REC Markets: Talk of further regulatory change stalks renewable markets

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The silence on the project commitment front was loud enough to induce a familiar tinnitus: speculation of further regulatory change.

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Modest improvements in price combined with a trend towards fewer, larger volume deals characterised the month of April in Australia’s LGC market. Meanwhile the silence on the project commitment front was loud enough to induce a familiar tinnitus: speculation of further regulatory change. 

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Large-scale Generation Certificate (LGCs)

Following a mixed start to the year, the spot LGC market ticked higher across April. Beginning in the low $78s, the market moved progressively higher as the weeks passed, culminating in a high of $80.45 late last week and ultimately ending the month at $80.10.

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Overall trade volumes in the spot were solid, though in part this was owing to a number of larger volume transactions in the 40-50k range, rather than to a particularly active period in the smaller volumes.

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The forward LGC market continues to trade actively across Cal 16 and Cal 17, with an escalation above the spot market of in the region of 2.5-3% generally prevailing. For Cal 18, the escalation has been more volatile, with the margin being squeezed as the spot price climbs, thus taking the forward vintage level closer to the scheme’s penalty and reducing the appeal for buyers.

On the regulatory front, April was important for two major developments. The first was the release of the federal opposition’s climate policy which reconfirmed its commitment to increasing the share of renewable energy in the nation’s total output to 50% by 2030. While light on detail, it appears Labor are intent on looking to measures outside the renewable energy target (RET) to achieve this, an approach that appears to reflect concerns surrounding the ongoing failure to see projects committed in the face of a target that grows substantially out to 2020.

Recent days have also seen speculation grow that the Coalition may be forced to consider some further changes to the RET in order to ensure that financiers and liable parties are willing to take the plunge by underwriting the 4000+MW of projects that are needed almost immediately to avoid an impending shortfall in 2018 or before.

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One such approach that was most recently raised by the Clean Energy Council is to both extend the RET’s peak, out from 2020 to 2025 or 2030, whilst also pushing out its end date from 2030 to 2035. The justification behind such a change being that financiers currently require 10-15 year power purchase agreements to be in place in order to fund projects. Yet a project committed today would likely enjoy (at best) 3 years in which the target is increasing and then only 10 more with it remaining flat.

As yet speculation of regulatory change has had little impact on the spot market which, at $80 remains very close to the scheme’s theoretical ceiling price (the tax effective penalty rate) of $92.85.

In part this has been because there appeared little interest within the Coalition to revive the RET as an election issue and because, to-date, no one is talking about reducing the target in the short term (say, in Cal 17) meaning there is no evidence that further changes will impact on demand within the immediate shortfall window. Precisely whether or not that will remain the case should members of the Turnbull Government start openly discussing the prospect of a reduction in the target in the short term in exchange for an increase over the longer term is an entirely different matter.

Small-scale Technology Certificates (STCs)
Small-scale Technology Certificates (STCs)

In the nation’s small-scale renewable market the highlight across April was a series of larger volume forward transactions for settlement across 2017. There continued to be little movement in the spot price which remains closely anchored to the $40 Clearing House price.

The spot STC market traded sporadically across April at the $39.90 level, with the Clearing House (CH) remaining in deficit across much of the month.

Of particular note however, was a series of transactions taking place Q2, Q3 and Q4 of 2017 at $39.00. Whilst essentially $1 below the CH price at a time when STC surpluses and hence price deviation appear non-existent, the price reflects the fact that the market is capped at $40 and that all the risk that exists is to the downside.

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.

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