Australian Renewable Energy Crisis

The Australian renewable energy industry faces a colossal threat of sudden extinction. Last month, the Renewable Energy Certificate (REC) price dove to AU $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.

Such a low REC price is likely to freeze the 6-gigawatt (GW) pipeline of wind power projects. The solar power industry 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. The 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, and it is quite likely that 2011’s requirements are largely met too.

The massive oversupply of RECs can mostly be attributed to the overheated solar hot water and heat pump market. 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 earlier this year when the Australian government’s economic stimulus package gifted $1,600 to that sector, an 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. Solar power was previously supported by an $8000 rebate plus about $1000 in RECs on small (1kW) systems. This discount, combined with a dive in PV module prices and a stronger Australian dollar, meant that many companies offered systems that were effectively free to the customer. This situation changed in July, when the rebate was substituted with solar credits, whereby one MWh of renewable energy generation creates 5 RECs rather than just one. 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 5x solar multiplier effect) distort the REC market, the 2.2 million more RECs that are required in 2011 could be supplied by only 14,000 1.5-kW solar power systems. This 21 MW of PV is about three months worth of business at today’s installation rate, suggesting that 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. Doing so requires smart, targeted marketing of high-quality large systems in states that have feed-in tariffs. Australian governments’ preference for net feed-in tariffs means that large systems sited on buildings with low daytime power consumption are required in order to achieve payback within a reasonable timeframe. The rest of the Australian renewable energy industry must hope that REC market distortions such as phantom credits and unfair competition with subsidized markets can soon be addressed.  

UPDATE: This article was written in late October.  Last week, the minister for Climate Change and Water announced a review of the REC market spot price (PDF). The REC price gained slightly on this news.

Warwick Johnston manages SunWiz, a solar energy consulting business that has spent the last two months analyzing the renewable energy target legislation, predicting the REC crisis, and charting a solution for smart solar power companies. Contact him via warwick@sunwiz.com.au

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