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Small-scale technology certificate market update

In the first six months of 2017 there was an increase in the number of small-scale solar Photovoltaic (PV) systems installed, reversing the gradual downward trend since 2013. There was a 23 per cent increase in the number of systems installed in the first half of 2017, compared with the same time last year. This is impacting the volume of STCs in the market.

The best view of STC supply and demand is immediately after a quarterly surrender. The second quarterly surrender for 2017 occurred on 28 July 2017, and for the first time since 2015 the clearing house was in surplus at the end of a surrender period. When this has occurred in the past, STCs have mostly been sourced from the open market and STCs have traded below $40.

Participants who offer STCs for sale in the clearing house should expect a delayed sale, as STCs are likely to remain there for a period of time, and until the supply in the broader market is diminished. While there remains considerable uncertainty on whether or when a STC shortage may arise, it is unlikely to be before mid-2018 as the first quarter surrender occurs on 28 April 2018.

The below graph tracks the spot price and availability of STCs over time. It shows that the STC surplus is currently significantly lower than the peak reached between 2011 and 2015.

STC surplus/deficit and spot prices from 2011.

Chart: STC surplus/deficit and spot prices from 2011 to present

Data current as 1 August 2017.

STC spot prices are based on end of week closing rates sourced from TFS Green and Mercari. This does not take into account daily price fluctuations.

Market background

The Renewable Energy Target operates through the creation of tradable certificates which create an incentive for additional generation of electricity from renewable sources. Certificates are created and issued through the REC Registry—the online platform managed by the Clean Energy Regulator.

The Small-scale Renewable Energy Scheme is a market-based scheme. There are two markets for small-scale technology certificates (STCs): the open market, and the STC clearing house where certificate prices are 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 STC open market. Prudent commercial measures may be necessary to manage exposure to price fluctuation.

Supply and demand

On the supply side of the market, participants create STCs for each megawatt hour of renewable source electricity deemed to be generated or displaced (no longer required from the grid). The number of small-scale systems installed each year changes, and is influenced by consumer behaviour and a number of often unpredictable factors (such as electricity prices, feed-in tariffs, lower system costs and new technologies) which can result in an over or undersupply of STCs in the market at any given time.

On the demand side, electricity retailers source these STCs to meet their renewable energy obligations. The number of STCs each electricity retailer needs to source and then surrender each year is in proportion to the amount of electricity they acquire to use or sell and the small-scale technology percentage for that year.

In the Small-scale Renewable Energy Scheme, the aim is to keep demand in equilibrium with supply.

How is demand created?

The small-scale technology percentage creates demand for STCs by setting the number of STCs each electricity retailer needs to source.

A key consideration when setting the small-scale technology percentage is estimating the number of small-scale installations in the following year. When installations end up being higher or lower than predicted, over supply or under supply of STCs can form in the market.

In setting the small-scale technology percentage, an adjustment is made for any over or under supply of STCs in a previous year. Due to the high rate of STCs that have been created so far in 2017, the 2018 small-scale technology percentage is expected to increase, which will increase demand for STCs next year.

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