REC Price Surge Signals Doom for Australia’s Renewable Target & its Wind Industry

atomic-bomb-e1355417893840

When a policy is unsustainable its failure is inevitable: Australia’s Large-Scale Renewable Energy Target is just such a policy. STT has been spelling it out since December 2012.

It was around then, when Australia’s commercial power retailers determined that there was no bankable certainty attached to the LRET; since then, no commercial retailer has entered a Power Purchase Agreement with a wind power outfit (we don’t count the couple of PPAs signed with the ACT government) – it’s that simple commercial fact that will force the LRET’s hitherto political ‘champions’ to cut the current target, or that may even force them to abandon it altogether.

A long-term PPA (of at least 10 years in duration) is a critical ingredient in obtaining finance for the construction of new wind farm projects; in the absence of a PPA, a wind power outfit hoping to develop a project is unable to offer any valuable security to the lending institution; wind turbines that fall apart in less than 6 years are hardly valuable security.

Access to credit on commercially favourable terms depends, critically, on the value of any security offered by the hopeful borrower.

The value of a PPA is that it guarantees a future stream of income, with a fixed price for the power dispatched – usually in the order of $110 per MWh: that fixed price in turn relates to the value of the Renewable Energy Certificate ‘REC’ (aka Large-Scale Generation Certificate ‘LGC’) – under the Federal LRET, a wind power outfit receives 1 REC for every MWh of wind power dispatched to the grid, which the wind power outfit hands over to the retailer as part of the trade under the PPA.

To the retailer, the only benefit of receiving a REC is the value placed on avoiding the penalty set by the LRET for failing to meet its mandated annual target.

That penalty is the “shortfall charge”, a fine imposed on retailers at the rate of $65 per MWh for every MWh that the retailer falls short of the mandated target (in The Australian article below it’s referred to as a cost to retailers of $93, and we’ll explain why in a moment). STT will also provide some detail and numbers on how the shortfall charge works and on how much this monstrous little “stealth tax” is going to cost all Australian power consumers; if the current LRET remains on Australia’s growing list of economically self-destructive policy nasties.

But first, we’ll hand over to The Australian’s Kylas Loussikian and Sid Maher.

Kylas is a relative newcomer to journalism, Sid is a seasoned Canberra political correspondent who, until very recently, was renowned for regurgitating press releases drawn up by the wind industry plants (like Patrick Gibbons) that worked in former Environment Minister, Greg Hunt’s office and the spin masters who worked for the Clean Energy Council; Sid happily pumped out lots of the usual pro-wind piffle about wonderful ‘free’ wind energy powering Australia, saving the Planet etc.

For some reason though – perhaps the debacle playing out in South Australia? – Sid has turned on the wind industry with a convert’s vengeance. Whether he knows it or not, this 1,000 word, front page article has just signalled doom for Australia’s LRET; and with it the Australian wind industry.

Power bill shock as RET helps big firms
The Australian
Sid Maher & Kylas Loussikian
1 November 2016

Households face higher bills and the largest electricity retailers stand to make tens of millions of dollars in windfall gains from a spike in renewable energy prices caused by concerns Australia will not reach its 2020 renewable energy target.

The price of large-scale generation certificates — which are produced for each megawatt of renewable power and act as an effective subsidy to wind, solar and hydro generation — has spiked in recent weeks as investment in new projects fails to keep pace with the growth required to meet the Renewable Energy Target of 23.5 per cent, or 33,000GWh, by 2020.

The developments mean consumers face paying more for electricity without increasing the amount of renewable generation in the system.

The certificate price is peaking as a panel led by Chief Scientist Alan Finkel examines the national electricity market, ­including energy security, costs, and the integration of renewables. The inquiry comes after South Australia’s statewide electricity blackout last month, sparked by a storm that forced the state’s windfarms to close and the interconnector with Victoria to trip.

AiGroup chief executive Innes Willox told The Australian yesterday a spike in spot ­prices for LGCs reflected “a growing risk that new renewable energy is not rolled out fast enough to meet the Renewable Energy Target on time’’. “This could add an extra 1-2 per cent to retail electricity bills for households and businesses, on top of the much steeper rise in electricity prices that is already happening as the power market tightens and high gas prices flow through,’’ Mr Willox said.

