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23.3 million LGCs were created in 2018 and 31.4 million certificates were available by the surrender deadline of 14 February 2019.
Liable entities acquitted 24.3 million LGCs for the 2018 assessment year against a total liability of 28.2 million LGCs1. This left a shortfall of 3.9 million LGCs or 13.9 per cent of total liability.
Note: Totals may not sum due to rounding.
*The LGCs acquitted for 2018 does not equal the total 2018 LGC liability because liable entities have used carried forward surplus to acquit their 2018 LGC liability.
Following surrender, 7.1 million LGCs remained in the market compared to a 9.4 million surplus at the same time last year. This surplus is above the 5 million LGCs we estimated in our October market update.
LGC spot prices consistently remained above $80 from July 2016 to June 2018. As the pipeline of renewable energy projects continued to grow above what was required to meet the 2020 target LGC spot prices halved from June 2018 to December 2018 and reduced even further to $34.50 in early 2019 before rebounding slightly to $39 at the shortfall deadline. The fall in LGC spot prices also affected future contracts with Cal20 and Cal21 also falling.
Liable entities may surrender LGCs 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 LGC not surrendered2.
In October 2018, we released an updated position on shortfall. This position stated that as the 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 LGCs in a subsequent year.
For 2018, $220 million is now in consolidated revenue due to 3.4 million LGCs in paid shortfall. These funds can be redeemed within 3 years when LGCs are surrendered to acquit this shortfall. There was an additional 0.5 million certificates for carried forward shortfall of less than 10 per cent.
The use of shortfall by liable entities has shifted demand into future years and likely smoothed and brought forward a fall in LGC prices due to investment exceeding generation levels needed to meet the Renewable Energy Target.
We estimate that the 6400 MW required to meet the 2020 target is likely to be accredited in the second half of 2019. The pace of investment in new large-scale renewable energy project announcements has continued at a consistent rate since the last quarter of 2016. 11,805 MW of new large-scale capacity has been firmly announced since 1 January 2016. This is 1,739 MW more than our market update in October. Of this new capacity:
Last year a record 3455 MW was accredited. We estimate that over 4000 MW of capacity will be accredited in 2019.
The legislated demand for 2019 is set at 31.2 million LGCs3, an increase of 2.5 million LGCs from 2018. Generation from accredited large-scale renewable energy power stations and our pipeline of projects is expected to increase to over 31 million MW hours and to approximate demand in 2019.4
As long as short term prices remain higher than longer term prices, deferral of liability through shortfall may continue. This effect should see short and long term prices converge as demand is shifted into future years. Entities may begin applying for shortfall refunds in 2019, which would see the surrender of additional LGCs.
We expect there is adequate incentive for liable entities to redeem shortfall as forward LGC prices continue to fall, however it is possible that due to lower forward prices liable entities may redeem as late as possible. In 2020 the supply from large-scale renewable energy projects is expected to exceed legislated demand.
As LGC prices fall, the impact of the Large-scale Renewable Energy Target (LRET) on household electricity prices will also decrease. The AEMC estimates the pass through cost of the LRET in 2019 to be $44 based on LGC spot prices from August 2018. Using current spot prices, the pass through costs decrease to $33. This reduction is expected to offset the increased cost to consumers from the Small-scale Renewable Energy Scheme5.
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