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LGC, STC and PPA
Wednesday, October 21, 2020
LGC, STC and PPA
(plus RET, REC, LRET and SRES)
The abbreviations used in renewable energy can be dizzying at the best of times. We do our best to clear it up...
…From the start
It’s Thursday December 21st, 2000: we are almost full a year beyond Y2K fever; those with foresight can collect Amazon shares for around US $16 apiece; but most importantly for us across the pond, the Renewable Energy (Electricity) Act is born via royal assent somewhere near Lake Burley Griffin.
What is the Renewable Energy Target (RET) scheme?
Today, we know that this Act of Parliament went on to enable the RET scheme, which continues to drive reductions in greenhouse gas emissions in the electricity sector, and to encourage the additional generation of electricity from sustainable and renewable sources.
The RET allows for the creation of Renewable Energy Certificates (REC) as the primary mechanism for reducing emissions. The RET is split into two parts:
- the Large-scale Renewable Energy Target (LRET), that deals with solar PV systems 100 kW and above, and
- the Small-scale Renewable Energy Scheme (SRES) for solar PV systems up to 100 kW. This is based on the DC component, in other words the capacity in watts installed.
REC’s, what does it all mean?
For each megawatt hour of electricity generated by a renewable energy source, a value is attached to it. As a guide, 1 megawatt hour = 1 x Renewable Energy Certificate.
The number of certificates created is based on factors including: the location, when the renewable system was installed, and how much energy is, or can be, created.
Large Scale Generation Certificates (LGC)
LGC’s are created on a yearly basis based on the actual amount of energy generated and these are for solar PV systems 100kW and over. One LGC is created for every megawatt hour the PV system produces annually and is the actual amount of energy produced as opposed to calculated. This is one major difference between LGC’s and STC’s - subsequently, LGC’s are not offered as a point of sale discount.
Large-scale generators provide an ongoing revenue stream, but selling price per watt of these systems can be higher.
It is the LRET (Large Scale Renewable Energy Target) that creates LGC’s.
Small Scale Renewable Energy Certificates (STC)
STC’s, on the other hand, are created on the expected output over x amount of years (the deeming period), and these are for solar PV systems under 100 kW and are usually offered as a point of sale discount by the accredited renewable energy installer involved with the solar proposal.
What happens with these LGC's and STC’s?
They are a tradable commodity and subject to market forces and specific companies trade in them. The role of the Renewable Energy Target is to create demand for renewable energy and it requires liable entities to surrender an amount of Renewable Energy Certificates in proportion to the electricity they acquire in an assessment year.
How does this affect solar system design?
With systems below 100 KW, the initial $/watt cost is less than larger systems and this is because system STC’s can be offered as a point of sale discount. Some systems may be designed below the 100 kW threshold based on the above even though the financial modelling may indicate a larger system potentially is the better option.
Large systems have to be presented slightly differently in regards to the formal proposal as initial payback periods are longer than sub 100 kW systems.
Power Purchase Agreements
A power purchase agreement (PPA), or electricity power agreement, is a contract between two parties, one which generates electricity (the seller) and one which is looking to purchase electricity (the buyer).
A PPA is the principal agreement that defines the revenue and credit quality of a generating project and is a key instrument of project finance.
There are many forms of PPA in use today and they vary according to the needs of buyer, seller, and financing counterparties.
Traditional methods versus PPA’s
With the traditional model, the customer purchases a solar system and they use their own capital, consuming the energy produced by the system and the system provides reduced power bills.
But with PPA’s the system is installed/financed by solar developers and they maintain ownership for life or a nominated period (the customer can buy the system at an agreed point in time).The business owner agrees to purchase energy at an agreed rate.
With PPA’s the energy rate will typically be less than the grid rate while still providing profit for the solar developer.
At the end of the contract (typically between 10 - 20 years), the business owner can extend the contract, negotiate to purchase the system at a fair price, or organise to have the system removed.
PPA contracts are typically set up in one of two ways:
- All energy produced by the system purchased by customer
- Only the energy consumed at business is purchased
The first contract is best suited to commercial customers having a load profile that typically matches solar generation, in other words, predominantly day time loads that match the output profile of a typical Equator facing system.
The second contract is for customers for example who have high energy use in the morning and evenings (pay for the solar energy that is consumed onsite not the solar energy exported to the grid).
The Renewable Energy Target split into two parts: the Large-scale Renewable Energy Target (LRET) and Small-scale Renewable Energy Scheme (SRES). The LRET is for systems 100 kW and over, the SRES for systems under 100 kW.
PPA’s are a contract between two parties, one (the seller) and one (the buyer) with both benefiting financially.