Small-Scale Renewable Energy Scheme
As described in Chapter 1, the proposed legislation will separate the
Renewable Energy Target (RET) market into the Large-scale Renewable Energy
Target (LRET) and the Small-scale Renewable Energy Scheme (SRES). By comparison
with the LRET, the establishment of the SRES is a more fundamental change to
Operation of the SRES
Definition of 'small-scale'
The small-scale technology category includes renewable electricity
generation units under a certain size and solar water heaters or air-sourced
heat pump water heaters. Under current regulations, small generation units
- Hydroelectric systems with a capacity of 6.4 kW or less and a
total annual electricity output of 25 MWh or less;
- Wind systems with a capacity of 10 kW or less and a total annual
electricity output of 25 MWh or less; and
- Solar (photovoltaic) systems with a capacity of 100 kW or less
and a total annual electricity output of 250 MWh or less.
Solar water heaters must meet certain standards and have a capacity of
700 L or less. However, in certain circumstances larger systems are permitted.
Small-scale Technology Certificates
The proposed legislation establishes a new class of Renewable Energy
Certificate called 'Small-scale Technology Certificates' (STCs).
Owners or installers of the above-mentioned systems will receive a certain
number STCs based on the estimated output of the technology. This estimation
uses information such as the model installed, the expected lifespan of the unit
and the location of the installation.
Deeming arrangements that currently apply under the existing RET will
continue under the SRES. This means that owners or installers of small-scale
technology systems receive STCs for the unit's expected lifetime generation upfront
in order to subsidise the cost of installation. For solar water heating
systems, STCs can only be created once, using a deeming period of ten years.
Owners or installers of small generation units can opt for STCs to be created
in batches one, five or 15 year deeming periods.
In principle, one STC is equivalent to one MWh of renewable energy
generation. However, the Solar Credits scheme that is currently in operation
will continue under the SRES. This means that owners or installers of small
generation units will earn multiple STCs per MWh of generated electricity, with
the multiplier reducing over time.
The proposed legislation establishes a clearing house, to be
administered by ORER, which will provide a mechanism for the transfer of STCs.
Sellers of STCs can apply to sell them through the clearing house at a fixed
price of $40 per STC (GST exclusive).
When an owner applies to the clearing house to sell an STC, it is added
to a list that operates as a queue. The clearing house will then offer the STCs
for sale in the order in which they were received. When a buyer requires an
STC, the STC at the top of the list (ie the earliest STC registered with the clearing
house) is sold and the $40 remitted to the seller.
If there are no STCs available for sale, the clearing house will be able
to create and sell additional STCs (still at the fixed price). The next time an
STC is registered for sale, the seller is paid the $40 and the registered STC
is cancelled, in lieu of the STC previously created. Conceptually, this simply
represents bringing forward future STCs for sale in the present.
STCs may also be traded outside the clearing house, but the existence of
the clearing house will constrain the price to $40 or less.
Liability under the SRES
There is no set target for renewable energy generation under the SRES.
Instead collectively, liable entities are obliged to purchase and surrender all
STCs created under the scheme, regardless of how many are created.
Calculating a firm's liability under the SRES is more complicated than
under the existing RET, as the liability is calculated based on an estimation
of how many STCs will be created in the year ahead.
The liability is calculated using the Small-scale Technology Percentage
(STP) which will be published in regulations on or before 31 March of the
relevant year. The STP for 2011 for example, would be:
Projection of the number of STCs to be created in 2011 (GWh)
projected relevant acquisitions in 2011 (GWh)
The STP would be used to calculate an individual firm's liability based
on its usage of electricity, with the liability payable in four instalments.
The publication of the STP by March of the relevant year provides liable
entities with some forward notice. Furthermore, ORER will publish estimates of
the STP for the following two years. While non-binding, these will provide
guidance to liable entities.
Quarterly Surrender of STCs
The SRES features quarterly rather than annual STC surrender periods. A
discussion paper prepared by the Department of Climate Change and Energy
Efficiency noted that quarterly surrender periods would provide more regular
demand for STCs and hence 'clearing of the pool' on a more regular basis.
The dates for surrender are shown in Figure 2.
