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Large-scale generation certificate market update May - 2018

11 May 2018

Enough capacity under construction or already built to meet the Renewable Energy Target

The May market update provides our view on progress towards the 2020 target and key factors that may impact future large-scale generation certificate (LGC) supply and demand.

Current market observations

  • There is now 6553 megawatts of capacity from new renewable energy projects under construction or already built, which is considerably more than the 64001 megawatts of capacity required to meet the 2020 Renewable Energy Target.
  • There is an additional 1454 megawatts of projects subject to power purchase agreements that are likely to be fully financed and under construction this calendar year.
  • These figures take into account build that has currently applied for accreditation at the lower end of the range of the Large-scale Renewable Energy Target (100KW–1MW). The Clean Energy Regulator is able to track this build from accreditation applications, but this is generally not visible to the market. Additional build over the year will add to aggregate supply.
  • We expect the 2020 Renewable Energy Target will be exceeded at current build levels.
  • The judgement that the Renewable Energy Target will be exceeded takes into account the effect of updated AEMO marginal loss factors and expected curtailment as a result of network congestion.
  • The Clean Energy Regulator is aware of other projects that are likely to be announced in the near term.
  • If the spot LGC price remains high, additional electricity retailers may time shift demand by either carrying forward less than 10 percent of their liability to later years or by paying the shortfall charge.
  • Around $238 million, or the equivalent of 3.66 million certificates, of shortfall charge is in consolidated revenue, which may be redeemed in the future2.
  • We remain confident the market will continue to operate with a healthy working surplus of around 5 million LGCs in 2018 and 2019. The surplus should start to increase again from 2020.

Update on new large-scale renewable energy projects

Since 1 January 2016, 8007 megawatts in new capacity has been firmly announced. These are project announcements we have tracked and do not assume any potential announcements from current Victorian and Queensland government renewable processes that are yet to be decided.

From this total, 6553 megawatts of capacity is under construction or already built. Almost half of this capacity is already accredited and generating (1536 megawatts) or has applied for accreditation and will soon be generating (1592 megawatts).

An additional 1454 megawatts of projects are subject to power purchase agreements and are likely to be fully financed and under construction this calendar year.

The breakdown of the total pipeline of renewable energy projects as at 7 May 2018 is below.

Project statusCapacity (megawatts)
Under construction or already built6553

Under construction or already built is comprised of:

  • Accredited - 1536 megawatts
  • Applied for accreditation and will soon be generating - 1592 megawatts
  • Fully financed and under construction - 3425 megawatts
Signed power purchase agreements (PPAs) that we expect will be fully financed and under construction this year1454
Total8007

The momentum of announcements continues and we are aware of other large-scale projects that are expected to be publicly announced in the coming months.

We are closely monitoring construction, including using satellite and aerial imagery. To inform the market we will be releasing future updates on the pace of construction and the accreditation pipeline.

Commercial and industrial solar systems

There has been a surge in applications for accreditation of commercial and industrial solar systems – those sized between 100 kilowatts and one megawatt.

The agency currently has 100 applications on hand with a cumulative capacity of 25 megawatts – the equivalent of a utility-sized power station.

Based on information from discussions with installers, we expect that there could be more than 130 megawatts of these projects applying for accreditation this year, about five times more than last year.

There are significant numbers of commercial and industrial sized-systems and average sizes have been steadily increasing. So there may be considerably more projects being built in the market than anticipated. This could lead to higher levels of LGC supply than expected.

Large-scale generation certificates

If the spot LGC price remains high, additional electricity retailers may time shift demand by either carrying forward less than 10 percent of their liability or paying the shortfall charge.

This occurred following the 2016 and 2017 assessment years, with around $238 million, or 3.66 million certificates, of shortfall put into consolidated revenue.

Assessment yearCertificates in shortfallValue
20162.28 million$148 million
20171.38 million$89.5 million
Total3.66 million$238 million

The potential use of the 10 per cent carry-forward of liability and paid shortfall may shift demand for LGCs in the market from 2018 and 2019 to later years when generation from large-scale renewable energy power stations is higher and more LGCs are available. This is a commercial decision available to retailers. If all liable entities take this option, it will shift demand for another 3 million LGCs into future years and increase the surplus in the next two surrender years.

There are currently 13.5 million LGCs in the REC Registry and an additional 1.9 million are pending registration.

Outlook to 2020

Compared with our previous market update in February, we are confident that, based on firmly announced projects, at least 2600 megawatts of new capacity will be accredited in 2018 and at least a further 3500 megawatts in 2019.

On balance with the improved outlook for the commercial and industrial sector and increased solar announcements, we believe these areas of expansion should balance the net effects of changes to AEMO marginal loss factors and the effects of potential curtailment.

So, we maintain the view that existing and newly accredited large-scale renewable energy power stations will generate approximately 24 million LGCs during 2018.

References

1 The agency has previously said 6000 megawatts of capacity was needed for the target to be met, which was based on a mix of 75 per cent wind projects and 25 per cent solar projects. Our estimate of the required capacity has increased to 6400 megawatts due to the surge in solar which now makes up almost 50 per cent of the total capacity. Solar has a lower capacity factor than wind, so more installed solar capacity is required to achieve the same level of generation.

2 Shortfall charges can only be redeemed within three years.

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