Carbon windfall for power retailers: offsets certificate prices for companies soar

A corporate push towards carbon neutrality is helping drive up the price of renewable energy and the largest electricity retailers stand to make windfall gains.

Companies that rely on their own fossil fuel generation pay cash for large-scale generation certificates to solar and wind farms.

A corporate push towards carbon neutrality is helping drive up the price of renewable energy and the largest electricity retailers stand to make windfall gains as major companies look to buy up offsets against fossil fuel generation.

Large-scale generation certificates – produced for each megawatt of renewable power under Australia’s Renewable Energy Target system – are trading at twice the value indicated by forward pricing a few years ago.

Tristan Edis, a market analyst at Green Energy Markets, said the price was being held up by “voluntary” buying from major Australian corporations with big carbon footprints – as they try to meet self-set emission reduction targets over the next few years.

“Two years ago the forward market was pricing an LGC for delivery in 2022 at about $15 to $20. The last trade as at 23rd of December, for LGCs for 2022 delivery, is $42 – so more than double that,” Mr Edis said.

“There‘s been a massive expansion in voluntary demand for LGCs – that is large corporates trying to meet climate change targets that they’ve set.”

The overwhelming majority of LGCs are held by electricity retailers such as Origin, AGL and EnergyAustralia, and the LGC market has also attracted some of Australia’s largest financial institutions — Commonwealth Bank is the seventh-largest holder of LGCs generated in the 11 months to the end of November, with Macquarie the 13th largest holder, according to analysis by The Weekend Australian.

Grattan Institute energy director Tony Wood said the scheme – initially developed by the Howard government – was not a particularly efficient way to encourage the reduction of carbon emissions, but had helped provide an incentive to build solar and wind farms at a time when it was expensive to do so.

“When you generate a megawatt hour of renewable electricity, you can sell the electricity into the energy electricity market, and then you could sell a certificate into the credit market,” Mr Wood said. “It‘s not driving any new investment. To be honest, it hardly even gets talked about anymore in the energy market.”

The three largest electricity retailers control about 30 per cent of the 28.6 million certificates generated this year so far, analysis shows.

But companies that rely on their own fossil fuel generation, such as the big miners that run massive iron ore operations in the Pilbara, have long been forced to buy LGCs through brokers to meet their national renewable energy target obligations.

They pay cash for the certificates to solar and wind farms in other parts of the country, topping up the income they earn from selling power into the grid.

Rio Tinto’s Hamersley Iron subsidiary was the 29th biggest holder of LGC’s in the county as at November 30, according to The Weekend Australian’s analysis of data sourced from the Clean Energy Regulator, with BHP Iron Ore sitting not far behind.

But those same companies, as well as major industrial emitters such as BlueScope Steel, Orica and Incitec Pivot – and a raft of other Australian corporate heavyweights – have been setting their own voluntary carbon reduction targets amid increasing concern among investors and the community over the future impact of global warming.

Companies are seeking to meet those targets partly by acquiring forward-dated LGCs, Mr Edis said, planning to hand them in as offsets against carbon emissions under the federal government’s Climate Active scheme.

“Under that program you can use LGC‘s to offset your electricity emissions – but you can’t use them to offset your direct emissions,” he said. “We’d previously estimated private sector, voluntary demand at something around 2-3 million per annum. And now we’re seeing it‘s closer to something like 12 million LGCs per annum.”

That activity, which Mr Edis said was largely occurring outside of traditional brokerage markets, was helping support the forward price of LGCs over the next few years. “It‘s cheap to do because they’re doing them through long term contracts. So they’re not buying on the brokered market. They’re picking up they might be picking up the LGC for maybe a $10 to $20 premium over the underlying power cost,” he said.

It could also help underpin profits at generators that have been hit hard by falling wholesale prices over the last two years.

Origin Energy booked a loss on its LGC trading last financial year, largely because it elected to pay upfront fees worth $262m to hang onto certificates it had previously agreed to cancel in current and previous fiscal years.

But those fees will be refunded – now on a tax-free basis, after tax laws were changed in September. Origin said the 2020 certificates would have been worth $19 each had it surrendered them on time, with the 2021 certificates worth an average $12. If LGC prices hold above earlier estimates due to corporate buying in pursuit of carbon offsets, Origin could realise a profit by holding them in future years.

The Renewable Energy Target, was once a hot political topic. Five years ago, amid concern enough new capacity could not be built to meet the target, LGC prices spiked to more than $90, twice the current value, sparking fears household energy bills could surge. But the target was met and Australia’s 33GWh renewable energy target has been static since 2020.

Both the Coalition and Labor say they will not legislate higher levels, andexpect the penetration of renewable generation to grow without new mandatory targets. That means the value of LGC’s had been tipped to fall dramatically this decade, as new renewable generation hubs enter the market increasing the amount of LGC’s issued. But, even if major corporates are not buying LGCs through brokered markets, locking them in through future power contracts will still affect the relatively scarcity of certificates available across the market, pushing up values across the board.

Mr Edis said a higher price for large-generation certificates would almost certainly be passed on to consumers by electricity retailers, but any real change in household bills would be relatively minimal compared the impact of changes in wholesale electricity prices – which have been trending downwards for the last two years.