Figure 2—Quarterly SRES surrender dates
Source: Amended version of
Figure 5, Enhancing the Renewable Energy Target, Discussion Paper,
Department of Climate Change and Energy Efficiency, March 2010.
Liable entities will need to surrender STCs in four instalments each
year to account for their SRES liabilities. This method is similar to the
Pay-As-You-Go company tax arrangements. In essence, the liability is calculated
with reference to:
- the STP (estimated using projections of STC creation and total
- historical electricity acquisition from the previous year; and
- an adjusted fourth quarter liability that takes into account electricity
acquisition for the current year once it is known.
An individual firm's liability in the first three quarters of 2011 is
calculated based on the firm's electricity acquisition in 2010 and the STP. For
instance, if the firm acquired 100 000 MWh of electricity in 2010, and the 2011
STP is 10 per cent, then the 2011 liability is calculated as 10 000 MWh, or 10
000 STCs, payable in quarterly instalments. As the 2011 STP must be published
by 31 March 2011, firms will have at least one month's notice of their
first-quarter STC liability, payable on 28 April.
The quarterly instalments are weighted differently, with 35 per cent of
the liability due in the first quarter, 25 per cent in the second quarter and
25 per cent in the third quarter. The fourth quarter features an adjustment
taking into account actual electricity acquisitions for that calendar year.
Rather than using the historical 2010 electricity acquisition data to
calculate the 2011 liability (as in the first three quarters), the fourth
quarter surrender amount is adjusted to take into account actual 2011
electricity acquisition data. Essentially the fourth quarter becomes a 'true-up'
mechanism that ensures the relevant year's liability is calculated using the
same year's electricity acquisitions. However, the STP remains unchanged, with
any discrepancy between the amount of STCs created in a year versus the number
surrendered reflected in the following year's STP.
Uncapped liability under the SRES
The explanatory memorandum for the bill notes that the establishment of
the SRES represents a:
...possibly open-ended commitment to small-scale generation
with cost impacts for the liable entities. The proposed approach attempts to
mitigate this risk by monitoring the uptake in the market and reviewing the
fixed price in 2014.
The possible risk associated with establishing an uncapped SRES liability
was an issue commonly raised by witnesses and submitters. With no set target
under the SRES, liable entities collectively must purchase and surrender all STCs
that are created through the scheme.
The LRET has been set at 41 000 GWh in recognition that the SRES is
expected to result in at least 4000 GWh of renewable energy generation. The
government retains a commitment to delivering at least 45 000 GWh of additional
renewable energy generation under the proposed legislation.
The government has stated that if the SRES does not deliver the 4000 GWh
minimum, the LRET will be revised upwards to compensate. However, the LRET will
not be revised down if the SRES exceeds the nominal 4000 GWh target.
The MMA report predicted an eventual SRES size of 6000 GWh, while other
organisations predicted figures as high as 10 000 GWh.
The Department of Climate Change and Energy Efficiency informed the
committee that the MMA modelling suggested that the amount of renewable
generation in 2020 would be 22 per cent of total electricity generation.
Many submissions expressed concern that the uncapped nature of the SRES
represents a significant risk to liable entities in the event that household
uptake of small generation units and solar water heaters exceeded expectations.
For example, A3P noted that:
Capping the price but not the quantity of small‐scale renewable
electricity certificates introduces uncertainty into the electricity price for
consumers. This problem is compounded in the case of electricity‐intensive processes
for which electricity makes up a significant proportion of their operating costs.
portion of the RET should be capped, or removed from the RET altogether.
Alcoa noted that the design of the SRES reflected a transfer of risk to
the liable entity sector. Previously, the influx of RECs from small-scale
installations had reduced REC prices and jeopardised investment in large scale
renewable energy generators. Under the proposed scheme, the risk posed by the
uptake of small-scale technologies would be transferred to liable entities in
the form of the uncapped obligation to purchase all STCs that were created.
The Australian Industry Greenhouse Network were of a similar opinion,
The effect of the SRES proposal is to remove all price risk
from SRES suppliers and to substantially reduce the price risk faced by LRET
suppliers. However, these risks have not been removed from the renewables
markets — rather, they have been transferred to liable parties and electricity
The Energy Supply Association of Australia felt that the scheme could be
simplified by the government instead providing a subsidy for small-scale
technologies through a budgetary measure:
On the other hand, the resultant Small-scale Renewable Energy
Scheme (SRES) has the same effect as an upfront capital subsidy for households,
community groups and businesses to install small-scale renewable generators and
solar water heaters, but with considerable complexity in the administration and
delivery due to the Government’s reluctance to take fiscal responsibility for
its own policy initiatives.
