CLIMATE SPECTATOR: A tricky trap ahead for solar

Climate Spectator

Within the bowels of the Climate Change Authority's Review Paper on the Renewable Energy Target is a series of recommendations that could significantly reduce the level of support for solar, but also possibly cannibalise the large-scale renewable energy target.

Over the past few years solar PV has managed to consistently surprise the government in terms of the number of systems sold. This has resulted in the cost of the small-scale renewable energy scheme (SRES) blowing out to levels well beyond anything the government or anyone else imagined.

To counter future cost blowouts the Climate Change Authority has proposed the following two changes to the design of the SRES:

– Push PV systems above 10 kilowatts out of the small-scale SRES and into the large-scale renewable energy target;

– Reduce the number of small scale renewable energy certificates or STCs that solar PV and solar water heaters would receive.

Background to recommendation

At present solar PV systems up to 100 kilowatts in capacity and solar water heaters are supported under a separate scheme to large-scale projects such as wind power. Instead of receiving their renewable energy certificates (which have had a market value of between $25 to $40) only after they generate electricity, these small-scale systems instead receive them upfront.

This is based on an estimate of what the system is expected to generate in the future over a 15-year life for PV; or the electricity it would be expected to displace over a 10-year life for water heaters. Giving the support upfront reduces administrative burden with having to measure the output of lots of small systems, and acts like a rebate off the system purchase price which works well with household consumer behaviour.

Unlike the large-scale renewable energy target, which has a fixed target set out to 2030 for the amount of renewable energy it will support, the level of generation supported under the SRES is uncapped. Instead targets are set each year by the regulator based on a forecast of expected capacity installed.

This forecast is based on an assumption that STCs carried a value of $40 (known as the ‘clearing-house price'). If it turns out that the STCs created is larger than the target set by the regulator, then the target for the next year is boosted by the number of certificates in excess of the previous year's target.

To contain costs, the government has the following options:

1. Reduce the clearing house price per certificate below $40. This would then act to automatically reduce the level of the target for the SRES set each year by the regulator because one would expect systems would be less popular with a lower subsidy. Also the clearing house price acts as a price cap on certificates so it could reduce not just the number of certificates but also their price.

2. Set a fixed target for STCs for several years into the future, or otherwise merge the small and large-scale targets into one single scheme with a fixed target out to 2030.

3. Reduce the number of certificates given to systems per megawatt-hour of generation.

In the end the Authority has chosen to go for a mixture of options 2 and 3.

Systems above 10 kilowatts rolled into LRET

Due to a concern that there might be a possible boom in larger systems installed on commercial business premises, the Authority has proposed that systems above 10 kilowatts be pushed into the LRET, which has a fixed electricity target. In addition, it suggests that rather than being able to get certificates upfront for 15 years worth of generation, they would be given in blocks of 5 years. This would enable installers to get the first five years worth upfront but then would have to wait another five years before they could create the next five-year block of certificates.

This has its pros and cons for the solar PV industry. The pro is that certificates are likely to be worth noticeably more than $40 in the LRET. The con is that you wouldn't get 15 years worth of certificates upfront. However it's possible that intermediaries like banks and electricity retailers could offer money upfront to buy the right to create the future blocks of certificates. Overall the impact for commercial PV may even be positive, but further analysis is required.

For those in large-scale renewables, such as wind power, however this is not good news. The price for electricity in the commercial sector is high enough that solar PV is starting to look financially viable. Every time I attend a solar PV industry gathering I come across people with big ambitions for solar on commercial business rooftops, with talk of this becoming a multi-gigawatt market. There are plenty of potential roadblocks that could prevent this market from coming to fruition, but the sector is trying hard to resolve them.

Reducing the number of certificates given to small-scale systems

For systems that remain in the SRES, the Authority suggests that the responsible minister for the RET (currently Greg Combet) be given the discretion to reduce the number of certificates a small-scale system could create per megawatt-hour of generation/displacement to below one. It suggests the following circumstances could trigger the minister to reduce the number of certificates:

1. Where there is a rapid reduction over the prior year in out of pocket expenses to purchase a small-scale system.

2. Where the cost of the SRES is expected to exceed 1.5 per cent of electricity consumers' bills.

3. The average payback period for a small scale system has fallen below 10 years.

This recommendation is likely to cause some serious headaches for the solar PV sector. Trying to predict the market for STCs is already nigh near impossible more than 12 months in advance without having to also factor in a minister applying their "discretion”.

Estimating the payback on a solar system sounds like a straightforward calculation, but in reality is subject to wide variations depending on electricity tariff structures, system size, the exchange rate, and solar irradiance. With the AEMC recommending more widespread roll-out of time of use tariffs it will become even harder.

There is a need for a mechanism to contain the cost of the SRES to safeguard against cost blowouts, but the Authority's recommendation needs a lot more work.