Australia’s Guarantee of Origin Scheme: consultation papers

8 February 2023

Department of Climate Change, Energy, the Environment and Water
GPO 2013
Canberra, ACT 2601

Email: GuaranteeofOrigin@industry.gov.au
RE: Australia’s Guarantee of Origin Scheme

About ZEN Energy
ZEN Energy is Australia’s first electricity retailer to have a near-term science-based emissions reduction target in line with limiting global warming to 1.5° C. ZEN has contracted renewable energy and environmental certificates from 17 solar and wind farms and is actively growing its firmed renewable energy supply. ZEN’s larger customers include the South Australian Government,
Bunnings in Victoria and South Australia, CSIRO’s sites in New South Wales, Victoria, and the
Australian Capital Territory, and the Southern Sydney Regional Organisation of Councils (SSROC) comprising twenty-five councils in New South Wales.

Through engaging with likeminded partners, and building innovative agreements with them, ZEN is working to support the Commonwealth Government’s goal of building Australia into a renewable energy superpower. We are focused on a broad range of innovative, new technology solutions across Australia. We are committed to leading communities into the zero-carbon world.

Our values drive us to be a supportive partner to the Department of Climate Change, Energy,
Environment and Water (the Department) in delivering practical solutions to the energy transformation as fast as possible, with the greatest possible positive economic impact.

More information about how ZEN’s ambition aligns with that of the Commonwealth can be found in our ESG report. Australia’s leading ESG report specialists, Currie Communications assessed this report using the globally recognised Global ESG Monitor (GEM) methodology. GEM ranks organisations based on the clarity and relevance of their ESG reports. After being extensively assessed against a benchmark comprising the top 50 ASX companies (2019 reporting sample), ZEN
Energy’s ESG report was ranked at the top, with a score of 50.
ZEN Energy Submission

Executive Summary
ZEN welcomes the opportunity to comment on the Guarantee of Origin (GO) and Renewable
Electricity Guarantee of Origin (REGO) certification proposal. We support a transparent certification mechanism to track and verify emissions associated with hydrogen and other low emissions commodities produced in Australia. We agree that such a scheme will help unlock economic opportunities for Australian industry to meet growing domestic and international demand for verified renewable energy and clean products. However, the proposal set out in the consultation paper, if implemented, would have the unintended consequences of lowering investment in renewable electricity. This undermines the Commonwealth’s ambitions of 82 percent renewables and 43 percent reduction in carbon emissions by 2030 and would raise average wholesale electricity prices.

Fortunately, variations on the proposals could secure the desired outcomes without disrupting investment in and expansion of renewable energy generation. We suggest:
1. Accrediting REGOs for below baseline renewables, but only for use by trade-exposed
emissions-intensive industries
2. Delaying the abolition of the mandatory RET until 2035, and recalibrating the Renewable
Energy Target (RET) targets from 2024, with mandatory targets rising at a rate consistent
with achieving 82 per cent renewables by 2030 and almost 100 per cent by 2035.
3. Replacing the RET by a single REGO from 2035.

Revenue from the sale of LGCs has provided a large part of the incentive for new investment in solar and wind power generation since the RET was established in its current form in 2008.
Uncertainty about the RET for a period from mid-2013 caused a deep slump in renewables investment (see section 2.1). As the Climate Change Authority said in its early period of legitimacy, in the absence of a carbon price, extension of the RET beyond its current 2030 horizon and strengthening of targets beyond the 2020 limits is necessary for continued expansion of renewables investment.

Up till now, the combination of mandatory and voluntary surrender of LGCs has caused total demand for LGCs to exceed the mandatory minimum. This has maintained a positive price for LGCs after sent out generation from renewable assets eligible for the RET scheme exceeded the 2020 mandatory target of 33 million certificates.

Expansion of wind and solar generation lowers the wholesale price of power during the hours when solar and wind generation is significant. Value from LGCs so far has maintained incentives to invest despite the observed decline and further expected decline in the price achieved by renewable generators in the electricity spot market. The Government’s proposed improvement of grid access would facilitate higher levels of renewable generation if and only if expected present value of revenues from sale of power plus LGCs exceeds expected present value of investment costs.