Mr Brad Page, CEO of the Energy Supply Association of Australia noted
that the risk associated with the uncapped liability of the SRES would add to
existing risks in the electricity market:
One of the issues that the industry I represent faces very
substantially, right now, on every front is an enormous amount of risk. It is
being put at risk because of delays, because of changes and because of
open-ended schemes and, quite frankly, it is very hard to make efficient
investment decisions when there is uncontrollable risk.
Following consultation with stakeholders by the Department of Climate
Change and Energy Efficiency, the proposed model seeks to provide certainty
about the SRES liability at least one year in advance, with guidance provided
on the liability in the subsequent two years. As noted in the first half of
this chapter, a firm's annual liability will be calculated using the STP which
will be based on projected STC creation and would be published at least by March
of the year in question. This would give liable entities up to a year's forward
notice of their SRES liability. In addition, ORER would publish estimates of
the STP for the subsequent two years as a future guide for liable entities.
Origin Energy noted that the proposed SRES is overly complex, but felt
that the inclusion of a projected annual target and the publication of an
estimate of the STP in the following two years was useful. Origin Energy was
concerned that the notification of the annual STP, permitted to be as late as
31March, would mean that liable entities received only one months notice of
their first quarter liability. This was compounded by the fact that first
quarter liability represented 35 per cent of the annual total.
Mr Andrew Livingston, the Renewable Energy Regulator, noted that while
the deadline for prescribing the STP each year would be 31 March, in practice
ORER would endeavour to publish the STP as early as January.
For the very first year of the system there could be a tight
timeframe, but after that with the way it is organised we will give a year in
advance as well.
Greenbank Environmental noted that, in most cases, liable entities would
be able to pass any extra costs resulting from high uptake of small-scale
technologies to the consumer. The majority of the liability would therefore be
borne by consumers of electricity.
The exception to this would be industries that traded goods at world
prices and therefore competed with overseas firms not subject to an overall
SRES liability. For this reason, Emissions Intensive Trade Exposed (EITEs) industries
were particularly concerned about the SRES liability and the degree to which
they were exempt from the scheme. This issue is discussed in chapter 4.
The Energy Retailers Association of Australia supported the proposed
legislation, but suggested that the number of STCs created each year should be
limited to the number forecast by ORER, effectively capping the scheme:
Further certainty could be given to retailers by placing a
cap on the number of STCs produced in any given period, for example the length
of time the [STP] is projected. This could be capped to the projected [STPs]
and then this would ensure that there will not be the need to reconcile unpurchased
[STCs] into future [STPs].
TRUenergy, while generally supportive of the bill, felt that the SRES,
including the provision for annual forecasting of the SRES liability was overly
complex and inefficient. TRUenergy therefore recommended adopting a fixed
target approach to the SRES.
Rio Tinto noted that the risk associated with the open-ended commitment
to small-scale technologies could undermine certainty in the operation of the
scheme, particularly given the planned 2014 review.
The Australian PV Association was concerned that the uncapped nature of
the SRES may lead to uncertainty about the scheme's long term viability:
The SRES market appears likely to very rapidly reach the
nominal 4000 GWh by which the RET target has been reduced. Liable parties will
strongly oppose any continued requirement to purchase RECs from small‑scale
generators at that stage. Hence the scene is set for another sudden policy
change, and a boom-bust cycle for the industry.
The issue of an overheated SRES market industry is discussed below.
Impact of state and territory
Many submitters noted that state and territory government policies
strongly influence demand for small-scale technologies and hence could significantly
impact on the overall size of the liability under the SRES.
Rheem Australia noted that there was a high likelihood that ORER may
underestimate uptake of small-scale technologies and hence set the annual STC
liability too low. This was in part because alternate Commonwealth, state and
territory policies introduced subsequent to the estimation of the STP may drive
demand in unforseen ways:
For example, changes to the Federal Government’s Solar Water Rebate
scheme have reduced demand for heat pumps by 70% in the last 9 months. Similarly,
the NSW Government’s introduction of a gross feed in tariff for PV
installations has substantially increased the uptake of solar PV. Neither of
these changes could have been foreseen and therefore could not have been
included in the annual target setting.
