Despite criticism about "undermining" the Renewable Energy Target, ERM Power is fully within its rights to pay a penalty fee to acquit its 2016 liability under the scheme.
But yet to be seen is whether the electricity retailer's customers, who have paid a premium to support renewable energy generation, will stand for it.
Certainly there's a view around that as customers are being billed extra to cover retailers' obligations under the RET, they want to see that money go where it is supposed to – backing renewables projects to help meet the 2020 target – rather than straight into government coffers through the "shortfall charge".
So far, ERM essentially stands alone in its controversial strategy for meeting its 2016 liability almost entirely by paying the penalty. It can, as per the scheme's rules, make good that shortfall in the following three years by submitting the LGCs and getting the penalty refunded.
But fears of a widespread snubbing of the "spirit" of the RET – as charged by the Clean Energy Regulator against those that deliberately opt to pay the charge rather than submit their full quota of Large-scale generation certificates (LGCs) – look to be unfounded.
Most other retailers look set to submit the required quota of LGCs to meet their 2016 liability or – like Alinta Energy – pay the "shortfall charge" for just a relatively minor amount. The evidence will be laid bare after the Clean Energy Regulator's February 14 deadline for liable parties to do one or the other.
Scale of shortfall
Instances of paying the shortfall charge have not been uncommon: as evident from the regulator's database, for 2015, 10 liable entities had an LGC shortfall.
Where ERM stands out is the scale – its $123 million penalty fee covers a shortfall of some 1.9 million certificates, almost 50 times more than the biggest seen previously.
The surge in LGC prices over recent months combined with expectations that prices will turn down again has made it worthwhile for ERM to pay the penalty, with the knowledge it will benefit from any price reduction over the next three years. There is, by the way, no shortage of LGCs around, with plenty available to meet all retailers' RET obligations for 2016, sources say.
Citigroup estimates ERM has paid about $13 million to take the position – paying the tax-effective penalty of $93 per LGC rather than the $88 per LGC on the market, plus $800,000 in interest costs. Citi estimates ERM will profit on the deal if LGC prices fall below $85, with the potential of "material upside": an LGC price of $70, for example, generates a $28 million gain.
ERM is also driven by its desire to utilise tax losses and generate franking credits for future dividends.
The retailer, which services business customers, insists that the flexibility built into the RET in the timing of surrendering LGCs, makes it more – not less – likely to meet the 2020 target, a point also made by Alinta.
New projects
ERM argues that exercising that flexibility for 2016 will help it bridge a "disconnect" between the maximum three-year contracts typically entered into by its customers and the much longer power purchase agreements required by renewables developers to underwrite their projects.
It will, therefore, stimulate rather than inhibit the construction of new projects required to meet the 2020 goal, it says, voicing disappointment with "the emotive and unbalanced response" that news of its RET strategy has drawn.
But other retailers see it differently: Dominic Drenen, boss of second-tier retailer Click Energy, says Click's policy is always to surrender LGCs to meet its liability no matter the "high price".
"It's what our customers would expect," Drenen says. "They are effectively paying for that, as it's a charge we are passing on to them."
The chance of a customer backlash is greater for a retailer like Click selling to households than one selling to commercial customers.
But it must also be a consideration for ERM, with the Nature Conservation Council, for one, urging the NSW government to terminate its contracts with the business power retailer.
So far, ERM reports minimal feedback on its RET strategy from customers, apart from a few "queries". Many are watching closely to see if that changes.
amacdonald-smith@afr.com.au
Twitter: @angelamacd
