COVID-19 no speed bump for renewables

The government agency responsible for overseeing the national renewable energy remains bullish on the clean energy sector. The Clean Energy Regulator’s (CER) Quarterly report covers activities in three certificate markets: the large-scale and small-scale renewable energy targets (LRET, SRES) and the carbon offsets market (ACCUs) that is propped up by the federal government’s Climate Solutions Fund.

The CER doesn’t think COVID-19 has had a significant impact to date on any of these markets, although it notes there may be some project delays due to supply chain constraints or uncertainties over power demand. A severe recession might see some of the PPA counterparties appear less reliable (or at worst see them go bust) which could undermine financing efforts.

For the LRET (large wind and solar farms), having previously forecast at least 2GW of new projects to reach financial close during 2020, the CER notes that almost half that amount was committed in Q1 alone (837MW). It is also tracking another 1.9GW that is close to committed – i.e. partial finance has been obtained or development approval and a PPA have been obtained (key requirements for lenders). This latter figure has been substantially boosted by the announcement of the MacIntyre wind farm which will be underwritten by CleanCo, the Queensland government owned renewables company. This positive outlook for new large renewable plants may seem to clash with the tales of woe around grid constraints, losses and other factors restricting new plants’ ability to maximise their earnings. CER does warn in its report about what it sees as the risk of underestimating renewables growth in the forecasts that drive grid planning decisions. Assuming most of these projects do go ahead they will be a welcome boost to regional economies as Australia tries to recover from the COVID-19 induced recession.

Unsurprisingly, the LRET certificate price (LGC) continues to decline as more plants enter the market and increase supply. Demand under the scheme has plateaued and voluntary surrenders over and above the legislated requirements is around 3m pa, or around 9 per cent of the total. Prices dropped from $46 to $28 over the quarter, the lowest price for six years. Forward markets are projecting prices below $10 by 2023.

The SRES (rooftop PV market continues to increase too, with a 33 per cent increase on Q1 2019, driven by both more installations and upsizing. If COVID-19 derails the market (which the CER isn’t seeing signs of yet) there is a risk that not enough certificates are created to meet demand from liable entities. This is because their liabilities are set by the regulator in advanced based on expected supply of certificates. Lower power demand offsets this risk as does the store of certificates in the system. But a 20 per cent fall off could be enough to see certificates run out, leaving some liable entities (mostly electricity retailers) having to pay the shortfall charge of $65 instead of the market price of just under $40.

The CER notes a potential convergence between the implicit carbon prices of the national offset scheme (ACCUs) and LGCs. The latter still trades at $37/t CO2 abated (because the emissions intensity of Australia’s electricity grids is less than a tonne/MWh, more than one certificate is needed for a tonne of abatement) or more than double the ACCU price of $16.40 but with the rapidly falling future price of LGCs crossover is expected around 2023. This is consistent with the CER noting that certain commercial solar installations can qualify for either type of certificate and Q1 2020 saw the first such projects opting to generate ACCUs rather than LGCs.