REC prices in Australia could fall by up to 30% on RET cut - analysis

Oct 28, 2014 - The price of renewable energy certificates (RECs) in Australia is expected to drop by between 10% and 30% if the government makes a “substantial” reduction to the 2020 renewable energy target (RET).

In a new analysis, law firm Baker & McKenzie explained that the low prices for RECs will translate into lower revenues for existing wind, solar and other green power plants. In turn, this increases the risk of them not being able to meet debt servicing obligations if operating on a merchant basis or once the term of their power purchase agreements (PPAs) expires.

Cutting the RET in Australia will, for sure, bring down the value of existing renewable energy plants so the government risks triggering significant compensation claims by investors, the law firm warns. What is more, this would be a complex process as any compensation and transitional assistance regime will need to be tailoured for the specific financial arrangements of each and every renewable energy project.

Baker & McKenzie also expects to witness the launch of legal challenges to any changes in the RET scheme, which further affect the financials of renewable energy operators and developers.

“A retrospective change to the policy would result in financial impairment and a substantial risk that existing projects and businesses would collapse, as well as inflicting damage on Australia’s reputation as a safe place to invest,” Kane Thornton, the CEO of Australia’s Clean Energy Council, commented in relation to the Baker & McKenzie analysis.

Australia aims to source 20% of its total power from renewables by 2020 under the RET, so the programme offers support to projects such as solar and wind farms. When the goal was set, these 20% were calculated to be equal to 41,000 GWh annually. That was the actual target up to a recent review initiated by the government. Due to declining power demand, however, more up-to-date estimates say the real 20% renewables target would require far less green electricity at the end of the decade.

Last week, Australia’s ruling party launched a proposal to cut the RET to a "real" 20% of demand for large-scale project, or around 26,000-27,000 GWh. The Labour Party did not accept the proposal. Negotiations are in progress currently.

“There is a risk for the Australian Government that the policy objective of achieving even reduced targets might not be met because of the impacts resulting from sovereign risk associated with a reduction to the RET,” Baker & McKenzie says in the report, Financing impacts of amendments to the Renewable Energy Target.

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