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Historically, increased investment in renewables has primarily been driven by large liable entities (usually tier one electricity retailers) that are required to obtain and surrender certificates to meet their obligations under the Renewable Energy Target.
In 2018 market dynamics reached a turning point. Drivers of demand for renewables have now clearly shifted. Increased competition has expanded the writing of power purchase agreements to tier two electricity retailers. Tier one electricity retailers only underpin 22 per cent of the 11.6 gigawatt renewable energy project pipeline but represent 60 per cent of demand in the National Electricity Market.
At the same time, high electricity prices and sustainability drivers have led to the growth of corporate power purchase agreements (see page 30). Together these drivers suggest that investment in renewables is now driven more by commercial factors than the Renewable Energy Target.
State and territory incentive programs and targets also continued to support investment in both Large-scale and Small-scale renewables in 2018.
The boom in utility-scale renewable energy projects will significantly boost supply for the Large-scale generation certificate market. The increased availability of Large-scale generation certificates reduced certificate spot prices in 2018. The lower spot price cut the cost of the Renewable Energy Target for consumers, and may result in lower electricity pass through costs for households and businesses in future years.
Many liable entities play a role in both the supply and demand side of the market for renewable energy certificates, as some operate power stations under the Large-scale Renewable Energy Target and support installations for households and businesses in the Small-scale Renewable Energy Scheme.
Under the Renewable Energy Target, liable entities are required to surrender Large-scale generation certificates and Small-scale technology certificates in proportion to the electricity they acquire in a year.
The number of certificates liable entities need to surrender is determined by applying the renewable power percentage for Large-scale generation certificates and the Small-scale technology percentage for Small-scale technology certificates to an entity’s relevant acquisitions of electricity, minus any exemption, for that calendar year.
The Minister for Energy and Emissions Reduction sets the percentages before 31 March of the calendar year.24 The renewable power percentage for 2018 was 16.06 per cent. The Small-scale technology percentage for 2018 was 17.08 per cent.
*Medium entities have a liability between 100,000 and 1 million certificate liability and small entities have less than 100,000.
For 2018, across both the Large-scale Renewable Energy Target and Small-scale Renewable Energy Scheme, liable entities surrendered 93.3 per cent of certificates on time, down from 95.5 per cent for the 2017 assessment year.
The surrender rate for Large-scale generation certificates in 2018 was 86.1 per cent, down from 93.3 per cent in 2017. For Small-scale technology certificates, the surrender rate was 99.9 per cent.
Liable entities may surrender Large-scale generation certificates for more than 90 per cent of their liability and carry forward a shortfall of less than 10 per cent of their liability to the following assessment year. Carry forward shortfall does not result in a shortfall charge.
Liable entities with shortfall of greater than or equal to 10 per cent of their liability must pay a shortfall charge of $65 for each Large-scale generation certificate not surrendered.25
In October 2018 we released an updated position on shortfall. This position stated that as the Large-scale Renewable Energy Target will be exceeded, we have no objections to the use of shortfall provided liable entities true up their position by surrendering sufficient Large-scale generation certificates within the allowable three-year period.
A total of $458 million (or the equivalent of 7.5 million Large-scale generation certificates) of shortfall charges generated in 2016, 2017 and 2018 is in consolidated revenue, which may be redeemed by liable entities within three years.26 Of this, $220 million relates to the payment of charges for 3.4 million Large-scale generation certificates in shortfall for the 2018 assessment year. In addition to paid shortfall for the 2018 assessment year there was a further shortfall of 0.5 million certificates carried forward to 2019.
The use of shortfall by liable entities has likely shifted demand into future years and smoothed and brought forward a fall in Large-scale generation certificate prices.
For Small-scale technology certificates, the surrender rate in 2018 was 99.9 per cent. As the STC clearing house provides unlimited certificates at $40 per certificate (GST exclusive), well below the shortfall charge of $65, a very high surrender rate continues.
We publish the details of all entities in shortfall (see Appendix A).
