Australia’s Renewable Energy Target – Enhanced or Disfigured?

After being 500% exposed to fluctuations in the market price of Renewable Energy Certificates (RECs), the Australian PV industry was highly relieved when the Government announced modifications to the Renewable Energy Target that would fix the value of a REC. However, amendments to the legislation as it passed through parliament have significantly increased market uncertainty.

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Fluctuations in the REC price make selling solar risky and difficult. Under the renewable energy target, PV installations received a 5x multiplier on the number of RECs created on the first 1.5 kWp of installed system capacity. This made PV sales prices highly exposed to the rapid fluctuations of a REC market that is highly sentimental and gamed against solar installers. Thus, the unlimited demand, fixed price RECs under the Small-scale Renewable Energy Scheme (SRES) arm of the enhanced Renewable Energy Target’s (eRET) sounded like a blessing for Australian PV. Even though the fixed $40 + GST REC price offered by the SRES clearing house from 1/1/2011 would lead to small quarterly oscillations in REC price due to the cost of carry, this was far more stable and certain than the previous incentive scheme.

However, senate inquiry concerns about the uncapped nature of the SRES and thus its impact upon consumer’s bills (even though shown to be minor) led to amendments to the legislation. As passed by parliament, the fixed $40 REC price can now be modified by the minister on the 1st of April each year. In making their decision, the minister must take into consideration

• whether the total value, in MWh, of small‐scale technology certificates created in 2015 exceeded or is expected to exceed 6,000,000; and

• any changes to the costs of small generation units and solar water heaters; and

• the extent to which owners of small generation units and solar water heaters contribute to the costs of small generation units and solar water heaters; and

• the impact of the clearing house price, and the number of small generation units and solar water heaters installed, on the electricity market, including on electricity prices; and

• any other matters that the Minister considers relevant.[2]

Additionally, the regulator can reduce the solar multiplier at any stage in advance of its legislated date (1/7/2012 and annually thereafter). The regulator also has the ability to increase the system size affected by the multiplier from 1.5kW to 3kW.

The following sections show that the uncertainty about the multiplier bring an uncertainty to the market that is at least as significant as the previous fluctuating REC price, and less exposed to market forces (and therefore less predictable). It also shows the impacts upon system price of possible extension of the multiplier to 3 kW.

The following graphs show the effective system price for a range of system sizes for a variety of adjustable eRET parameters; where SM denotes Solar Multiplier, prices have been sourced from a median of web-published quotes, and REC Zone 3 is assumed. SunWiz has used the strong capabilities of the eRET-ready PV Sales Tool to produce this analysis:

The impact of an increase in the REC price to $40 ($44 including GST) is to decrease the price paid by customers by a further $1700 when compared to a REC price of $30 that persisted until the eRET was announced. However, this means that customers are only paying a small portion of the cost of their 1.5 kW system, particularly if they are buying budget-quality systems or are located in REC Zone 1 or 2.

If the REC multiplier is reduced to combat the possibility of free systems, the affordability of 1.5 kW systems diminishes notable, as $1364 is added to the price for every lower solar multiplier. The industry must get by on a smaller solar multiplier eventually, as legislation will mandate its reduction in 2012, if the regulator does not reduce it beforehand. The industry may face difficulties bridging the gap while it waits for global PV prices to fall, though certain state’s more generous feed-in tariffs may assist in this regard.

Adjusting the threshold at which the solar multiplier ceases could encourage installation of larger systems, which have greater long-term environmental and financial benefit. However, this is unlikely to occur without a corresponding reduction in the solar multiplier, as otherwise inexpensive systems may overheat the market. A multiplier of 3x up to a threshold of 3kW strikes a good balance between avoiding ‘free’ 1.5kW systems whilst providing a reasonable discount on systems. Interestingly the price for systems exceeding 3kW is the same under a 5x multiplier up to 1.5 kW, which successful companies are having little difficulty selling where a fair feed-in tariff exists. SunWiz considers a 3x multiplier with a 3kW threshold might be the most likely occurrence within the next 12 months, unless PV prices increase significantly. One concern is that this would place Australia in direct competition with global demand for 3 kW inverters, which tends to be a standard system size internationally.

Interestingly, the market faces the same price uncertainty as it did prior to the eRET. Changing the multiplier rules can swing the 1.5kW system price up or down by 78% (of the average 1.5 kW system price, a price-sensitivity similar to market-based REC fluctuations before eRET.

How Long Will the Party Last?

It can be seen from the previous graphs that solar power is hugely discounted under a $40 REC price. However, the minister and regulator have the ability to change program parameters as they see fit. How soon will this occur? And what will the adjustments be? Most importantly, what will be their effect?

The REC price affects both solar hot water and PV installations. Thus, the minister must take both into account when setting the REC price. The multiplier and system size threshold are levers that the regulator can apply independently to PV, and are thus more likely to be used if PV is hot and solar hot water is cool. What will be the chosen mix of REC price, multiplier, and threshold? We can answer this by inspecting the minister’s considerations.

Extent to which owners pay for their systems

From our previous analysis, it is clear that purchasers of 1.5kW PV systems are only paying 25% of the upfront cost (with the fixed REC price and no changes to multiplier rules). However, the previous analysis assumed installation in REC Zone 3, where the majority of the population lives - those living in REC Zone 2 have 11% greater discount. This could effectively make PV systems free for some of the population, leading to an overheated market that might start to substantially affect electricity customers bills, though this is unlikely[3]. Changes to the cost of PV: If PV prices fall sooner than the REC multiplier, owners of PV systems will be barely contributing to the costs of their system. This would suggest a modification of program parameters, whether through an early reduction in the REC multiplier, or by reducing the REC price on 1^st of April.

Solar Hot Water system owner’s contributions to their system cost might also be affected by state based rebate schemes, which might influence the minister’s decision. At a low solar multiplier, the upper REC price would most likely be governed by Solar Hot Water system costs.

Total Value of Certificates exceeds 6 million in 2015

6 million certificates is equivalent to 6,000,000 MWh of deemed PV generation over 15 years. As a 1kW system earns approximately 21 certificates, this 6 million REC mark would be reached by 286 MW of PV installation. However, Solar Hot Water systems contribute to this 6 million RECs, suggesting that if the PV and SHW market equally contribute, then 143 MW of PV would suffice. If the legislated maximum 2x REC multiplier still applies to the first half of 2015, then 95 MW of PV might be sufficient to reach this 6 million REC threshold, which is the amount already installed in the first half of 2010. How successful the Australian PV industry will be with a 2x or 1x multiplier depends upon the status of the feed-in tariff schemes, the price of electricity, and the price of PV. But, at present installation levels, the minister would have just cause to reduce the REC price.