The Large-scale Renewable Energy Target (LRET) requires liable entities to meet their compliance obligations by acquiring a proportion of their electricity from renewable energy sources. This occurs in the form of large-scale generation certificates (LGCs), which are created by accredited large-scale renewable energy projects and sold to liable entities to surrender against their LRET obligations.
The last two years have been a rollercoaster ride for LGC spot prices, with large project delays, persistent curtailments, below average wind output, and concern about reduced electricity demand due to COVID-19, causing large swings in spot prices.
Over the medium-term, the projected LGC surplus is likely to weigh more heavily on the market, with spot prices likely to decline as more renewable energy is commissioned beyond the LRET’s legislated demand. As this occurs, we expect the LGC floor price to ultimately be set by the carbon equivalent value of an LGC to the price of Australian Carbon Credit Unit (ACCU) offsets. This could see ACCU and LGC prices converge in the 2020s, with large-emitting entities able to secure more easily obtainable LGCs to meet their carbon offset obligations (for electricity use and voluntary emissions reductions), while the long-run price of ACCUs could also support continued investment in renewable energy generation.
In this article, we take a closer look at current and future dynamics in the LGC market, and the longer-term interaction between LGCs and carbon offset prices.