STC Oversupply: Implications for Solar Businesses

It’s clear: three months into the ‘enhanced’ Renewable Energy Target, Australian solar is in a ‘sticky’ mess. Its official: STC oversupply is occurring, and the market impacts have already started, but only just begun. This brief article will inform solar companies of the associated risks.

Information is drawn from ClearView, SunWiz’s STC Market Intelligence package. Subscribe to keep track of STC creation levels and trading activity, and to be informed of strategic opportunities.

STC creation is occurring at a rate of 1.2 million STCs per week, with 9.4 million already created by the end of March. Considering that only 28 million STCs are required to be surrendered in 46 weeks time (14/2/2012), STC oversupply seems certain to stick around for some time. While reduced STC supply will occur in the second half of the year due to a reduction in REC multiplier and installation caps being reached in NSW, Victoria, and SA – an issue of concern in itself – by that time STC creation levels will likely have exceeded the amount required by years end.

Impacts:

Q1: 1/1/11-28/4/11
As a consequence of the lag in STC validation by ORER, STCs created after 7th of April will certainly be trading against Q2 liabilities of the utilities. The 2.5M STCs that are currently pending registration should be registered by 21st of April, adding to the 0.75M in the Clearing House and 6M registered but not in the Clearing House Queue. That leaves approximately 0.5M STCs that can be created this week before the quarter’s 9.8M STCs are fully allocated.

As a result of this oversupply, expect the spot price of STCs to drop. The price offered by major STC aggregators has already dropped by $1 this week.

But opportunities may still exist to ‘fast-track’ STCs created this week or next.
1.    Some of those 2.5M STCs pending registration will be invalidated upon audit by ORER, creating a gap to fill to reach the 9.8M STCs required this Quarter.
2.    STCs sold direct to liable entities take precedence over STCs bought from the Clearing House queue, meaning that selling direct to liable entities may fetch a better price
3.    There are many liable entities, many of which don’t have sophisticated STC strategies – they may purchase from the Clearing House at $40, or may be open to purchasing ahead of time for a slightly cheaper rate.
4.    Develop a strategic play with SunWiz

Q2: 29/4/11 - 29/7/11
Clearing House Q2 is shorter than Q1, with a backlog of STCs to be validated, and a smaller demand of 7M STCs. As such, expect Q2 to be oversupplied before the quarter is halfway through (16th June). As a consequence:
1.    Expect the spot price of STCs to fall as liable entities start to purchase against Q3 obligations.
2.    There may still be some lee-way to sell direct to smaller liable entities at higher rates, but these players may follow the spot price.
3.    Beware the possibility of the big three utilities wielding their asymmetric market power to drive the STC price down, effectively testing the PV market to find out ‘how cheaply can I purchase STCs for’?

What could you do:
1.    Consider locking-in a STC forward contract as a hedge against STC price drops.
2.    Bypass the Clearing House entirely (if you haven’t already being doing so)
3.    Monitor STC levels with SunWiz ClearView

Q3 & Q4:
In this period, Liable Entities will start to need to purchase against 2012 liabilities. However, uncertainty remains against the 2012 STC price (which can be changed by the minister) and the levels of STC demand to be established. With such risk, it may be possible that the forward purchases dry up, or only proceed at a low price. The issue is compounded by the drop in multiplier, and the end of Feed-in Tariffs in multiple states.
What to do:
1.    Develop a highly-strategic sales approach
2.    Predict your most profitable sales and segments under the new multiplier and pricing
3.    Enlist SunWiz’s assistance to identify your most profitable regions, products, and salespeople.

SunWiz ClearView

CLEARING HOUSE MARKET INTELLIGENCE

STC Oversupply: Know BEFORE it happens, Trade BEFORE the price plunge
• Avoid STC payment delays of 3-6 months.
• Bypass the overflowing queue by going direct to undersupplied liable entities
• Manage Your STC Risks to Help Get a Better STC Price

Broker, Clearing House, or Direct: What’s Best For Your STCs Today? The Clearing House queue is minor when compared to the STCs that will be sold direct to liable entities. In this light, it’s important to know whether you’re better off trading STCs through a REC Aggregator, putting them in the queue, or jumping the queue by selling direct to a liable entity. Your best strategy depends upon ClearView knowledge.

