THE BACKYARD CARBON MARKET

(This is a summary of an article by Angus Grigg ['The carbon market in your back yard']: The Weekend Australian Financial Review 15 - 16 August 2009.)

The government's renewable energy targets have created a market in Renewable Energy Certificates (RECs). These are being accumulated by tradespeople installing energy-saving devices such as solar hot water heaters, solar panels, water-saving shower heads and insulation. How does this work? Read on.

Under current law electricity retailers and large wholesale buyers in Australia must buy 2% of their energy from renewable sources. If current government proposals become law, this requirement will rise steadily from 2% to 20% by 2020. While the Coalition government kept the renewable energy target at 2%, the REC market stagnated. When the Labor government raised the target to '20% by 2020', the market exploded. As the requirement increases, it will increase demand for RECs. This year, over $300m worth of RECs will be traded and the number of REC traders registered by the government has more than doubled to 91. The market in RECs is expected to be $500m in 2010 and $1bn in 2011. Further, RECs are seen as precursors to carbon credits which, if government proposals become law this year, could create a market worth $2b by 2012.

At the same time, state and federal government rebates for solar hot water and for solar panels have increased the number of RECs enormously - from 60,000 in May to 1,000,000 (face value $70m) in both June and July; and it's estimated that in the financial year 2008-2009, 17.1 million RECs were created - an increase of 88% on the previous year. Despite that steady increase in the volume of RECs traded, the price of RECs is very volatile. When the Opposition voted against the government's renewable energy proposals in May, REC prices fell almost 25% and today's price is around $38 per certificate.


Pricing and trading RECs
Even as the price of credits remains relatively low, the sheer volume is creating a new industry of aggregators, brokers and speculators. It starts when a tradesperson installs, say, a solar hot water system. This comes with 30 RECs (as well as any rebates). Each REC is equivalent to a megawatt-hour of electricity. As this comes from a renewable source - the sun, in solar systems - it reduces the amount of energy (and, thus, carbon dioxide) required from coal-fired generators.

The customer can swap the RECs for a price reduction from the installer … or keep them to trade. However, to register as an REC trader, you need to own at least 5,000 RECs. This is a large number for an individual - or even for an individual tradesperson - to accumulate. 5,000 RECs is the equivalent of, for example, 167 solar hot water systems. Consequently, 'aggregators' buy small numbers of RECs from tradespeople, accumulate them into tradeable bundles and then sell these bundles - often through a broker - to carbon-emitting companies to offset their emissions. The aggregator and the broker each takes a cut from their transactions. (For more information, go to the web site of the Office of the Renewable Energy Regulator (ORER): http://www.orer.gov.au/)

It's estimated that carbon-emitting companies will require 20% more RECs in 2010 and another 30% more in 2011. This will soak-up the current oversupply of RECs, but after then, creating sufficient RECs to keep pace with demand will require a huge increase in Australia's sources of renewable energy. Consequently, it's estimated that meeting the '20% by 2020' target will require $20bn of new investment in the next decade.

Of course, developments aren't unique to Australia. For example, in the USA, an REC is equivalent to 1,000 kilowat-hour of electricity and are traded by companies such as Green Merchant Alliance in Aspen, Colorado (from whose web site the little graphic in this article is taken).

A threat to large-scale energy reduction?
Victoria, the ACT and Queensland have feed-in tariffs for electricity and NSW has promised to introduce one. These schemes pay householders - at three times the current going rate - for any electricity that they feed-in to the grid. This makes small-scale solar projects very attractive. For example, the average 2 kilowatt solar system costs $20,000 - 25,000 to install; it would take five years to pay for itself through reduced power bills; then it would generate a 13% return on investment each year for the rest of its life. As power bills rise with carbon taxes, such an investment looks increasingly attractive. However, as the number of solar hot water systems and solar panels increase, it drives down the price of RECs and reduces the attraction of the sort of large-scale energy reduction projects required to meet the '20% by 2020' target.