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.

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