Peter Sachs Industries shared this opinion, stating:
Since September 2009 there have been two Federal Government
solar hot water rebate reductions, a NSW Government solar hot water rebate
reduction, a QLD Government Solar Hot Water Program scrapped and a new QLD
Solar Hot Water Rebate introduced. The NSW Government introduced a gross feed
in tariff for PV installations dramatically increasing uptake of photovoltaic
solar panels and the Federal Government Home Insulation Program has been
halted. Each one of these program adjustments or policy changes has had, or
will have, a profound effect on the solar hot water and solar photovoltaic
The Cement Industry Federation (CIF) also noted that state and territory
policies concerning renewable energy would operate in concert with the SRES to
drive up demand. The CIF was of the opinion that, in the absence of a cap on
the size of the SRES, there was a need for 'adequate policy levers available to
the Australian Government to control a blow out in the uptake of the SRES.'
The SRES will continue the Solar Credits multiplier arrangements that
currently exist under the RET legislation. The Solar Credits scheme will
continue to provide multiple certificates per MWh of electricity generation
from small generation units. The Solar Credit multiplier operates as follows:
Table 2—Solar Credits Multiplier
Multiplier: STC per
9 June 2009–30 June 2012
1 July 2012–30 June 2013
1 July 2013–30 June 2014
1 July 2014–30 June 2015
Source: Renewable Energy
(Electricity) Regulations 2001, 27 March 2010.
The multiplier only operates with respect to certificates related to the
first 1.5 kW of the rated power output of the unit.
Mr Adrian Ferraretto, Solar Shop Australia, noted that in practice this
limited consumer demand to smaller systems, stating:
If you look back at data from the department of climate
change to see what happened 10 years ago when the government had a 1.5 kilowatt
rebate, the average system size installed was 1.5 kilowatts. When they changed
it in 2003 to a one kilowatt rebate, the average system size installed was
around one kilowatt. The reason for this behaviour is that it goes to the value
proposition. When you buy to the cap of the rebate, I suppose you are getting
the best value for money. If you are buying more panels after the rebate has
been capped you are pretty much buying unsubsidised solar panels, which costs
you a lot of money and offers poor value for money, relatively speaking,
compared to getting fully subsidised solar panels.
In addition to receiving multiple certificates per MWh of generation,
owners or installers of SGUs such as PV and solar hot water, are also able to
receive the estimated life-time generation of RECs 'up front' in order to
subsidise the cost of installation through a process called 'deeming'.
The resulting subsidy for example, for a Sydney household that installs
a 1.5 kW solar panel system in 2011 is an upfront discount of $6,200
Overheating the SRES market
Representatives of six solar photovoltaic (PV) businesses noted that
costs of solar PV had declined significantly over time and that the Solar
Credits scheme had failed to keep pace with the price of installing a PV
For example Mr Adrian Ferraretto of Solar Shop Australia told the committee:
In the past 18 months, we have witnessed a dramatic drop of
more than 50 per cent in the price of solar panels. This is because
dedicated photovoltaic polysilicon plants have become extensively
commercialised throughout the world following the silicon shortage that we
experienced five years ago. Ninety-nine per cent of the world’s solar panels
are made from silicon. It is the single biggest cost of goods in the
manufacture of solar panels. Even with these record low prices over the past 18
months, solar panel manufacturers are still making good margins—good
profits—and they are also forecasting further cost reductions in the price of
The businesses' joint submission noted that this had led to the
emergence of installers offering minimal or no cost PV systems under certain
Combining these market changes [lower PV wholesale prices] with
the current Solar Credits multiplier, in Zone 3 (Sydney, Perth, Brisbane,
Adelaide) the actual cost to the consumer to install a 1.5kW solar power system
is minimal. In fact, we are already seeing suppliers offering systems at no
cost to the consumer in Zone 2, (Alice Springs, Broken Hill, Broome).
It is unsustainable for the industry to have solar power
systems available at no cost to consumers. Solar power systems offered at no or
low cost encourage low standards in materials, poor returns on financial and environment
investments, and could cause long term damage to the entire industry.
