Australia's shrinking target for solar

This year’s small-scale renewable energy target crucially sees the scheme's contribution to electricity costs reduced again, but it will also result in lower solar sales for the segment.

Small-scale Technology Certificates are the backbone of the Australian solar market and on Friday the Clean Energy Regulator announced this year’s target. At 18.6 Million STCs the 2014 target Small-scale represents 10.48 per cent of electricity purchases.

In simple terms the annually set target specifies how many Small-scale Technology Certificates each liable party is required to surrender (in addition to meeting the Large Scale Certificate Target). Liable parties are typically large purchasers of electricity made by electricity retailers or, in some circumstances, electricity generation companies on liable grids.

Liable parties can create their own STCs or buy them on the market and if they fail to do so then they must pay a penalty (currently $65/MWh). Certificates can be created through a number of renewable energy technologies although solar photovoltaic dominates the market. Under the regulations companies who are classified as conducting Emission-Intensive Trade-Exposed activities can apply to the Clean Energy Regulator for Partial Exemption Certificates.

In summary, it’s a well-developed and rather elegant scheme that has built-in flexibility, a number of options for liable parties and even a facility to ensure that highly exposed industries are able to remain internationally competitive by seeking exemptions. It also has a self-correcting element; if too many certificates are created above the published target, the market price will naturally fall, slowing demand, and we have seen this work effectively over the history of the scheme. The recent history of the scheme is described in the graph below.

Graph for Australia's shrinking target for solar

The announcement of this year’s target is a crucially important juncture for renewable energy for several reasons.

Firstly, the target it is roughly what the industry expected, because each year non-binding forecasts are also calculated in advance so that there are no huge surprises and everyone can do some forward planning. In March last year the non-binding target was set at 16.7M STCs, so this year’s final number is very close. That’s good news for everyone involved.

Secondly, although there is an opportunity for political influence in announcing the final annual target via the appropriate minister, this hasn’t happened historically and didn’t happen this year. The fact that the CER’s final target announcement was broadly in line with independent recommendations is thus, a comforting outcome.

Thirdly, being broadly in line with expectations this announcement should offer industry a degree of security. If you had been planning your business on the previous market volumes according to the non-binding forecast, the new target should help deliver outcomes that are in line with your efforts and investment.

Lastly and perhaps most importantly, as a lower percentage of electricity sales the contribution of the STC scheme to electricity costs will reduce again, this year. This is an issue that has been highlighted over and over to those bemoaning the schemes cost. If you looked at the data and the forecasts it was crystal clear the schemes costs peaked in 2011 (resulting in an adjustment) and since then has been reducing.

So, what does this mean for the PV industry?

That is a complex question to answer because although it is crucially important, the STC target and the resultant price are not the only factors which affect market volumes each year.

The first thing to remember is that STCs only apply to installations under 100kW so the target really impacts on the dominant residential segment and the small and medium commercial segments. A smaller target will, in all probability, result in lower sales levels but there are other markets and opportunities.

I don’t want to underplay the significance of the reduction in the target and expected sales, however. Lower sales means: less employment, less economy of scale and higher overheads; 2014 will be painful year in our industry; adjustment will be essential, consolidation and contraction will be inevitable.

One of the really tricky aspects of support programs is that they are not particularly dynamic nor do they necessarily take into account other market or policy factors – and this is my big fear for 2014. When we look at the overall solar market we can count 15 primary factors that determine whether sales are incentivised on de-incentivised and, from where we sit, 14 of these factors are at risk of heading the wrong way this year, so there is absolutely no room for complacency.

Many companies I talk to are eagerly awaiting the day that we can be subsidy-free and thus free from the ups and downs of policy, and I couldn’t agree more. However, the reality is that virtually all energy markets are subsidised and as a relatively new energy technology PV deserves and needs this support, too. As an emerging technology on a global growth curve that is clearly the way of the future, it could be argued we deserve far more support than we currently receive.

We do have a target and that is something to be thankful for, but don’t lose sight of the bigger picture.

Nigel Morris is director of Solar Business Services.

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