Large-scale generation certificate market update - February 2019

Current market observations

7.1 million large-scale generation certificates (LGCs) remained in the market after the 14 February surrender.
On time surrender of LGCs was 86.1 percent.
LGC spot prices fell from above $71.90 at the date of our last market update on 4 October 2018 to $39 on 14 February 2019.
- LGC forward prices for 2020 and 2021 have also fallen and are at $23.60 and $14.75 respectively
As at 14 February 2019, there was a total shift of demand (deferral of liability) equivalent to 7.5 million LGCs. Of this:
- 3.4 million LGCs relate to carried forward paid shortfall for the 2018 assessment year (equivalent to $220 million)
- 0.5 million LGCs relate to carried forward shortfall of less than 10 per cent (unpaid) for the 2018 assessment year, and
- 3.7 million LGCs relate to carried forward paid shortfall for previous years (equivalent to $238 million).
Total consolidated revenue for paid shortfall is $458 million. These funds can be redeemed within 3 years. Given forward LGC prices, we expect all shortfall to be redeemed in future years.
Using the current spot price for LGCs and the Australian Energy Market Commission’s (AEMC) methodology on household pass-through costs, costs to electricity users should fall from an expected $44 to $33 in 2019.
We now have 11,805 MW of renewable energy projects that are generating, under construction or committed to be built; almost double the 6400 MW needed to meet the 2020 target.
- A record 3455 MW was accredited and commenced generation in 2018
LGC supply for 2019 should be approximately equal to statutory surrender requirements for the first time since 2015.

Surrender for 2018

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.

Number of entities reporting shortfall	Liable entities that reported	Shortfall (millions of LGCs)	LGCs acquitted (millions of LGCs)	LGC liability (millions of LGCs)
No shortfall	93	0	17.3^*	17.4
<10 per cent	7	0.5	5.4	5.9
≥10 per cent	17	3.4	1.5	4.8
All entities	117	3.9	24.3	28.2

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.

Large-scale generation certificate price fall

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.

LGC prices from January 2017 to February 2019. — *Source TFS Green*

Deferral of liability

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.

Pipeline of projects and accreditation

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:

4767 MW is accredited
5506 MW is fully financed and under construction
1532 MW is subject to power purchase agreements

Last year a record 3455 MW was accredited. We estimate that over 4000 MW of capacity will be accredited in 2019.

Expectations in future years

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.

Impact on household electricity prices

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.

References

Please see the renewable power percentage on our website for legislated demand.
Shortfall and shortfall charge information is available on our website
Please see the renewable power percentage on our website for legislated demand, and setting the RPP. The 2019 RPP will be set by 31 March 2019 as such this number may change.
This assumes long term average wind and hydro generation conditions.
As costs associated with the Renewable Energy Target imposed on electricity retailers are not a levy, it is not possible to be definitive about how much of these costs will pass through to consumers.