Greenbank Environmental noted a similar concern:
As the economies of scale drive future price reductions in
the deemed category, it could cause those underlying technologies to become
cost neutral in a short space of time, especially if the deemed sector is to be
The Department of Climate Change and Energy Efficiency informed the
committee that it was not aware of offers of 'free' solar PV systems in the
industry. Ms Shayleen Thompson informed the committee that:
...claims of solar panels being installed for free have been
made from time to time over the last year or so. The department has repeatedly
sought evidence that these claims are in fact correct, and to my knowledge we
have not been provided with any evidence that demonstrates the veracity of
Ms Thompson noted that the department's own modelling indicated that the
uptake of small-scale technologies would most likely decline over time:
We understand and talk to those in the industry that feel
that other scenarios may unfold, but as I said, the modelling examines the
forms of support that are around for these systems and draws the conclusion
that those forms of support are winding back. As Mr Leeper has said, the
outcome of that in the modelling report is that the number of certificates
created by the small-scale units declines quite significantly from its height
in the early years of the scheme.
During the course of the inquiry, the committee became aware of current
advertisements for 'free' rooftop PV systems, but was unable to assess how
widespread the offers were or how stringent were the conditions attached to the
Nevertheless, given the available evidence, the committee considers that declining
PV costs combined with existing state and territory rebates and current Solar
Credits arrangements could feasibly result in free or extremely low-cost PV
systems to households.
Several businesses that appeared at the public hearing were concerned that
the availability of free systems and an associated spike in demand could result
in significant risks to the industry. Mr Ferraretto noted that such a spike in
demand had already occurred under the former Solar Homes and Communities Plan
In the dying days of the old $8,000 rebate, or the SHCP, we
saw 60,000 systems given away for free in just a few weeks at a cost of $480
million to the taxpayer.
Mr Ferraretto informed the committee that 60 000 of these systems could
generate up to 11 million certificates, of which 80 per cent would be as a
result of the 5-times Solar Credits multiplier.
The committee notes that this would be close to the total number of
certificates required for surrender in 2010 under the existing RET scheme.
PV businesses that appeared before the committee were concerned that an
overheated market may result in a decline in quality, harming the long-term
reputation of the industry:
The only way to offer a free system is by using really cheap
products and the really cheap installation and maybe frames that are made out
of galvanised steel instead of aluminium, that will not last as long as what
the solar panel guarantee is and things like that. To offer a free system you
have to cut corners.
Mr David McCallum from Conenergy, was of the opinion that if PV
installation was provided for free, the subsequent swift upswing in demand
could lead to a greater use of unskilled or poorly trained labour:
...when the system is free, [with] installation capacity where
they may be installing a couple of hundred systems a week in suburbs and towns,
you have mass deployment of unskilled labour carrying out the vast majority of
those installations, with the electrician connecting the system to the grid.
So, the electrician turns up at the end of the day.
Industry participants noted that currently the sector was well
regulated, including accreditation requirements for both equipment and
There is a lot more rigour in the installation of solar
panels. You need to not just be an electrician to receive the solar credits
multiplied but also do an extra course on top of that to receive Clean Energy
As the Department of Climate Change and Energy Efficiency noted, despite
a spike in solar panel installations in 2009, they were not aware of any
resulting safety concerns.
One of the things that should be observed about solar panel
installations is that, even though we had 50,000 installations in the last
year, there have been no reports of serious safety outcomes. As far as we are
aware, there have been no reports of fire or electrocution resulting from those
installations, despite the very significant increase. You would have to say,
from any perspective, that the incidence of very adverse outcomes from solar panels
in Australia is very low.
The department noted that it was seeking to further improve the already
robust safety regulations. Ms Thompson stated:
The current regulatory framework requires that installers of
solar panels are in fact accredited through appropriate TAFE-type training
arrangements. The CEC accreditation rules require that they be licensed
electricians, and the CEC accreditation arrangement also requires that they use
panels that meet Australian and international standards, both for the panels
themselves, other modules of equipment that go on the roof and also with
respect to the panel design or layout on the roof...
In addition, as well as extending, the deeming arrangement
will also be extending the scope to cover other small-scale technologies, so we
will be extending those arrangements to cover small-scale hydro and micro wind.
