The 2020 Large-scale Renewable Energy Target remains achievable provided the current pace of investment continues in 2017.
Progress was better at the end of the year than at the start, with good momentum continuing into early 2017. The risk that future supply of certificates might fall below total demand diminished in the course of the year. However, supply and demand will be tightly balanced in the 2018 compliance year.
For the 2020 target to be reached, we estimate around 3000 megawatts will need to be committed in 2017 and a further 1000 megawatts in 2018.
The portion of household electricity bills attributable to the Large-scale Renewable Energy Target increased marginally in 2016.
In the 2015 annual statement we said that for progress to be satisfactory, the total capacity of committed new build in 2016 would need to be around 3000 megawatts. This level was not reached. Nevertheless, more new large-scale renewable power generation was financed during 2016 than in any other previous year4.
The available information indicates that 1350 megawatts of new large-scale renewable power stations was committed5 in 2016, with another 719 megawatts sufficiently advanced to count as probable6. Together, these projects represent around one-third of the new capacity required to deliver the 2020 target, and nearly a five-fold increase on the 409 megawatts capacity committed or probable in 2015.
The majority of new commitments were announced in the later part of 2016. The target remains achievable provided the pace of investment keeps up with this momentum in 2017.
The impact of the slow start of new commitments is offset to some extent by two positive factors. Our 2015 assessment anticipated that 230 megawatts of new capacity would be accredited in 2016. In fact, we accredited large-scale renewable energy power stations with a combined capacity of 494 megawatts.
In addition, we found a higher than anticipated proportion of proposed projects are solar power stations. Solar projects typically have faster construction times so the lag between final investment decision and commissioning is shorter. This means that generation can begin sooner and large-scale generation certificates are available to the market earlier.
The slow start in 2016 will result in a tightening of certificate supply in the market in the short term. Certificates from new power stations will come on stream more slowly than the rise in demand from electricity retailers, resulting in a further decline in certificate surplus.
The spot price for large-scale generation certificates reflects the market's view that supply is getting tighter. It reinforces that additional build is needed. The spot price was $86.75 at the end of 2016. While significantly higher than the $72 at the end of 2015, it remained below the $93 tax-effective cost of the shortfall charge.
Following the February 2017 deadline for acquitting 2016 Large-scale Renewable Energy Target liability, a surplus of approximately 13.4 million large-scale generation certificates remained in REC Registry accounts. This highlights that more than sufficient certificates were available to cover the surrender obligations of the entire market.
Nevertheless, in 2016 the compliance rate fell to just over 89 per cent of the liability compared with over 99 per cent in 2015.
For commercial reasons, two large electricity retailers chose not to surrender sufficient certificates to cover their full obligation and instead paid the shortfall charge. Entities in shortfall can make good their position and apply for a refund by surrendering the missing number of certificates at a later date7. ERM Power8 and Alinta Energy9 have demonstrated their commitment to the Renewable Energy Target by indicating they will be taking steps to support new renewable build in the future.
Our position remains that payment of the shortfall charge does not fulfil the purpose of the Renewable Energy (Electricity) Act 2000.
According to the Australian Energy Market Commission10 the Large-scale Renewable Energy Target accounted for an estimated 2.8 per cent (or an average $9.38 per quarter) of the average household electricity bill in 2016. This is an increase of $2.25 per quarter from 2015. This increase is in line with the trajectory towards the 2020 target and takes into account the Australian Energy Market Commission's estimate of the effect of 2016 certificate prices.
For satisfactory progress towards the 2020 target, we consider that 3000 megawatts will need to be committed in 2017, in addition to the 2069 megawatts that was committed or probable in 2016. A further 1000 megawatts will be needed in 2018. The earlier this capacity is built, the more certificates that will be available to electricity retailers to meet their obligations in future years.
Settled policy for the 2020 target has contributed to an improved investment environment, and the pipeline of potential projects remains in excess of the level required to meet the target. The large-scale generation certificate spot price may remain relatively high until sufficient committed projects are announced to give the market confidence in an adequate supply of certificates through to 2020.
The total holdings of surplus certificates will continue to fall, although supply should be adequate for 2017. Supply and demand for certificates is likely to be tightly balanced for the 2018 compliance year. However, the recent series of new project announcements leads us to consider that the market is most likely to remain in surplus overall. There is time for sufficient build to come on for the operating surplus to return to adequate levels for 2019 and 2020 compliance years.
The actual surplus will depend on variables including the profile of new commitments, actual electricity demand, the amount of voluntary surrender11, and the level of generation from accredited power stations, specifically hydro (which can vary significantly depending on rainfall).
It is in the hands of electricity retailers to mitigate their risk of shortfall by making prudent commercial arrangements to cover their future obligations. This will have the benefit of bringing forward new build towards the 2020 target and should also moderate certificate prices.
In our assessment, there is still time for the necessary new capacity to be built to provide the required supply of large-scale generation certificates through to 2020 and beyond.
This year ended strongly with major players in the market—investors, financiers, developers and retailers—expressing positive intentions, notwithstanding the ongoing public debate about the role of renewables in the electricity market and the post-2020 climate policy environment. If this investment momentum continues into 2017, the 2020 Renewable Energy Target can be achieved.
We provide more detailed analysis of our assessment of progress towards the target, including the indicators we use to make this assessment, in Chapter 3. Progress towards 2020.
'The purpose of the Renewable Energy Target is to encourage more renewable energy and reduce emissions.'
4 Based on analysis of Clean Energy Australia reports 2012–2015.
5 & 6 See glossary for definition
7 Refer to Section 97 of the Renewable Energy (Electricity) Act 2000.
8 ERM Power announces renewables offtake agreements, www.ermpower.com.au/erm-power-announces-renewables-offtake-agreements/, 23 February 2017.
9 Alinta Energy's Commitment to Renewable Energy, https://alintaenergy.com.au/nsw/about-us/news/alinta-energy%e2%80%99s-commitment-to-renewable-energy, 21 February 2017.
10 Australian Energy Market Commission Report, 2016 Residential Electricity Price Trends. Estimates for 2016 price impacts are an average of the 2015–16 and 2016–17 financial year estimates.
11 Voluntary surrenders are currently associated with GreenPower and some desalination plants. The Australian Capital Territory government's 100% Renewable Energy Target proposes that all large-scale generation certificates will be transferred from generators to the Territory and voluntarily surrendered to the Clean Energy Regulator. However, no surrenders have been made to date.