The price of certificates generated by large users climbed to about $90 last month from an ­average of $54.15 last year.

The LGC market has attracted some of Australia’s largest financial institutions — ANZ is the third-largest holder of LGCs generated this year while Macquarie is the ninth largest, according to analysis by The Australian — as well as a significant number of overseas investors. AGL, Origin Energy and ­EnergyAustralia are best positioned to take advantage of the pricing difference between a low contract price for the long-term supply of renewable energy credits and the spike in spot prices. Tristan Edis, a market analyst at Green Energy Markets, said: “The current situation is a buyer’s market for retailers. There are plenty of (renewable energy) projects available but there are only a small number of retailers who can offer bankable power purchase agreements.”

While the contracts are confidential, AGL’s financial statement shows earnings in the account in which certificates are held jumped 135.5 per cent this year, from $31 million to $73m.The three largest electricity retailers control more than 30 per cent of certificates generated this year, analysis shows. An AGL spokeswoman said the company was a “net buyer from the market at current spot prices’’.

Origin declined to answer questions about its certificate trading and the price gap between its long-term contracts and the competitive market rate passed on to consumers. But the company confirmed it had procured certificates “at variable prices since 2000, through long-term contracts with wind producers, building and contracting large scale solar projects and via the spot market”.

However, the company’s energy markets head, Frank Calabria, appeared to suggest earlier this year that Origin’s cost on the spot market and for hedging contracts was significantly below the market rate. While the price of certificates generated by large users rose from an average of $54.15 last year to an average of $82.49 this year, Mr ­Calabria told investors Origin’s contract costs had increased from $38 to $71 per certificate. In its ­financial statements, Origin said: “Trends of increasing wholesale prices, volatility and (certificate) prices are expected to improve Origin’s competitive position compared to retailers with less integrated and flexible portfolios.”

Despite being scaled back last year after 18 months of political acrimony, new investment commitments in renewable energy have fallen short of the level required to meet the target. As a result, LGCs last month spiked to nearly $90 per MWh, just below the statutory penalty of $93 per MWh retailers would pay if they did not take part in the scheme.

power-surge

Grattan Institute energy director Tony Wood said there was uncertainty about whether the target would be met through projects yet to be developed. “And if the target is not met, whether consumers will just end up just paying something for nothing, that is the penalty for not meeting the target,’’ he said.

With 6000MW of new large-scale generation capacity — the same amount built since 2001 — required to meet the 2020 target, analysts warn that at least half of it should be committed this year or early next year. But less than 2000MW of the required 3000MW for 2016 has been committed to or is likely to be committed to this year.

The difficulty in building the target of about 23.5 per cent from the current level of 12.75 per cent comes as Bill Shorten took a target of 50 per cent renewable energy by 2030 to the July federal election. Victorian and Queensland Labor governments have announced renewables targets of 40 per cent by 2025 and 50 per cent by 2030 respectively. Under a compromise between the government and Labor the 2020 target was scaled back from 41,000GWh by 2020 to 33,000GWh, or about 23.5 per cent. The RET steps up each year with this year’s target of 21,431GWh, rising to 26,031GWh in 2017, 28,637GWh in 2018 and 31,244GWh in 2019.

Mr Wood said the RET had been a very poor policy, “very poorly designed, partly because it was always based on a forecast and it has been subject to continual change ever since it was created’’.

He said one of the key problems with the scheme was that the effective subsidy available through the LGCs was due to end in 2030.

“As the cliff face has been approaching, the number of years you can get a return on a renewable energy project is diminishing, and not surprisingly the price has been going up,’’ Mr Wood said.

The Clean Energy Regulator, which oversees the scheme remains confident the targets can be reached. In industry briefings it has cited the fact 8000MW wind and 2500MW solar projects have obtained development approval.

Clean Energy Council policy manager Tom Butler said spot prices weren’t necessarily indicative of the market, calling them a “relatively thinly traded commodity”.
The Australian

lgc-price

Tony Wood is deluding himself in his assertion that there is “uncertainty about whether the target will be met through projects yet to be developed”.

