HG Alert: Dual Markets for Renewable Energy Certificates - 3 Mar 2010

On 26 February 2010, the Rudd Government announced that it would divide the renewable energy certificates market into two separate markets - a small scale market and a large scale market.

This article provides a brief explanation of the Government’s rationale behind this decision, and an overview of the renewable energy certificates market.

Renewable energy targets

The Rudd Government’s carbon policy is based on four distinct elements:

  1. The Carbon Pollution Reduction Scheme;
  2. Carbon capture and storage;
  3. Action on energy efficiency; and
  4. Expansion of the Howard Government’s renewable energy target.

The fourth element, the renewable energy target, was created by the Howard Government through the Renewable Energy (Electricity) Act 2000 and the Renewable Energy (Electricity) (Charge) Act 2000. The Howard Government also created the Office of the Renewable Energy Regulatory, which oversees the administration of this legislation, the registration of renewable energy certificates, and the associated certificate market.

The legislation was introduced to ensure that two percent of all electricity in Australia would be sourced from renewable energy by the year 2010, equivalent to approximately 9,500 GWh. The Rudd Government’s expansion of the renewable energy target will ensure that 20 percent of all of Australia’s electricity produced by the year 2020 will be sourced from renewable energy producers, equivalent to 45,000 GWh.

The scheme works by creating renewable certificates, which are traded and surrendered annually. Essentially, for each megawatt hour (MWh) of renewable energy produced, a certificate is created. Wholesale purchasers of electricity must ensure that by February of each year, they hold or have surrendered a certain number of certificates to comply with the renewable energy target for their liability for the previous calendar year. Failure to do so will result in a levy being charged.

The number of certificates to be surrendered can be worked out using the renewable power percentage, which is calculated as a rate of liability for the number of MWh of electricity purchased in the previous year. For example, the 2009 renewable power percentage is 3.64 percent, so if a liable party purchased 100,000 MWh of electricity in 2009, then 3,640 certificates must be surrendered or a charge of $65 per MWh will be payable.

As a result, the renewable energy certificates market encourages investment in new technologies such as wind farms, commercial solar power, hydroelectricity and geothermal electricity production. These producers can not only make money from selling the electricity, but also from producing and selling renewable energy certificates to liable wholesale purchasers of electricity, who would normally purchase electricity from non-renewable sources such as coal fired power stations.

The division of the renewable electricity market

Investment in renewable electricity projects appeared to stall as the renewable energy certificates market was flooded with thousands of certificates from small suburban solar hot water and roof top solar panel installations, which had been subsidised by governments across Australia.

As with any supply and demand situation, the effect of this was that the price for certificates fell closer to $30 than the expected $50 per certificate. Large scale renewable energy projects became uneconomic, and therefore stalled.

The Government has announced that the division of the renewable energy certificates market will take effect on 1 January 2011. This division will provide for a small scale certificate market for suburban solar panels and suburban hot water, with a guaranteed small certificate of $40 per MWh. A separate large scale certificates market will be created for large scale renewable energy projects such as wind farms, commercial solar, geothermal and landfill gas.

The announcement has been well received. For example, AGL Energy said in the Weekend Australian Financial Review (27/28 February) that the announcement probably “went far enough” to allow AGL to continue with its $7 billion investment in planned wind farms.

It would seem that the Rudd Government’s announcement will be the kick start that Australia’s large scale renewable energy projects need to get back on track.

For more information on Australia’s renewable energy target or the renewable energy certificate market, please contact HopgoodGanim’s Climate Change team.