Large-scale Generation Certificates (LGCs)
For the nation’s large-scale renewable market the last fortnight brought a number of key developments of (hopefully) medium to long-term significance. Principally they related to the Clean Energy Futures package. Yet included among the highlights was also the resurgence in the spot LGC price and a minor Coalition backbench rebellion, which may have had far reaching implications for the scheme’s future.
With the prospects of an expanded RET and the introduction of a carbon price – both front and centre policies of the victorious Rudd government – it appeared there was nothing but blue sky ahead for developers of large-scale renewable energy projects. The reality in fact was quite different, as a surplus of Renewable Energy Certificates (or RECs, created before the renewable scheme was split into large and small-scale offshoots) and a change of political plight on the issue of pricing carbon meant realising the conditions required to get a large-scale renewable energy project off the ground became an almost impossible task.
Project developers will look to the significance of recent days with great optimism arising from the confluence of three substantial policy initiatives. The introduction of the carbon price will elevate wholesale electricity prices, a boon for greenhouse gas emissions-free technologies by virtue of the fact that it increases the value of one of their two outputs. The last week has also seen the passage through the Senate of the Clean Energy Finance Corporation, whose aim it is to bridge the funding gap that currently exists in the private sector.
In addition, July 1 also saw the commencement of the funding conglomerate that is the Australian Renewable Energy Agency (ARENA), which in its centralised form should hopefully assist developers in negotiating the substantial bureaucratic journey involved in obtaining government funding. Each of these developments is important because it will go some way toward assisting the nation to meet the very significant renewable target which lies ahead.
Perhaps with no apparent link to these developments, the spot LGC market has managed a healthy recovery in recent weeks, trading back up to $38.00 for the first time since early May. The rally, which constituted a 5 per cent improvement off its recent low, came after a period of three weeks in which the market remained fairly stagnant in the low $36s.
Activity in the forward market across the last month was been focused around the shorter end of the curve, specifically Cal 12 (delivery Jan 2013) and Cal 13 (delivery Jan 2014). Most transactions continued to reflect a cost of carry above the spot of within the 4.5-5 per cent range.
Having been overshadowed at the time by several big news weeks, the LGC market was also given some food for thought via a surprise which emanated from the Coalition Joint Party Room. Media reports suggested an apparent revolt against the renewable energy target from among the backbench. According to reports, included in the clique of agitators was long-time opponent to the RET, Ron Boswell.
The story suggests the backbenchers were lobbying for the abandonment of Coalition support for the RET because of its impacts on electricity prices. Tony Abbott, who has repeatedly reaffirmed his support for the 20 per cent by 2020 target, apparently put his foot down on the issue saying the Australian community supported the development of the nation’s renewable energy industry.
As has been mentioned above, it doesn’t appear the LGC market is currently too concerned by this advent, given the market rallied across the same period. However, it nonetheless highlights both the importance and potential fragility of the bipartisan support which has to date underpinned the nation’s renewable energy market.
Wholesale Electricity Update
Forward power prices rose steadily across the National Electricity Market during June as colder weather kept spot prices elevated. However trading was subdued ahead of the much anticipated incorporation of the carbon tax into the price setting equation. Much of the uncertainty surrounded the compensation to Victorian brown coal generators and whether they would use these funds to offset the higher cost of production or pocket the cash and look to pass on their roughly $35 per Megawatt hour carbon impost.
The carbon tax came into effect on Sunday July 1 and, being a Sunday, demand was low. Prices across all nodes were roughly $25-$30 higher than the previous day giving a hint that generators in all states were fully pricing in the cost of carbon on their operating costs.
On the Monday forward prices were being quoted somewhat higher but trading was very light. Physical circumstances, however, overtook carbon concerns. Capacity in Victoria has been under strain recently as the Yallourn power station has had problems with mine flooding, limiting the amount of coal it can produce and consume. This has made it more difficult to separate carbon uplift from the higher prices limited capacity can cause. Then both Loy Yang stations had to reduce their output due to coal issues whilst at the same time the Basslink Interconnector which provides Victoria with power from Tasmania tripped. This caused prices in both Victoria and SA to go to the maximum allowed, $12,900 per MWh.
Forward prices also leapt on the event. Third quarter 2012 Victorian flat prices, which had closed on Friday at $57.25/MWh, traded as high as $87. Calender 2013 prices across the NEM rallied, with Victoria up over $5/MWh from Friday’s levels. Basslink and both generators returned to normal service within the hour but spot prices remained around $100/ MWh for the rest of the day.
Prices retreated somewhat in the following days but remain higher than June’s close. The jury is still out on the transfer price of carbon into the wholesale electricity price, but it seems the market has accepted that it will be higher than was being priced in as recently as last month.
Dan Foster is Head of Energy Products at Nextgen. 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 from The Green Room.