Price of renewable energy credits to soar

Research from carbon market analytics firm RepuTex indicates that a lower than expected Australian carbon price will result in a significant rise in the price of large-scale generation credits (LGCs) created under Australia’s Renewable Energy Target (RET), with LGCs trading as high as $65/MWh in 2020.

In October, the federal government’s Climate Change Authority (CCA) published a discussion paper ahead of the release of its review of the RET. The CCA sees LGC prices coming down to near zero by 2026, as the carbon price rises high enough to meet 100% of the cost of renewable energy. A high carbon price would, in theory, replace the need for renewable generators to sell LGCs in order to subsidise the cost of building and operating new clean energy plants.

In its analysis, the CCA assumes that Australia’s carbon price will trade at $29/t CO₂-e in FY 2016 when Australia moves to flexible price trading and links with the EU Emissions Trading Scheme (ETS), rising 5% per year thereafter. According to RepuTex, the government’s carbon price forecast is overly optimistic, with the company forecasting a carbon price after FY 2016 well below government expectations.

“The lower than expected carbon price is due largely to policy influences from Europe which will impact on the price of Australian carbon after Australia’s carbon market’s linkage with the European scheme from FY 2016,” said RepuTex’s Associate Director of Research, Paul Bourke.

“Given the current magnitude of the oversupply of carbon allowances in the EU ETS, we believe that, even with a tightening of permit supply in Europe, as per current policy proposals, carbon prices in Australia are likely to trade at an average of $16/t CO₂-e between 2016-20, meaning that renewable generators will continue to rely on selling renewable energy credits to energy retailers to meet their costs.”

Under RepuTex’s more moderate carbon price scenario, LGC prices will retain their value, reaching a high of around $65/MWh in 2020, with the carbon price not expected to displace renewable energy credits before the RET expires in 2030. According to RepuTex, an understanding of the dynamics between European policy and the Australian carbon and renewable energy markets is critical for local operators and investors, as EU policy continues to drive the Australian carbon price and renewable energy market.

“Should the EU Commission backload permits in the EU ETS, we will see the Australian carbon price temporarily rise, then fall again as those withheld permits are returned to the market towards 2020,” said Bourke.

“Without that high carbon price to do the heavy lifting, Australia’s RET will remain the key driver of investment in renewable generation well beyond its scheduled shelf life to 2030.”