Introduction of the full REGO proposal would see voluntary purchasers of LGCs switch to REGO’s from below baseline renewables generation. The quantity of below baseline generation would

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exceed the volume of voluntary purchase and surrender of LGCs, so the LGC price would fall sharply. REGO prices would also be low at first, as the volume of below baseline output (which the
CER estimates to be 14 TWh) would exceed the total amount of voluntary surrender of LGCs in the early years. Growth in exports of zero carbon products certified by REGOs would lift the value of
REGOs over time.

There are two mechanisms through which removing or significantly reducing the price of LGCs would increase wholesale electricity prices. First, solar and wind generators would cease production when the electricity price fell below zero, instead of when they fell to a negative level with absolute value equal to the LGC price. Second, investment in and therefore future generation of solar and wind power would fall.

Without LGC revenue, renewables generation that would have been bid and sold at a negative price will not be available to put downward pressure on average wholesale prices, or to meet the
Government’s 82 per cent renewables objective or 43 per cent emissions reduction target.

According to AEMO’s Quarterly Energy Dynamics report, negative pricing brought down average wholesale prices by $23/MWh in South Australia and $11/MWh in Victoria during Q4 of 2022. The downward pressure of negative prices on average wholesale prices in SA in Q4 2022 exceeded the direct costs of LGCs to power users by almost $30 million (see section 2.2).

The frequency and duration of negative pricing is greatest in the states with the highest proportion of variable renewable power generation. The proportion is rising in all states and will continue to do so for as long as renewables generation expands, until such time as the spread of prices causes expansion of storage capacity to match expansion of renewables generation.

The renewable generator depends on the revenue from both LGCs and energy to cover its cost of capital and other fixed costs. The energy price required for new investment is lower to the extent of the LGC price. Expansion of solar and wind production from new investment lowers the average price of power. This is evident in the rapidly increasing discount of solar and wind to baseload
(discount to the volume weighted price) apparent in the charts below (see section 3.1). This is the mechanism through which the expansion of renewables lowers future wholesale prices in the modelling by Reputex produced for the Labor Opposition before the 2022 election.

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Table of Contents

1. Exporting from the Australian Energy Superpower ………………………………….…………………………… 5
1.1. Product certification for export.
1.2. Opportunities for improving renewable energy certification in Australia.

2. Implications for Markets and Investment …………….……………………………….……………………………… 5
2.1. Implications for investment in renewable generation.
2.2. Implications for wholesale prices.
2.3. Implications for investment in storage.
2.4. Distributional effects of allowing LGCs to be substituted by REGOs from below baseline generation.

3. Delivering 82 Per Cent Renewable Energy by 2030 …………..………………………………………………..… 8
3.1. The need for a market mechanism - Renewable investment needs to accelerate but instead is stalling.
3.2. Renewable Energy Target - an engine to take us to 82 per cent.
3.3. Why mandatory.

4. ZEN Energy Recommendations ………………………………..………………………………………………………… 10
4.1. Only allow below baseline generation to create REGO certificates and restrict use to trade-exposed emissions-
intensive industries from 2025 to 2035.
4.2. Increase the LRET in line with 82 per cent by 2030 and near 100 per cent by 2035.
4.3. Roll out the REGO scheme as proposed in 2035.

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1. Exporting from the Australian Energy Superpower
Prime Minister Albanese, in his first major speech on climate change as prime minister, told the
Sydney Energy Forum:
“… Australia has the workers, the resources and the capacity to become a renewable energy
superpower.”
ZEN shares this vision. We see zero carbon exports from the Australian Energy Superpower as being essential to the success of global decarbonisation as well as to full employment with rising incomes for the next two generations of Australians. For this reason, ZEN supports the Department’s proposal of a product-level Guarantee of Origin scheme.

1.1. Product certification for export

The recent adoption of a European Carbon Border Adjustment Mechanism (CBAM) signals the important role zero-emission certification will play in the future of trade. ZEN supports the
Department’s initial focus on hydrogen and its plan to expand certification to a broader range of products.