There is absolutely no uncertainty: there isn’t a snowball’s chance in hell that the ultimate annual 33,000 GWh target set by the LRET will be met, when it comes into force in 2020. As we detail below, there isn’t even sufficient renewable generating capacity to meet the current target of 21,431 GWh, which applies for this calendar year.

Every banker and every power retailer knows that the LRET is finished: what appeared on the front page of The Australian last Tuesday simply confirms it. With that article (and the many others that will follow) spelling out the inevitable cost of a $93 per MWh penalty  – that will be collected from all power consumers under the LRET – commercial power retailers will never sign another PPA; and, in the absence of a PPA that runs for at least 10 years, bankers will never hand over another penny.

In the meantime, as we detail below, there is a Federal government policy on foot which will cost all Australian power consumers more than $20 billion in fines and a further $23 billion in subsidies paid to existing wind farms.

With the massive shortfall in accredited renewable generation (representing 16-17,000 GWh of the ultimate 33,000 GWh LRET target) guaranteeing that retailers will very soon be paying the $65 per MWh “shortfall charge” (a Federal penalty tax on all Australian electricity consumers) the current REC price has rocketed to $89 (see above – courtesy of Mercari).

When the current oversupply of RECs is exhausted, the market will go to penalty, and the REC price will hit $93. The table above (taken from Mercari) suggests – with the Offer price of $92 in Cal 20 – that the market knows that the penalty will start being imposed in the not too distant future; thereby driving up the REC price, before the LRET finally implodes. Note that a number of minor ‘shopfront’ retailers have racked up liability for the shortfall charge with the CER and will be forced to pay up, if they don’t hand over the mandated number of RECs by January next year.

Here’s how the LRET’s mammoth numbers stack up.

The LRET target is set by s40 of the Renewable Energy (Electricity) Act 2000 (here).

At the present time, the total annual contribution to the LRET from eligible renewable energy generation sources is around 16,000 GWh (depending on the weather, of course); and, because retailers will not enter PPAs, is stuck there now and forever. There has been some talk by AGL of offering PPAs, but these are limited to terms of 5 years and wind power outfits (or rather their financiers) need a minimum of 10, and preferably 15, year terms to make the venture worthwhile.

In the table below, the “Shortfall in MWh (millions)” is based on a total contribution to the LRET from eligible renewable sources of 16,000,000 MWh (1GWh = 1,000MWh). The LRET target is, likewise, set out in MWh (millions).

As appears from the forward price for RECs, the shortfall charge will kick in very soon; the timing depending on whether those currently holding RECs decide to sell or hold out for the market to actually hit penalty.

The expected REC price of $93 is due to the impact of the shortfall charge; due to the taxation treatment of RECs versus the shortfall charge, the full cost of the $65 per MWh shortfall charge to retailers is $93. RECs are tax deductible as an expense; the penalty is a fine and, therefore, is not tax deductible.

Retailers, including Origin, have indicated to STT’s sources that they will be recovering the full $93 cost of the shortfall charge (which is probably why Sid and Kylas have simply quoted the full $93 cost of the penalty in their article).

Using that figure applied to the current LRET target, we’ll start with the cost of the shortfall penalty.

Year

Target in MWh (millions)

Shortfall in MWh (millions)

Penalty on Shortfall @ $65 per MWh

Minimum Retailers recover @ $93

2016

21.431

5.431

$353,015,000

$505,083,000

2017

26.031

10.031

$652,015,000

$932,883,000

2018

28.637

12.637

$821,405,000

$1,175,241,000

2019

31.244

15.244

$990,860,000

$1,417,692,000

2020

33.85

17.85

$1,160,250,000

$1,660,050,000

2021

33

17

$1,105,000,000

$1,581,000,000

2022

33

17

$1,105,000,000

$1,581,000,000

2023

33

17

$1,105,000,000

$1,581,000,000

2024

33

17

$1,105,000,000

$1,581,000,000

2025

33

17

$1,105,000,000

$1,581,000,000

2026

33

17

$1,105,000,000

$1,581,000,000

2027

33

17

$1,105,000,000

$1,581,000,000

2028

33

17

$1,105,000,000

$1,581,000,000

2029

33

17

$1,105,000,000

$1,581,000,000

2030

33

17

$1,105,000,000

$1,581,000,000

Total

471.193

231.193

$14,947,745,000

$20,012,949,000

****

Between 2016 and 2031 the total target could be satisfied by the issue and surrender of 471 million RECs. However, with only 16 million RECs available annually there will be a total shortfall of 231 million; with only 240 million RECs available to satisfy the remaining 471 million MWh target over the life of the current LRET.

