auto_stories Quarterly Carbon Market Report September Quarter 2022

​Carbon markets generally continued to perform to previously stated expectations in Q3 2022. Key 2022 calendar year to date (January to September period) highlights include:

• Australian Carbon Credit Unit (ACCU) voluntary and state and territory cancellations total 1,201,060 (up 93% from 621,087 over the same period in 2021).
• Large-scale Generation Certificate (LGC) voluntary cancellations total 6,225,992 (up 46% from 4,265,169 over the same period in 2021).
• Early signs of an increase in rooftop solar installations and capacity.
• 1.5 gigawatts (GW) of large-scale wind and solar projects is expected to be approved for LGC creation in Q4.

As Q4 is typically the largest quarter for added rooftop solar capacity, it is likely total added renewable energy capacity for Q4, including from large-scale renewable power stations, will exceed 2.3 GW – potentially setting up 2023 for a good step up in total renewable energy generation.

ACCU holdings at record levels

ACCU holdings increased 3.6 million over the quarter, reaching a record 19.7 million. Since 1 January 2022, holdings have increased by over 8 million ACCUs.

Increased demand for ACCU holdings likely reflects hedging against future needs for Safeguard liability or voluntary demand or for speculation, potentially suggesting expectations of a rising ACCU price over the remainder of the decade.

Supply to meet this increased demand was available, in part, as a result of the first exit window from fixed delivery contract milestones. The first window ran from 4 March to 31 August, during which 2.6 million ACCUs were approved to exit with the contract holders paying $29.7 million. This represents about 45% of the 5.8 million ACCUs eligible to exit. The second pilot window is now open for exit applications for ACCU deliveries scheduled from 1 July 2022 to 31 December 2022.

The generic ACCU spot price softened from $35.10 to $30.75 over the quarter. While the price strengthened post the Federal election, it seems to have settled back around the $30 price level that was suggested in the March Quarter 2022 report. Notably, this price is high enough to incentivise exit from fixed delivery contracts because it is about double the average contract price with CER plus a commercial margin.

Markets appear to be broadly stable pending finalisation of the Safeguard Mechanism Reform and Independent review of the integrity of Australian Carbon Credit Units. Consultation on the draft safeguard legislation closed 28 October and the Government's current plans are to implement changes by July 2023.

ACCU trading volumes continue at record levels

Q3 was another record quarter for the ACCU secondary market with 8.4 million ACCUs transacted. The total ACCU secondary market transaction volume in 2022 to the end of Q3 was 17 million, 3.8 times the volume transacted over the same period in 2021.

The increase in transactions was also reflected in reported spot market trades (a subset of total transactions) which increased dramatically in 2022 to the end of Q3 to 4.8 million, up 436% from 0.9 million over the same period in 2021.

This rise in trading activity signals a significant increase in market participation. More information is available in chapter 1.

LGC price continues its run up

LGC spot prices increased rapidly in mid-September passing $70 for the first time since November 2015, before settling back to approximately $65 in mid-October. Since 1 July 2022, spot prices have increased by over 40%.

The March Quarter 2022 report pointed out the market was in an effective deficit, with $1 billion in consolidated revenue that can be redeemed with LGCs under the 3-year rule. The report suggested LGC supply-demand balance may remain tight over the next several years.

In 2022 to the end of Q3, 2 GW of large-scale renewables capacity reached a final investment decision (FID). Total FID capacity for this year is still expected to be about 3 GW, taking the average capacity reaching FID over the last three years to 2.8 GW.

CER expects to approve up to 2.7 GW of additional capacity for LGC creation in 2022, with about 1.5 GW of that expected to be approved in Q4. Given the rate of FID in recent years, the capacity approved each year will likely remain at similar levels over the following 2 years.

While the spot LGC price is signalling a need for increasing investment, it is still an open question as to when a material step-up in FID capacity will occur to meet demand. Further analysis is available in chapter 2.

Rooftop solar installations and capacity showing signs of recovery

Following the previous two quarters of relatively subdued installation capacity previously reported, rooftop solar PV experienced a small rebound with an estimated 729 megawatts (MW) installed in Q3. Total capacity installed in 2022 to the end of Q3 is 1891 MW, 19% below the same period in 2021.

Significant increases in retail energy prices may have influenced consumer sentiment in purchasing solar PV. It is inherently difficult to predict whether this trend will continue as many factors impact consumer behaviour, including rising interest rates. However, post the end of Q3 there have been reports of a material increase in enquiries with solar retailers. This follows substantial public commentary about the potential for further increases in energy bills next year.

Q4 is typically the largest quarter for installed capacity often with material uptake of larger commercial and industrial systems (100 kilowatt (kW) capacity limit). Over the last three years, Q4 installations accounted for an average 30% of annual capacity. If this trend continues, total capacity in 2022 will be about 2.7 GW.

In the lead up to the Q3 statutory surrender of 11.8 million Small-scale Technology Certificates (STC) on 28 October, the STC Clearing House deficit increased to 7.4 million certificates. More information on the small-scale renewable energy scheme is available in chapter 3.

Footnotes

¹ Data sourced from Jarden and TFS Green.