Large-scale Generation Certificate (LGCs)
The new financial year continued to cast off the concerns that negatively impacted the LGC market across the first half of the year, with the forward curve recovering despite project commitments continuing.
While the Prime Minister has thus far failed to convince his side of the need to adopt the major recommendation from the Finkel Review, hope remains that he will. Meanwhile, state governments in South Australia and Victoria continue their push for a more ambitious transition toward renewable energy.
Across the first half of 2017 a sneaking suspicion that the seemingly impossible may be achievable took hold. Spot and forward LGC prices, despite some volatility along the way, began losing ground.
In recent months however, the belief that there would be sufficient project commitments to prevent a short fall scenario in Cal 18 and Cal 19 has receded with a steady recovery continuing in the LGC market.
In a somewhat less liquid setting the spot LGC market began July by softening back into the $78s, before the market switched tack and began a gradual recovery that would last several months and see the spot surpass the $85 mark in late August for the first time since March.
During this time the forward market (particularly Calendar years 18 and 19) was both liquid and ascending with steady price increases ultimately seeing the Cal 18s edge above $88.00 and the Cal 19s into the low $79s by late August.
Yet this recovery happened against a backdrop of ongoing project commitments and further developments at state government level (see below).
The key issue at moment remains the commissioning dates for the new generation. To date it appears the market has returned to the belief that there will not be a material impact on Cal 19 (or before). Instead, it is the Cal 20 vintage where the concerns lie.
Sporadic activity in the Cal 20 vintage continues to a show a lack of buying interest out that far, reflecting concerns amongst buyers that the target will be met by that point and the period of inflated prices at an end.
During August, trades at $48, $47 and $46 took place in the over the counter market, though volumes remained very modest. The passage of time will reveal whether the steady flow of project commitments continue, delivering sufficient LGCs for the Cal 20 obligation or whether instead they will dry up, thus extending the period of high prices.
With what could be diplomatically described as policy hesitation at the federal level on the issue of climate change and renewable energy, numerous state governments continue to pursue their own agendas, much akin to what has taken place in the US.
A significant development in August was the Victorian Government’s release of its finalised renewable energy targets (25% by 2020 and 40% by 2025, to be legislated rather than just remain a policy ambition) with the first of its auctions coming in October. Such an initiative will both bring forward project commitments and encourage investment specifically in Victoria.
The continued push toward the transition to renewable energy has highlighted the need for measures to smooth generation, which is where storages become important. In this area, South Australia has found itself at the coal face (yes, ironically), with a number of significant events including the announcement of the winner of the tender for the largest battery in the world and Australia’s first solar thermal project (also the largest of its kind), for Port Augusta.
Both of these developments were important next steps toward the roll out of ever larger proportions or renewable energy in Australia with the solar thermal project particularly exciting.
Interestingly, the federal government did play a role in that one, with the promise of a $110m concessional equity injection from the Turnbull Government the result of a deal with Senator Nick Xenophon.
With supply figures strong, the new financial year and the passage of Q2 compliance seemed destined to produce some major changes in the STC market. In the end what resulted were sharp declines in spot and forward pricing on the back of frenetic, often volatile trading days fuelled by no winter relief in the rate of PV installation.
In the face of surging wholesale electricity prices and reducing technology costs, the case for rooftop solar has not been stronger since the days of premium feed in tariffs. PV installs and the STC submission numbers they underpin have been strong all year and with no sign of a let up in sight, the spot STC price had already begun to soften in late June in anticipation of a hefty surplus materialising for Q2 compliance (28 July).
The new financial year began on a positive note, with the spot STC market strengthening briefly in early July from the low to the high $37s before the reality of the size of the looming STC surplus eventually took its toll. Despite the strong submission figures, Q1 saw a shortage of STCs and ultimately resulted in the Clearing House being used. For Q2 however this was not to be the case with surplus of circa 1.5m STCs left over after surrender.
Across July, in the lead up to Q2 surrender (28th), the STC market came off sharply with the spot falling through the mid $30s on its way to a low of $28.50. The forward market during this period was particularly busy with strips for settlement across the remainder of the year and even into the first 6 months of 2018 agreed in very large volumes as creators sought to hedge themselves against the risk of further losses.
The month was characterised by frequent periods of frantic trading activity, evoking memories of the STC market in 2011/2012, only without the underpinning of premium feed-in tariffs and the solar credit multiplier.
The outlook for the STC market is mixed at present. On the one hand weekly STC submissions across July and August averaged 430k per week, adding 180k STCs to the surplus each week and setting the scene for even larger surpluses in Q3 and Q4 than previously expected.
With the coming of spring and the sales from increases in electricity prices in some states from July still to come, there are concerns that the rate of installations may even increase. And then comes the effects of the ‘get in before the deeming period is reduced on 31 Dec17’ sales pitch.
Against this is balanced a first in recent times; an increase in panel prices as the glut of global photovoltaic production is eliminated, with demand in China skyrocketing on the back of some eye watering installation figures in recent months.
There is also the hope amongst creators that the target for 2018 will be set dramatically higher and that what currently appears set to be a surplus of more than 7m STCs by year’s end will be added to the 2018 target and thus absorbed across next year. Which side of the scales proves correct, it appears likely there will be some eventful days ahead in the small-scale market’s immediate future.
Marco Stella is Senior Broker, Environmental Markets at TFS Green Australia. The TFS Green Australia team provides project and transactional environmental market brokerage and data services across all domestic and international renewable energy, energy efficiency and carbon markets.