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Address at the Clean Energy Summit 2016

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08 May 2017

Market trends and outlook for the Renewable Energy Target

27 July 2016
Chloe Munro, CEO and Chair

Thank you so much, and thank you for the opportunity to talk today.

In this session I am going to talk about the Renewable Energy Target and the market trends that we have observed, their impact, and how the Clean Energy Regulator sees the outlook for renewables in general.

But I did just want to start off — like so many panellists today — to mark the passing of Matt Zema. I’ve known him for the best part of 20 years, and he was a good man, as well as being a great leader in our industry. It’s with great sadness that I give my condolences today — it’s very sad indeed. But having said that, the Australian Energy Market Operator is a tremendous institution and I think will really serve us well through the changes that need to take place as our energy market transforms.

The issue for the Clean Energy Regulator is — how we are tracking with the Renewable Energy Target? It’s now 12 months since the legislation was amended to put in place the new target of 33,000 gigawatt hours — so now there’s some policy certainty, and I think you’d be a very brave person to bet on any change to that.

What we’ve seen in committed investments so far in the year is double what we saw in 2015. But the pace still needs to pick up, and that is our fundamental message. There certainly is a tremendous pipeline of at least 10,000 megawatts of projects that have planning approval, which shows strong promise.

What we said in our annual statement — in reflecting on the 2015 year — was that progress to the target was adequate under the circumstances, and we chose those words very carefully because they reflected the circumstances at that time. Naturally it was going to take a while for investment to get back on track after a hiatus for market decisions to be made, and for the risks and opportunities to be assessed. But, I have to say, we’re well past the time where that assessment has been done, and I think people now have as good of an understanding as they’re ever going to have of what the dynamics are, and what the opportunities are for investment.

In terms of how we look at progress — we built a simple scenario to be the basis of what we say in the annual statement. To be confident that the 2020 target could be met without shortfall on the way through, we would need to see 3,000 megawatts of new commitment this year. The way we reached this number was by starting with the legislated target which shows up as the faint grey line on the chart (slide three, below), and on top of that the additional requirement for voluntary surrenders including the ACT reverse auctions, GreenPower, and desalination contracts. So that’s what the market needs to be able to deliver in terms of large-scale generation certificates to stay out of shortfall.

Graph: Progress towards the target

We then looked at the inventory that’s on hand and that’s the dark grey line. You can see how we expect the current surplus to run down. We made a call that we would be looking at a minimum of about two million certificates maintained in the market. Now that might not be right — it is hard for us to estimate the inventory across the whole market to provide sufficient liquidity, but the market certainly has to be somewhat in surplus to operate efficiently. From this we derived the pace of construction which would be required on this trajectory, shown as the light blue additional generation capacity, on top of what’s already operating. That’s where we get our requirement for 3000 megawatt commitment this year and the total of 6000 megawatts or so across the whole period.

Other scenarios could reach the same results, depending on the mix of solar and wind. We’ve made some estimates about the relative capacity factors: the precise outcome all depends on the location and specific technologies and so on. Nevertheless this trajectory gives us a reasonable indicator against which to assess progress.

In terms of the announcements of which we’re aware, we see around 1140 megawatts so far this year of either committed or probable build that we expect to be committed by the end of the year. We count about 374 megawatts of this as fully committed — that is, with finance locked in. This gives an indication that pace of investment still hasn’t picked up sufficiently to avoid shortfall in 2018. That is a concern. So we’re very alert to what it would take for that gap to be closed. I’m most encouraged by the conversations that are taking place today about the different financing options that are taking shape and can move along that investment pipeline a bit more quickly.

Before I move off that, I just want to say a little bit about the market conditions which are about to be changed by virtue of the surplus certificates being mopped up very quickly. We have made very clear to the liable entities under the scheme — who are of course, largely the retailers that compliance under the Renewable Energy Target means surrendering certificates. In the past you might have been able to happily just run along and sell electricity to customers and then pick up the certificates you need to cover the liability from the market when the time comes for the February surrender. That is no longer going to be the case.

Every liable entity in this market needs to be planning forward to cover their exposures adequately. We would expect the large retailers to have a very sophisticated trading operation to carry inventory all the time. They’ve got some self-generated supply and they’ve got other contracts. There certainly would be no excuse for them to go into shortfall, and I would be astonished if that happened. Our warning is to the smaller and mid-range retailers: unless they really look forward to how this market is developing, then they could be caught short.

Now, at the end of the day, if they do go into shortfall, there is some flexibility to recover that position in future years — either by carrying forward shortfall if it’s less than 10 per cent into the next year or if they pay the shortfall penalty, they can actually apply to us to submit the missing certificates later, and be refunded. Then of course the position is rectified and they have come back into compliance with their obligations. I think that’s an important flexibility but it’s not huge. The more important thing is commitment to secure sufficient certificates when they required..

What we’re seeing in the market is a strong price signal (chart on slide six, below) for investment. The price of small-scale technology certificates has stabilised towards the ceiling of $40, and we expect it to stay around there. The large-scale generation certificate price, as you’d all be well aware, has reached as high as almost $86 at one point and the forward prices for 2017 and 2018 are not much different. So what is clearly required is innovation in finance to allow the unmet demand for certificates to be satisfied, I thought it was fantastic to listen to the various presentations during the day about the innovative practices that are coming forward. There’s quite a lot of innovation from state governments. The sort of arrangements that they’re talking about are really about tackling this issue of risk allocation between the developer, the equity investor, the debt provider and the purchaser of those certificates. That’s what it’s all about. We need to redefine risk allocation in project proposals. But also important is a better and shared understanding of the outlook and not overstate the degree of risk.

Graph: Market outlook

We’ve heard about AGL’s PARF, which has been backed by the Future Fund which is very interesting given their investment stance. There’s the new Liberman Fund, and the Clean Energy Finance Corporation has a new loan product coming forward, so there’s a tremendous opportunity right now for and all that appetite for renewables to come together. Today it’s still a bit slow compared to where we’d like to see it, but it is, certainly attainable.

And the final thing I just wanted to point out here (chart slide seven, below) was commercial and industrial solar. This sector is quite an interesting player, with systems in the 10–100 kilowatt range able to participate in either the small or large-scale schemes. Obviously, you’d need an awful lot of these to make a dent in the Large-scale Renewable Energy Target. Against the upfront deeming of the small-scale scheme — it certainly hasn’t been the attractive thing. With this growth of participation in this market and high LGC prices, some of them actually see more benefit in the large-scale market. That’s a trend that we’re going to watch very closely.

Graph: Increase in commercial and industrial solar

I’m very much looking forward to what our new minister will say tonight, and your questions and observations, after we’ve all spoken. Thank you.

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