We are also preparing regulations that will directly require that the installer
be a licensed electrician. We are strengthening those arrangements through the
Mr Ferraretto, Solar Shop Australia, recommended that the Solar Credits
multiplier should be reduced but cover larger capacity and more expensive systems.
In the opinion of small-scale PV installers that appeared before the committee,
this would ensure that systems would not be offered for free, but would provide
a reasonable subsidy for a greater range of systems.
Mr David McCallum, ConEnergy, noted that by ensuring consumers had to
spend some of their own money in order to purchase a solar PV system, they
would have an incentive to pursue quality:
As soon as you can convert the consumer from a free system
and they now have to put their hand in their pocket to acquire a product, their
motives change. They start looking for the quality of the supplier, the quality
of product and the performance of the system rather than the issue of, ‘It
doesn’t matter. I don’t care because I am not paying for it.’
Subsequent to the hearing, another solar PV market participant, Nu
Energy, provided a submission to the committee that disagreed with the views of
the PV installers that were present at the committee hearing. Nu Energy noted
that the average price of a 1.5 kW system across Australia after rebates was
Nu Energy were of the view that exchange rate volatility, equipment
availability and the phase out of Solar Credits and other rebates may act to
increase this price. It therefore did not support the proposal outlined by
Solar Shop Australia to reduce the Solar Credits multiplier and increase the
system size to which it applied, on the grounds that it would raise the price
of a 1.5 kW system and 'disadvantage working families, the elderly and rural
The committee is concerned by the potential risks posed by demand in the
household solar PV market. Notwithstanding the strength of the existing
accreditation process, the regulatory improvements foreshadowed by the Department
of Climate Change and Energy Efficiency, and claims that risks will be
mitigated 'by monitoring the uptake in the market and reviewing the fixed price
the committee is of the view that additional mechanisms could be considered for
The explanatory memoranda notes that a full statutory review of the RET
scheme is planned for 2014. The government will also commission a review in
2012 including possible mechanisms for setting the fixed price for small-scale
RECs under the scheme that could apply from 1 January 2014.
In particular, the 2012 STC pricing review would be an opportunity to review
the fixed price of STCs including considerations such as:
the development of a framework in which REC prices in the future
are set by an independent regulator;
- options to ensure consistent national assistance by incorporating
consideration of state and territory assistance in setting small-scale REC
- changes in the costs of the technologies; and
- the impact of the small-scale REC price and levels of small-scale
technology deployment on the electricity market, including electricity prices.
The committee notes that this review may not occur in time to prevent a
possible upsurge in demand under the SRES, particularly in relation to
household PV systems.
The SRES component of the enhanced RET is uncapped and set at a fixed
price in order to deliver certainty to both householders seeking to install
solar panels and other renewable technologies, and to the installers of such
systems. However, it is also the case that state and territory policies such as
preferential feed-in tariffs are an important driver of demand for such systems
and these policies are beyond the control of the Commonwealth.
The committee recommends that the government consider mechanisms to
manage potentially high demand under the Small-scale Renewable Energy Scheme.
Cost-of-carry and cash-flow
implications for small-scale installers
The operation of the clearing house and the method by which STC
liability is calculated is described above. The main concern raised by solar
hot water manufacturers and installers relates to length of time it may take to
redeem the value of STCs through the clearing house.
This was said to be important as it impacted on the ability of an installer to
maintain adequate cash flow and the price it would receive for STCs if it chose
to sell them through the private market instead.
The length of time it would take for an STC to sell through the clearing
house relates directly to the STP, which is calculated based on (amongst other
things) the expected uptake of small-scale technologies in that year.
Peter Sachs Industries, a manufacturer of solar water heating systems,
noted the difficulty the Renewable Energy Regulator would likely have in
estimating the STP accurately:
It is impossible for any manufacturer to forecast 12 month
demand in the current market and we believe that the regulator would have an
impossible job estimating demand across all deemed technology types.
Rheem Australia was concerned that in the event that uptake of
small-scale technologies exceeded ORER's expectations, and hence led to an
underestimate of the STP, there would be a surplus of STCs created relative to
the amount required each quarter. This would mean that the clearing house may
take longer than a quarter to sell an STC. This was an issue because of the
'cost-of-carry' associated with holding STCs.
