Where are REC prices headed?

27 Aug 2010

We have witnessed a $6 reduction in wholesale REC prices over the last two weeks. Many people in the solar industry are now asking where prices will go.

As we have previously mentioned, this reduction in price has been driven by a significant increase in the number of PV RECs created. The month of July saw just over 2 million PV RECs created, which was a 25% increase on the 1.6 million created in June. We now expect around 2.3 million PV RECs to be created in August (15% higher than July).

To put this into perspective the target for all renewable technologies for 2010 is 12.5 million and at the present rate PV, on its own, will be able to supply this nearly two times over.

With the recent changes to the legislation passed by Parliament, any significant increase in the level of RECs created in 2010 will be added to the renewable energy target in 2012 and 2013.

The issue is that the large numbers of RECs currently being created by solar need to be absorbed by the electricity retailers and then carried forward until 2012. The supply of RECs significantly exceeds the present demand for them, and therefore prices have fallen.

Where will the price stabilise? Looking to the past we observe that after a significant fall, prices tend to reach a level and stabilise. This is likely to happen when the price falls to a level where electricity retailers believe it’s more attractive to buy RECs and hold them for future use, than invest in new renewable power generation projects.

Another important consideration is the extent to which the reduction in REC prices will lead to increased systems costs, which results in a reduction in the number of installations, and hence REC creation. The $6 reduction in REC prices is equivalent to around $1,000 increase in price for a customer purchasing a 1.5 kW PV system. Will this be enough to slow down REC creation to levels that the market can manage?

Systems installed from 1 January 2011 will be eligible for the small-technology scheme, this will have a less volatile certificate price, much higher than today’s price. As we get closer to the end of this year we expect that it will become more attractive for customers to hold off buying systems so that they are installed next year.

In summary, while the excess supply of solar RECs continues, we expect that pressure on the REC price will remain. Longer term (next year and beyond), as we need to commit to building a large number of new renewable generation projects, we expect that prices will improve – as few people will commit to such large expenditures at current prices. The problem is therefore one of timing.