Significant changes to the current Renewable Energy Certificate (REC) market are legislated to occur on 1 January 2011. The Renewable Energy Target will be split into two parts: the Large-Scale Renewable Energy Target and the Small-Scale Renewable Energy Scheme. Consequently, there will be two new types of RECs, namely: Large-Scale Generation Certificates and Small-Scale Technology Certificates.
The most important legal aspects of the new Large-Scale Generation Certificate (LREC) and Small-Scale Technology Certificate (SREC) markets are summarised below. This article is not exhaustive and significant further detail is contained in the legislation.
Fully understanding the legislated rules for these new markets (and the associated transitional provisions applicable after 1 January 2011) is essential for every participant in the electricity market and the clean energy sector. This is because of the material roles the new LRECs and SRECs have (respectively) in determining the financial feasibility of new clean energy power stations (of all sizes) and the affordability of solar water heaters (SWHs) and small generation units (SGUs) such as solar panels, small wind turbines and micro hydroelectric systems.
In summary, great care should be taken to ensure your contracts and REC-related systems and procedures are effectively drafted to cater for these important changes.
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LREC demand considerations
The demand for LRECs is created by the obligation imposed on liable entities to acquire and surrender LRECs in order to avoid paying the large-scale generation shortfall charge. A key factor in the calculations to determine how many LRECs are required is the required gigawatt hours of renewable source electricity for each year which is legislated as follows:
Importantly, an automatic demand adjustment mechanism has been included in the legislation to modify the demand for LRECs in the event that an initial oversupply of LRECs risks depressing the LREC market. If, at the end of 2010 the total value of valid RECs (in GWh) exceeds 34,500, then the required GWh of renewable source electricity for 2012 and 2013 will be increased and the required GWh of renewable source electricity for 2016–2019 will be decreased. These changes are important because they affect the calculations of the renewable power percentage which is used to determine the number of LRECs each liable entity is required to surrender each year. In short, the LREC demand is initially increased and then reduced over those periods.
LREC supply considerations
The LREC demand adjustment mechanism described above is important. This is because from 1 January 2011:
- All valid RECs will be regarded as, and possibly converted into, LRECs even if they were created in relation to SWHs or SGUs
- LRECs will be created in respect of eligible electricity generation during 2010 including in respect of SWHs and SGUs
- LRECs will be created for the remainder of the certificate creation period that extends into 2011 for SWHs and SGUs installed by 31 December 2010
- LRECs will be created in respect of eligible electricity generation by accredited power stations during 2011 and subsequent years up to 2030.
SREC demand considerations
The demand for SRECs is created by the obligation imposed on liable entities to acquire and surrender SRECs in order to avoid paying the small-scale technology shortfall charge. A key factor in the calculations to determine how many SRECs are required is the annual small-scale technology percentage, which will be prescribed by regulations each year.
In order to set the small-scale technology percentage at the right level, and therefore facilitate the operation of a ‘smooth’ SREC market, the Minister is required to estimate the number of SRECs likely to be created as well as the relevant acquisitions and partial exemptions in that year and consider the amounts by which the estimates of the previous year exceeded or fell short of actual levels.
In addition, liable entities may surrender SRECs on a quarterly basis.
SREC supply considerations
The number of SRECs that can be created for SWHs and SGUs is determined by the detailed rules in the Act and the Regulations.
Of particular note however is the retention of the Solar Credits Multiplier. Regulations will prescribe that the number of SRECs that may be created is to be multiplied by a certain number.
The Solar Credits Multiplier only applies to the prescribed rated output of a SGU which is currently 1.5 kilowatt (kW) for grid-connected SGUs and 20 kW for off-grid SGUs. However, for off-grid SGUs, the multiplier cannot be use to create more SRECs than set out in column 2 above.
SREC clearing house facility
To facilitate the transfer of SRECs, the Regulator will establish and operate a clearing house through which parties may buy and sell SRECs at a fixed price of $40 (excluding GST).
The Minister may reduce the clearing house price but only after considering a range of issues at the heart of the commerciality of the SWH and SGU markets including the extent to which owners contribute to the costs and any impacts on the electricity market (including electricity prices).
The inclusion of specific SRECs on the clearing house transfer list does not prevent the holder of those SRECs from trading and transferring those SRECs outside of the clearing house at a different price.
At the time of writing, further detail on the operation of the clearing house was yet to be prescribed by regulation.
What about existing contracts?
REC-related contracts entered into before 28 June 2010 that extend beyond 31 December 2010 are deemed to relate to large-scale generation certificates unless the contract or a subsequent agreement expressly states otherwise. For example, this means that a contract relating to RECs from a SWH or a SGU could require delivery of or payment for LRECs rather than SRECs. However, what is written in the contract does not determine which type of certificate is created.
Continual improvement
An independent review will be conducted in the second half of 2012 (and every two years after that) into:
- The operation of the Renewable Energy (Electricity) Act 2000
- The operation of the Renewable Energy (Electricity) Regulations 2001
- The operation of the Renewable Energy (Electricity) (Large-Scale Generation Shortfall Charge) Act 2000
- The operation of the Renewable Energy (Electricity) (Small-Scale Technology Shortfall Charge) Act 2010
- The diversity of renewable energy access with reference to the environmental and economic impact of that access.
In this regard, it is important to recall the objects of the Act, namely:
- To encourage the additional generation of electricity from renewable sources
- To reduce emissions of greenhouse gases in the electricity sector
- To ensure that renewable energy sources are ecologically sustainable.
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