I have just read Evan Beavers attempt at explaining Renewable Energy Certificates (REC’s) in yesterday’s Crikey Clarifier. Despite Evans best efforts I don’t think he fully understands the issues currently faced by the renewable energy industry. Therefore, I thought it might be useful to provide a perspective from someone who is deeply involved in the industry as a developer and investor in utility scale renewable energy projects.
Prices in the renewable energy market will always fluctuate due to a whole range of reasons including the dynamics of supply and demand, input costs, purchasing strategies of buyers and cost of capital. These are all normal risks that participants need to deal with. The rollercoaster ride that has typified the price of REC’s, however, has more to do with the manipulation of the scheme by state and federal governments as they attempt to manufacture outcomes for certain technologies and in some cases, industry participants finding loopholes in the regulations allowing them to make windfall profits. Happily the latter issue has recently been resolved but the former issue, in all its manifestations, will continue to dog the industry until it is rectified.
The new Solar Credits sections of the renewable energy legislation is a perfect example. Up until recently 1 megawatt hour of renewable energy produced by an accredited generator created 1 REC. This 1 for 1 relationship between energy produced and REC’s is fundamental to the efficient operation of the market. This relationship ensures genuine greenhouse abatement is achieved at all times and the renewable energy target, which calls for an additional 45,000 gigawatt hours of renewable energy to be produced by 2020, is achieved.
With the introduction of the Solar Credits multiplier, 1 megawatt hour of energy produced by a household solar system now earns 5 REC’s, therefore creating 4 “phantom” REC’s that are not associated with clean energy production. While this was intended to solve a problem for government by allowing them to scrap the very popular and increasingly expensive cash rebate system (which is what Senator Minchin was talking about) it has inadvertently created a number of new problems. Significant and unexpected supply of REC’s from this type of system, which is contributing to the depressed REC price, is one such problem, however, the undermining of their own legislation is possibly the most significant for government.
How is the legislation being undermined? Liable parties under the legislation (energy retailers) are required to submit sufficient quantities of REC’s every year to satisfy their compliance liability while the legislation clearly requires an additional 45,000 gigawatt hours of energy to be produced by 2020. This is all well and good if the 1 for 1 relationship between REC’s and energy is maintained but the Solar Credit multiplier will result in more REC’s being created than energy produced. The upshot of this situation is the legislated target for energy will not be met despite full REC compliance by liable parties. Depending on the uptake of domestic solar technologies under the scheme we could miss the legislated 2020 energy target by some distance.
Other interventions in the market include the $1,600 cash rebate for solar hot water, that when accompanied by their eligibility to create REC’s under the scheme has seen this technology dominate the supply of REC’s for the last 12-18 months. This alone has made a significant contribution to the oversupply of REC’s which is depressing the price of certificates. Now, even if we set aside the fact that solar hot water units do not create energy but avoid energy consumption (this might be a discussion for another day), if this market dominance came about due to significant cost reductions in solar hot water and or vast improvements in efficiency then so be it. When dominance is brought about by governments intervening in the market, however, even if their intentions were good, then we do not have a market that will deliver least cost renewable energy or a market that provides all technologies with a fighting chance. This is by no means a complete list of the overlapping policies, some federal some state, that will continue to have a profound influence over the renewable energy market for years to come if not rectified.
Now I hope this is not interpreted this as an attack on solar hot water or domestic solar technologies. Both have an important role to play in the transformation of how we produce and consume energy. Our concerns are not with the technologies but the method by which governments are seeking to deploy them.
Importantly, with the price of REC’s well below what most would consider to be investment grade we will not see new investment in utility scale renewable energy for a number of years. I am not sure what financial model Evan is working from or what debt financier he is speaking to where a $30 REC price is sufficient to secure project financing but I would like to learn his secret. A REC price of $50 plus is required for wind and something further north of that required by technologies that are still moving their way down the cost curve. So, the current situation is not only a disaster for billions of dollars worth of planned utility scale renewable energy like wind farms, but for a whole suite of exciting new technologies like geothermal, large scale solar and wave power.
Unlike Evan, we do not think the market will “self correct”, at least not in the next 3-4 years. If the government is genuine about encouraging significant investment in utility scale renewable energy they need to work with those who will be making the investment to ensure the right market conditions are created. We do not expect the government to remove commercial or market risk but I don’t think it’s unreasonable to expect that they won’t add risk and complexity when designing such policies.