Q2 2022 saw the investment signal for large-scale renewables trending up. As highlighted in the
March Quarter 2022 report, investment in low-cost renewables is supported by a combination of LGC prices and wholesale electricity prices. LGC spot price exceeded $50 on 22 June 2022 - the first time since November 2019. The quarterly average NEM spot price of $264 per megawatt hour (MWh) was more than triple Q2 2021 average of $85 per MWh.1 Whilst it is difficult to predict how long this trend may continue, these events have strengthened the signal for increased supply of renewable energy.
It is possible that high wholesale prices in Q1 flowing through to retail costs and the desire for many businesses to use renewable energy, may lead to additional 'bundled' power purchase agreements (PPAs) for renewable energy and LGCs. This could support more projects to reach FID and assist businesses in hedging electricity prices and demonstrating the use of renewable energy.
An additional 328 MW of capacity reached FID over the quarter. This follows 1.3 GW of capacity reaching FID in Q1, highlighting the variable nature of renewable investment from quarter to quarter, as
previously noted by the Clean Energy Regulator. Given the strong investment signals and Clean Energy Regulator's understanding of the renewables pipeline, total FID capacity in 2022 could exceed the 2.9 GW recorded in 2021. FID represents a commitment to invest, so it is defined investment to come.
LGC price expectations remain stable in the medium term, (Cal22 and Cal23) while forward prices are showing significant growth in the second half of the decade (Cal26s and Cal27s increased by 28% and 58% off a low-price expectation to $34 and $26 respectively), see Figure 2.1. Strong upward movement in forward prices suggest market expectations of a tight supply demand balance continuing longer than previously anticipated. This is primarily due to rapidly increasing voluntary demand and ongoing taking and redeeming of shortfall charges to provide liquidity. On the latter, there is still an effective deficit of 14.7 million LGCs needed to redeem $950 million in shortfall charges in consolidated revenue.
CSIRO's 2021-22 GenCost report confirmed solar and wind are still the cheapest source of new-build electricity generation, even when accounting for component price increases and the additional integration costs such as storage and transmission.
There is no shortage of future demand for renewable energy. A stronger case for greater uptake of renewables is being driven by competitive technology costs, current price signals, early retirement of coal plants and Government ambition for Australia to accelerate the transition to renewable supply. This includes an agreement to introduce an emissions reduction objective into the National Energy Objectives and a stronger emissions reduction target for 2030. The proposed changes to the Safeguard Mechanism will likely create significant additional demand for renewable energy as part of the process of reducing existing scope 1 emissions through fuel switching or electrification of existing processes.
In addition, there is a large potential supply of new large-scale wind and solar projects. Industry analyst Rystad suggests 57.5 GW of large-scale wind and solar projects currently hold development approval, with many likely to progress to FID over time. Further, there is a significant pipeline of offshore wind farms in various stages of planning.
The Australian Energy Market Operator released the
Integrated System Plan (ISP) 2022 in June. Based on the 'Step Change' scenario, grid-scale wind and solar capacity is expected to nearly triple by the end of the decade and increase by 9-fold by 2050, reaching 141 GW. This significant scale-up of renewables will support electrification of fossil fuel reliant sectors, such as transport and commercial and residential heating, as well as contributing to Australia's net zero commitments.
An additional 547 GW of wind and solar capacity may be needed in the NEM by 2050 under AEMO's 'Hydrogen Superpower' scenario. International and domestic demand for low and zero-emissions commodities is growing in response to corporate and global commitments to achieve net zero emissions targets.
Australia's ability to supply low emissions commodities in response to growing demand will be supported by an internationally aligned Guarantee of Origin (GO) scheme, under development by the Department of Climate Change, Energy, the Environment and Water (DCCEEW) and the Clean Energy Regulator. A GO scheme will certify the emissions intensity and production attributes of hydrogen and other low emissions products.
Australia has an opportunity to leverage and grow its renewable resources to decarbonise its products such as hydrogen, minerals and chemicals. Lowered product emissions intensity would be certified under the GO scheme, allowing suppliers to meet growing global demand from decarbonising supply chains and improving access to markets in jurisdictions with emissions regulations.
DCCEEW is also exploring options for an enduring renewable electricity certification mechanism that would align with the GO scheme. A renewable electricity GO framework that extends beyond the Renewable Energy Target's 2030 sunset could provide a stable long-term framework to support claims of renewable energy use. This could support tracing of renewable usage in GO-certified products, development of renewable power purchase agreements for corporate emissions reduction targets, and certification of exported renewable electricity through projects such as Sun Cable.
The Clean Energy Regulator is currently undertaking
trials with real world projects to inform the development of the GO scheme.
The second quarter of 2022 has seen significant operational challenges for the NEM. These included extremely high international prices for thermal coal and gas, scheduled and unscheduled thermal plant outages leading to higher levels of gas-fired generation, restricted hydro output and an early cold snap that started in late Autumn increasing domestic demand for heating.2
Some pressure in the NEM may be relieved by an expected 1.8 GW of new large-scale capacity reaching first generation in H2 2022 plus around 1 GW of rooftop solar, combined with the seasonal increase in wind and solar generation in the second half of the calendar year. Wholesale electricity prices remained very high in July averaging $388/MWh, since softening to an average of $146/MWh over the first two weeks of August.3 With increasing wind and solar generation in H2, prices may soften further.
