Falling price of STCs
18 Apr 2011
As the price of STCs started falling several weeks ago we have had a number of questions regarding why the price has fallen and what the future outlook is. We have tried to address the key issues in the following:
The small-scale renewable scheme (SRES) is not uncapped with a fixed price as was first announced by the Australian Government. Changes to the renewable energy legislation that were made in June 2010 essentially impose an annual target or cap that gets re-adjusted each year and the $40 is in effect a price cap with the market operating as it always has with the certificate price determined by supply and demand..
- There is no fixed price – the $40 is the maximum that small-scale technology certificates (STCs) are worth if they are settled through the clearing house at the end of each quarter. Very few certificates are expected to be settled through the clearing house as solar businesses expect to be paid for certificates more frequently than quarterly and there is currently a surplus of certificates in the market.
- The small-scale scheme is not uncapped – the regulator must set a target for the year before 31 March (we expect the target for 2012 to be announced before 31 December 2011). Any surplus or deficit is then added to the following years target. There is an adjustment mechanism in place that essentially sets the target – based on expected level of supply over a two year cycle. Within this cycle however certificate prices can be considerably less than $40 and the price can be more volatile than initially expected due to the leveraging impact created by the Solar Credits multiplier. As the multiplier reduces we expect a lot less volatility in the market.
- Why have prices fallen? – Solar PV is proving to be very popular particularly at prices of $2000 to $3000 net cost to customer for a 1.5 kW system which have been regularly advertised in mainstream commercial media. As a result significant numbers of systems are being installed and submitted to create STCs. As an example for the month of March 2011 more than 30,000 systems, representing 5.3 million certificates were submitted to the regulator for registration. There are now more than enough STCs available to meet the first quarters target of 9.8 million when only a month or so ago most people expected that the first quarter’s target (35% of the annual target of 28 million) would not be achieved. As a result of the large oversupply building and the expectation that the 28 million target will be significantly exceeded the STC wholesale price has continued to fall to around $30 for May settlement.
- What will happen to STC prices? – we can expect that the wholesale STC price will remain under pressure if a significant surplus of STCs continues to develop. While forecasting prices is fraught with difficulty there are several observations we can make:
- Prices will remain weak until the level of PV installations claiming STCs starts to fall;
- Large numbers of systems sold under the attractive NSW gross feed-in-tariff regime in 2010 are being installed in 2011 and it will take a bit of time to get these through the system; and
- There is growing anticipation that the Minister will further reduce the Solar Credits multiplier from 1 July 2011 to take some heat out of the market.