1.2. Opportunities for improving renewable energy certification in Australia

Renewable energy certification is of high importance. While we have concerns about the proposed
Renewable Energy Guarantee of Origin (REGO), the proposal recognises four important issues of renewable energy certification in Australia:
1. Policy Position 1 would extend renewable energy certification beyond the legislated end of
the RET. This is necessary for utilisation of Australia’s Superpower opportunity.
2. Policy Position 6 acknowledges the below-baseline zero-emissions electricity generation.
3. Policy Positions 8-17 provide more detail about electricity’s origin.
4. Policy Position 22 from the Guarantee of Origin paper proposes an improved Residual Mix
Factor. It is an underappreciated flaw of current arrangements that Residual Mix Factors
have not accounted for the claim LGCs have on renewable MWhs. This has facilitated
inequitable freeloading. ZEN commends the Department for raising these issues.
In the recommendations in section 4 of our response we seek to conserve constructive elements of these four points of recognition, while removing unintended negative consequences of current proposals.

2. Implications for Markets and Investment
ZEN urges the Department to consider the effect of having the REGO scheme, as currently proposed, operating concurrently with the RET. The proposed REGO scheme would allow below baseline generation to create REGO certificates. There is no reason to expect the voluntary market to distinguish between these certificates and LGCs—or if there is some differentiation, comprehensively to separate them. As a result, we can expect to see substitution of demand for
REGOs produced with below baseline generation, for demand for LGCs. As scarcity in the LGC market is entirely the result of voluntary demand for LGCs and the amount of below baseline generation (~14TWh) far exceeds the amount of voluntary sacrifice (~7TWh), there is no reason to suppose that the LGC price in the first year of the new scheme—2024—would be significantly above zero. This would have serious consequences. In section 2.1, we outline the impacts on

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renewables investment. In section 2.2, we discuss the interactions with wholesale electricity prices.
In section 2.3 we look at the flow-on effects for investment in storage. Finally in section 2.4, we investigate the distributional effects of allowing below baseline generation to create renewable energy certificates.

2.1. Implications for investment in renewable generation

A falling LGC price reduces investment, through expected loss of revenue from LGCs, and the reduction in confidence caused by the change in the arrangements. New development projects need sufficient expected revenues and sufficient confidence in those expectations to reach financial close and to proceed with construction. Substantial and reasonably predictable LGC prices have been centrally important to meeting both requirements since the RET was introduced in its present form in 2008. The period of uncertainty about the future of the RET from 2013 led to a collapse of investment in renewable energy (see figure 1). ZEN’s experience in arranging finance for new developments has shown us that certificate revenue is a key contributor to reaching financial close and subsequent decisions on construction. A sudden fall in the LGC price caused by a regulatory intervention or by uncertainty about the regulatory environment would make many potential projects uneconomic. In section 3 we say more about how LGC revenues are essential to the renewables’ investment case, and the central role they play in the energy transformation.

Figure 1

Investment in Renewable Capacity
3.5

3

2.5
$USD Billion

2

1.5

1

0.5

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: BloombergNEF, Note: includes small-scale solar investment, dollar amounts are in nominal terms.

2.2. Implications for wholesale prices

Lower investment in and therefore future output of renewable energy will cause future average wholesale energy prices to be substantially higher than they otherwise would be. To the surprise of the Warburton Committee—established by the Abbott Government in 2014 to make a case for abolition of the RET—the modelling commissioned from ACIL Allen showed that the rise in prices caused by lower investment was expected to outweigh the direct cost of purchase and surrender of
LGCs.

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In addition to the detrimental effect on investment and therefore future renewable electricity supply, there will be immediate upward pressure on wholesale power prices from lower LGC prices.
Renewable generation is now curtailed when the wholesale price is negative to the extent of the
LGC price. In the absence of a positive LGC price, renewable output would be curtailed when the electricity price is zero. With continuation of current incentives, we can expect the downward impact of negative pricing on average electricity prices to increase in all states with the expansion of renewable supply. Without revenue from LGCs, the potential renewable electricity that would otherwise be driving negative prices will be spilled and lost to the market. According to AEMO’s
Quarterly Energy Dynamics report, negative pricing reduced average wholesale prices by $23/MWh in South Australia and $11/MWh in Victoria during Q4 of 2022. The direct cost of LGCs and direct savings from negative pricing for South Australia in Q4 of 2022 are calculated in the box below.

