This year has turned out to be a ‘boom’ year for the solar industry and it will only get better as the support for renewable energy grows, writes Green Energy Trading.

Australia’s photovoltaic (PV) industry has grown rapidly over the last few years and responded strongly to government policy, so much so that policy settings have continually been reset.

As one of Australia’s largest environmental certificate agents, we expect that around 600MW of PV will be installed in 2011. This is a 60% increase on 2010 levels and nearly 30 times the level we had a few short years ago in 2008 – all in all, it’s a growth rate of around 300% per annum.

PV has achieved this amazing growth rate for three key reasons:

• Installed PV costs have fallen dramatically;
• Government policy measures have made it economically attractive; and
• Consumers have embraced the technology as a means to manage rising power prices.

The rapid changes in the market have caught government policy makers by surprise and they have been slow to change policy support levers for solar PV. Government policy has not been able to keep pace with industry developments and falling costs which have triggered significant policy reversals in recent times. Notably, the removal of the 60 cents gross feed-in tariff in New South Wales and the early reduction of the five-times Solar Credits multiplier under the small-scale renewable energy target (SRES).

In addition, researchers and policy advisers have failed to keep pace with industry developments and seem to be consistently over-estimating the cost of solar PV. This has been the case with the Productivity Commission’s recent report on solar PV and several researchers at the NSW Government’s recent Solar Summit (held on 1 July 2011 in Newcastle) used old data which overstated the cost of solar PV by up to 40%.

The cost of solar PV has fallen much faster than expected due to lower international panel prices, a stronger Australian dollar and falling supply chain and installation costs as volume economies of scale are achieved. The significant reduction in costs has been a dramatic development over the last few years and this has the potential to dramatically change the conventional centralised electricity supply model.

Over the medium term, as costs continue to fall and fossil fuel-based power prices continue to rise, the economics of solar PV become quite compelling. 

Solar PV is getting close to being economic and achieving grid parity. Achieving this will mean that PV will be providing net economic benefits, however, the challenge is to ensure that policy support remains in place until this time. If payback of less than 10 years can be achieved then this implies a discount rate of around 7.5% which is lower than a “community or societal” discount rate. Due to higher up-front costs PV will suffer from similar barriers to solar hot water and other energy efficiency technologies and will therefore require policy support to address these.

The separation of the Renewable Energy Target (RET) into the large-scale and small-scale components from 1 January 2011 saw the creation of a new market for solar energy installations in Australia. The dramatic growth in PV industry installations has resulted in a significant oversupply of certificates in the market which in turn has led to a dramatic reduction in the wholesale STC price which fell to $20 at the end of June this year.

The increase in the number of solar PV installations has necessitated the government’s early reduction of the Solar Credits multiplier reducing it from 5 to 3 in July 2011. The 28 million STC target for 2011 was essentially met on 27 June – six months early.

The reduction in the multiplier coupled with the reduction in the STC price will slow the industry down in the second half of this year undermining the attractiveness of PV.

So what about carbon pricing?

From 1 July 2012, Australia’s largest 500 polluters will be required to buy permits to emit carbon pollution. The permits will be sold by the Federal Government initially at a fixed price of $23 per tonne, increasing at 2.5% above the inflation rate for the first three years of the scheme. From 1 July 2015, the scheme will transition to a full emissions trading scheme, and permits will then be market traded. Annual targets, or caps on the amount of total carbon emissions will be enforced, and the price will fluctuate according to supply and demand for permits.

Carbon pricing is completely different to renewable energy pricing. A price on carbon penalises polluters (such as large coal fired power stations) by placing a liability on them to acquire and surrender emissions permits for each tonne of carbon pollution they produce. This operates inversely to the SRES or LRET schemes, which reward renewable generators by enabling them to produce certificates (STCs and LGCs) which must be surrendered by electricity retailers. The schemes are completely separate, the permit/certificates are different commodities and pricing is not linked at all.

Electricity prices are expected to increase by around 2 to 3 cents/kWh. The average household electricity bill is expected to increase by around $3.30 per week. As a result of higher energy prices, solar PV and solar hot water systems will be more attractive to consumers.