Renewable Energy (Electricity) Act 2000 allows exemptions from Renewable Energy Target liability for companies conducting eligible emissions-intensive trade-exposed activities. Companies eligible for exemption are issued with a certificate detailing an amount of exemption in megawatt hours. They then agree to a commercial arrangement with their electricity retailer, which can then use the exemption certificate to reduce their obligation under the Renewable Energy Target.
A total of 211 exemption certificates were issued for 2018. This is an increase of 23 per cent compared with 2017. Of these, 192 were issued under the old production calculation method and 19 were issued under the new electricity use method (see page 51 for more information).
The exemptions represent 39,126 gigawatt hours of electricity that can be used to reduce electricity retailers’ relevant acquisitions and hence the amount of renewable energy certificates they need to surrender to meet their liability obligations.
According to the Australian Energy Market Commission, the Renewable Energy Target accounted for an estimated 5 per cent (or an average of $68.50 per year) of the average household electricity bill in 2018. The Large-scale Renewable Energy Target was estimated to contribute $39.40 and the Small-scale Renewable Energy Target around $29.10.
The Australian Energy Market Commission’s modelling suggests that across the next few years wholesale electricity costs are expected to decrease in all jurisdictions of the National Energy Market, in part due to additional renewable energy and battery storage entering the market.27
Large-scale generation certificate spot prices fell sharply towards the end of 2018—from $85.30 in January to $70.50 at the end of August, before falling a further 33 per cent to finish the year at $47.50.
The fall in Large-scale generation certificate prices will likely reduce the impact of the Large-scale Renewable Energy Target on electricity prices in 2019 and 2020, despite the increase in the renewable power percentage and the Small-scale technology percentage.
The Small-scale technology certificate spot price was more stable throughout the year, fluctuating between $33.50 and $39. The Australian Energy Market Commission estimated the impact of the Small-scale Renewable Energy Scheme to be $29.10 per household in 2018.
Drivers of investment in renewables are diversifying. Aside from the Renewable Energy Target, state and territory incentive schemes are bolstering demand and power purchase agreements are finding favour with corporate entities. A number of institutions such as the Australian Renewable Energy Agency and the Clean Energy Finance Corporation have also played a central role in driving the cost of renewables down and supporting investment to enable Australia to meet the Large-scale Renewable Energy Target.
During 2018 several state and territory incentive programs encouraged further investment in both Large-scale and Small-scale renewables, to meet individual state and territory targets. These programs include incentives that make Small-scale renewables more accessible to those previously unable to take advantage of these systems, such as low income households, renters and public buildings. Newer initiatives are encouraging the co-installation of batteries and solar PV systems, which will improve reliability and assist in grid stability. These schemes are expected to drive even higher levels of Small-scale installations from 2019 onwards.
A power purchase agreement is a contract between two parties, where the buyer purchases electricity generated by the seller.
These agreements have traditionally been between Large-scale renewable energy power stations and electricity retailers. However, rising electricity costs combined with low renewable energy costs means it is becoming commercially viable for businesses to enter into corporate power purchase agreements with renewable energy electricity generators, to meet all or part of their energy needs.
Corporate power purchase agreements are likely to drive new investment in renewables post-2020 and soak up the surplus of Large-scale generation certificates available in the 2020s. Large Australian corporates have begun to sign contracts to purchase Large-scale generation certificates after 2020, intending to voluntarily surrender the certificates to meet carbon neutral goals or to enhance their corporate social responsibility.
While several Australian companies have led the field in signing corporate power purchase agreements for renewable energy—such as Bluescope, Telstra and Nectar Farms—industry-led initiatives are also growing.
For example, the global RE100 initiative includes 162 of the world’s most influential companies that are committed to sourcing the equivalent of their entire energy demand through 100 per cent renewables. In 2018, the Commonwealth Bank of Australia became the first Australian corporate to join RE100. While it was the first Australian company to join, almost three-quarters of RE100 companies have operations in Australia, including Mars, Fujitsu and Carlton United Breweries.
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