The Renewable Energy (Electricity) Amendment Act 2010 (Cth) (Act) and its two associated acts1 received Royal Assent on the 28 June 2010.2 The Act amends the Renewable Energy (Electricity) Act 2000 (Cth) by dividing the existing Renewable Energy Target (RET) scheme into two schemes from 1 January 2011—the Large-scale Renewable Energy Target Scheme (LRET) and the Small-scale Renewable Energy Scheme (SRES).
Of particular relevance to clients involved in large renewable energy projects, the Act is intended to have the effect of making spot market prices for Renewable Energy Certificates (RECs) more stable, and will progressively increase demand for RECs until 2020. It is hoped that investment in large-scale renewable energy projects will increase as a result.
Purpose and impact of the Act
The Act splits the REC market into the LRET and SRES. The inclusion of small-scale technologies under the existing RET appears to have delayed investment in large-scale renewable energy projects.3 With the implementation of a split REC market, small industry participants will not impact the spot price of RECs, as has recently been the case. In addition, increased targets for renewable energy generation will boost demand for RECs over the medium term, which should lead to increased REC prices.
Because forecasts of future REC prices and demand for RECs are important factors in the financial viability of large renewable energy projects, the greater spot price stability created by the Act should result in less risk and greater investment certainty for those involved in the development and financing of such projects.4
Targets under the Act
The target under the RET is set to increase more than four-fold to reach 45 000 gigawatt-hours by 2020 (which equals 45 million RECs).
The LRET includes legislated annual targets starting at 10,400 gigawatts in 2011, increasing to 41,000 gigawatts in 2020 and remaining at that level until 2030.5 The SRES will not have an annual target.
The large-scale market will continue to operate similarly to the existing RET scheme. Large-scale generators (eg wind farms, solar arrays, hydroelectricity) will be eligible for one Large-scale Generation Certificates (LREC) per megawatt hour of renewable energy that they generate.
As the LRET target increases to 41,000 gigawatts in 2020 and the obligation of liable entities to purchase LRECs increases demand for them (see below), LREC prices are expected to increase and support the investment and expansion of large-scale renewable generation.
The SRES is an uncapped scheme that is demand-driven. Owners of small-scale technology like solar water heaters and household photovoltaic systems will receive one Small-scale Technology Certificate (SREC) for each megawatt hour that is estimated to be generated by the technology. In addition, the existing Solar Credits scheme will continue to operate until 2015. The Act also creates a ‘Clearinghouse’ where SRECs can be traded, or SRECs may be sold using private markets.
There were concerns raised in submissions to the Senate Standing Committee’s report on the Act that the uncapped nature of the SRES transfers price risk from suppliers of RECs to liable entities, as liable entities are obliged to purchase all SRECs created and there is no certainty as to how many certificates will be created. However no amendments were made to the Act to deal with this issue.
REC targets for liable entities
The related amending acts6 to the Act impose a shortfall charge on liable entities who do not meet certain individual targets.
‘Liable entities’ are wholesale purchasers of electricity who must buy RECs and then ‘surrender’ them to the Office of the Renewable Energy Regulator to show they have complied with their individual targets (and legal obligations) under either the LRET or SRES. Individual targets are set in proportion to the entity’s share of the national wholesale electricity market and the total LRET for that year. If the liable entity does not meet their individual target, they avoid paying a ‘shortfall’ charge of $65 per megawatt hour.
Treatment of existing forward contracts
If a party has entered into a contractual arrangement to transfer RECs at a future date at a negotiated price, parties will be able to apply to the Renewable Energy Regulator (Regulator) to have that contract recognised as a ‘relevant pre-existing contract’ (a Pre-Existing Contract) if the contract:
- was entered into on or before 25 February 2010
- relates to the transfer of RECs after 1 January 2011, and
- involves SRECs to be generated after 1 January 2011.
If a Pre-Existing Contract exists and involves the sale of RECs that were to be created from small-scale technologies, the buyer may have entered into the contract to obtain RECs to meet its liabilities under the LRET. In this case, the seller of RECs under the Pre-Existing Contract would apply to the Regulator and ask that a certain amount of SRECs be changed into LRECs in order to comply with its delivery obligations under the Pre-Existing Contract.
Existing banked RECs that have not been surrendered before 1 January 2011 will be able to be acquired by liable entities to meet their LRET obligations in future years (but not their SRES obligations). This is intended to ensure there is adequate liquidity in the LRET market, particularly in the early years of the new RET scheme.
There is concern that there may be an oversupply of banked RECs by the end of 2010. This could mean that liable entities would meet their individual targets for the next few years without any new large-scale investment in the renewable energy sector.7 This would be a disincentive for investors. However, the Senate Standing Committee’s report stated that banked RECs should not significantly impact investment and so no related amendments to the Act were made.
Emissions-intensive trade-exposed industries Industries
that are both emissions-intensive and trade-exposed (EITE) will continue to be partially exempt from the costs of the RET scheme under the Act, just as EITE industries were under the original 9500 megawatt hour Mandatory Renewable Energy Target.
The only change the Act makes for EITE industries is its specification that the exemptions apply to both large and small scale liabilities. This means an EITE firm will have to surrender 10 or 40 per cent (depending on its activity) of the additional SRECs and LRECs required to meet its individual target under the new RET scheme.
Voluntary surrender of RECs
Individuals and organisations still have the option to purchase and voluntarily surrender LRECs to drive renewable energy generation (as LRET is based on a quantitative target). It is not possible to voluntarily surrender SRECs.
The Act should increase certainty in the spot price for RECs and create a more favourable environment for investment in large-scale renewable energy projects in Australia.