SUCCESSFUL SOLAR STRATEGIES

Solar Credits and Beyond

A Bright Future for Australian Solar Power

An investigative report by Warwick Johnston, SunWiz, October 2008

October 2009

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Cover Image: Warwick Johnston

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© Warwick Johnston 2009

Executive Summary
Analysis shows that the REC market is hugely oversupplied. At the time of writing, there were 5 million more
RECs on the market than will be needed in 2009, the balance of which could be used against 2010’s and quite
possibly 2011’s REC Requirements. The additional supply of RECs from the National Solar Schools Program and
the backlog of Solar Home and Communities installations could further add to 2010’s REC oversupply, but still
be dwarfed by Solar Hot Water’s dominance of the REC market. Modelling demonstrates the oversupply
situation particularly affects PV because the solar multiplier means that fewer PV systems are needed to meet
the RET than would occur without the multiplier. The situation does not appear to improve much until 2012, a
year in which the solar multiplier decreases by 20%.

2009-2011 Banked REC Scenarios

25,000
Thousands

20,000

15,000
RECs

10,000

5,000

0
2007 2008 2009 2010 2010 2011 2011 Highly
Projection Estimate Estimate Conservative Conservative
Conservative Highly Estimate Estimate
Conservative

SHW Wind Other RE

SHCP Backlog Solar Schools Previous Years' RECs
Solar Credit PV RET + GreenPower

These factors point to a low REC price for the years ahead, which when combined with REC price volatility and
the disproportionate market power wielded by the retailers over small REC suppliers suggest that it is strongly
in the interest of the solar power industry to increase its independence from RECs. This report presents
supporting evidence of the factors that could contribute to a low REC price, and an analysis of the impact that
this might have upon solar power businesses. It also presents strategies for countering the risks posed by RECs,
and a number of methods that solar power businesses could employ to increase market share whilst reducing
exposure to REC prices.
In addition to presenting possible actions a business may take to reduce its RECs exposure, the report
identifies a number of strategies that may be used to successfully sell solar power systems.

High REC Moderate Low REC Commercial Beyond

Price REC Price Price Systems Subsidies

Target Feed-in Commercial FiT

Larger Systems
Tariff Target Markets

Bulk Installs
Solar Schools
(incl 3 markets)
Install Quickly
REC Zones 1 &2 Diesel Mini-
(+mapping tool) grids

Customer Accelerated
Experience Grid Parity

It is demonstrated that larger installations have greater independence from REC prices, as well as other
benefits to retailers and customers alike. Larger systems tend to be more profitable for installation companies,
and their typically greater amount of export power can significantly reduce their payback in states that have
net Feed-in Tariffs (FiTs). This also results in a larger internal rate of return (IRR) for business customers with
low daytime power consumption.

As reflected in the following graphs, it is demonstrated that:

• A 2 kW system typically pays for itself more quickly than a 1.5 kW system for average Australian
households in states with net Feed-in Tariffs due to the significantly greater amount of export power.
Typical payback improves further still for 5 and 10 kW systems.
• Favourable IRRs of up to 15% are achievable with large systems that export a lot of power in states
with FiTs
• Customers that miss out on the 50% tax break for small businesses might forfeit 3% of their IRR.
• The FiT rate and duration have a significant impact upon IRR – although Victoria’s FiT is limited to
5 kW systems, its IRR is up to 3% greater than a South Australian 10 kW system if the same
percentage of power is export.
• The determinable revenue provided by ACT’s gross Feed-in Tariff produces outcomes that could
exceed 10% IRR. Higher IRRs are achievable in NSW if low-use electricity customers can be identified.
The report also shows that:

• In Zone 4 Victoria, IRRs of 7% are achievable either through a 75% exporting system before the tax
break finishes, or a 100% exporting system after the conclusion of the tax break. However the cap
upon the Victorian FiT is fast approaching.
• Even in Victoria a positive return on investment is possible without RECs or the tax break and with
more expensive panels and conservative performance estimates.

