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RECs Crisis -

Sunset for the Solar Industry?


The Impact of Low REC Prices upon the Solar Power Industry

An free solar power industry report by Warwick Johnston, SunWiz, October 2009

Copyright © Warwick Johnston 2009

Cover Image: Mykl Roventine and Warwick Johnston – Licensed under Creative Commons
Introduction
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.
Foreword
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
profits
• 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
1
Economics

“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 2

“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:

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.

Here’s a pictorial summary of the situation:

1
www.carbonmarkets.com.au/text/FoREsight3.pdf
2
UBS Consulting, July 2009
3
http://www.environmentalmanagementnews.net/storyview.asp?storyid=1034595&sectionsource=s0
Demand Supply

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 AGL has “around A$1 billion
National RET. While the curve trends up, indicating the requirement [in wind farm projects]
for more and more renewable energy generation each year (left axis ready to go, and well over
of the graph), the additional amount of generation in each year isn’t $2 billion more in the
huge (shown in bars and read from the graph’s right axis)– 4,400,000 pipeline”
RECs more in 2010 than 2009, and 2,325,000 RECs more in 2011 than
2010.
Renerable Energy Targets
5000 50000
4500 45000
4000 40000
1000s of additional RECs

1000s of RECs (Total)


3500 35000
3000 30000
2500 25000
2000 20000
1500 15000
1000 10000
500 5000
0 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Additional RECs MRET RECs Expanded National RECs

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.

REC Creation: PV vs SHW (2009 YTD)


6,000,000

5,000,000

4,000,000
RECs

3,000,000 SHW
PV
2,000,000

1,000,000

0
2001 2002 2003 2004 2005 2006 2007 2008 2009
The REC price is prevented from going too high by the availability of free Solar hot water systems
solar PV or Solar Hot Water Systems. If the REC price gets near $50, then “are economic at a lower
free solar PV and free solar hot water systems compete for a share of the REC price than even wind
REC market. As the REC market isn’t that large, it wouldn’t be long before requires”
supply exceeded demand and the REC price would dive again. Large-scale
renewable energy technologies are also competing to create RECs, with
4
over 800 MW of wind power ready to be deployed in the next 1-2 years ,
5
and up to 6000 MW over the next 10 years - 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.

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
6
years, but modelling performed by Carbon Market Economics suggests that wind farms alone may create
7
another 2m RECs over the next 1-2 years. The 10,000 schools 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?

Solar Credits
Other RETs •????
•Historically
5,400,000
•extra 2,000,000 in
2010?

SHW
•5,400,000 by Sep Excess RECs on
2009 Market
•>55% of total market

Solar Schools SHCP


•Up to 1,000,000 •1,300,000 Backlog
•Was 8% of total
market

4
Carbon Market Economics, “Renewable Generation Projects 2009 – 2028, Revised Final Report”, January 209
5
“Australian renewables law to spark wave of wind projects”, BusinessGreen.com, 21/8/09
6
Carbon Market Economics, “Renewable Generation Projects 2009 – 2028, Revised Final Report”, January 209
7
http://www.abs.gov.au/AUSSTATS/abs@.nsf/MF/4221.0
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.

2009-2010 Banked REC Scenarios


25,000 20,000
Thousands

1.5 kW PV Systems (155 RECs each)


18,000
20,000 16,000
14,000
15,000 12,000
RECs

10,000
10,000 8,000
6,000
5,000 4,000
2,000
0 0
2009 2010 Estimate 2010 Estimate 2011 2011 Highly
Projection Conservative Highly Conservative Conservative
Conservative

SHW Wind
Other RE SHCP Backlog
Solar Schools Previous Years' RECs
Solar Credit PV RET + GreenPower
1.5 kW PV Systems (155 RECs)
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.
Summary
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.
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 System Performance Monitoring and


Tender Preparation 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

Consulting projects that Warwick has been involved with include:

Opportunity identification for PV inclusion in Tsunami reconstruction on behalf of an international


NGO
PV opportunity identification and pre-feasibility studies for a number of local councils
PV opportunities investigation on local council sporting pavilions
Identification of 10 MW of untapped renewable energy resources in one council area
Analysis of Victoria’s off-grid market potential for renewable energy
Pre-feasibility study for two 250 kW tracking PV power stations
Energy Efficiency Opportunity Assessments for large electricity users

Phone: +61 (0)413 361 534


Address: PO Box 263 Bangalow NSW 2479
Accreditation #: P1902

Member: ANZSES, ISES, ATA, EWB

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