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Small-scale technology certificate market update - May 2018

11 May 2018

5.5 million small-scale technology certificate surplus after quarter one surrender and likely to grow this year

Current market observations

  • Over 5.5 million small-scale technology certificates (STCs) remained registered after quarter one surrender on 28 April 2018; with 5.3 million in REC Registry accounts and a further 226,000 STCs pending clearing house sale. Quarter one is the largest quarter accounting for 35 per cent of the total year’s liability.
  • The rate of STC creations for the first four months of the year has been 2.1 million above that required to meet the demand set in the small-scale technology percentage (STP) that was based on consultant forecasts made earlier in the year.
  • If the high rate of STC creations continues for the rest of 2018, the STC surplus could reach approximately 9.5 million by the end of the year.
  • During past periods of STC oversupply, the STC spot market price has often traded well below the $40 clearing house sales price.

Analysis

The number and size of small-scale solar PV installations has continued to increase in 2018. There has been a 35 per cent increase in the number of systems installed and a 54 percent increase in capacity so far in 2018 compared with the same period last year. The average size of PV systems also continues to grow with noticeable increases in residential systems between five and seven kilowatts.

The increase in system numbers and sizes in 2018 has more than offset the decline in deeming period. If current installation rates continue for the remainder of the year, around 1400 megawatts of capacity is likely to be installed – an increase of 29 per cent from the previous year. This will increase the number of STCs by 17 per cent compared to the previous year.

The first quarter surrender for 2018 occurred on 28 April 2018 – this first surrender of the year is always the largest and accounted for 35 per cent of the year’s total liability (approximately 10.4 million STCs). However, after surrender, over 5.5 million STCs remained registered with 5.3 million in REC Registry accounts and a further 226,000 in the clearing house.

STC creation rates have consistently been higher during 2018 than estimated in the consultant modelling that underpins the STP. The rate of STC creations for the first four months of the year has been 2.1 million above that required to meet the demand set in the STP.

If the current rate of STC creations continue for the rest of 2018, it is projected that the market will remain in material surplus into at least early 2019.

Estimated STC surplus after quarterly surrender1

Bar graph of estimated STC surplus after quarterly surrender

When a surplus of STCs in the market has emerged in the past, STCs have mostly been sourced from the open market and have traded below $40 (see the table below on purchases from the clearing house in recent years). We expect a low rate of clearing house purchases through to early 2019; generally limited to small parcels where buyers may see little value in sourcing in the open market; or for specific vintage needs.

Participants who offer STCs for sale in the clearing house should expect a delayed sale, with no certainty of when they might obtain a sale through the clearing house.

The STC spot market price is set by supply and demand; hence, installers, installation companies and agents should take prudent commercial measures to manage exposure to price fluctuations. During past periods of STC oversupply, the STC spot market price has often traded well below the $40 clearing house sales price.

STC surplus/deficit and spot market prices from 2011

Bar and line graph of STC surplus/deficit and spot market prices from 2011

Typically, when a surplus emerges in the open market the gap between the clearing house sales price and the STC spot market price widens. The widening of this gap provides incentive to purchasers to use the open market. It is likely that some smaller electricity retailers will continue to purchase STCs via the clearing house, however, material purchases through the clearing house are unlikely as the surplus progressively builds.

STC purchases through the clearing house

YearDemand set by small-scale technology percentageSTC clearing house purchasesPercentage of purchase against the STP
201517,487,6678,926,84051%
201616,957,02413,719,23081%
201715,100,0002,314,95115%
201822,100,000101,1440.5%

Market background

The Small-scale Renewable Energy Scheme is a market based scheme. There are two markets for STCs: the open market, and the STC clearing house where certificate sales prices are currently set at $40 (GST exclusive). Participants should be aware that STCs are a commodity and prices will fluctuate in the open market based on the balance of supply and demand along with other factors. The Clean Energy Regulator does not regulate the open market.

For more information on supply and demand dynamics in the Small-scale Renewable Energy Scheme, please see the previous market updates or the Small-scale Renewable Energy Scheme page.

References

1 The quarter four data accounts for STCs that are created after 31 December 2018, creations after 2018 are not accounted for in the 2019 small-scale technology percentage.

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