Volatility in the Small-scale Technology Certificates market has caught many installers out, but not all. Is there further to fall?

It’s been a cracking year for solar installers, as homeowners take matters into their own hands and invest in rooftop PV systems as a protest against steeply rising electricity costs. Those who can afford it are committing to batteries, to shift some of that free daytime energy to use in the evening, when peak tariffs kick in.

“We’ve had the best start to the year of any year ever,” says SunWiz managing director Warwick Johnston. “August was one of the best months ever [with 98MW registered]. We’re really hitting some record strides.”

There’s just one snag.

The spot price of Small-scale Technology Certificates (STCs) – steady until mid-May at $40 – dropped in July to $28.

Any installers who had been banking on selling all those STCs they’d been working so hard to accumulate got a rude shock, as the price started to drop away from its usually-predictable $40 level around mid-May to hit $37 in June. That’s not so bad, but July was savage. The market dropped to the high $20s before levelling out around $30.50 by early September.

Suddenly a low-risk component in installers’ revenue forecasts was worth a whole lot less.


SolaX Power chief engineer technical support Edwin Cotter says many installers are feeling the effects of the STC price changes, but to varying degrees. The larger more established companies that are well managed are dealing with the changes, he says, whereas those that operate on very small margins are struggling.

“Installation companies that deal in quality of installation and equipment are not affected so much,” Cotter says. “But companies that offer bargain systems are struggling to keep their price low enough to appeal to the bargain hunters.”

Many in the market had spotted an oversupply of STCs in 2017 early on, says TFS Green Australia senior broker environmental markets Marco Stella. “The reason prices have gone down is that the [2017] target was set too low by a decent stretch and supply – installs – have spiked, so it’s a double whammy,” he says.

Stella says it became more obvious the market was looking at a surplus for calendar 2017 when installers were busy throughout winter working on solar PV systems when it’s usually a time that orders drop off. “Generally you see a reduction in the number of systems being installed and therefore certificates being created through winter, but we’ve seen the opposite this year,” he says.

Well over expectations

Green Energy Markets data released September 14 shows the weekly submissions of STCs for June, July and August averaged about 425,000. The weekly average for the calendar year to date was 391,000. But a weekly average of only 245,700 is required to hit the target for the year.

In order to absorb this surplus, Stella says the STC target for 2018 is going to have to be increased to more than double the 2017 target.

“There were some pretty clear signs that started to pop up, especially once the [2017] target was announced,” he says. “Some people noticed that, but a lot of people didn’t. It took them a long time to work that out. They only started paying attention after the market had tumbled in June.”

It doesn’t bode well for prices for the remainder of the year. “The expectations of oversupply at this stage look like being understated,” he says. “It looks as though surpluses are going to be larger than once thought.”

Installers can hold on to certificates as long as they like, if they expect prices to recover, and some of Stella’s clients are doing that in the hope that things will get better, he says. But a lot of companies may need the cash and be forced to sell their STCs at a discount to expectations.

Forward rate agreements can be used to hedge against loss, where a fixed quantity of STCs is traded at a fixed price on a fixed date, as far away as two years. A whole lot of volume is traded in the “forwards” market, Stella says, but it is not without its risks. “On that day you have to deliver; it doesn’t matter if the price is higher or lower.”

An options market also exists for STCs, but minimum parcel sizes rule it out as being suitable for most installation companies.

History repeats

Many installers who saw the $40 STC price as written in stone were caught out, although Johnston says he hasn’t seen the price drop flow through to system registrations yet. The problem is the drop in prices may have wiped out profits taken in the first six months of the year. “But sales are still strong, from what we can see,” he says.

“I guess people were so caught up with trying to keep pace with all the sales that many forgot to check that market. The information was there that STCs were over-supplied, and if you’d have taken to time to look at it you’d have realised a price drop was coming.”

He says many of the players who had been in the industry six years or longer had hedged their positions using STC futures. “They remembered the pain people had experienced previously. But many companies weren’t [hedged], particularly the newer ones or those who were too busy to look up the latest prices.”

Installers who can cast their minds back beyond 2015 will remember bouts of wild volatility, where prices slumped to the low $30s at the start of 2013 before maintaining relative stability in a range between $36 and $40 until mid-2015.

Two years of calm followed, until May this year. The drop in July was sharper than any before it.

Maybe next year

Who can installers blame? Each year the Clean Energy Regulator sets demand for STCs based on a forecast of solar uptake and in recent years there has been less solar uptake than forecast, so the STC has reached the $40 capped price of the clearing house. “When it gets it wrong in the other direction you see the STC price falls,” Johnston says. “It’s a semi-rational market.”

Next year the regulator will forecast installations and count how many certificates are left over from this year, then set a level of supply. “If they get the forecasts right you’d expect by the end of the year the STC price will get back to $40; if they’re short again then it won’t get that high.”

The price of the STC flows through to the price consumers pay, so systems should become relatively more expensive as prices fall.

It’s just a matter of what a contract says – and whether the installer is brave enough to go back to the customer and say, sorry, you’re going to have to pay more (and tolerate any effects against their reputation).

Are there expectations of any more volatility in the STC price?

“I would expect that the STC price can fall further, and it will,” Johnston says. “In my mind it has further to fall.”