The cost-of-carry refers to the time value of money. Put simply, $40 in
the future is worth less than $40 today in real terms due to inflation. Similarly,
holding an STC incurs an opportunity cost, as the funds used to purchase or
acquire an STC could have been invested in assets that appreciate in value or
provide return on the investment. This means that STCs lose relative value over
Because STCs lose value over time, liable entities are likely to wait
until STCs are required for surrender before purchasing them at the fixed price
through the clearing house. In order to induce a sale prior to this time,
small-scale installers would need to offer a discounted price reflecting the
cost-of-carry. The committee was informed that, assuming an interest rate of
seven per cent and an average time of six weeks for an STC to sell through the
clearing house, the cost-of-carry would be approximately 30 cents per STC.
This would suggest a market value for STCs of $39.70.
However, as the cost-of-carry would be directly related to the length of
time it took for an STC to sell through the clearing house, any delay caused by
an underestimated STP would result in a lower spot market price.
Rheem Australia noted the need for small-scale installers to maintain
sufficient cash flow would necessitate them to sell STCs in the private market
rather than waiting for a sale through the clearing house. As small-scale installers
tended to offer discounted systems in return for receiving STCs from an
installation, they held a large proportion of their revenue from installations
in the form of STCs.
Similarly, Mr Michael Sachs of Peter Sachs Industries provided an
illustration of the cash flow issue for small-sized businesses that install
What would happen is you have a small operation like that
installing, say, 40 water heaters a month and they are going to generate
$50,000 or $60,000 worth of [STCs] resulting from those...
...just in a business that size you are going to have $50,000
to $60,000 a month accruing in money that is going to be taken out of
circulation because those businesses have given those as point-of-sale
discounts. So at the end of your three-month period you are going to have
$150,000 to $180,000, which for any business, but particularly for a small
business like that, is a significant amount of money. Add on to that the fact
that, if you then have the risk that those certificates, or a portion of them
may not be, may not actually be paid back out by the clearing house to that
business at the end of that quarter and they may carry over, I think you have a
system there that a lot of people will avoid, because there is not enough
certainty involved in getting payment from it...
As such, many small-scale installers would be forced to sell STCs at
less than the fixed price to reflect the cost-of-carry. GWA Heating and Cooling
expressed a similar concern, stating:
We believe setting an annual target [through the estimation
of the STP] could lead to a situation that if more [STCs] are generated than is
estimated for the target to be taken up by the liable parties, it will result
in a collapse of the [STC] value as smaller operators in the market will not be
able to deal with the delay in their cash flow and sell [STCs] at unsustainable
Mr Matthew Sexton of Rheem Australia, noted that the solar water heater
market was volatile, making accurate estimation of the STP difficult.
We believe there is a very high likelihood that there would
be an underestimation of the [STCs] that would be created, given very frequent
changes to federal and state policies on rebates and incentives...
...in 2009 the peak monthly volume of certificates generated
for water heaters was just over one million in July, down to a low of about
300,000, most recently, in April . So there has been a great deal of
volatility and the acceleration of demand for certificates we believe will
conflict with the target setting on an annual basis. So, what we would
recommend is that the regulator be given discretion to amend [the STP] on a
much more frequent basis, and that should be at least quarterly.
The Department of Climate Change and Energy Efficiency recognised the
issue raised by the small-scale installers, noting that it had been considered
in the department's March 2010 discussion paper.
The department noted that the scheme incorporated a number of mechanisms
to minimise the possibility of delays in selling STCs through the clearing
house. These include:
- allowing system installers to continue to give householders an
upfront discount at the point of sale;
- ensuring the clearing house transfers STCs on a 'first in, first
- front-end loading (35 per cent in the first period) the required
small-scale REC liability to encourage purchase of STCs by liable parties early
each year; and
- ensuring the STC projection each year takes account of any excess
STCs from the previous year.
While recognising that STCs will trade slightly below the fixed $40
figure in the spot market, the committee is of the opinion that the
arrangements for transferring STCs through the clearing house are adequate.
While presenting some risk to small‑scale installers in terms of the
cost-of-carry, the scheme also represents an open‑ended commitment
supporting small-scale technologies at a relatively stable price.
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