Don’t get caught out. The Clearing House is almost certain to be over-supplied in Q1, 2011. When this happens, those with direct relationships with liable entities will skip ahead of those in the queue, meaning payment may be delayed by 3-6 months for some or all of your STCs.
3 options to suit your needs: ClearView: Q, Foresight, and Trading

ClearView: An Essential Investment for the Protection of Your $10,000s of STCs

Will Australian Solar's Exponential Expansion Collapse into a White Dwarf?

Astrophysicists predict that our sun will eventually grow to envelop the earth, before falling back to be a white dwarf star. The growth of the Australian solar industry may not be quite so cosmic, but the national forecast is showing signs of a gathering storm. Could the same factors that are fuelling growth be those that create an implosion, leaving behind little but a dwarf industry?

The ‘fuel’ for recent growth in Australian PV has been a combination of states’ feed-in-tariffs with a Federal Government support mechanism that provides an effective upfront discount on PV system price. Australia’s already-high installation rate has soared as fuel scarcity looms, with the hotly competitive residential installation sector battling to install before government support winds back. Simplistic projections have Australia currently on target to reach 600 MW this year, but it seems many lemming-like Australian companies are racing for the sun, forgetting what happened to Icarus.

Problem 1: End of Feed-in Tariffs
Feed-in tariff caps in three Australian states will be reached within months, stoking the fire as companies race to install systems beforehand, with the industry being kept in the dark by infrequent and inadequate communication about remaining available capacity levels. Genuine concern exists that once those caps are reached - in a clear example of moving the ‘grid parity’ goalposts - solar generation may only receive 6c/kWh for any power export to the grid. While Victoria has a 1:1 net FiT fallback, industry bodies are campaigning to create a similar fallback for NSW and SA.

Problem 2: Reduction in Government’s upfront discount
At the same time, a race is on nationwide to have installations completed by 1st July 2011 in advance of a $1200 reduction in government discount that occurs on that date. While some companies have already stopped taking forward orders, there is a risk of consumer backlash should sales not be installed by those dates. The economics of solar power could be hit by a simultaneous wind-back of government support on the upfront discount and FiT, leading to a sharp decline in sales that could threaten business viability.

Problem 3: Sticky Oversupply of RECs
The race to the finish line is creating a third problem – an oversupply of solar RECs known as Small-scale Technology Certificates (STCs). Ironically named, this ‘sticky’ oversupply is likely to persist for half-a year after problems 1 & 2 take effect. Though supply of STCs will lessen as fewer installations occur and as each installation earns fewer STCs, the volume of STCs currently being created suggests that this year’s STC demand will be met by mid-year. STC purchasers will then be buying against next year’s liabilities, with uncertainties about government-set STC demand and ceiling price. This oversupply and uncertainty, combined with the overwhelming market power wielded by STC purchasers, is likely to lead to a depressed STC spot price. This further reduces the value of the upfront discount provided by government (problem 2), leading to still-worsening financial outcome from a solar investment.

Worm Hole to the Future

In light of these coincident problems, it is very possible that the Australian solar industry may shrink back to dwarf-size in comparison to its current supernova levels. And yet, this is not the first time that the Australian solar industry has overcome challenges to reach new heights. Frequent changes to government schemes, inverter shortages, panel price spikes, and diving exchange rates have all occurred and even coincided at times. In spite of such challenges, Australia still has twice as many installations as the USA (though lower installed capacity). The ingenuity of the local industry has been demonstrated on frequent occasion, as it responded to reductions in government support as if they were only road bumps. This perfect storm will be navigable by companies with the best business fundamentals, and those that respond innovatively to challenges.

SunWiz produces a suite of innovative services that can assist smart companies to succeed. ClearView can assist PV companies and STC aggregators to manage their risk, and help obtain a better STC price by strategically identifying shortfalls in the STC holdings in smaller liable entities. Solar Hot Spots can identify suburbs with more favourable demographics for purchases of higher-priced PV systems. Market Insights can help companies track whos buying solar, where. And Maximum Portfolio Profitability Tracker, an in-depth custom analysis of client’s sales, can assist smart companies to identify easy-to-capture opportunities from within their own operations - contact SunWiz for more information.