The report also identifies target markets that may have low electricity consumption, large roofs, and be eligible
for the FiT – and thus be prime candidates for high IRR. Also contained are other suitable target markets for
bulk installation, in which costs might be minimized through efficiencies of scale. Possible techniques solar
power businesses may consider for increasing sales are also presented.
Introduction
Since the Solar Homes and Communities Plan was abruptly terminated, the solar power industry has wondered
how it will be affected by the Solar Credits and the Renewable Energy Target (RET). The passing of the new RET
legislation saw Renewable Electricity Certificate (REC) prices dive from $50 to $37/REC. The REC price has since
crashed further, presently sitting around $24/REC. This report reveals that the low REC price is here to stay, a
sentiment experts agree upon:

“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
Economics 1

“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 Consulting2

“We are forecasting an oversupply of RECs for the next few years … this is likely to keep a downward
3
pressure on REC prices”. Ric Brazzale, Managing Director, Green Energy Trading.

After highlighting the potential causes and problems of a low and volatile REC price, this report demonstrates
strategies that could assist smart solar power businesses to survive and thrive by targeting bulk installations,
installing larger systems, and targeting Feed-in Tariffs and commercial systems. Along the way, promising
markets are identified and explored in further depth, and great selling and target market opportunities are
featured at the end of the report. These strategies and tool-kit should help the reader’s solar business to shine.

The document is summarised in the figure below.

Risky RECs
•How the RET Legislation impacts you
•Why the REC price is Volatile
•Why the REC price has dived and could remain low
•How a low REC price affects your business

Four Key REC Strategies

•Conservative assumptions
•Sharing REC risk
•Lock in REC price
•REC market price cycles

Solar Strategies
•for a high REC price
•for a moderate REC price
•for a low REC price

1
www.carbonmarkets.com.au/text/FoREsight3.pdf
2
UBS Consulting, July 2009
3
http://www.environmentalmanagementnews.net/storyview.asp?storyid=1034595&sectionsource=s0
The image below summarises the contributors to the oversupply of RECs, and the impact upon your sales price
– each part is covered in more detail in Section 2.

Solar Hot
Water
Wind Farms
Solar Schools
etc

Reducing
SHCP Backlog Solar
Multiplier

Your CPRS & higher

Solar Credits Business electricity
Price
(REC$)

Part B presents the solutions to the problems identified in the above illustration. Section 5 provides some key
strategies for mitigating REC risk, as illustrated below.

Conservative
Assumptions

Observe REC
REC Risk
Share REC
market Mitigation risk
Cycles
Strategies

Lock in REC
price

Sections 6 through 9 present solutions to low REC price – strategies that can be adopted for various ranges of
REC prices, as illustrated below. Finally, awaiting at the end of the document is a bonus section containing
great advice on innovative sales approaches to employ (Section 12), plus a bonus section target markets for
Feed-in Tariffs (Section 11).
 Strategies for a High REC price
Sell and Install Swiftly

Strategies for a Moderate REC Price

Bulk Installation (with 3 Quality and Customer
Target Zones 1 and 2 Larger Systems
key opportunities) Experience

Strategies for a Low REC price

Target Feed-in Commercial
Solar Schools Grid Parity Diesel Mini-grid
Tariff Installations
Acknowledgements
SunWiz wishes to acknowledge the contribution of the following people, whose input helped shape this report.

• Fiona O’Hehir of Greenbank Environmental

• Stephen Ingrouille of Going Solar
• Andrew Hall of Bright Generation
• Glen Morris of SolarQuip
• Muriel Watt of IT Power
• Ric Brazzale of Green Energy Trading
• Bruce Hannam of SEIA
rd
Wherever possible, approval has been gained for inclusion of content provided by 3 parties, with references
included in the document.