Under the current LRET, with RECs hitting $93 as the penalty begins to apply, the total cost added to power consumers’ bills will nudge $44 billion (471,193,000 x $93), as set out in the table below.

Power consumers will end up paying for the shortfall penalty collected by the Federal government, and for the cost of the RECs issued to wind power outfits – in relation to collecting the cost of the REC Subsidy from power consumers, Origin Energy’s Grant King correctly puts it:

[T]he subsidy is the REC, and the REC certificate is acquitted at the retail level and is included in the retail price of electricity”.

It’s power consumers that get lumped with the “retail price of electricity” and, therefore, the cost of the REC Subsidy paid to wind power outfits.

To give some idea of how ludicrously generous the REC Subsidy is, consider a single 3 MW turbine. If it operated 24 hours a day, 365 days a year – its owner would receive 26,280 RECs (24 x 365 x 3). Assuming, generously, a capacity factor of 35% (the cowboys from wind power outfits often wildly claim more than that) that single turbine will receive 9,198 RECs annually. At $93 per REC, that single turbine will, in 12 months, rake in $855,414 in REC Subsidy.

But wait, there’s more: that subsidy doesn’t last for a single year. Oh no. A turbine operating now will continue to receive the REC subsidy for another 15 years, until 2031 – such that a single 3 MW turbine spinning today can pocket a total of $12,831,210 over the remaining life of the LRET. Not a bad little rort – considering the machine and its installation costs less than $3 million; and that being able to spear it into some dimwit’s back paddock under a landholder agreement costs a piddling $10-15,000 per year. State-sponsored theft never looked easier or more lucrative!

The REC Tax/Subsidy, including that associated with domestic solar under the original RET scheme, has already added more than $12 billion to Australian power bills, so far.

At the end of the day, retailers will have to recover the TOTAL cost of BOTH RECs AND the shortfall charge from Australian power consumers via retail power bills.

And that’s the figure we’ve tallied up in the right hand column – which combines the annual cost to retailers of 16 million RECs at $93 (ie $1,488,000,000) and the shortfall penalty, as it applies each year from now until 2031, at the same ultimate cost to power consumers of $93.

Year

Target in MWh (millions)

Shortfall in MWh (millions)

Shortfall Charge Recovered by Retailers @ $93

Total Recovered by Retailers as RECs & Shortfall Charge @ $93

2016

21.431

5.431

$505,083,000

$1,993,083,000

2017

26.031

10.031

$932,883,000

$2,420,883,000

2018

28.637

12.637

$1,175,241,000

$2,663,241,000

2019

31.244

15.244

$1,417,692,000

$2,905,692,000

2020

33.85

17.85

$1,660,050,000

$3,148,050,000

2021

33

17

$1,581,000,000

$3,069,000,000

2022

33

17

$1,581,000,000

$3,069,000,000

2023

33

17

$1,581,000,000

$3,069,000,000

2024

33

17

$1,581,000,000

$3,069,000,000

2025

33

17

$1,581,000,000

$3,069,000,000

2026

33

17

$1,581,000,000

$3,069,000,000

2027

33

17

$1,581,000,000

$3,069,000,000

2028

33

17

$1,581,000,000

$3,069,000,000

2029

33

17

$1,581,000,000

$3,069,000,000

2030

33

17

$1,581,000,000

$3,069,000,000

Total

471.193

231.193

$20,012,949,000

$43,820,949,000

****

Whether it’s RECs being generated by current (or additional) wind power generation, or the shortfall charge being applied, retailers will be recovering the combined costs of BOTH from all Australian power consumers.

