market participants can buy and sell small-scale technology certificates through the secondary market or the small-scale technology certificate Clearing House.

In 2016, electricity retailers needed to surrender 16 691 555 small-scale technology certificates to meet their obligations. 16 111 973 small-scale technology certificates were validated in 2016, which meant demand outweighed supply. This resulted in regular use of the Clearing House, which allows electricity retailers to source the small-scale technology certificates at a fixed price of $40 (GST exclusive).

When the Clearing House goes into deficit, we create 'Regulator created small-scale technology certificates'. Buyers can purchase, trade and surrender these certificates like other certificates. Over time, as more small-scale technology certificates become available, they are sold into the Clearing House and cancelled, until the deficit is cleared.

The Clearing House remained in deficit during most of 2016, reaching a high of 4 271 564 million certificates in deficit in July and ending the year with a deficit of 1 822 143 million certificates. Sales tend to be faster if the Clearing House is in deficit, but may take some time if it is in surplus.

During 2016, there were 266 purchases of 13 777 402 small-scale technology certificates, valued at $551 million. The largest purchase was worth $38.8 million.

This compares with 115 purchases of 6 964 491 small-scale technology certificates in 2015, valued at $278 million.

Engaging with participants to ensure market integrity

As the agency responsible for administering the scheme, our role involves ensuring integrity in both entitlements (creating certificates and obtaining exemptions) and obligations (surrendering the correct number of certificates or paying a penalty).

We register market participants, accredit large-scale renewable energy power stations, validate certificates, and issue exemption certificates for certain emissions-intensive trade-exposed activities.

We also undertake a range of communications, education and engagement activities to ensure participants understand how the Renewable Energy Target works and the requirements of participating in the scheme.

See Chapter 4. Market integrity and scheme compliance for more information.

Reporting to the public

Under the Renewable Energy (Electricity) Act 2000, we are required to publish a range of information about the operation of the Large-scale Renewable Energy Target and Small-scale Renewable Energy Scheme.

We do this by reporting annually on the operation of the Renewable Energy (Electricity) Act 2000 (this publication), including an annual statement on the progress towards the 2020 target. We release additional data periodically on our website.

Footnotes

12 Electricity generation emissions projections 2016, Department of the Environment and Energy.

13 Generation capacity and output by fuel source data, Australian Energy Regulator, www.aer.gov.au/wholesale-markets/wholesale-statistics/generation-capacity-and-output-by-fuel-source [as at 8 March 2017].

14 The existing generation of renewable source electricity in 1997 is referred to as 'baseline'.

15 Based on average household electricity consumption. Source: Household Energy Consumption Survey: Summary of Results 2012, Australian Bureau of Statistics.

16 See glossary for definitions.

17 See glossary for definition.

18 For more details about small-scale system eligibility, see Small-scale systems eligible for certificates.

19 For details about how the renewable power percentage and the small-scale technology percentage are calculated, see www.cleanenergyregulator.gov.au.

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