REC Price Crash in Australia: What To Do?

Australia's REC markets are in the midst of a crash.  How the government of Australia as well as renewable developers respond will be crucial both to Australian renewable markets as well as the broader global marketplace.

A renewable energy credit or certificate (either way, a REC), represents the renewable attributes associated with a particular megawatt-hour of generation. REC markets are one tool states use to incent the development of renewable generation capacity.  RECs are designed to be additive to other energy products.  This means that the revenue stream a project owner reaps from RECs is on top of the energy and capacity values of its project.  The philosophy behind this policy incentive is that because renewable projects are socially desirable but tend to demand greater revenue streams - and revenue certainty - than do other traditional projects.  (This may not be universally true across the board of all renewable projects, but is generally accepted as the primary policy explanation for RECs.)  Developers can either sell RECs into the spot market at a floating market-based price, or secure long-term contracts to sell the RECs at a specified price fixed in the agreement.

What happens when REC prices crash?  A look at Australia's REC market is illustrative.  Under Australia's Renewable Energy Target law, load-serving entities must ramp up REC purchases toward a target of 20% renewable by 2020.  RECs are awarded to generators for every MWh of renewable power produced in excess of a regulatory baseline established by the Office of Renewable Energy Regulator.  As in other markets, REC value is determined by supply and demand.  Throughout 2010, RECs have generally been between $35 and $45 (in Australian dollars).  Prices of at least $45-$50 are seen as necessary to support the development of new wind in Australia.

Today, Australian REC prices are below $30.  Analysts point to the glut of REC supply created from broad acceptance of small-scale residential and commercial solar panels funded through government subsidy, which caused the utility-scale market to tank.  Australian RECs may still have been serving a purpose - supporting widespread rooftop solar - but are no longer functioning to incent the development of large-scale wind farms, something they were broadly expected to do.  Indeed, companies placed large bets on the continued value of the REC market.  For example, Australia's largest renewable baseload generator, NSW Sugar Milling Co-operative, faces receivership unless the REC price nearly doubles.

So what to do?  Australia is in the midst of restructuring its REC markets to carve out small-scale RECs as a separate market with a $40 fixed price, while simultaneously restoring the (government-mandated) demand for large-scale RECs.  Will this bring the large-scale REC market back to life?  What have we learned about REC markets from Australia's experience?  Clearly, developers are planning projects based on assumptions about REC pricing -- assumptions that they require be backed by some amount of certainty.  Any jurisdiction that wants RECs to function in this way should be mindful of how disruptions or changes in the REC market shake up developers' certainty, and what that means for their willingness to continue forward with projects.