Renewables market REC'd until 2014

www.smh.com.au
July 16, 2010

A massive pool of renewable energy certificates will limit the impact of Australia's new energy laws until 2014, even as the rules inject a welcome dose of long-term certainty into the market. Continued weakness in the cost of the certificates, used as a partial subsidy for clean but expensive power, may slow investment in clean energy that the industry hopes could reach $20 billion by 2020. renewable energy certificates (RECs) flooded the market last year after a supply spurt generated by small solar household installations, squeezing prices of what is a crucial component of wind developers' profit.

This led to parliament last month passing amendments to the nation's renewable energy target scheme, splitting it into programmes handling small-scale and large-scale investments. The Large-Scale Renewable Energy Target will not offer near-term relief for developers, but should benefit renewable energy companies such as AGL Energy and Origin Energy who have stockpiled cheap certificates. "With the current oversupply of RECs likely to carry through into the LRET scheme, the market will remain firmly in surplus for the next two years", said Macquarie analyst Aimee Kaye, "There won't be sufficient investment in renewables until the REC price is close to $65 per MWh".

Law unlikely to boost prices soon
Australia wants a fifth of its electricity to come from renewable energy by 2020, and is pinning its hopes on the certificates to bolster clean energy investment, which the industry-backed Clean Energy Council estimates could reach as much $20 billion by the target date. Australian law compels wholesale power retailers and some generators to buy the certificates - which represent aMW-hour of electricity from a renewable energy project - from green power providers. Worries about the impact of the REC surplus sent shares of the country's top wind power providers Infigen Energy and Transfield Services Infrastructure down than 10% in the week after June's legal revamp, bringing the falls to more than 40% this year.

REC prices are around $40 aMW hour (MWh), with Macquarie Equity Research estimating a glut of about 12.6 million certificates worth $504 million will accumulate by year's end before tapering down to about 1.5 million by 2014. Analysts see the overhang clearing by 2014 when utilities will need to replenish stocks of the certificates. Some retailers have been stockpiling cheaper RECs to meet obligations under the scheme, but eventually this supply will run out. The changes to the scheme, which take effect from Jan 1, 2011 and bar certificates generated by smaller solar water heaters and household solar installations, will trim the excess.

Gone with the wind
The scheme is expected to lead to an additional 7,000 to 9,000MW of wind power generation on top of about 2,000MW now to meet Australia's renewable energy target of 46,000GW-hours (GWh) by 2020. The bulk of this target must be met from large-scale renewable energy projects. Energy firms Origin Energy and AGL Energy have combined wind resources of 4,000MW in the pipeline - double that of Infigen Energy and Transfield at more than 1,000MW each - they can choose to develop when REC prices recover. Based on current power contracts. AGL Energy and Origin Energy, which bought RECs when prices bottomed near $29 per MWh in 2009, have adequate projects and certificates to meet their obligations under the LRET scheme until 2014.

"Retailers would effectively recover the price of the associated green liabilities, plus a small margin, once the load is ascertained", Bank of America-Merrill Lynch wrote in a note. The bank also expects a large shortfall in supply of the certificates to kick in by 2015, possibly driving prices beyond $65 a MWh and raising the value of some clean energy projects. The sweeping change to the laws is a long-term positive factor as it gives investors in large renewable projects more certainty on investment returns.

The Investor Group on Climate Change, which represents some of Australia's largest investment funds with more than $600 billion under management, sees the revised law as opening up an opportunity to invest in the sector. "Discussions have been going on but investors have been sitting on their money", said Nathan Fabian, the group's chief executive. "These changes mean that investment funds will flow, especially as banks will have the confidence to lend, and that's important as it will give funds confidence to provide equity".