Enviro markets update: LGCs

Large-scale Generation Certificates (LGCs)

Activity in the Large-scale Renewable Energy Target market has been incredibly restrained in recent weeks, with many participants exercising patience in the lead up to the release of the controversial RET Review Issues Paper. The recent announcement of the decision to remove the price floor and establish a European link to Australia's emissions trading scheme also failed to provoke any substantive action in the market

The RET Review presents a particular set of challenges for the large-scale renewables market because of the long-term time horizon that investors must accept in order for projects to go ahead. Given the history of regulatory change that has occurred over the last five years in particular, having confidence in the long term appearance of the LRET is no easy thing.

The RET Review Issues Paper raises a range of important questions, included among them the potential of a reintegration of the small and large-scale schemes, as well as the headline grabbing issue of a fixed versus percentage based target.

Among a variety of other matters including the appropriateness of the existing size of the target, whether it should be increased post 2020 and whether the introduction of technology banding to encourage greater diversity of renewable generation is warranted, responses are also sought on the issue of the ongoing legislative requirement for a biannual review. While there may be some who see the benefits of a frequent repetition of the review, the CCA appears genuinely aware of the risks which arise from the uncertainty it would create.

Also of considerable significance to the large-scale market was the decision last week to remove the carbon price floor from the floating period of the Carbon Pricing Mechanism, whilst simultaneous establishing a link to the European Union Allowance market.

The announcement naturally led many forward looking individuals to examine the likely impact on the LGC market. In the medium term, the spot LGC price should approximate the difference between the cost of fossil fuel generation and the cost of the marginal form of renewable energy generation. The presence of a carbon price increases the cost of generating electricity via fossil fuels and hence pushes up the wholesale price of electricity.

For renewable generators, the higher wholesale price of electricity is a benefit because of the fact they receive a higher price for the power they export, without incurring any additional liability (because they do not emit). The increase in the value of the electricity produced subsequently reduces the subsidy required from the LGC price. Hence any change which reduces the price of carbon (which in turn decreases the wholesale price of electricity) should push LGC prices higher.

While this logic can be clearly mapped out on paper, it is almost completely obscured by the considerable regulatory uncertainty which surrounds both the LGC and carbon markets. The RET Review (and the prospects for change that is explores) as well as Tony Abbott's commitment to repeal the carbon price being the major culprits.

Hence, while last week's announcement will certainly be viewed as no bad thing as far as renewable energy developers are concerned the fact that it didn't result in an instant rally in the LGC market is hardly surprising.

As mentioned earlier, both of these major developments failed to prompt any significant response to the spot LGC market. After an extended quiet period the market eventually traded lower to sit around the $36.00 mark.

Marco Stella is a Senior Broker, Environmental Markets and editor of The Green Room at Nextgen, a wholesale energy and environmental brokerage firm. www.nges.com.au The content above is sourced from excerpts taken from The Green Room.