Over the last month or so, we’ve been quietly chuckling at the efforts of the Federal Energy and Environment Minister, Josh Frydenberg.

Josh has been railing at the renewable energy targets set by the States, claiming that these targets have destroyed Australia’s once reliable grid and its once affordable power. The numbers above are the product of Federal legislation and have nothing at all to do with anything done by the States. No matter how ludicrous their 50% RETs sound, no subsidies have been paid under them; and no penalties are about to be imposed by them, either.

No, it’s the Federal government’s LRET that – whether it’s satisfied or not – will add almost $45 billion to retail power bills over the life of the scheme.

In recent weeks, Josh Frydenberg has been making plenty of nervous-noise, in a valiant effort to save the Federal LRET and the wind industry by claiming that it can plug in to a mythical, as yet to be built, grid-scale battery storage system.  Josh, in one of his sillier moments, apparently press-ganged by the wind industry and its parasites, blurted out the nonsensical statement that the LRET is “set in stone”.

In a similar vein, wind industry puppet, the Clean Energy Regulator, Chloe Munro has been asserting that it would be ‘inconceivable’ for Australia’s power retailers to allow the power market to go to penalty. To the same ends, Chloe has had her minions put together the “industry briefings” – referred to by The Australian – in which the CER “has cited the fact 8000MW wind and 2500MW solar projects have obtained development approval”.

Sorry to rain on the parade, but most of the planning approvals for wind farms in Australia were obtained more than five years ago and a fair number were obtained over a decade ago. In Victoria, for example, there are close to 1,000 turbines with planning approval: many of those obtained approval back in 2005.

At the moment, in classical Ponzi scheme style, the major operators are looking to ditch a number of those projects to gullible Chinese “investors”. If there was any real confidence in the LRET (or piss-and-wind State based targets), developers wouldn’t be flogging these projects off to greater fools, they would be hanging onto them, as guaranteed government underwritten cash machines.

Josh, Chloe – ‘desperation’ is a stinky cologne.

With the wind power debacle unfolding in South Australia – rendering it an international laughing stock – the smart money is on the market going to penalty; and, thereafter, another hasty retreat from the current LRET target of 33,000 GWh.

SA’s business leaders are fuming about an erratic power supply and routine spot market power price spikes of $2-4,000 per MWh, hitting the market cap of $14,000 – every time wind power output goes AWOL on a total and totally unpredictable basis; with its few remaining industries threatening to pack up and leave the state – threatening thousands of jobs in a state with the worst unemployment figures in the Nation.

Against that politically toxic backdrop, no financier in their right mind is going to invest so much as a penny in an industry that exists, and only exists, as a result of guaranteed subsidies under a policy scheme that can be scrubbed at the stroke of a pen.

Josh and Chloe might have slept through 2015 and missed the fact that the once “rock solid”, “immutable”, “set in stone” 41,000 GWh target – which had die-in-a-ditch “bipartisan” support – was slashed for precisely the same reasons it will be slashed again.

The recent focus on South Australia has alerted millions of Australians to the pointless expense of subsidised wind power. Australian businesses, lucky enough to operate outside of its borders, have no inclination to follow South Australians down the road to social and economic disaster.

When people finally wake up to the fact that the subsidies being paid to wind power outfits under the LRET constitute the largest single industry subsidy scheme in the history of the Commonwealth, power consumers (read voters) will be angry enough.  When they find out that around half of the LRET’s annual $3 billion Federal tax on electricity is being collected as a “fine” and being returned to general revenue, they won’t be angry, they will be furious.

Josh Frydenberg and Chloe Munro can bank on it.

josh frydenberg

Josh Frydenberg measures the chances of keeping his LRET set in stone.

About stopthesethings

We are a group of citizens concerned about the rapid spread of industrial wind power generation installations across Australia.

Comments

  1. estherfonc says:

    Hi,

    I started a PETITION “SA PREMIER JAY WEATHERILL : Demand the RESIGNATION of the Energy Minister for HIGH POWER PRICES CAUSING SA’s JOBS CRISIS and 15,000 household POWER DISCONNECTIONS, frequent POWER BLACKOUTS and the JULY 2016 POWER CRISIS” and wanted to see if you could help by adding your name.