Over the first half of 2022, the Clean Energy Regulator approved 700 MW of new capacity for LGC creation with 406 MW of that in Q2. Another 1.2 GW remained under application (see Table 2.1). Industry intelligence suggests more than 600 MW additional will be submitted for approval in H2. Consequently, total capacity approved in 2022 may exceed the Clean Energy Regulator's estimate of 2.5 GW. The approval stage represents capacity that has been built, leading to new generation subject to final AEMO processes. There have been reports of supply chain constraints likely causing delays to some projects; however, this has not impacted the industry widely. The Clean Energy regulator will continue to monitor and report on this.
As discussed in the
March Quarter 2022 report, the ability to deliver the grid upgrades set out in the Integrated System Plan will be critical to unlocking substantial further investment in large-scale renewables.
By the end of Q2, renewables contributed 32% of total generation in the NEM in 2022, up from 28% for the same period last year. Over the first half of 2022, LGC supply was 19.7 million, up 15% on the same period in 2021. Figure 2.2 shows LGC supply increased across all fuel types, with most of the increase attributable to additional solar generation.
The Clean Energy Regulator estimates generation eligible for LGCs in 2022 will be approximately 44,000 GWh - a 33% increase on the statutory target of 33,000 GWh which was reached over 2020.
LGC prices are being sustained by increasing demand from parties looking to demonstrate use of renewable energy beyond the statutory target. 356,000 LGCs were voluntarily cancelled in Q2 2022, taking total cancellations for the year to 1.6 million. This total is 2.4 times the volume for the first half in 2021 (excluding the ACT government cancellation).
The ACT government cancelled 2.2 million LGCs in early July towards its 100% renewable electricity target (see figure 2.3).4 Further material demand growth is expected from GreenPower and individual renewable energy commitments in the second half of the year. Total voluntary cancellations for the year are on track to be around 8 million compared to the 5.8 million cancelled last year, materially increasing demand additional to the legislated target of 33 million LGCs.
Over the longer term, demand from Climate Active and
Corporate Emissions Reduction Transparency (CERT) report participants will add to growing LGC demand and renewable investment.
The LGC market is now operating to intermediate demand for renewable generation into a stronger build signal for renewables investment. Demand for renewables investment is also expected to arise from the strengthened Safeguard Mechanism as facilities fuel switch to electricity (to reduce scope 1 emissions) and are likely to purchase renewable electricity to reduce scope 2 emissions.
On 7 July 2022, the Clean Energy Regulator published the first
Corporate Emissions Reduction Transparency (CERT) report. The report provides a snapshot of the progress being made by some of the biggest companies in Australia towards their climate ambitions under a standardised framework. The report provides a new way for eligible companies to present their climate-related commitments, progress and net emissions position all in one place. In this first year, the 2022 CERT report is operating as a pilot with 23 companies from across energy, manufacturing, mining, retail, financial, construction and education sectors participating. These companies represent 23% of Australia's scope 1 emissions for 2020-21.
The 2022 CERT report shows that 90% of participating companies have committed to reaching net zero emissions or 100% renewable electricity consumption, and many have a target year of 2030 for their commitments.
CERT participants cancelled 545,000 Australian units and certificates, consisting of 363,000 LGCs and 182,000 ACCUs for FY21 or CY21, a combined 48% of cancelled volume. International units were cancelled in slightly higher volume at almost 600,000 units in total, led by 499,000 Verified Carbon Units (VCUs), while 99,000 Verified Emissions Reductions units made up the remainder (see Figure 2.4). Not all CERT participants cancelled offsets or renewable energy certificates, and none of the companies cancelled Certified Emissions Reduction units (CERs) to offset their emissions.
As demand for climate-related information grows, the Clean Energy Regulator believes the CERT report will serve an important role over the coming years, driving increased demand for LGCs and ACCUs. Following the successful pilot, opt-ins for the first full CERT report will open later this year. Details will be available on the Clean Energy Regulator's website.
Redeeming shortfall is another factor that influences LGC prices. At the end of Q2, 3.2 million LGCs have been cancelled to redeem $208 million in shortfall charge during 2022. Another $950 million of shortfall charge remain in consolidated revenue (equivalent to 14.7 million LGCs) that can be redeemed to recoup shortfall charges. The market is effectively using shortfall and redemption as a liquidity mechanism. Figure 2.4 shows volume of LGCs required to be surrendered during 2023, 2024 and 2025 without forfeiting the right to redeem associated prior shortfall charges. However, some entities may choose to surrender LGCs earlier than required.
Given the commercial incentive to redeem the shortfall charge (which is well above the current spot price), LGCs are expected to be surrendered to redeem all outstanding shortfall charges.5 Current market conditions suggest the shortfall charge and redemption arrangements may continue to be exercised in future years.
1 AEMO: Quarterly Energy Dynamics Q2 2022 - July 2022.
2 Australian Energy Market Operator,
Quarterly Energy Dynamics Q2 2022 July 2022
3 Data sourced from
4 The ACT Government cancelled a similar number late in Q2 2021.
5 For further explanation, see 'Redeeming shortfall charge' section in
March Quarter 2021 report
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