Electricity price update

19 Dec 2011Archived News Climate Change Matters

This article provides an update on electricity invoice costs associated with Victorian network charges, carbon price premiums and mandatory environmental schemes.

Increase in network costs

Network costs make up roughly 50% of delivered electricity costs and are regulated by the Australian Energy Regulator. Network tariffs are revised 1 January each year in Victoria and 1 July in all other states. The following table shows the approximate network increases for the Victorian network providers from 1 January 2012, and the impact on delivered costs. 
The increases shown above can vary depending on which network tariff is being applied to a site's invoices. Although network prices are regulated, most customers will have a choice of tariff that can be applied to billing.  Energetics can assist by reviewing your portfolio and advising the optimal tariff arrangement for your business.  

Carbon price premiums - electricity contracts

The following table shows the expected carbon impact on energy prices at a starting carbon price of $23/t CO2-e from 1 July 2012.  This is an update to the previous forecast provided by Energetics in July 2011.
Once carbon pricing commences, electricity retailers will rely on various contract clauses to recover carbon costs on existing supply agreements.  Energetics recommends all customers become familiar with the clause specific to your supply agreement, as it could result in the pass through of costs which differ significantly from those shown in the table above.  
For new supply contracts being quoted, retailers are increasingly willing to offer prices that are inclusive of carbon (i.e. no further cost premium will be passed through from 1 July 2012).  Over time, Energetics expects some converging of the state carbon price premiums shown in the table above, reflecting that electricity can flow between states.
Energetics can assist in providing carbon cost budgeting that takes into account your specific circumstances.

Costs associated with mandatory environmental schemes

There is now a range of federal and state government schemes designed to improve energy efficiency and encourage the take up of renewable energy.  For business these programs create costs, but there are also opportunities to ameliorate their impacts with certificate schemes that reward energy savings or projects that produce renewable energy.  
This newsletter provides an update on the various environmental schemes, the expected impact on invoice costs and the offset opportunities available through white and green certificate schemes. 

Large-Scale Renewable Energy Target (LRET)

The federal government has a Renewable Energy Target (RET) of 20% renewable electricity generation by 2020.  From 1 January 2011, RET was split into the Large-Scale Renewable Energy Target (LRET) and the Small-Scale Renewable Energy Scheme (SRES). 
Under LRET, large-scale renewable energy projects, such as wind farms, create 1 Large-scale Generation Certificate (LGC) for each 1 MWh of electricity generated.  Electricity retailers are then obliged to purchase an increasing number of LGCs each year to fulfil their obligations under LRET.  The costs associated with the purchase of LGCs can be passed through to end-users.  It is important to note that the pass through of LGC charges is not regulated and can be negotiated with your retailer. LGC pass through costs are around $3/MWh in 2011 but will more than double over the next few years as scheme targets increase.

Small-Scale Renewable Energy Scheme (SRES)

This is a new scheme from 1 January 2011 to fund small-scale residential solar power and hot water systems.  Unlike the large-scale scheme, which has fixed targets, the number of certificates retailers must purchase for each calendar year is not formally announced until the start of that year.  To account for this uncertainty, most retailers are treating SRES as a pass-through cost to customers, rather than nominating fixed pass through costs in the contract.   
Retailers have the option of purchasing certificates through a central clearing house as $40 each, or through the market at the prevailing market price.  As present, the spot market price for SRES certificates is around $33 each.  In 2011, SRES pass through costs on electricity are typically between $5-6/MWh, depending on how your retailer has purchased certificates.  In 2012, this cost is expected to increase to between $7.50 - 9.50/MWh before falling to $2 - 3/MWh in 2013. 

Gas Electricity Certificates (GECs)

GECs apply in Queensland only and are used to fund 15% gas-fired generation in the State. GECs are traded so prices do vary but have remained stable to date. Pass-through costs on an electricity bill should be between $0.50 - 1/MWh. 

NSW Greenhouse Gas Abatement Certificates (NGACs)

NGACs apply in NSW only with prices also traded. In this case, pass through costs should appear at around $0.50 - 1.50/MWh on an electricity bill. There is an equivalent AGAC scheme that applies in the ACT.  It is expected that the Greenhouse Gas Abatement Scheme will cease upon introduction of carbon pricing from 1 July 2012.

Energy Savings Certificates (ESCs)

ESCs are applied in NSW to fund energy efficiency initiatives in the State. The number of certificates required increases annually. For 2011, pass through costs on an electricity bill should be around $1/MWh, rising to $1.50/MWh in 2012.

Victorian Energy Efficiency Target (VEET)

From 1 January 2012 the Victorian Energy Efficiency Target (VEET) will be expanded to cover business users.  VEET has been in place since 1 January 2009, with a target of reducing greenhouse gases by 2.7 million tonnes per annum across residential customers.  With the expanded coverage, the annual target reduction has been increased to 5.4 million tonnes. 
The magnitude of any pass through costs to business users under the VEET scheme cannot be predicted with certainty until the electricity and gas target reduction rates are set prior to 31 May 2012.  However, based on a range of potential prices for Victorian Energy Efficiency Certificates, pass through costs could be in the range of $2-5/MWh for electricity users.
Modelling from Victoria’s Treasury shows that the extension of the VEET scheme to cover the state’s businesses will have a cost neutral effect economy-wide.  
Customers should note that although each of the above schemes are mandatory, the associated costs are a negotiable part of your electricity supply contract, and should be incorporated into tenders when requesting contract pricing. 

Offset opportunities within environmental schemes

There are a number of opportunities to offset the costs associated with environmental schemes by actively participating in energy savings certificate schemes.

NSW Energy Savings Scheme

The NSW based Energy Savings Scheme (ESS) was introduced in July 2009 to provide an incentive to businesses to reduce their energy use. Through a mechanism of project approval, eligible energy reduction schemes are rewarded annually for every tonne of CO2 emissions savings achieved. The reward comes in the form of tradeable carbon certificates (also known as “eskies”) which can be retired, banked or sold. Currently, carbon certificates are valued in the region of $30 per tonne and can provide a valuable revenue stream in addition to the reduced energy costs arising from energy saving activities. In this way, the business case for energy saving projects is improved and effectively makes reduction in emissions achievable at a reduced cost. In many cases a forward creation of certificates can be made, further improving cash flow.
Energetics is actively involved with our clients in indentifying, preparing and submitting applications to obtain accreditation for their energy saving projects and providing support for the on-going administration of the scheme. For those clients who are required to participate in the Federal Government’s Energy Efficiency Opportunities (EEO) program, the ESS offers a way for the cost of compliance to be mitigated and the EEO assessments themselves provide an excellent source of potential ESS projects. It is not unusual for many of our clients to have over $1 million of potential certificate creation opportunities. Energetics’ experts can similarly  help your business access these funds.

Renewable Energy Target (RET)

The RET provides an incentive for renewable energy projects via a tradeable certificate scheme. A REC is created for each MWh generated by an eligible renewable energy technology such as solar PV or wind. These certificates are currently worth in the region of $40 and provide an additional source of revenue to support renewables projects. This revenue, together with falling technology costs, the strong A$ and increasing energy and carbon costs can provide a compelling business case. 
Energetics is currently working with a number of clients to develop and install renewable energy projects across their portfolios. Investing in these projects provides energy price certainty, supply diversity and a positive sustainability outcome which is in part subsidised by the RET legislation.


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