Late last week, Senator Nick Minchin raised concerns about the drop in value of RECs. First, what are they? Where do they come from and is he making this up?
RECs — Renewable Energy Credits
Literally, an REC is a Renewable Energy Certificate. They are a financial mechanism created to allow the trade of units of renewable electricity. Each REC represents one mega-watt hour (MWh) of electricity generated from a renewable source. It’s worth noting here the difference between capacity and generation. Capacity is generally the amount of electricity any given source can generate instantaneously and is presented in kilowatts (kW), MW and even up to gigawatts. A watt hour (or kWh, MWh, GWh) on the other hand, is most often a historical measure, a record of how much a generator actually produced. Think of a Formula One engine, going flat out. Hooked up to a generator, these will produce roughly 1000 kW (1 MW) instantaneously; do that for a whole hour and you’ve got 1 MWh. So each REC represents the generation of 1 MW for a whole hour.
Why do they exist at all?
Thanks to the government’s Mandatory Renewable Energy Target (MRET) energy retailers have to purchase a pre-determined amount of electricity from renewable sources. This amount is governed by a pretty simple straight line increase from somewhere about 10% at the moment, to 20% in 2020.
Because the electricity network and associated market are so obscenely complex, the accounting of renewable energy percentages is not done in real time. Rather, they are calculated after the fact as an accounting exercise. Say the MRET for a particular year is 10% and the retailer supplies 100MWh of electricity during that period. To meet their MRET obligations they will need to “retire” 10 RECs.
How are the certificates created?
You might have heard about Spot Prices and market fluctuations in the electricity market. RECs, their creation and value are entirely separate to this process. As a renewable energy generator chugs along, the asset owner effectively has two separate income streams. The first is the value of the actual electricity produced, which varies over time, but is usually pre-determined in bulk-buy contracts with retailers. The second is the value of the RECs that are produced. Their value wobbles up and down following the normal laws of supply and demand.
So, what is Minchin talking about?
The value of RECs has varied from a low of near $10 to a high of about $55 to something closer to $33 now. This is a little out of date now, but shows the historic context.
Without speculating too much on the precise reasons for the recent drop in price, several factors could have applied pressure on the supply and demand sides of the equation.
First, and the point that Minchin is referring to, is the change in policy surrounding domestic solar rebates. Until June 2009, the government was offering up to $8000 per installation for domestic photovoltaic installations. In July the rebate disappeared and was replaced with the Solar Credits scheme, which currently provides five times as many RECs for household generators. This tails off in future years. This scheme has some advantage in terms of value-for-money to government, in that tying the incentive to the ability of the system to actually generate means there will be a better geographic spread of generators. Under the old scheme, installations in Cairns qualified for the same rebate as an installation in Hobart. Under the new scheme, more sun means more money. There is little change for the customer though, as many installation companies offer an estimate of your future RECs and will deduct that from you installation price.
Also increasing supply of RECs were changes to laws regarding eligible generation sources. Avoided electricity use by solar hot water and heat-pump systems now qualify for solar credits. Further, amendments were made to the MRET bill to allow coal-seam methane to qualify for RECs. I’ve got strong personal opinions about this, but I’ll spare you from them. In any case, broadening the rules to allow more supply was always going to affect the market.
On the demand side, it is also possible that the non-passage of the ETS/CPRS affected investor confidence and therefore REC demand.
Is this a disaster for planned projects?
Any engineer worth their salt would definitely have included volatility in RECs in their forward revenue estimates. Further, projects I’ve done maths on usually worked off a REC price of about $30 anyway. But, there’s no doubt that a weak REC market will be making some optimistic project engineers sweat in their brown pants and short-sleeved shirts.
What should be done about it then?
Probably nothing. It is a market after all, with all the associated rough and tumble. A better way to provide certainty would be a commitment to put a price on carbon. But, I’ve been holding my breath for a while now waiting for this and I’m starting to get a bit dizzy.