Example – Net effect on power costs to users of negative prices and LGC costs, Q4 2022 SA.
Parameter values:
• Total demand = 2,506,589MWh
• Renewable Power Percentage = 18.64%
• Average reduction in wholesale prices = $23/MWh
• Indicative LGC price = $60/MWh
Costs and savings:
• Total cost = Total demand x Renewable Power Percentage x LGC price = $28,033,691
• Total saving = Total demand x Average reduction in wholesale price = $57,651,547
• Net saving = $29,617,856 (above lower costs from increased renewables investment).

2.3. Implications for investment in storage

The curtailment of renewable generation when prices would have been negative as a result of positive value in LGCs would weaken the case for investment in electricity storage. The negative prices supported by positive LGC prices increase the price spread between times of high and low renewable generation. This spread allows storage to make arbitrage revenue. The reduction in negative prices reduces spreads and hence storage revenues and investment.

2.4. Distributional effects of allowing LGCs to be substituted by REGOs from below baseline
generation

Almost all the below baseline generation is owned by the Commonwealth, Tasmanian and to a lesser extent Queensland Governments. The REGO revenue earned by below baseline generators would transfer income from consumers of electricity to these governments—without any corresponding increase in incentives to invest in new renewables capacity. This is neither an equitable nor an efficient way to increase revenues in the Commonwealth and one or two states by a large amount. In section 4 we suggest solutions that allow the renewable character of below baseline renewables to be recognised without damaging renewables investment and without the problematic distributional effects.

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3. Delivering 82 Per Cent Renewable Energy by 2030
The Government has a stated emission reduction target of 43 per cent by 2030, alongside moving to 82 per cent renewable energy. As Australia’s first electricity retailer committed to a 1.5°C
Science-Based Target, ZEN commends this increased ambition. As a supportive partner to the
Department, ZEN wishes to ensure the Government’s goals are met. In section 3.1 we reiterate the need for a market mechanism. In section 3.2 we explain why an extended and expanded renewable energy target is the right engine to deliver the 82 per cent. Finally, in section 3.3 we explain why there needs to be a mandatory target.

3.1. The need for a market mechanism - Renewable investment needs to accelerate but
instead is stalling.

AEMO’s latest Electricity Statement of Opportunities report projected total NEM demand to be
233TWh in 2030. To be at 82 per cent renewable generation, accounting for projected rooftop solar and existing large-scale renewables both above and below baseline, 101TWh will need to come from new grid-level renewable generation. That requires an average increase of 13TWh generation from new renewables each year from now until 2030. Over the last five years the NEM has averaged only about 5TWh of annual new generation, so the rate of additions must be more than doubled.
Figure 2
Renewable Investment
40 Current Trajectory (grey) v Required Trajectory (yellow) 160
Additional generation (TWh)

Above baseline large-scale
35 140

generation (TWh)
30 120
25 100
20 80
15 60
10 40
5 20
0 0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Actual Actual Actual Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast

In this context it is concerning that the market conditions for new generation are deteriorating.
Renewable generation reduces the price of power in the times of high solar and wind generation.
This effect is seen in the price of solar and wind as a percentage of the system volume weighted price (figure 3). Whereas in 2015 solar was capturing nearly 100 per cent of the volume weighted price in the NEM wholesale market, the ratio had fallen to around 60 per cent by 2022. This seriously weakens the investment case for new generation.

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Figure 3

Solar Wind

% Discout to Volume Weighted Price
% Discout to Volume Weighted Price

140% 140%
130% 130%
120% 120%
110% 110%
100% 100%
90% 90%
80% 80%
70% 70%
60% 60%
50% 50%
40% 40%
09/2021
01/2015
11/2015
09/2016
07/2017
05/2018
03/2019
01/2020
11/2020

07/2022

01/2015
11/2015
09/2016
07/2017
05/2018
03/2019
01/2020
11/2020
09/2021
07/2022
Source: OpenNEM

More energy storage will help to restore incentives, but this will take time and as we showed in section 2.3 the incentive to invest in storage would be lessened by a lower LGC price. What is needed is a market mechanism that rewards generation from new renewable sources. In section 4,
ZEN proposes that investment incentives be sustained until renewable energy supplies almost all the power entering the grid. At that time, the need to differentiate between renewable and other forms of power disappears.

