An STC market shake-up

For a market already primed for the passage of several significant landmarks, June finished with a bang in the STC space thanks to the Queensland government’s solar FiT announcement. But what does it mean for the market going forward?

Small-scale Technology Certificates (STCs)

It was always going to be an interesting end to the financial year in the STC market. The reduction of the 3-times Solar Credits Multiplier to a multiple of 2 from July 1 was bound to produce a massive week in terms of STC submissions (and it did at 1.43 million). The introduction of the carbon price and the focus it has put (rightly or wrongly) on electricity prices had also been fuelling sales of PV systems as consumers attempt to hedge themselves against increasing electricity prices. Yet it was the surprise (though not wholly unanticipated) announcement from the Queensland government of its decision to reduce the last of the nation’s original premium feed-in tariffs that really set the market alight.

Previous weeks had revealed a strong degree of support in the spot market at $26.00. When the Queensland announcement surfaced early last week, the spot was sitting in the mid $26s. In the following morning’s session the spot traded briefly to $28.00 before promptly softening to the $27.00 level and ultimately closing the day at $27.25. This kind of significant intra-day volatility persisted across the week resulting in a series of subsequently modest daily gains. To conclude the financial year the spot market last traded at $27.50.

To look now in depth at the Queensland FiT announcement, from midnight on July 9, the 44 cents/kWh Queensland Solar Bonus Scheme will be reduced to 8 cents. A review of the scheme will also be undertaken by the state’s Competition Authority to determine a ‘fair and reasonable’ value for energy exported to the grid. It is not clear whether the review (ostensibly of the same ilk as those previously adopted by Coalition governments in New South Wales and Victoria) will broach the controversial issue of the benefits of distributed generation.

The spike in the spot price which followed the announcement appears predicated on the argument that the changes to the Queensland FiT will bring that state – which has been the nation’s leading market in terms of installs and hence STC creation in 2012 – back to the pack. And with the nation’s booming market under control, and the effects of the reduction in the Solar Credits Multiplier to be felt across the country, STC creation in the second half of the year (the theory runs) would fall.

Contrary to what one would expect from such a sizeable reduction in the nation's leading FiT, it actually appears that the way in which the reduction is structured may very well bolster STC creation numbers in Queensland for the months to come. This is because in the days following the announcement and until July 9, a window exists in which PV retailers can sell (or even quote) systems and lodge the Inverter Energy System (IES) connection application without the need to have installed the system.

That only need happen by June 30, 2013. This means that there will be no mad rush to install, which reduces the risk of poor workmanship, whilst also meaning many installers will be very busy into the future whittling away the backlog of 44 cent eligible systems. And this means plenty of STCs.

From July 10 onward, the FiT reduction will of course result in fewer PV system sales in Queensland which will eventually mean less STCs created at some point into the future. The question remains when will the effects be manifest via a reduction in the STC submission numbers?

In the medium to long-term however, the FiT reduction along with the drop in the Multiplier will reduce the elasticity of STC creation, making it easier for the Regulator to accurately estimate the 2013 Small-scale Technology Percentage (STP). Should this be the case, STC supply and demand would be more closely balanced, and hence STC prices will ultimately be higher. And whilst it may have been an uncommon phenomenon in recent times in the renewable markets, perhaps the longer-term view has managed to trump its myopic alternative.

Energy Efficiency

In recent times both of the nation’s energy efficiency markets have been characterised by bearish sentiment. In both cases the primary cause appears to be expectations of increases in supply.

In the Victorian Energy Efficiency Certificate (VEEC) market, a recovery off the $21.00 lows seen in March had been building into May and June. Having reached a high of $24.25 however the market has since slipped trade back to $21.50.

The mild recovery into the $24s which took place in May and the subsequent stability at that level which persisted into the middle of June had largely been ascribed to persistent rumours of compliance issues surrounding Stand-by Power Controllers (SPCs) and the possible amendments to the regulations that could limit the number of certificates created from that methodology into the future. Given the recent dominance of the SPCs as a creation methodology (over 80 per cent of 2012 VEEC creation), such a change may very well have put serious pressure on the supply/demand balance of the scheme for the 2012 compliance year.

However, by the second half of June expectations had suddenly changed, with many instead believing that there would be little to no change to the SPCs methodology. It appears that the concerns which had existed surrounding the improper installation and post-installation removal of the devices which had been playing on the mind of the scheme’s regulator proved to have been over stated, according to a significant market survey undertaken on behalf of the Essential Services Commission. The survey found that only 16 per cent of the devices were removed post-installation and that 75 per cent of those who had them installed were happy with the experience.

Combine this with the fact that the month of May saw a considerable jump in SPC creation which meant there were already sufficient certificates in circulation to meet half of the 2012 (5.4 million) target and it isn’t hard to trace an outline of a fairly robust explanation for the recent softening.

In New South Wales, the Energy Savings Certificate (ESC) Market has also been softening, with a range of transactions bringing the market lower.

The softening has gathered some momentum in recent weeks with a number of short forward transactions in the $25.75-$26.00 range backed up by a spot trade on Wednesday at $24.50.

The softness does not appear to be so much the result ESC creation, but more so expected ESC creation which is weighing on the market. To date, less than 300k of the approximately 2 million 2012 obligation has been created. Yet rumours in the market of countless new entrants seem to have had an impact on buyers.

The end o the financial year also saw the passing of the final date for liable entities to acquire and surrender 2011 compliant certificates to avoid having to pay the scheme’s shortfall penalty. Where there had not been a trade in 2011 compliant ESCs reported since late May, this effectively means the market for 2011 ESCs definitely no longer exists.

Marco Stella is a Senior Broker, Environmental Markets and editor of The Green Room at Nextgen, a wholesale energy and environmental brokerage firm. The content above is sourced from excerpts from The Green Room.

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