    Our goal is to reach 100 signatures and we need more support.

    You can read more and sign the petition here:

    https://www.change.org/p/sa-premier-jay-weatherill-demand-the-resignation-of-the-energy-minister-for-high-power-prices-causing-sa-s-jobs-crisis-and-also-15-000-household-power-disconnections-frequent-power-blackouts-and-the-july-2016-power-crisis?recruiter=135406845&utm_source=share_petition&utm_medium=email&utm_campaign=share_email_responsive

    Please share this petition with anyone you think may be interested in signing it.

    Thankyou for your time.

  2. By the way, do you have a link to the reference Mecari data series for the forward price of the LGC’s please?
    cheers
    Bruce

  3. I have done a few papers over the years railing against these very perverse ‘policy settings’, based on ideology without a thought of any practical application.
    I am an electricity broker mainly operating in SA, as well as Secretary of The Norwood Resource, (link below) and I can tell you first hand that when Alinta first announced (mid 2015) it would close Port Augusta Power Stations (780MW) in early 2016, the forward price (which is what all business have to contract for if they want electricity in the following year or two) increased from $50/MWh (excluding retailer margins) to $90/MWh by Nov 2015 – for supply in 2016 / 2018.

    Since the beginning of this year, and Port Augusta power stations closed in May 2016, the 2017-8 forward prices have gone up again – to $110/MWh (excluding retailer margins).

    While the energy component (which is what I am referring to above) is approx. 50% of a business’s bill, this sort of increase in almost untenable for some businesses.

    As an example, a client that has a number of pubs, but just looking at one of them – uses 1 GWh/a (1000 MWh/a) – in 2015 his energy component of his bill was $60k/a. This year it is $100k/a. Next Year (2017) it is in excess of $130k/a rate. He is laying staff off to sort the costs.

    Another example, a large client has a large winery, the energy costs for 2017 are such that he is installing three vary large diesel generators, and will try getting off the grid. So what does that do for the emission targets?

    The policy was ill thought through, political expedient at the time, and is now tossing up unintended consequences that will be a disaster for our economy.

    The LRET must be scrapped, or blended with a Reliability Factor that effectively reduces or even halves the LRET Certificate scheme and returns stability and some lowering of the cost of electricity, the link
    https://thenorwoodresource.org.au/2014/07/25/perverse-outcomes-of-green-subsidies-for-renewable-electricity-generation-in-australia/

    Bruce Holland

  4. Jackie Rovensky says:

    A couple of things spring to mind.
    Maybe another reason there are no new PPA’s, is the financiers have cottoned-on to the fact they may fund say a 140MW project, but do they get REC’s for the full capacity production of a 140MW project investment, or for the little energy it produces, as they are paid for what is produced it would seem they are providing funding for a greater potential profit than they actually receive.
    Also if to reach an actual RET mandated target just how much more actual production is needed to be built as opposed to the stated capacity factor of a project and will it need more than the mandated target to reach an acceptable estimate of that target to prevent a shortfall.
    It would seem its a ‘dogs breakfast’ of a policy which is followed in one way or another around the world, by those around the world who followed without thoroughly assessing its work-ability. So much for the abilities of the UN to put forward a rational proposal.
    Maybe I am a bit thick and have it wrong, but it seems its all a bit suss.
    Thanks STT for continuing the great work in exposing all aspects of this industry.

  5. Reblogged this on Wolsten and commented:
    Fantasy wind economics about to finally play out down under. Hopefully a lesson the UK can take on board.

  6. Michael Lyons says:

    Mr Frydenburg’s comment that the LRET is “set in stone” laughingly reminds me very clearly of a federal Minister for Agriculture many years ago who said the same thing about the reserve price scheme for wool. It too was “set in stone” and if my memory serves me anywhere near correctly, about 6 months later the government walked away from the scheme and the cards were allow to fall where they may. Many went broke or moved into another pursuit.

    May exactly the same thing happen to the LRET. It is bad policy that especially hurts those who can probably least afford it. It should be ditched immediately.

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