Current market observations

• The 6.4 gigawatts (GW) of new large-scale renewable energy capacity required to be accredited between 2017 and 2019 to meet the 2020 Large-scale Renewable Energy Target (LRET) was approved on 30 August.
• At the end of September 2019, the accredited capacity for 2019 so far was 7.3 GW.
• Since 2016, over 13 GW of new large-scale renewable energy projects are generating, under construction, committed or probable to be built.
• Recent additions to the pipeline have been driven by smaller market players and corporate power purchase agreements (PPAs).
• The large-scale generation certificate (LGC) balance may be tight this year depending on the amount of paid shortfall and the 10 per cent carry forward mechanism.
• We estimate that 35.3 million LGCs will be in the market by February 2020. This includes expected supply of 28.2 million LGCs and a 7.1 million LGC surplus.
• It is expected that around 4.7 million of these LGCs may be unavailable for surrender due to shortfall charge refunds and voluntary surrender.
• The Clean Energy Regulator’s position on shortfall remains unchanged; liable entities may defer liability through paid shortfall or carried forward shortfall of less than 10 per cent.
• LGCs surrendered for shortfall charge refunds are not subject to the vintage rule, this means that entities who intend to surrender LGCs for the refund in February 2020 can use LGCs created and validated in 2020¹.
• LGC spot prices were $44² on 17 October 2019.
• LGC forward prices for 2020 and 2021 are at $34.75 and $15.60 respectively.

Pipeline of projects

The 6.4 GW of new large-scale renewable energy capacity required to meet the 2020 target has been accredited. This capacity combined with the existing fleet of power stations accredited prior to 2017 is expected to generate more than the 33,000 gigawatt hours required to meet the target in 2020.

We are tracking a 13 GW capacity pipeline of new renewable energy projects, of this capacity:

• 7.3 GW is accredited
• 4.3 GW is fully financed and under construction, and
• 1.6 GW is subject to power purchase agreements.

We estimate that 4 GW of new capacity will be accredited in 2019, up from 3.5 GW last year.

Investment has continued in 2019, at a more moderate pace, with 1.3 GW of new large-scale capacity committed since the start of the year. Significant announcements, such as the Coles PPA³, suggests new investment may come from large Australian corporate entities and other activities additional to the LRET such projects from equity.

Our data shows that only 19 per cent of projects tracked on our pipeline (since 2016) have been underpinned by the three largest Australian electricity retailers⁴. Recent drivers of demand for large scale renewables from PPAs has come from new players, corporate entities and smaller retailers looking to expand their market share. International developers, using equity, are also likely to drive investment in renewables.

Whilst utility-scale investment has moderated, mid-scale solar under the LRET (100 kilowatts (kW) to five megawatts (MW)) continues to be an area of growth. Mid-scale solar is expected to increase to 200 MW this year, up from 113 MW last year. This is a strong area of growth as the economics of behind the meter solar remain strong.

Figure 1: 100kW to five MW power stations

Expected supply

Despite enough capacity having been accredited to ensure the LRET is achieved in 2020, material announcements towards this capacity did not begin until late 2016. This is one factor leading to tight supply for this year.

We estimate that approximately 28.2 million LGCs will be validated and available for surrender for the 2019 assessment year; this is slightly lower than the 31 million estimate in our February 2019 update. A surplus of 7.1 million LGCs remains from the 2018 assessment year. Hence, we estimate a total supply of around 35.3 million LGCs. However, approximately 4.7 million may be unavailable to the market owing to demand requirements additional to 2019 assessment year.

The Australian Energy Market Operator (AEMO) finalised amendments to marginal loss factors (MLFs) at the end of June 2019. These changes affected all accredited utility-scale power stations and resulted in reduced MLFs for the majority. We expect these changes to reduce the total LGC supply by 0.77 million in 2019 and 1 million in 2020. Delays in connection and construction across the pipeline have also slowed the supply of LGCs.

A high 2018 hydro generation year and current low dam levels means above baseline LGC creation from hydro power is expected to be lower than average for 2019.

Expected demand

Statutory LRET demand for 2019 is set at 32.1 million LGCs. We expect supply and demand to be tightly balanced for the 2019 assessment year depending on the amount of paid shortfall and the 10 per cent carry forward mechanism. Liable entities currently eligible for shortfall charge refunds will also increase demand for LGCs this year, this would see the surrender of an additional 2.6 million LGCs on or before 14 February 2020. Given the state of the market, we expect the total balance outcome in table one to be unlikely. With the level of supply tightness and forward LGC prices remaining relatively low we expect material shortfall, both paid and carried forward 10 per cent.

Certificate vintage requirements do not apply to LGCs surrendered for refund. This means that liable entities required to surrender LGCs on or before 14 February 2020 to meet their three year requirement may use LGCs created in 2020 and validated before their respective deadline. We encourage liable entities redeeming LGCs to consider utilising certificates created in 2020 to meet their obligations, this would increase supply of 2019 vintage certificates available for surrender.

Our position on carried forward paid shortfall remains unchanged from our update to industry in October 2018. Carried forward shortfall of less than 10 per cent also remains an option for liable entities to time shift demand into the next assessment year. If all liable entities utilised this option, it is expected there would be sufficient LGCs available in the market for all liable entities to meet their remaining surrender obligations⁵.

Demand for LGCs from voluntary and state sectors is expected to reduce available supply by 2.6 million LGCs for the 2019 assessment year. The ACT Government are expected to hold 2.1 million LGCs by the end of this year for their 100 per cent renewable target and an additional 0.5 million LGCs are expected to be surrendered to meet GreenPower obligations.

As LGC prices fall, additional voluntary demand is expected, and will provide long term support for LGC prices. LGCs are likely to reach price parity (carbon dioxide equivalent) with Australian carbon credit unit (ACCU) prices in early 2022.

See our October ACCU market update for further information.

Table 1: Expected supply and demand 2019 assessment year

Large-scale generation certificate prices

The LGC spot price dropped to $39 in February 2019 and to a low of $31 in mid-March before climbing during June and July to end at $48 on 30 September 2019. The increase in spot price is likely due to the tight supply and demand balance for the 2019 assessment year. This is also shown in the current Cal19 prices, which have increased from $36.85 in mid-March to $48.50 as at 30 September 2019.

Cal20 have increased from $26 in mid-August to $35.30 at the end of September. Cal21s and Cal22s have remained relatively stable throughout this period, finishing at $14.90 and $10.50 respectively.

Figure 2: LGC spot and forwards graph

More information

For more information on supply and demand dynamics in the Large-scale Renewable Energy Target, see previous large-scale generation certificate market updates or our Large-scale Renewable Energy Target market data.

Footnotes

¹ Entities should seeks guidance from the Clean Energy Regulator on their eligibility to surrender LGCs for refunds. Further information will be issued in the coming months regarding requirements for power stations seeking to create and obtain 2020 vintage LGCs for shortfall refund purposes.

² Data sourced from TFS Green.

³ Coles supermarket intends to purchase more than 70 per cent of the electricity generated by three proposed solar farms in regional New South Wales.

⁴ AGL, Energy Australia and Origin

⁵ The use of paid or carried forward shortfall is a commercial decision for the liable entity.