REC Crisis 2009: Why it happened

REC Crisis – Why it Happened (2009)

This document was compiled from SunWiz’s research into the REC market, and sent to Australian politicians. It explains why the REC crisis occurred (largely due to solar hot water subsidies) and the impact it would have upon the solar (PV) power industry.
A review of the REC market was announced subsequently to distributing this document to key politicians.

REC Crisis-Sunset for the Solar Industry


This free report provides a succinct insight into why the REC price is almost certain to be low for the foreseeable future. Over 200 hours of research have gone into this report. It has been offered for free in the interests of the solar power industry, as an industry that is forewarned can take action to ensure its future prosperity.
This free introductory report has been abridged so that the whole industry can quickly read and understand its key implications. A wealth of supporting information than provides the bigger picture has been collated and documented into the “Successful Solar Strategies report” – this information helps readers more deeply understand the drivers behind REC prices, the risk to solar business, and what solar businesses could do to prosper in uncertain and difficult times.

Executive Summary
Since the termination of the $8000 rebate, solar power businesses now have to rely upon solar credits to provide affordable solar systems. However, these businesses are now face a five times greater exposure to REC price fluctuations, whose frequent $10 fluctuations can cost PV businesses $1500 per system.
Recently the REC price has halved from $50 to $24, which has meant that the price of a 1.5 kW system has leapt from $3000 to $7000, out of the reach of most customers. A net feed-in tariff means such installations may receive highly-uncertain amounts of electricity revenue – anywhere between $300 and $1200 per year, though a commonly expected annual revenue might be only $400. States without feed-in tariffs suffer even more.
A major problem faced by the entire renewable energy industry is Phantom Credits. The five-times solar multiplier means solar power systems create 5 RECs per unit of electricity production. This reduces the overall amount of Australian renewable energy deployment because the renewable energy target does not increase to reflect true electricity generation, only the number of RECs created. Because of this, the 20% renewable energy target will not truly be met without correcting this market distortion. Furthermore, other renewable energy technologies can have their market share reduced by this market distortion, which also acts to keep the REC price below $60. A simple fix would be to increasing the target by 4 RECs per installed 1.5 kW solar power system – keep the solar multiplier but remove the phantom credits.
The low REC price can be explained by a huge over-supply of RECs. Energy retailers have been buying RECs and banking them for future years requirements, as the expanded renewable energy target also includes a higher shortfall penalty equivalent to $93, whereas previously it was about $57. The REC market has largely been oversupplied by Solar Hot Water and Heat Pumps, whose $1600 and $1000 federal government subsidy, plus further state subsidies, has meant that large volumes of RECs have been cheaply created. The oversupply of RECs is likely to last at least until 2011. In the following year, the solar multiplier reduces, thus meaning that solar power industry support is highly ineffective, and severely compromised by subsidies that distort the market.
Some long-term solutions involve removing market distortions by addressing phantom credits and ensuring that subsidised RECs cannot be created. However, this will not impact upon support levels for the renewable energy industry (wind, bagasse, solar power, solar hot water, etc) until 2011. In the short term, increasing demand for RECs seems to be the best solution. This could be achieved by bringing forward the renewable energy target. GreenPower also creates demand for RECs, and a government mandate of 10% GreenPower for residents (with provisions for opt-out) could also restimulate the market. Alternative support for solar power might also be considered, such as a nation-wide gross Feed-in Tariff.

It is official: the REC Catastrophe that was predicted has occurred. The problem is: the Solar Credit Crisis is not about to go away.
This report covers:
• What experts opinion is on the future REC price
• What will keep the REC price low until the window of opportunity for PV has passed
• Why the REC price is volatile, and how this could eat into your
• What can be done about it

Expert Opinion on the REC price
Experts agree on the bleak prognosis for RECs for the foreseeable future:
“Our analysis suggests that on the basis of current subsidy proposals, the REC market may be significantly oversupplied by [PV, SHW, and Heat Pumps] in the period to 2015, … all stand to be affected by this oversupply and we advise careful consideration of the implications” – Carbon Market Economics1
“REC prices are likely to be depressed as the new supply is absorbed… The recent collapse in prices is arguably partly driven … more so by the massive incremental supply to come from PV solar as announced in the recent budget” – UBS Consulting
“We are forecasting an oversupply of RECs for the next few years … this is likely to keep a downward pressure on REC prices”. Ric Brazzale, Managing Director, Green Energy Trading:
Why the REC price is low, and why it will continue to be.
To answer this question, we need to consider the background to the Renewable Energy Target. But consider this, the most crucial consideration: Already by October, there are 5 million more RECs on the market than are needed for 2009. And 2010 requires only 4.4 million more RECs to be surrendered than in 2009. So next year’s target may already have been met. Up until recently, electricity retailers were buying up RECs (thus keeping the REC price higher than what it would otherwise be with such an oversupply) so they don’t have to buy next year when their shortfall penalty increases to $65. As retailers don’t need to buy many RECs next year, expect a low REC price for 2010.

