LGC prices have (finally) fallen below $30 per unit for the first time since the COVID era. At one point, prices actually dipped below $26 per LGC, almost halving from the $40s level a month ago. While rumours suggest the plunge was triggered by forced position closures from trading activities, it certainly raises alarm bells for those who believed high LGC prices would last forever. With just five years remaining until the end of the RET scheme, are prices finally heading to zero?
LGC recap
For those unfamiliar, an LGC (Large-scale Generation Certificate) is a tradeable green certificate legislated under the Renewable Energy Target (RET) scheme, awarded to a green generator for every one MWh of green energy supplied to the grid. The RET scheme targets 33,000 GWh of renewable energy by 2030 by incentivising new renewable projects through additional LGC revenue. Despite the achievement of the renewable target in January 2021, it did not stop the building of new renewables, nor are LGC prices anywhere near zero.
Supply and Demand
Source: CER Quarterly Carbon Market Report September 2024
Incremental LGC supply is essentially the MWh of renewable generation in a period, a function of renewable capacity and weather conditions like wind and sunshine. This has been expanding rapidly at 2–3 GW a year thanks to the ever-expanding renewable pipeline.
The demand side has three main components:
RET demand (~60% of annual demand): Under the RET scheme, retailers comply with their mandated targets by acquiring and surrendering the required number of LGCs, calculated as their load multiplied by the RPP (Renewable Power Percentage), which is currently 19% for 2024 and will effectively remain flat until 2030 given the fixed 33,000 GWh target.
Non-RET demand (~20% of annual demand):
Government surrenders. Government entities receive and surrenders LGC on a voluntary basis, under their respective government offtakes schemes. The biggest component are ACT and Victoria government offtakes. Recently, government surrender demand has been largely static as the corresponding projects have been built and are steadily providing LGCs.
Private sector voluntary surrenders. Businesses who are surrendering LGCs over and above RET obligation, as a part of their carbon neutral goals or renewable electricity usage claims. The growth has been strong over the past years but has slowed. This is expected to step up in 2025 with corporates now subject to the mandatory climate disclosure scheme.
Shortfall charge refund (~20% of annual demand): Retailers can defer up to 10% of LGC obligations for up to three years by paying shortfall charges of $65 per LGC in the liable year, which can be refunded if the required LGCs are surrendered within a three year window. This effectively creates additional roll-forward LGC demand at any point in time. This component is shrinking as retailers work off past surrenders (see chart below).
LGC Dynamics
LGC prices have fallen steadily but remained elevated between 2022 and 2024 in the $40–$50 range. The forces keeping LGC prices elevated had been the growth of voluntary surrenders from corporate and government entities and delays in projects reaching completion. These delays forced retailers with offtakes to go to the market to plug the shortfalls. La Nina years also reduced LGC supply altogether.
Over time, these upward forces have weakened, while renewable generators have entered the market at an ever-stronger pace. The equilibrium seems to be shifting with supply growth outpacing demand, in particular, the clearing of the LGC backlog. Finally, in November 2024, the price decline accelerated, dipping below $30 for the first time since 2021.
The future renewable pipeline also does not appear to have slowed, with a record pipeline of projects reaching financial close. RET demand and shortfall demand have plateaued, as incentives to defer shortfalls decrease with lower prices and more opportunities to secure LGCs under offtakes. While voluntary surrenders are expected to grow due to new corporate disclosure requirements next year, the magnitude of this growth seems unlikely to outpace supply. This suggests prices could slowly converge to the low $10–$20 range without further demand growth.
Key implications.
So what does it mean for existing renewable projects?
Lower revenue. The most immediate impact is on revenue, as LGCs currently account for almost half of a merchant project’s revenue stack. However, projects have been quick to adjust their bidding strategies from the -$40 range to -$26 during the price dip event, which has somewhat marginally improved spot energy prices. Though, the bidding adjustment is unlikely to fully offset LGC revenue losses.
PPA slow down. The second impact is the potential slowdown in demand for Power Purchase Agreements (PPAs) – particularly for solar, where LGCs have been a significant portion of the value proposition. This particularly true in the low solar dispatch weighted energy price environment such has prevailed over 2023 and 2024.
Overall, this dynamic doesn’t look good for renewables, but the outcome is somewhat expected. The RET was designed for LGC ‘subsidy’ to eventually converge to near zero. The high prices were never supposed to last forever, and they certainly have lasted longer than we thought it would. As Australia transitions to a renewable-dominated grid, renewable generators will continue to adjust their strategies to achieve their required return on capital.
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