Benefits realisation from on-site renewables

On-site renewables create financial benefit in two main ways:

1. Electricity cost savings – on-site generation reduces the amount of power required from the grid. These savings represent about 75% of the total ongoing benefit.

2. Creation of Large-scale Generation Certificates (LGCs) – LGCs are created based on the quantity of renewable electricity generated. These LGCs have a financial value, which is described in more detail below.

LGCs – what are they?

Australia’s Renewable Energy Target (RET) is a Federal Government policy designed to ensure that at least 33,000 Gigawatt-hours (GWh) of Australia’s electricity comes from renewable sources by 2020.

Energy retailers (e.g. Origin Energy, ERM Power, etc.) must buy LGCs to meet the legislated target which is based on a percentage of their total energy sales. The total of these LGC purchases is intended to match the 33,000 GWh target. If a retailer does not meet its individual target, penalty payments have to be made.

LGCs are created by renewable energy generators – either from generation on a customer’s premises (e.g. rooftop solar) or large-scale systems that connect directly to the electricity network (e.g. wind farms).  They are a tradeable commodity and their value is impacted by supply and demand.

How do companies realise value from LGCs?

The accreditation of renewable systems and the creation of LGCs is administered by the Clean Energy Regulator (CER). LGCs can only be created using metered generation data that has been validated by the CER. Once LGCs have been created, organisations have two main options to realise their value:

1. Sell the LGCs

The simplest way to realise value is to sell the LGCs through a broker into the commodities market or directly to an energy retailer. They can be sold at the prevailing spot price or at an agreed future value. More complex options, such as Contracts for Difference, also exist.

2. Supply LGCs to retailer to reduce bill

Energy retailers pass the cost of buying the LGCs to meet the RET through to energy users. For large organisations, this appears as a separate line item on the energy bill, often called an ‘LREC charge’. Instead of paying this charge, some retailers will allow customers to supply a quantity of LGCs to meet the portion of the RET that is attributable to their consumption. This reduces the size of the energy bill.

This can be beneficial for end users, as the unit price charged by the retailer is a combination of the weighted average price the retailer has paid to purchase the LGCs, plus a small fee for their own internal costs. This is expected to be particularly significant over the next 5-10 years as many retailers have had to strike LGC purchase contracts in the last year or two during all-time highs for LGC prices. It can be assumed that retailers will be keen to recover all costs.