2 UBS Consulting, July 2009

As depicted in the figure above, the REC price is set, like any market, by supply and demand. On the demand side is the Renewable Energy Target (RET) and GreenPower, both of which create the need to purchase and surrender RECs. The demand for RECs has limits that are known in advance with a high degree of accuracy. On the supply side, a number of renewable energy technologies compete to supply the required number of RECs. If supply is less than demand, then a shortfall penalty ($65 from 1/1/2010, which is equivalent to a post-tax liability exceeding $90) is paid. However, if REC supply exceeds demand, then the REC price is established by the technology that can most-cheaply create RECs – for this reason, solar power competes with other renewable energy technologies for a share of the REC market.
On the demand side, the graph shows the number of RECs that must be surrendered each year under the old MRET and the expanded National RET. While the curve trends up, indicating the requirement for more and more renewable energy generation each year (left axis of the graph), the additional amount of generation in each year isn’t huge (shown in bars and read from the graph’s right axis)– 4,400,000 RECs more in 2010 than 2009, and 2,325,000 RECs more in 2011 than 2010.

AGL has “around A$1 billion [in wind farm projects] ready to go, and well over $2 billion more in the pipeline”


Consider carefully: 4.4 million RECs may sound large, but 1.5 kW systems generate 155 RECs in Zone 3. Thus it would only take installation of 28,400 solar power systems to fully meet the increase in RET from 2009 to 2010. The situation is worse in 2011 – half as much increase in deployed renewable energy is required. Even if the REC price creeps up in 2012, the reduction in 2012’s solar multiplier will continue to make life tough for solar power.
On the supply side, the solar power industry – well capable of installing 30,000 systems per year – competes not only with other renewable energy technologies but also with itself. Furthermore, the Solar Hot Water industry, already a dominant creator of RECs, is in rapid expansion mode on the back of the $1600 federal rebate it receives in addition to other state rebates.


The REC price is prevented from going too high by the availability of free solar PV or Solar Hot Water Systems. If the REC price gets near $50, then free solar PV and free solar hot water systems compete for a share of the REC market. As the REC market isn’t that large, it wouldn’t be long before supply exceeded demand and the REC price would dive again. Large-scale renewable energy technologies are also competing to create RECs, with over 800 MW of wind power ready to be deployed in the next 1-2 years4, and up to 6000 MW over the next 10 years5
The figure below conceptually illustrates the “piece of the pie” that the solar power industry has to compete for amongst other suppliers. Solar Hot Water systems had already created 5.4m RECs in 2009 by September, capturing 55% of the market this year. Other renewable energy technologies have created 5.4m in recent years, but modelling performed by Carbon Market Economics – plus other renewable energy technologies such as bagasse, landfill gas, etc. A high REC price hastens the development of these power stations, which can flood the market with RECs and thus lower the price dramatically. Therefore, solar power businesses cannot expect a high REC price anytime in future.
6 suggests that wind farms alone may create another 2m RECs over the next 1-2 years. The 10,000 schools7
within the National Solar Schools Program could generate about 1m RECs, and the 63,000 system backlog of Solar Homes and Communities Program could generate 1.3m RECs. How many RECs are left for Solar Credit PV systems?

4 Carbon Market Economics, “Renewable Generation Projects 2009 – 2028, Revised Final Report”, January 209
5 “Australian renewables law to spark wave of wind projects”,, 21/8/09
6 Carbon Market Economics, “Renewable Generation Projects 2009 – 2028, Revised Final Report”, January 209

In summary, here are the threats that face solar power businesses:
• There is a huge oversupply of RECs available on the market – perhaps enough to cover 2010.
• Subsidised sectors such as Solar Hot Water, Solar Schools, and the Solar Homes and Communities Plan continue to supply RECs almost without regard to their price
• The REC price is prevented from getting much above $50 by the resulting “free” solar systems
• Other large-scale renewable energy technologies could flood the market with RECs in coming years
• The Solar Multiplier means very few systems can be installed before the REC requirements are met.
The following graph puts this all together into an outlook for RECs supply and demand. While it is difficult to estimate the exact amount of RECs that will come from each sector in future years, combining analysis of a number of scenarios with some sensible assumptions allows the exploration of likely outcomes. Consider that:
• There may be 18 million RECs available by the end of 2009, 8 million more than needed
• This would mean 2010’s requirement of 12.5 + 1.9 = 14.4 million RECs (RET + GreenPower) would only require creation of 6.4 million RECs.
• Existing wind farms and other renewable energy power stations create 5.6 million RECs per year.
• Solar Schools and Solar Credits are likely to produce 0.6 million RECs in 2010
• This leaves at least 0.2 million RECs required in 2010 between Solar PV and Solar Hot Water
The major unknown for 2010 and 2011 is the performance of Solar Hot Water. Considering that it has already created 5.4 million RECs this year, it seems likely that it will easily create 0.2 million RECs in 2010. The graph below shows scenarios of a 10% contraction of SHW to end of 2009, and a 75% and 50% contraction (conservative and highly conservative estimates) for 2010, and the same levels of SHW deployment in 2011.

