auto_stories Quarterly Carbon Market Report September Quarter 2022

Demand for rooftop solar PV picks up

The rooftop solar PV market appears to be picking up from the decreases seen in the first half of 2022. After two quarters of substantial year on year declines, Q3 saw an estimated 729 MW of small-scale PV capacity installed, just 3% below the 752 MW in Q3 last year. Installed capacity in year to date is down 19% from 2021, an improvement from the 27% decline in the first half of 2022.

In the March and June Quarter reports, CER noted the record 3.2 GW installed in 2021 could have been driven by the boom in home improvements during the pandemic. In addition, the reduction in the first half of 2022 was likely due to discretionary spending shifting from home improvements to travel as international borders opened. Further, given the consumer nature of the product and the efficient and competitive nature of the industry, CER highlighted there could be an increase in rooftop solar installations later in the year, particularly if high wholesale electricity prices flowed through to retail bills.

Following the increased installations and capacity observed in Q3, CER has revised the estimate for installed rooftop PV capacity for 2022 to 2.7 GW, up from 2.3 GW. There are still competing factors at play for consumers, including rising interest rates and inflation impacting business and households. Further, enduring La Niña conditions continue to have practical installation constraints which may ease as the climate factors causing high rainfall are expected to weaken.

Q3 saw high wholesale electricity prices flow through to retail bills and starting to affect households and businesses. It is expected these prices may continue to increase in 2023.¹ Post the end of Q3, there were reports of substantial increases in the number of quote requests for rooftop solar. This indicates that consumers may be looking for alternate energy sources in response to increased energy costs. At this stage, it seems possible that ongoing installation strength will continue into next year despite the potential for further interest rate rises. CER will update on this in the December quarter report.

Commercial and domestic fuel switching from gas to electricity and increasing penetration of electric vehicles (EVs) are expected to increase demand for larger rooftop solar systems going forward.

As highlighted in the June Quarter report, trends indicate a greater number and larger systems are installed in the second half of each year. This is driven by demand from commercial and industrial consumers and a typical ‘rush to install’ before the end of each year as the value of the incentive (the number of STCs per system) decreases annually from 1 January. The decline in the deeming period reflects the reduction in the number of years left to generate renewable electricity under the Small-scale Renewable Energy Scheme (SRES), which ends at the end of 2030. This means there is an annual reduction in STCs and thus the value of the incentive declines at an increasing rate out to 2030, as shown in Figure 3.2 below. However, this figure assumes that the cost of a 7 kW system remains the same to the end of the decade. It is important to note that this was previously not the case owing to declining component costs and competition – see the years 2018 to 2021 in figure 3.2.

Even with the declining deeming over the last several years, the net cost of a solar PV system to a consumer has been slowly declining apart from this year. In the short term, it is possible the net cost to consumers may increase due to more demand for installations and ongoing supply chain constraints for components owing to the pandemic. However, once supply chain constraints ease and if key component costs continue to decline in line with pre-pandemic trends, the out-of-pocket costs may not increase at the level suggested in Figure 3.2.

If retail energy prices increase next year to the level some are predicting, the average pay back period for a rooftop solar system could decline from about 4 years to 3 years, still making it an excellent investment. This plus figure 3.2 does suggest that now could be a good time to invest in rooftop solar for those in a position to do so.

Air source heat pumps

In addition to rooftop solar PV, the SRES also provides incentives for the installations of solar water heaters (SWH) and air source heat pump water heaters (ASHP).

Historically SWHs and ASHPs have not seen comparable installation numbers or STC creation volume to solar PV, in part due to typically lower STC incentives per system. Recent data suggests economic pressures have led to a sharp rise in ASHP installations, as households look to make use of government incentives to save on energy bills.

From 2010 to 2019, ASHP installations experienced relative stability, with an average of around 17,000 systems installed per year. Since the start of 2020, ASHPs have experienced a period of sustained growth with an estimated 23,000 installations in Q3 2022 alone. As at the end of Q3 ASHP installations totalled 59,000, 44% higher than the same period in 2021, driven primarily by replacements of existing gas and electrical water heaters (see Figure 3.3 below).

Victoria is leading the nation in ASHP installation accounting for 62% of the total installs in 2022. A combination of state-based incentives and the SRES allows for Victorian households to install ASHPs at a greatly reduced out of pocket cost. In addition to STC incentive, Victorians can access up to $1000 under the Solar Victoria solar hot water rebate and up to $2100 from the Victorian Energy Upgrades Scheme.² Amid high electricity and gas prices, ASHPs represent effective cost savings for households, particularly when complementing rooftop solar PV, enabling consumers to harness their own generation during the day to cut energy bills.

Installations have been steadily shifting from SWHs to ASHPs (see Figure 3.3), particularly in regions with high uptake of solar PV, such as South Australia, owing to the complementary nature of solar PV and ASHP. Markets such as NSW and QLD are primed for growth, with a strong base of rooftop solar PV and warmer weather improving the efficiency of heat pumps and state rebates providing further incentive.

Owing to the lead time associated with procuring and installing efficient water heater systems to replace old and less efficient systems, to avoid being unable to switch technologies consumers should consider investigating options if their current system is getting close to end of life. CER expects consumers will continue to take advantage of the SRES and state/territory schemes to drive further installation growth, saving not only on their energy bills but also reducing their emissions in the process.

Continued STC Clearing House activity

As reported in the March and June reports, the STC Clearing House has seen material use throughout 2022. Weekly STC supply is still short of the volume required to meet surrender obligations as shown in Figure 3.4.

122 liable entities surrendered more than 11.8 million STCs for the Q2 2022 surrender period, resulting in a surrender rate of 99.8%. The STC Clearing House deficit increased to 7.4 million certificates immediately prior to the Q3 surrender on 28 October. 5.9 million STCs were purchased through the Clearing House in the period leading up to the surrender date (29 July to 28 October). STC creation rates suggest the Clearing House will not return to surplus in 2022.  In such a scenario, an adjustment reflective of the deficit is applied when the Small-scale Technology Percentage is set.

SRES data deep dive

The Q3 2022 Quarterly Carbon Market Workbook contains additional data on trends in small-scale solar PV installation and capacity. Updated information on STC supply, transactions and pricing is also available.

Footnotes

¹ Reserve Bank of Australia Statement on Monetary Policy – August 2022

² Figures provided are the maximum possible rebate under each scheme, eligibility and actual rebate may vary.