July 15, 2014
Australia

Banks exposed to big RET risks

Andrew White, Associate Editor | The Australian | July 14, 2014 | www.theaustralian.com.au

Australia’s banks are holding nearly $900 million worth of certificates designed to stimulate investment in renewable energy generation as the price of those instruments becomes captive to the political debate over green energy schemes.

Banks including ANZ, Macquarie Group, Westpac and Commonwealth Bank hold 5.9 million, or 20 per cent, of the 28.4 million large-scale energy certificates (LGCs) issued and yet to be redeemed under the Renewable Energy Target scheme, according to information supplied to the Senate.

The holdings, which have come to light as the government attempts to repeal the carbon tax, could leave the holders exposed to wild fluctuations in market price owing to the political risk that the scheme will be watered down or scrapped. Both Labor and the Coalition went to the election promising to retain the RET introduced by the former Howard Coalition government. But the Abbott government has become increasingly critical of the scheme because of the hidden cost to electricity consumers and question marks over how effective it is in reducing carbon emissions.

The certificates are issued by Clean Energy Regulator to generators of solar, wind and hydro electricity, who then sell them to retailers to help them meet the mandatory target of generating 20 per cent of electricity from renewable sources by 2020.

They are a key component in claims made about the higher cost of renewable energy because electricity retailers must buy the certificates to show they are moving towards the target and either carry the cost or distribute the cost across the bills of consumers.

But industry players say the market is oversupplied and the cost has become captive to a political debate about the future of the scheme.

Pacific Hydro general manager for Australia, Lane Crockett, said fears that the government was using the review by businessman and climate-change sceptic Dick Warburton as cover to scrap or water down the scheme – which was due to run to 2020 – had sent the price of the certificates to record low prices. Generators and traders say the price needs to be substantially higher to stimulate further investment.

The price of the LGCs fell from $30.50 per megawatt hour to $26.05 in three days following Mr Warburton’s appointment in mid-February and hit a low of $22.43 last month amid concerns about the likely outcome of the review.

Energy generators and retailers have been calling for a “real’’ 20 per cent target, which would mean cutting renewable electricity generation from a mandated 41,000 gigawatts to 26,000 gigawatts because investment has been running ahead of schedule and a fall in overall consumption means the nation is headed for 27 per cent generation.

The price of LGCs shot to $27 in one day following Palmer United Party leader Clive Palmer’s announcement that he would oppose elements of the government’s environmental policy, including the abolition of the Clean Energy Finance Corporation and the Renewable Energy Agency.

The price soared to a peak of $30.80 last week, fuelled by supportive comments from Motoring Enthusiasts Party senator Ricky Muir and the failure of the government to secure a vote in the Senate repealing the carbon tax.

“We are not going to have a stable market until there is some sort of resolution of the politics,’’ Ric Brazzali, managing director of Green Energy Trading, said.

Market sources speculated that the banks were holding large pools of LGCs under financing arrangements with renewable energy generators and electricity retailers. According to information on the holdings given to Senate Standing Committee on Environment and Communications by the regulator, ANZ is the second-largest holder of LGCs, with 4.36 million, behind Origin Energy, with 5.9 million. Origin is also the largest holder of retail certificates, with 372,677 of the 5.1 million on issue. The price of the retail certificates has climbed from about $25 last year to nearly $40.

Macquarie Bank has almost 800,000 LGCs in two accounts, while CBA holds 536,527.

Mr Crockett said the price of the LGCs needed to be between $40 – where it had been in 2011 and 2012 – and $50 to act as an incentive for investment once the carbon price was removed.

“As soon as you have uncertainty you can’t put the capital to work and get on with building new capacity,’’ Mr Crockett said.