Renewable Energy Certificates

Source: The Australia Institute

The Renewable Energy Certificates (RECs) in Oz are similar to the US Federal Production Tax Credit, which pays 1.8 cents/kWh for each kWh of wind power produced in the first 10 years of the wind farm's life.  The difference in Australia is that no one knows how much the RECs will be worth in the future.  In the US, the tax credit/subsidy is fixed.  In Australia it depends on the gap between the Renewable Energy Target (RET) and actual renewable electricity production.  This is what the government body The Clean Energy Regulator says about RECs (there are small scale RECs too, for rooftop solar)

The Renewable Energy Target operates through the creation of tradable certificates which create an incentive for additional generation of electricity from renewable sources. Certificates are created and issued through the REC Registry —an online trading platform managed by the Clean Energy Regulator.

Through the scheme, large renewable power stations and the owners of small-scale systems are eligible to create certificates for every megawatt hour of power they generate—creating the 'supply' side of the certificate market. Wholesale purchasers ​​​of electricity, mainly electricity retailers, buy these certificates to meet their renewable energy obligations—forming the 'demand' side of the certificate market. Wholesale purchasers of electricity then surrender these certificates to the Clean Energy Regulator in percentages set by regulation each year.

(Source: The Clean Energy Regulator)

The price for RECs will therefore vary.  If total renewable generation exceeds the 33,000 GWh requirement, then the price of RECs will be zero.  If renewable electricity production is very low, then the REC price will be commensurately high.  As a result of the attempted abolition of the Renewable Energy Target by the L/NP (the right-wing coalition which rules Australia at the Federal level), there was a slump in new investment in renewables.  But the attempt failed. In the end, Labor persuaded the government just to reduce the RET (to 33,000 GWh from 40,000 GWh), not abolish it, and investment restarted. 

However, the price of the renewable energy certificates zoomed, because of the absence of new renewable investments.  The RECs depend on how much renewable output is generated relative to the target, and the target kept on rising but investment stopped.  After the drought caused by Abbott's attempt to abolish the RET (which drove up the price of RECs) , there is currently a flood of new investment in wind and solar (18 GW of capacity, which will produce roughly 6 GW of new output or 52,560 GWh per year), which will increase renewables generation way above the target, and drive down the price of RECs to zero. This is reflected in the future price for RECs which drops from $84 this year to $40 next, and will likely reach zero before 2022. Moreover, the constant chatter from Abbott and others on the climate denialist right about abolishing the RET means that the certificates might in fact be worthless even before that.

Like the Production Tax Credit in the USA, the renewable energy certificates are earned for each MW of renewable electricity when they are produced, not upfront. So the calculation of how much RECs are worth to a new renewables generator is how much they will earn over the lifetime of the project (25- 30 years)? To get that (ignoring interest charges/discount rates), add up the price of RECs for 25/30 years and divide by 25/30 to get the effective upfront benefit.

The RET will end in 2020, but certificates will continue to be earned (though not for new generators) until 2030. For the last 15 or so years of the life of a renewable electricity project (say from 2030 to 2045), the price of RECs will by definition be zero. But because the price of RECs fluctuates, and is likely to slump as new renewables come on stream, even the near years (until 2030) are uncertain.

Right now, new renewable generation capacity is being planned by investors on the assumption that there will be little or no benefit from RECs. The current high price of RECs is a windfall to existing "green" generators, but no one in the industry expects it to last. You can't base a 25-30 year investment on one year's windfall.

There is no "massive subsidy" to renewables, whatever the Right and the Murdochcracy say.  Wind and solar farms will not go on earning $84 per MWh from RECs indefinitely into the future.  The only way the prices of RECs would rise from now on instead of falling rapidly to zero would be if the Renewable Energy Target were extended past 2020 and materially increased.   Even with Labor's 50% target by 2030, that would only happen if the flood of renewable investment were to slow, which as I have argued here is very unlikely.