How are RECs priced?

The wholesale REC market

Large buyers and sellers of RECs trade through the wholesale market with minimum parcel sizes of 5,000 RECs. The price for a parcel of RECs is called the spot price. Like any other commodity the price for RECs is determined largely by supply and demand. Wholesale prices can fluctuate considerably. The graph below shows the fluctuation in the REC price over the last 12 months.

Factors influencing wholesale REC prices

Wholesale spot* REC prices are determined by the willingness of buyers and sellers to transact at a point in time. This decision and the agreed price is based on their view of demand and supply in the short to medium term.

The key factors influencing supply and demand of RECs over the next few years will be:

• Level of new renewable power project commitments  – there have not been many projects committed recently as investors are waiting on legislation for the increased MRET target
• Level of rainfall and inflow to water storages for large scale hydro – low levels of rainfall mean that storages are at record lows and the level of REC creation is not likely to be significant in the short term
• Level of solar hot water sales and installations – solar hot water RECs have grown sharply
• Green Power sales – the voluntary Green Power market has grown strongly through 2008 and created new demand for RECs beyond the mandated target. However under the proposed CPRS Green Power will no longer be relevant (refer to www.vcma.org.au).
• Government legislation implementing expanded target – the ramp up of the renewable energy target over the next few years (see chart below) and the penalty level are key factors influencing price outlook.

The REC buyback price

*The spot price refers to a sale made for delivery within one week.