Damien Moyse explains the current state of play with Renewable Energy Certificates (RECs), helping to unravel some of their mystery in a constantly changing market.
RECs and Australia’s Renewable Energy Target have been an integral part of the renewable energy industry now for more than a decade, with the scheme changing and expanding significantly in the past 12 to 18 months.
REC stands for Renewable Energy Certificate, with these certificates being the trading currency for renewable energy in the renewable energy market. The value of one REC is equal to one megawatt-hour of renewable electricity generation (or in the case of some energy efficiency technologies such as solar hot water or heat pumps, one megawatt-hour of avoided electricity consumption).
Renewable electricity generators such as large wind farms, hydro-electric power stations or small-scale solar photovoltaic (PV) installations are able to create these RECs and sell them to the renewable energy market, thereby receiving a financial return.
The majority of RECs are purchased by electricity retailers, in line with their mandatory requirements set by the Federal Government under the Renewable Energy Target (RET). This cost to the electricity retailer is passed on to all electricity consumers (apart from a few large industrial users) in the form of a slightly higher charge per kilowatt-hour on your electricity bill. The Federal Government has recently expanded the RET so that 20% of Australia’s electricity supply (equivalent to 45,000 gigawatt-hours) comes from renewable energy sources by 2020.
What’s a REC worth?
Whether you’re a householder or a large-scale renewable energy developer, one of the key aspects of the market for any renewable energy investor is the variable price of RECs. The renewable energy market is a fixed market, with demand being mandated by the Federal Government each year. However, supply is not fixed, with any accredited renewable electricity generators being able to create RECs in any given year.
RECs are also traded through long-term contracts set up outside the electricity market. For example, a large wind farm operator might establish a contract with an electricity retailer to provide a fixed number of RECs for a fixed price over, say, five or ten years, in order to give both parties certainty regarding the supply and cost of RECs for business planning.
Recent RECs oversupply
Depending on the level of REC supply in the market, the price of RECs changes, similar to the price of shares. As an example, in April 2009 the price of one REC had reached a high of $54. By October 2009, with a significant oversupply in the renewable energy market, the price had dropped to $28. Historically, the renewable energy market has always operated with some level of oversupply, with more RECs being created than are required to be purchased each year. However, this oversupply has increased significantly in recent times, with the Federal Government giving more incentives to purchase solar hot water systems and heat pumps as part of the stimulus package, and under the Solar Credits Scheme (more detail on Solar Credits later in the article).
Greens senator Christine Milne has proposed that RECs generated by solar hot water systems and heat pumps be added on top of the Renewable Energy Target, so they are additional to the target and thereby don’t continue to decrease the value of RECs. It’s a complex problem: the drop in RECs value prompted by household energy efficiency incentives means that large-scale wind farm and solar investments are on hold until RECs gain value and can help fund big projects.
GreenPower and RECs
RECs can also be traded through the GreenPower mechanism. GreenPower is a voluntary renewable energy product that can be purchased by residential and business consumers to ensure that their electricity is tied to generation from renewable sources.
When a householder or a business purchases GreenPower through their electricity retailer, the retailer in turn purchases additional RECs from the renewable energy market. These RECs are purchased ‘in addition’ to the retailers mandatory requirements under the RET, meaning that the consumer has achieved investment and an environmental benefit on top of that mandated by the Federal Government’s target.
Solar credits and RECs.
One of the recent additions to the RET market is the Solar Credits Scheme. This new scheme came into effect in June last year, replacing the former Solar Homes and Communities Plan, which offered households a rebate of up to $8000 for the installation of a solar system.
The Solar Credits Scheme works by offering investors in small-scale renewable generation systems the ability to create and trade five times the number of RECs, thereby providing an increased financial incentive. This REC multiplier is available to solar PV systems up to 1.5kW in size, small wind turbines up to 10kW in size and micro-hydro systems up to 6.4kW in size. From mid 2012 the government plans to reduce this multiplier by a factor of one each year, until it expires in mid 2015, in anticipation of cost reductions in the small-scale renewable industry over that period.
One of the problems for consumers looking to invest in small-scale renewable energy systems under this new scheme is that it actually reduces the amount of new renewable electricity generation deployed in the market. If a householder can create five times the amount of RECs than normal (and bear in mind that small-scale generation units can create and trade RECs equal to 15 years worth of generation upfront), then for every five RECs created, four do not represent actual renewable electricity generation (i.e. four megawatt-hours).
These four RECs, once traded, will still be purchased by electricity retailers out of the market in line with their mandatory annual targets. In this way, investors in small-scale renewable energy systems are contributing to a reduction of the annual renewable electricity generation targets actually achieved. From the perspective of an individual household, one system may not make that much of a difference. However, given that over 70,000 micro-generation systems were purchased in 2009, the Solar Credits Scheme has the potential to substantially distort the achievement of the RET!
The way forward
Previously, many renewable energy system owners held on to their RECs to ensure that the renewable electricity generated from their system was additional to the mandatory government targets, as described in Don’t wreck those RECs in ReNew 105. Unfortunately, under the new Solar Credits Scheme, holding on to your RECs means that you miss out on any upfront financial assistance and pay the full retail cost of any solar, wind or micro-hydro electricity generation system. The Alternative Technology Association, along with a host of other environment, community and industry organisations, is currently lobbying the Federal Government to alter the Solar Credits Scheme to ensure the annual renewable energy targets are adjusted (i.e. increased) to account for the quantity of ‘fake’ RECs traded in the market.
In the long-term a much better mechanism to drive the uptake of small (and large) scale renewable generation is a strong gross feed-in tariff, whereby the investor knows exactly the price they will be paid for all the electricity they export and over what time frame, and the electricity networks know exactly how much additional distributed generation capacity is available. To date though we have seen only two effective feed-in tariff policies implemented for small-scale systems in Australia (in the ACT and NSW) and none for large-scale technologies.
With the current oversupply problems in the existing REC market and its inability to drive investment in the kind of large-scale renewable energy projects we need to deal with the climate crisis, the imperative for a strong, nationally consistent feed-in tariff to drive both small and large-scale technologies, complemented by a significant increase in energy efficiency investment, becomes more and more critical.
This entry was posted on Monday, June 21st, 2010 at 3:59 pm