Monday, 12 October 2009
The renewable energy industry faces a colossal threat of sudden extinction. Last week, the Renewable Energy Certificate (REC) price dived to $23 after spending recent months hovering at $38. This is well below the $50/REC enjoyed only four months ago, and poses severe problems for the renewable energy industry, writes Warwick Johnston of SunWiz consulting.
Such a low REC price is likely to freeze the 6GW pipeline of wind power projects. The solar power industry gained great momentum on the back of an $8,000 rebate, but now receives only $2,400 of subsidy on a $10,000, 1kW system. Solar hot water and heat pumps are strongly insulated from the REC price by federal and state government subsidies, but the price hike will surely have a chilling effect.
The sudden downturn in REC price can clearly be attributed to REC oversupply. Only 8.1 million RECs need to be surrendered to meet the 2009 Renewable Energy Target (RET), plus about 1.9 million RECs for GreenPower. However, even before this year has concluded, over 15 million RECs have been created. REC price did not slump until now because purchasers are banking RECs against 2010 requirements, because the shortfall penalty rises by 60% on January 1. Demand has only softened now that next year’s REC requirements have largely been met.
The massive oversupply of RECs can mostly be attributed to the overheated solar hot water and heat pump market (as reported previously). Solar Water Heaters (SWH) now account for more than 55% of all RECs created, whereas they used to account for 35%. SWH became effectively free when the governments economic stimulus package gifted $1,600, and amount since reduced to $1,000 for heat pumps in recognition that the market was overstimulated. By that stage, however, a significant REC excess had been created.
The problem is particularly acute for photovoltaic (PV) solar power, and unlikely to end soon. When the 7MW/month solar power industry completes its backlog of rebate-funded installations, it must face the unenviable task of selling previously free systems for an out of pocket cost exceeding $6,000.
Because phantom credits (from the solar multiplier effect) distort the market, the 2.2 million more RECs that are required in 2011 could be supplied by only 14,000 1.5kW solar power systems. This 21MW of PV is about three months work at today’s installation rate, suggesting even if the industry can somehow sell solar, it will contract markedly.
There are ways for the solar power industry to become independent of RECs (which will be further explained in a report to be released next week). Doing so requires smart, targeted marketing of high-quality large systems in states that have Feed-in Tariffs. Wise companies that adopt successful solar strategies could profitably and sustainably capture a large market share while the rest of the industry collapses around them.
In the meanwhile, unsubsidised large-scale renewable energy developments must hope that REC market distortions such as phantom credits and unfair competition with subsidised markets can soon be addressed.
Warwick Johnston manages SunWiz, a solar energy consulting business that has spent the last two months analysing the renewable energy target legislation, predicting the REC crisis, and charting a solution for smart solar power companies. The final report goes on sale next week. Contact via email@example.com