About SunWiz – Solar Energy Consulting

SunWiz has extensive knowledge of all facets of solar energy:

solar photovoltaic solar drying

solar heating and cooling passive solar design
concentrating solar power

SunWiz is able to provide the following services related to solar energy systems:

Award-winning PV System Design

Tender Preparation System Performance Monitoring and Reporting
Procurement Advice Technology Evaluation
Independent Tender Evaluation Feasibility Studies
Business Opportunity Identification and Installation supervision and sign-off
Evaluation

Warwick Johnston, manager of SunWiz has:

Won two awards for Best Australian Solar Power System

Managed the delivery of over 600 kW of PV systems
BCSE/CEC Accreditation (Design and Supervise) and Membership (pending board approval)
Completed a Masters in Renewable Energy (November 2009)
Been awarded a fellowship for solar air conditioning
Been a member of the PV directorate
Been the treasurer of ANZSES (Victoria)
Presented at a number of conferences
Table of Contents
1. RECs, RET – what’s it all mean? ............................................................................................................... 14
1.1. MRET and REC Creation ................................................................................................................. 14
1.2. Historical REC Creation .................................................................................................................. 15
1.3. Historical REC Prices ...................................................................................................................... 17
1.4. The Expanded RET ......................................................................................................................... 18
1.5. Solar Multiplier .............................................................................................................................. 20
2. Risky RECs: Sunset for Solar Power? ........................................................................................................ 21
2.1. Introduction: Why “$7500” REC Value is Incredibly Optimistic........................................................ 23
2.2. The REC Backlog ............................................................................................................................ 23
2.3. Your Sustainable Competition ........................................................................................................ 24
2.3.1. The other Residential Solar ........................................................................................................ 24
2.3.2. Large-scale Renewable Energy ................................................................................................... 25
2.4. What’s in it for PV? ........................................................................................................................ 28
2.4.1. SHCP backlog could mean fewer PV installations in future years ................................................ 28
2.4.2. Solar Schools could also have the same effect............................................................................ 28
2.4.3. Solar Multiplier or Solar Divisor?................................................................................................ 28
2.4.4. Your Solar Credits are Legislated to Shrink ................................................................................. 32
2.5. Other REC Risks ............................................................................................................................. 33
2.5.1. Electricity Price Increases Lower REC Prices ............................................................................... 33
2.5.2. The RECs market is gamed in favour of the buyers ..................................................................... 34
2.5.3. Rapid REC Price Fluctuations could Kill Your Business ................................................................. 34
2.6. Feedback ....................................................................................................................................... 36
2.7. Putting it all together: What’s the REC price going to be? ............................................................... 36
3. Summary and Conclusion........................................................................................................................ 39
4. System Prices, and how they are affected by RECs .................................................................................. 42
5. Four Key Strategies to Reduce the Impact of REC Price Fluctuations ........................................................ 44
5.1. Make conservative assumptions .................................................................................................... 45
5.2. Share the REC risk to the customer ................................................................................................ 46
5.3. Lock-in your REC price.................................................................................................................... 46
5.4. Observe REC market cycles ............................................................................................................ 46
5.5. Sell in Bulk??? ................................................................................................................................ 47
5.6. Buy RECs Now................................................................................................................................ 47
5.7. Promote GreenPower .................................................................................................................... 47
5.8. Lobby Furiously.............................................................................................................................. 47
5.9. The other prices… .......................................................................................................................... 48
6. High REC-price Strategies (should the present situation change) ............................................................. 50
6.1. Sell and install swiftly..................................................................................................................... 50
7. Moderate REC-value Strategies ............................................................................................................... 51
7.1. Target Zones 1 and 2...................................................................................................................... 51
7.2. Bulk installation ............................................................................................................................. 52
7.3. Larger Systems .............................................................................................................................. 55
7.4. Focus on quality and Customer Service Experience ........................................................................ 57
8. Strategies for a low REC-price ................................................................................................................. 58