The graph clearly demonstrates that even with significant contraction in SHW, there are enough banked RECs to cover most of 2011’s requirements. Solar power RECs are necessary to meet the target only if HW retreats to its 2008 installation level, and there is no other renewable energy power station development. However, the major players have 6000 MW of wind development representing billions of dollars of investment, and the deployment of 800 MW of wind can create 2 million RECs.
In summary, there is not much need for solar power systems to create RECs until 2012, and the phantom RECs they create exacerbate the problem. Thus the future of the solar power industry might be quite constrained.
Although we’ve discussed the “piece of the pie” that remains for the solar power industry, remember that if a wind farm is financially viable with $35 RECs, or there is high demand for solar hot water systems even with $30 RECs, then it is likely that the REC price will remain near that level. The technology that can survive with the lowest REC price is likely to gain greatest market share, and if the solar power industry has difficulty selling systems when RECs are less than $40, then there could be significant downsizing within the industry. So too, if one company within the solar power industry discovered a way to sell a large volume of solar power even with a REC price of $25, then the rest of the (solar PV and renewable energy) industry may suffer.
REC Price Volatility
The REC price is quite volatile, which can have a huge impact upon solar power businesses. Because RECs take three weeks to register and clear, and because solar PV businesses are now highly exposed to and dependent upon REC prices, any significant movement in REC price can hurt both in the short- and long-term. Consider that the past 18 months has seen $7-10 price falls happen over the course of weeks. A $10 drop in REC price can cost solar power businesses $1550 per 1.5 kW system. If a business has installed 20 systems in the last two weeks – that’s $31,000 they must wear… and then try to carry on business with a higher sales price.
There are a number of reasons the REC price is volatile. Like any market, the REC market is subject to player’s perceptions of what the price will do in the future. This can easily be influenced by government announcements, or the construction of a new renewable energy power station. The REC market gamed in favour of the buyers, further complicating matters. In simple terms:
• The buyers only have to surrender their RECs once per year. They have all year to strategically make REC purchases. If they have RECs in the bank, they can wait indefinitely before their next purchase.
• There are a huge number of sellers whose cashflow and livelihoods depends upon selling their RECs so that they can continue to install solar power, solar hot water, and heat pumps. These pressures mean that they need to sell, often at below-market rates. Also due to this reason, any sudden downwards shift in RECs price can unleash plenty more RECs from desperate installers wanting to cut their losses. For reasons explained above, the buyers can simply wait until the price bottoms out before taking advantage of the situation.

To summarise the threats to the industry, and to the success and sustainability of solar power businesses:
• 2010’s RET has effectively already been met, keeping REC prices low for at least the year ahead.
• SHW installations also act as a significant supply of RECs
• A flood of Solar Credits could supply the entire REC requirements for the coming years
• Other subsidised markets including schools and SHCP backlog will also contribute to supply RECs, independent of REC price
• Other large-scale renewable energy projects that have been waiting for an expanded RET will be deployed, leading to bulk increase in supply of RECs.
• REC market forces favour the buyers in the market
• Although market forces also act to stabilise the REC price, the REC multiplier creates a high degree of sensitivity to REC price fluctuations for the solar power industry.
Granted, it’s unlikely that all of the above comes true to its fullest extent – that would be a nightmare scenario. It’s more likely that a low REC price would dampen development of certain renewable energy technologies and of particular projects. However, some renewable energy technologies are supported by direct government rebates, grants and commitments – these projects may be less impacted by a low RECs price, and thus continue to create RECs and thereby keep the REC price low? Furthermore, solar power businesses are five times as exposed to REC price fluctuations than other technologies.
Many market analysts have suggested that a low REC price is likely for the foreseeable future. Unfortunately, a solar power industry that was solely reliant upon RECs would probably generate far fewer RECs if certificate prices dropped to $10 – the industry would grind to a near-complete halt.
Policy Solutions
As the present legislation stands, the 20% renewable energy target will not truly be achieved. This is because the phantom credits created by the solar multiplier mean that far less electricity will be produced than certificates are created. In order to achieve policy goals, the phantom credits issue must be addressed. This market correction could simply take the form of increasing the Renewable Energy Target each year by the amount of phantom credits that exist from the previous year.
Other market distortions should also be addressed if a government goal of “lowest cost deployment” of renewable energy is to be achieved. The state and federal subsidies for solar water heaters mean that subsidised RECs are being created, thus harming the chance of deployment of wind farms and solar power alike. This could be addressed by ensuring that renewable energy technologies received a subsidy or RECs, but not both.
However, these two measures will not impact upon the REC price until 2011, by which the excess of banked RECs might have been cleared. Consequently, deployment of wind, solar power, and solar hot water will be set back by two years or more. In the short term, increasing demand for RECs seems to be the best solution. This could be achieved by bringing forward the renewable energy target – achieving 20% renewable energy by 2015. GreenPower also creates demand for RECs, and a government mandate of 10% GreenPower for residential customers (with provisions for opt-out) could also restimulate the REC market by clearing banked RECs. Alternative support for solar power should be considered – one government revenue-neutral measure such as a nation-wide gross Feed-in Tariff would mean far greater certainty for solar power and reward high-quality, high-performing installations, without creating a boom-and-bust cycle that causes harm and cripples investment.