3.2. Renewable Energy Target - An engine to take us to 82 per cent

The 2014 review of the RET conducted by the Climate Change Authority stated:
In the absence of effective alternatives, RET arrangements will have to carry much of this burden,
so consideration should be given—at the appropriate time—to the nature and timeframe of
possible RET arrangements in the post 2020 period. In particular, the government should
consider increasing and extending targets…“
In the continued absence of an emissions trading scheme the RET remains the only reliable mechanism for delivering Australia’s renewable energy ambitions. Modelling has consistently shown that renewable energy targets are a low-cost way to support new renewable generation. A renewable energy target is familiar and has been shown to work in Australia. For all these reasons, now is the appropriate time to increase and extend the RET.

3.3. Why mandatory

Voluntary purchases of LGCs have sustained the value of certificates after the mandatory target was frozen in 2020. This has allowed ZEN to continue to support investment in new solar and wind and storage projects despite a lack of legislated ambition. However, ZEN does not think it is prudent to rely on voluntary sacrifice alone. A mandatory requirement provides more certainty and is more equitable.

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A mandatory requirement guarantees that targets will be met. With a mandatory scheme, if investment falls below the target trajectory, certificate prices increase, and with them incentives to invest. There is no reason why voluntary sacrifice would support enough renewables investment to meet the Government’s objectives.

A mandatory target provides certainty. In contrast, voluntary participation, by definition, can be removed at any time, in response to recession, disillusionment, or other changes in circumstances.

A mandatory target is more equitable, because it ensures the burden of decarbonisation is shared.
Without a mandatory requirement there is an effective tax on good behaviour. Those who want to see Australia succeed will have to purchase excess certificates to make up for others.

4. ZEN Energy Recommendations
In section 3, we explained the importance to Australia of maintaining the integrity of the RET, and updating targets to reflect the new national ambition, is the right decision for Australia. We recommend:

R1. Only allow REGO certificates for below baseline renewables generation for emissions-
intensive trade-exposed industries (EITEs) from 2025 to 2035.

Producers of EITEs may choose to purchase REGOs to demonstrate their zero emissions credential to those domestic and international customers who value them, or to demonstrate green credentials to lenders or investors. This recommendation would allow Australia to produce certified zero-emissions goods for EITEs using below baseline generation, without undermining Australia’s energy transformation. To the extent that claims are made on below baseline generation, the
Residual Mix Factor will need to reflect the loss of residual renewable energy. 36.3TWh of EITEs use of electricity was certified by the CER in 2021. This compares with about 14TWh of below baseline renewables generation: the relative quanta suggest a relatively low early price rising with pressure for zero emissions credentials in foreign and domestic goods and capital markets. It is possible that
EU and UK governments would question the validity of REGOs issued for below baseline production because of the absence of additionality; it is much more likely to be able to make the case for acceptance of REGOs in these circumstances, than if the new REGO system actually reduced domestic investment in renewables as it would do under the original proposal.

R2. Increase the LRET in line with 82 per cent by 2030 and extend its life to 2035.

Australia’s energy transformation is less than halfway done. To complete the job, ZEN proposes extending the LRET in line with reaching 82 per cent renewable energy by 2030. A target that delivers 82 per cent renewables is lower than 82 per cent. The remaining generation will come from below baseline generation, rooftop solar and a conservative allowance for voluntary sacrifice. We suggest a linear increase from 2025. The LRET should continue to increase until 2035, to a level that ensures an effectively 100 per cent renewable grid.

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R3. Roll out the REGO scheme as proposed in 2035.

ZEN sees the value of a broad-based renewable energy certification scheme. We suggest that the
REGO scheme be expanded to the full proposal in 2035. At this point there will no longer be negative policy interactions with the RET, as the RET will have done its job and be in retirement.

Having an official accreditation of zero-emissions hydrogen and goods is a national priority. ZEN is eager to work with the Department to refine the Guarantee of Origin proposal and would welcome further engagement on this issue. To engage with us please contact Mark Dawkins at
Mark.Dawkins@zenenergy.com.au.

Kind regards,
Anthony Garnaut
Chief Executive Officer, ZEN Energy

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