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2. Large-scale generation certificates (LGCs)

Key messages

  • 1.3 GW reaches FID in Q1 2022
    • Total FID capacity for the last three quarters is 3.4 GW
  • Voluntary cancellations are a record for Q1 of 1.2 million LGCs
  • LGC supply and demand balance continues to look tight

Renewable investment trending up

Q1 2022 was the third consecutive quarter with more than 1 GW of proposed wind and solar power stations reaching a FID. Given the strong start with 1.3 GW achieving a FID, and the probable projects being tracked by the Clean Energy Regulator, capacity reaching FID in the 2022 calendar year may exceed 3 GW. If that eventuates, it will be the third consecutive year where FID capacity has increased year-on-year.

The Clean Energy Regulator has always suggested caution in comparing quarterly data as these commercial decisions can be 'lumpy'. However, the Clean Energy Regulator notes substantial momentum in announcements and believes a year-on-year increase in large scale investment is possible given strong investment signals.

Figure 2.1 below shows the capacity reaching FID broadly follows a similar trend to that for combined electricity and LGC price signal. These 2 prices are once again suggesting a strong investment signal for low-cost renewable energy, for example wind and large-scale solar. The trends in Figure 2.1 suggests the Clean Energy Regulator's estimate of 3 GW capacity reaching FID in this calendar year may be conservative.

This graph suggests large-scale renewables industry investment has previously, and is currently, responding to changing price signals:

  • Wholesale electricity prices have been increasing, particularly in NSW and QLD, owing to a number of factors including high electricity demand, generator outages and network constraints.11 Also, more recently owing to increasing coal and gas prices as a result of the war on Ukraine.
  • Forward wholesale electricity prices have been trending up, possibly responding to several announcements of coal power plant closures being brought forward.
  • LGC spot prices continue to be much higher than forward markets had predicted (refer to Figure 2.2) primarily because of large year on year growth in voluntary cancellations and ongoing redemption of shortfall charge.

The spot LGC price finished Q1 at $48.00 per certificate or megawatt hour (MWh). In the context of the cost of new build for wind and solar, this is still a material incentive in addition to wholesale electricity prices. The RET still has more than 8.5 years until the scheme finishes at the end of 2030. However, the proposed Guarantee of Origin scheme for hydrogen and renewable energy may, if legislated, provide a Guarantee of Origin certificate for renewable energy beyond LGCs.

Downside risks to investment in large-scale renewables continues to be current grid constraints in the short term and the ability to deliver grid upgrades as per the Australian Energy Market Operator's Integrated System Plan in the medium term. On the positive side, the Qld-NSW interconnector upgrade project is nearing completion and a Vic-NSW interconnector upgrade is scheduled to be completed by the end of the year. Construction also is soon to commence on Project EnergyConnect, a 900 km electricity interconnector between SA and NSW which is expected to connect a number of proposed renewable energy zones in both states.

Voluntary LGC demand continues to grow

The Clean Energy Regulator estimates generation eligible for LGCs in 2022 will be approximately 44,000 GWh - substantially higher than the annual target of 33,000 GWh. Despite this, the LGC price remains at levels similar to those seen prior to the RET target being met.

In simple terms, LGC prices are being sustained by increasing voluntary demand. Voluntary cancellation of LGCs to prove use of renewable electricity is ramping up materially. This is increasingly adding to the legislated target. For example, 5.8 million LGCs were voluntarily cancelled in 2021, effectively adding 5,800 GWh to the 33,000 GWh statutory target.

There is no limit on voluntary cancellations and programs such as GreenPower, Climate Active and the ACT government’s own legislation recognise the cancellation of LGCs to prove use of renewable electricity. The Corporate Emissions Reduction Transparency report will also recognise voluntary cancellations and should be a material source of LGC demand over the coming years.

Q1 typically sees the smallest volume of voluntary LGC cancellations (refer to Figure 2.3). The 1.2 million LGCs cancelled in Q1 2022 is almost 4 times the previous Q1 record from 2021.

While this level of growth may not be sustained throughout this calendar year, demand from GreenPower and individual renewable energy commitments is expected to see significant growth this year. This will likely see voluntary cancellations in 2022 materially surpass the 5.8 million cancelled in 2021. The Clean Energy Regulator estimates a minimum of 8 million LGCs will be voluntarily cancelled in 2022, however it could be much higher. The level of voluntary demand growth will be an important watch point for the rest of this year.

The other factor at play in the LGC price is ongoing shortfall charge taken and expected shortfall charge redemption (see table 2.1). There are still shortfall charges in consolidated revenue, equivalent to a total of 16 million LGCs, that can be redeemed over coming years. This includes 5.4 million LGCs which are required to be surrendered in 2022, or the right to redeem associated shortfall charge will be forfeited. Given the commercial incentive to redeem the $65 shortfall charge paid (which is well above the current spot price), LGCs are expected to be surrendered to redeem the shortfall charge.

Table 2.1 shows the LGC balance if no shortfall is taken for the 2022 assessment year based on an estimated new supply of 44 million LGCs.

Table 2.1: Estimated LGC supply and demand balance in the 2022 assessment year
SupplyDemand
LGCs available from previous assessment years+7.8 million-
2022 LGC supply (available for 2022 surrender)+44 million-
Legislated demand for 2022--32.6 million
Estimated shortfall charge refunds for 2022--5.4 million
Voluntary cancellations--8 million (minimum)
Estimated total balance for 2022 assessment year 5.8 million (maximum)

On the supply side, it was a strong Q1 with 10.2 million LGCs generated, an increase of 10.6% on Q1 2021. The growth in LGC supply is supported by the continued addition of new renewable power stations into the grid. In Q1 2022, 34 power stations with a combined capacity of 293 MW were approved. Total capacity approved for LGC generation in 2022 is expected to be approximately 2.5 GW, on par with 2021.

Considering all these factors, the supply/demand balance for LGCs may remain tight over the next several years, potentially with some shortfall charge being used as a liquidity mechanism. Private demand will continue to ramp up and support prices to remain higher than previous expectations by the market. This provides an ongoing build signal for industry to bring on supply.


Footnotes

11Wholesale Markets Quarterly Q4 2021, Australian Energy Regulator


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