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 8.1. Solar Schools ................................................................................................................................. 58
8.2. Target Feed-in Tariff with intelligent sales message........................................................................ 58
8.3. Grid Parity ..................................................................................................................................... 66
8.4. Diesel mini-grid.............................................................................................................................. 67
9. Commercial Installations......................................................................................................................... 68
9.1. Selling Commercial Systems for 10% Less ....................................................................................... 68
9.2. Commercial Installations Tax Break ................................................................................................ 68
9.3. The Depreciation Blessing .............................................................................................................. 69
9.4. Return on Investment for commercial systems............................................................................... 70
9.4.1. An example of the calculations is provided in Example IRR Calculation ....................................... 72
9.4.2. Payback & IRR: NSW .................................................................................................................. 73
9.4.3. Payback & IRR: Victoria.............................................................................................................. 74
9.4.4. Payback & IRR: SA...................................................................................................................... 75
9.4.5. Payback & IRR: QLD ................................................................................................................... 76
9.4.6. Payback & IRR: ACT.................................................................................................................... 77
9.4.7. Best and Worst Case Paybacks ................................................................................................... 78
9.4.8. State-by-State Summary Comparison......................................................................................... 80
9.4.9. Example IRR Calculation............................................................................................................. 81
9.5. Leasing solar systems..................................................................................................................... 82
10. Conclusion ......................................................................................................................................... 82
11. Bonus Section: Feed-in Tariff Target Markets ..................................................................................... 83
12. Bonus Section: Thirteen Great Selling Strategies................................................................................. 86
13. Bonus – Graphs of Each Feed-in Tariff and Zone ................................................................................. 90
13.1. NSW Zone 2 ................................................................................................................................... 90
13.2. NSW Zone 3 ................................................................................................................................... 92
13.3. Queensland Zone 3 ........................................................................................................................ 94
13.1. Queensland Zone 2 ........................................................................................................................ 96
13.2. Victoria Zone 4 .............................................................................................................................. 98
13.3. Victoria Zone 3 ............................................................................................................................ 100
13.4. SA Zone 2 .................................................................................................................................... 102
13.5. SA Zone 3 .................................................................................................................................... 104
13.6. ACT Zone 3 .................................................................................................................................. 106
14. Bonus Section: Feed-in Tariff............................................................................................................ 107
15. Appendix: Assumed System Prices ................................................................................................... 110
16. Glossary........................................................................................................................................... 111

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 PART A
RECs Catastrophe
What happens to your business at an abysmal REC price?

As PV businesses now depend upon Renewable Energy Certificates (RECs) for their revenue, it’s vitally
important to deeply understand the Renewable Energy Target (RET) legislation. The future of your business
may depend upon your accurate assessment of how REC prices will vary in the immediate, intermediate, and
distant future. Part A of the report starts with a brief introduction into the RET legislation, then identifies
pertinent questions (what will the REC price be) and potential problems (namely a low and volatile REC price),
which are then addressed in Part B the report. Section 1 covers:

• The Mandatory Renewable Energy Target

• Which technologies contribute to the RET
• The amount each technology has historically contributed to meeting the target
• REC market dynamics
• Historical REC prices
• The expanded RET target
• The effect of the solar multiplier and phantom credits
• Influences upon the REC price

If you’re already familiar with RET legislation, then you could skip to Section 2, bearing in mind the key
messages from Section 1:

• The REC price, like any market price, depends upon supply and demand,
• Historically, the REC price has fluctuated significantly,
• The growth in REC demand matters to the PV industry more than the final target - although
12,500,000 RECs are needed in 2010, this is only 4,400,000 RECs more than were required in 2009.
• The inclusion of phantom RECs could have significant impact upon the REC price.
• And critically, PV, SHW, and other renewable energy technologies must compete for a share of the
REC market.

The remainder of Part A considers RECs at further length, covering:

• Why the REC price is likely to remain low: detailed REC supply and demand figures (Section 2).
• The impact of low REC prices upon your business (Section 2.4).
• Strategies to minimise the effect of REC price fluctuations upon your business (Section 5).
• How to sell systems as the REC price falls (Sections 6 through 9).

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