Such a low REC price is likely to freeze the 6 GW pipeline of wind power projects. The solar power industry now receives only AU$2400 of subsidy on a AU$10,000, 1 kW system. Solar hot water and heat pumps are strongly insulated from the Renewable Energy Certificate price by federal and state government subsidies, but the price hike will surely have a chilling effect.

The sudden downturn in Renewable Energy Certificate price can clearly be attributed to Renewable Energy Certificate oversupply. Only 8.1 million Renewable Energy Certificates need to be surrendered to meet the 2009 Renewable Energy Target (RET), plus about 1.9 million Renewable Energy Certificates for GreenPower.

However, even before this year has concluded, over 15 million Renewable Energy Certificates have been created. The Renewable Energy Certificate price did not slump until now because purchasers are banking Renewable Energy Certificates against 2010 requirements, because the shortfall penalty rises by 60% on January 1. Demand has only softened now that next year’s Renewable Energy Certificate requirements have largely been met.

The massive oversupply of Renewable Energy Certificates can mostly be attributed to the overheated solar hot water and heat pump market. Solar water heaters (SWH) now account for more than 55% of all Renewable Energy Certificates created, whereas they used to account for 35%. Solar water heaters became effectively free when the government’s economic stimulus package gifted AU$1600, an amount since reduced to AU$1000 for heat pumps in recognition that the market was over-stimulated. By that stage, however, a significant Renewable Energy Certificate excess had been created.

The problem is particularly acute for photovoltaic (PV) solar power, and unlikely to end soon. When the 7 MW/month solar power industry completes its backlog of rebate-funded installations, it must face the unenviable task of selling previously free systems for an out of pocket cost exceeding AU$6000.

Because phantom credits (from the solar multiplier effect) distort the market, the 2.2 million more Renewable Energy Certificates that are required in 2011 could be supplied by only 14,000 1.5 kW solar power systems. This 21 MW of solar PV is about three months work at today’s installation rate, suggesting even if the industry can somehow sell solar, it will contract markedly.

There are ways for the solar power industry to become independent of Renewable Energy Certificates (which is further explained in a report released this week). Doing so requires smart, targeted marketing of high-quality large systems in states that have Feed-in Tariffs. Wise companies that adopt successful solar strategies could profitably and sustainably capture a large market share while the rest of the industry collapses around them.

In the meanwhile, unsubsidised large-scale renewable energy developments must hope that Renewable Energy Certificate market distortions such as phantom credits and unfair competition with subsidized markets can soon be addressed.