Following 5 consecutive years of growth, the rooftop solar PV market experienced a downturn in Q1 2022. Between 2016 and 2021, annual added capacity of rooftop solar averaged 35% year on year growth, from 0.75 GW to 3.2 GW (see Figure 3.1). It has always been anticipated this growth would eventually slow or decline. As rooftop solar PV is a consumer product, accurately predicting the turning point was inherently challenging.
The Clean Energy Regulator estimates added installed capacity in 2022 will be approximately 2.3 GW if the current monthly installation rate continues. This expected capacity is still higher than the pre-pandemic period (see Figure 3.1).
The boom in home improvements in the first 2 years of the pandemic may have brought forward household investment in rooftop solar, leading to ongoing strong rooftop solar growth and delaying and accentuating the turning point that is currently being observed. Other factors that may have contributed to the Q1 decline include households choosing to spend discretionary spending on recreation and leisure including holidays now that COVID-19 travel restrictions have been relaxed, cost of living pressures and a prevailing view of future increases in interest rates. Also, feed in tariffs had been decreasing over the past year.
In the 12 months to February 2022, Australian Bureau of Statistics (ABS) data indicates the value of home improvements decreased by 8.9%12, while household expenditure on recreation and culture, and hotels, cafes and restaurants increased by 17.8% and 15.6% respectively.13 Figure 3.2 below illustrates that rooftop solar PV installations appear to follow similar seasonal and overall trends to the value of home improvements. The ABS data provides some evidence that the downturn in home improvements—including rooftop solar PV—may represent a shift in consumer preferences as COVID-19 restrictions eased.
It is likely some households that may otherwise have waited to install systems, brought forward their investment in rooftop solar as discretionary spending in other areas was reduced during 2020 and 2021. This may be the major factor at play. This is supported by the deviation from the long run growth trends experienced in 2020 and 2021. This was followed by a steep decline in the number of installations in early 2022, as consumers switched spending to recreation activities from late 2021.
In addition to the shift in expenditure, broader economic indicators show Australian households are facing a real increase in the cost of living which may also be contributing to the slow start for the small-scale rooftop solar PV market in 2022.14 Periods of extreme wet weather and installers isolating with COVID-19 may have also had an impact.
Market intelligence suggests concerns about increasing input prices, component and labour shortages, general supply chain issues and declining deeming periods, have not been key drivers of the declining small-scale rooftop solar PV installations in Q1 2022.15 The Clean Energy Regulator will continue monitoring for potential market implications resulting from potential supply chain disruptions and variable input costs.
The rooftop solar PV industry is competitive, innovative and resilient. Figure 3.3 shows the payback period for an average 8 kW system is between 3 and 4 years depending on factors such as location and electricity use - representing a very good return on investment for households and businesses. The Clean Energy Regulator anticipates these factors will at some stage drive a return to growth, although the precise timeframe is difficult to predict. If the prevailing narrative becomes that increasing wholesale prices are flowing through to increased electricity bills, then that may become a consumer consideration that moves the sector back to growth.
Installed rooftop solar PV capacity for Q1 2022 is 561 MW, 28% below the 782 MW installed during the same period in 2021. An estimated 68,250 rooftop solar PV systems with an average system size of 8.2 kW were installed in the quarter, a 31% reduction on nearly 99,000 systems installed in Q1 2021. In comparison to pre-pandemic figures, installed rooftop solar PV capacity in Q1 2022 is 23% greater than the 456 MW installed in Q1 2019, primarily driven by the increase in average system size during that period. STC creations in Q1 2022 totalled 8.2 million, a 32% decrease from Q1 2021 driven by a reduction in the number of system installations and the decline in the deeming period.
Based on current installation trends, the Clean Energy Regulator estimates approximately 2.3 GW of additional rooftop solar PV capacity will be installed in 2022, above the 2.2 GW in 2019 but below the installed capacity in 2020 and 2021. Installed capacity could be higher if the rate of installs increases later in the year. Installation numbers are expected to grow across 2022 in line with longer term quarterly growth rates, albeit off a lower base. As shown in Figure 3.4, smaller system sizes and fewer installations are typical for Q1 with the largest system sizes and the greatest number of installations typically occurring in Q4.
As noted in the December 2021 Quarterly Carbon Market report, STC creations since the beginning of 2022 have declined markedly. This has resulted in insufficient STC creations in the quarter to meet Q1 2022 surrender requirements equal to 35% of the annual liability.
The STC Clearing House operates as the scheme liquidity mechanism to deal with unanticipated downturns, such as this, by providing an alternative source of STCs for purchase by liable entities. Liable entities surrendered 16.6 million STCs for the Q1 2022 surrender period, leading to a compliance rate of 99.8%. Q1 accounts for 35% of the total small-scale technology percentage (STP) for 2022. As predicted in the Q4 2021 QCMR, the Clearing House was used in Q1 2022 in the lead up to the Q1 surrender on 28 April. Following the surrender, the Clearing House is in a deficit of 2.7 million STCs and 2.9 million regulator created STCs have been sold. The Clearing House has not been in deficit to this magnitude since 2017.
Over the quarter, the STC spot price increased from $38.95 to $39.90, approaching the Clearing House price of $40 as the market anticipated material purchases through the Clearing House in the lead up to the Q1 2022 surrender. The forward STC market shows future prices are slightly lower than the current spot price, which reflects expectations about STC supply constraints potentially easing in line with the lower quarterly liability obligations for the remainder of the year (25% or 11.9 million certificates in Q2 and Q3, and 15% or 7.2 million certificates for Q4).
While 2022 is off to a slower start, rooftop solar PV remains a good investment, with a 4-year average payback period and new integrity reforms as reasons for optimism. The industry is very efficient and competitive, and there is potential for consumer sentiment towards rooftop solar to pick up — particularly if electricity bills increase. The Clean Energy Regulator will report on any change in trends in future QCMRs.
12 As measured by the total value of building jobs for private sector residential alterations and additions (not creating dwellings). Australian Bureau of Statistics (2022)
Building Approvals, Australia
https://www.abs.gov.au/statistics/industry/building-and-construction/building-approvals-australia/latest-release, accessed 19 April 2022.
13 Australian Bureau of Statistics (2022)
Monthly Household Spending Indicatorhttps://www.abs.gov.au/statistics/economy/finance/monthly-household-spending-indicator/latest-release, accessed 19 April 2022.
14 The Consumer Price Index (CPI) rose 3.5% in 2021 and further increases expected in 2022. As a measure of household inflation, the increase in CPI implies an increase in the cost of living. Comparatively wages grew by 2.3% in 2021. Reserve Bank of Australia (2022) Key Economic Indicators Snapshot,
https://www.rba.gov.au/snapshots/economy-indicators-snapshot/, accessed 20 April. In May 2022 the Reserve Bank of Australia increased the cash rate target by 25 basis points to 35 basis points.
15 From 1 January 2022, small-scale systems were eligible for 10% fewer certificates than in 2021 due to the
deeming period declining from 10 to 9 years.
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