LGCs as a pathway to sustainability for commercial energy buyers
20 November 2020
If you’re an Australian commercial energy buyer, no doubt you’re getting serious about your sustainability objectives, be it net-zero, 100% renewables or similar, by a date in the not-too-distant future (and if not, you should be!).
We work with a lot of organisations in this space, and while the conversation often starts around opportunities for power purchase agreements (PPA), there are a lot of options to meet these objectives, including directly procuring LGCs.
How does this work? Let’s go through it.
LGCs can be purchased to offset a business’s direct carbon emissions, or scope 2 emissions. They can also be used to offset downstream or supply-chain electricity consumption, or scope 3 emissions. For example, transport, travel or in the case of a local council – streetlights.
An LGC, or large-scale generation certificate, is a tradable certificate for renewable energy. One LGC represents one megawatt hour (MWh) of accredited renewable electricity generated. There are more than 15 types of accredited renewable energy sources including wind, solar, hydro and landfill gas.
This is all part of the Federal Government’s renewable energy target (RET) mandating the additional generation of electricity from renewable sources to reduce greenhouse gas emissions in the electricity sector. Once purchased, LGCs are either held, sold or retired depending on the sustainability goals of the buyer organisation.
LGCs are created then registered by the generator through the Clean Energy Regulator. The units can then be sold or transferred to other entities at a negotiated price. The buyers of LGCs are usually electricity retailers, who are required to surrender a set number of certificates to the Clean Energy Regulator each year as part of the RET.
There’s also a secondary market for LGCs, where organisations can purchase LGCs directly from renewable energy generators in the market – something not all businesses are aware of.
What about PPAs?
We support our clients to meet financial and sustainability objectives, often through long-term renewable energy PPAs. These are a great option for many organisations with renewable energy targets looking to secure clean energy supply into the future at a competitive price via innovative contracting. PPAs deliver energy price certainty and protection from energy price fluctuations over the life of the PPA.
For others, alternative approaches to achieving carbon or sustainability objectives are needed, which are separate from their electricity procurement, such as directly purchasing LGCs from the wholesale market. LGCs can be forward purchased such as for 6 months, one year, or five years ahead. This is termed ‘buying in strips’ and can significantly reduce procurement costs, as well as being a simple way to meet clean energy targets.
Some organisations will look at a mix of the two options, and as no two organisations are the same, we can help in selecting the best option for your organisation.
Why purchase LGCs now, and why directly from the wholesale market?
Because energy retailers are required to source around 20% of their electricity load from renewable sources, they purchase and surrender LGCs and then pass that cost on their clients. By purchasing LGCs directly from the market, businesses can also unlock much better value.
And, because of market forces, right now LGC prices are low, meaning even better value.
The market price for LGCs hit a peak in in 2017 and 2018 (see above, sourced from the Renewable Energy Hub digital marketplace). LGC prices increased as a function of meeting the 2020 RET quantitative target (33,000 gigawatt hours of additional renewable electricity), which saw more revenue going to renewables, leading to a boom of renewable energy projects across the country. But now that the volume of LGCs required to comply with the RET has peaked, we’re essentially moving into an oversupply of renewables so there’s great value that can be captured by purchasing surplus LGCs.
Whereas prices for LGCs were as high as $90 back in 2018, the spot price is now around $40. For longer duration LGC “strips” (fixed volumes for five years or more), prices can be as low as $10. This provides a great opportunity to save money on the mandatory renewable component of your electricity supply (equivalent to around 20% of your load) or achieve even more ambitious renewable energy targets at the best possible price.
How does it work in practice?
Renewable Energy Hub recently provided advisory services to a client with ambitious sustainability targets for 2030. After working through the options, it was determined that for value and simplicity, the best way to meet their targets was to purchase and retire LGCs. By forward-purchasing to 2030, we secured an even better price. When all the factors were weighed up – stakeholders, value, transaction costs, timelines – keeping it simple delivered the greatest value.
It is important to be aware of how different procurement strategies contribute towards the various sustainability commitments and goals, from carbon neutrality to 100% renewables. Our team can guide you on the best strategy for your business to meet your goals.
What kind of organisations should be looking at this?
All organisations should be looking at LGCs as a potential pathway to sustainability – the key factor here is when. Now is a great time for Australian corporates to set their sights on ambitious targets, capture some great value and make a strategic decision about procuring renewable energy by going direct to the market.
Renewable Energy Hub, together with our parent company TFS Green, are Australia’s largest trader of environmental certificates, working with every renewable energy generator in the country. Our team have won the award for best broker of renewable energy and renewable energy certificates from Environmental Finance Magazine for the past 10 years.
Beyond Renewable Energy Hub’s extensive experience supporting clients with their energy procurement, and directly in the wholesale market, we’re about to launch our digital marketplace, giving users unmatched insight into the market, and a powerful suite of analytical and transaction tools for the renewable energy future.
Talk to us today to find out how we can help your business meet your sustainability and energy procurement goals.