Australian Solar's Gigawatt Valley of Death: Worth Dying For?

Hot on the heels of unprecedented growth, Australian solar installations will reach a cumulative 1 GW by the end of July 2011. Installations in 2011 alone are on track to exceed 1 GW, with monthly installation rates increasing four-fold within the first half of the year. Concerningly, the growth is unsustainable, indicative of a race-to-the-cliff, as severe wind-back of incentives has recently occurred. But a promising glow is developing on the horizon, with the government’s recently announced suite of long-term clean energy policies presenting a transformative opportunity for the Australian solar sector, if it can survive the next twelve months.

A steep-cliff’d valley

The Australian solar industry rejoined the ranks of the top 10 solar nations of 2010, with its 383 MW, placing eighth along with Spain. By mid-2011, Australia had already installed and declared 390 MW, with the 30-45-MW delay between system installation and registration, meaning that over 500 MW is certain to have been installed to date this year. This brings Australia’s cumulative installed capacity to 1070 MW. With the installation rate growing four-fold from the start of 2011, Australia is on track to be a GW market this year, which could make it a top-5 solar nation.

A severe reduction in government support at both federal and state levels means such trends are unlikely to continue. Australian installations receive an upfront discount though SRES, a certificate scheme for small-scale renewables with a multiplier for the first 1.5 kW of PV capacity. Government has underestimated the  consumer demand for PV, which has resulted in a massive oversupply of certificates. Annual requirements are met within the first six months of the year. The government has reacted by reducing the solar multiplier by 40% on July 1st, but not before the market price of the certificates dived. As a consequence, the combined value of the certificates has dropped by as much as 70%, with the price of an entry-level small solar power system doubling as a result.

At the same time, most Australian states have also wound back their feed-in tariffs, with only one state (Queensland) expected to be offering a premium feed-in tariff by year’s end. A revolt by system owners forced one state government (NSW) to back-down upon a proposal to retrospectively reduce a feed-in tariff for existing owners -- one side-benefit of having a strong residential solar sector. In spite of this, the local solar industry is now fighting to receive anything greater than the wholesale electricity rate (~A$0.06/kWh) for power that is not consumed on site. The simultaneous removal of federal and state subsidies has carved a valley through the playing field, and the lack of guaranteed fair value for solar generation has raised the 'grid-parity goal posts'. A cool-off is certain. Recent installation figures have had as much to do with consumers rushing to take advantage of the fore-warned reduction in subsidy levels, as it did with the subsidies in their own right. Though the rapid withdrawal of subsidies has created an industry-wide valley of death, what lies on the other side may be worth dying for.

A Bridge?

The Australian solar industry has taken heart from the federal government’s recent announcement of a suite of reinvestments of revenue from a carbon tax into clean energy initiatives. Detailed modelling released today predicts the renewable energy sector (excluding hydro) will be 18 times as large in 2050 as it is today. A newly created Clean Energy Finance Corporation will have A$10 billion to leverage private sector financing for commercialisation and deployment for renewable energy and clean technology projects, half of which are exclusively earmarked for renewable energy. The newly created Australian Renewable Energy Agency will put towards A$3.2 billion of funding towards research and development and the administration of a consolidation of existing programs such as Solar Flagships, and will include a Renewable Energy Venture Capital Fund. Importantly, both will be independent from government, removing the politicisation of funding announcements and hopefully delivering greater outcomes more rapidly than before. Coupled with an announced 2050 emissions reduction target of 80% and a request that the Australian Energy Market Operator start to plan for the time when the grid operates with 100% renewable energy, the future looks bright.

These announcements hold out hope for the solar sector. It appears as if the government is addressing the solar sector’s concerns about barriers to deployment and about the one-off, long-winded nature of grants such as Solar Flagships (announced to create the world’s largest solar plants but set to deliver one 150MW PV project by 2015). However, there are a few obstacles to clear first.

1. Parliament: The minority government has decreased in popularity since the last election, and though those holding the balance of power have guaranteed passage of carbon pricing legislation, the government must survive in office long enough to legislate. 
2. Time: The announced institutions take some time to establish, formulate programs, and release funding, and meanwhile carbon revenue will not start flowing until 1st July 2012. The solar industry will have to hold on for some time. 
3. Capability: The Australian solar industry currently services a predominantly residential market. A combination of approaching market saturation (already 10% of households own a PV system in three major states) and an uncertain future for solar power exported to the distribution network create medium-term challenges for the residential solar sector. Nothing in the recent announcements targeted residential solar, suggesting that the industry will need to rely upon residential grid parity for its future and existing schemes until then.

The transformation from cottage industry to residential mass rollout took less than three years. Largely as a result of populist federal government policy settings, 1-1.5-kW systems dominate the Australian landscape, to the extent that in 2010 Australia installed more small systems (<10 kW) than Germany. Recent policy announcements should unlock commercial and distributed utility-scale projects, but the current industry comprises mainly of electrical trademen and call-centre retailers. Many have the appetite but few have the experience to service the demands of commercial solar customers. The challenge is made greater by the looming cliff that will cause significant industry contraction. With grid parity for residential solar expected as soon as two years, a sleeping Phoenix may need to be revived if nothing changes, with the historical industry development considered wasteful in such light. Regardless, the opportunity for Australian solar has been clearly spelled out: Those that can cross the valley of death will be well-placed to take advantage of a potentially massive, multi-gigawatt industry.

SunWiz is a solar consultancy servicing over 150 Australian PV distribution, integration, and installation companies.SunWiz provides market intelligence, nationally-awarded system engineering services, and bespoke consulting. Visit www.sunwiz.com.au for more information.