Hiding policy where the sun don't shine
The NSW state government had an unenviable choice when deciding what to do about its solar bonus policy: Either plough ahead and admit that government contracts are no longer to be trusted, or make changes and concede it was incompetent. Few anticipated it would choose to tick both boxes.
Despite pressure from the Labor Opposition, the minor parties, its own members and the solar industry itself, the O’Farrell government has chosen to stick firm to its decision to make retrospective cuts to the rooftop solar feed-in tariff from 60c a kilowatt hour to 40c/kWh. Its only concession was to use an unspecified amount of the money recouped from this move to compensate the losses of those in "genuine hardship."
The fate of this policy is yet to be decided by parliament, although O’Farrell appears to have defused some of the political heat, at least among his own Coalition members, who seem to have the optimistic view that all their constituents will qualify under the hardship provisions. But the decision has left the industry incredulous, for the second time in 10 days. Its argument that the government had grossly overestimated the cost of the scheme have been ignored, and its suggested solutions – clawing back some revenue from the retailers and converting the last 50MW of rooftop applicants to a 1:1 net tariff, saving money all around – has been waved away.
The solar industry says that, for the sake of saving 60c per week per household, the government has chosen to put the future of an industry, and future investment in clean technologies in the state, at peril. The concern over sovereign risk is widely held; not just by local producers, industry groups, energy retailers, and lenders, but also by potential international investors. German solar majors Q-Cells and Schueco have already put expansion and entry plans on hold, and CBD Energy says its partners in a solar PV factory, the Chinese Fortune 500 company Boading Tianwei, are “appalled.”
It would be tempting to merely hurl insults at the NSW Coalition government, and accuse them of being no better than their patently hopeless Labor predecessors, but the decisions made in the last two weeks reflect a deeper malaise about Australia’s polity, and its inability to grasp and respond to the dramatic shifts in energy technologies and costs that are already sweeping the world and which will accelerate in coming years.
Sovereign risk for renewable energy exists in Australia largely because traditional ideas of technology are hard to displace, as is the noise from incumbent industries. In Australia, solar is still considered to be a novelty item, a middle class indulgence about as useful as an electric golf buggy. But those golf buggies have now morphed into family-sized electric vehicles, and are about to tip the automobile and retail fuel industry – global enterprises worth a combined $10 trillion a year – upside down, and possibly the energy industry as well. Solar PV and other renewable technologies will have a similar impact. It’s just a matter of time.
Consider this: On February 7, in the midst of Germany’s winter, solar PV mounted on rooftops delivered 13 per cent of Germany’s energy requirements. Wind and solar between them provided between one quarter and one third of the day’s electricity production. On some days this month, even with half of its nuclear capacity shut down, Germany has been able to export excess capacity on sunny days from its 6GW of rooftop solar to nuclear-powered France, according to energy traders cited by Reuters.
These are small and irregular incursions into an industry that still relies largely on coal, gas and nuclear. But Germany – despite its limited solar and wind resources (both are around half of those available in Australia) – is so encouraged by its results, to date, that it has committed to doubling renewables’ share of production to 35 per cent by 2020, 50 per cent in 2030, 65 per cent in 2040 and more than 80 per cent in 2050.
In Australia, there is no policy vision beyond the 20 per cent target by 2020. State-based schemes come and go with governments. The solar industry has no clear path to evolve because the principal stakeholders struggle to even agree on the value of the product which, at best, accounts for 2 per cent of the capacity within NSW, and well below 1 per cent nationwide.
This is reflected in the disputed claims between energy retailers and the solar producers. The solar industry and retailers are in furious disagreement about who benefits most from these NSW tariffs. The solar industry says windfall profits are being made by retailers, because they are asked to make no contribution to the tariffs, even if some have added voluntary payments of around 6c to 8c/kwh in a competition to attract what are clearly valuable customers. Even then, they are able to sell these electrons at between 20-40c/kwh, with no pricing risk and minimal transmission costs of 2c/kwh because the electrons are produced at or near the point of consumption.
The retailers argue that they should not pay any more for electricity from solar PV than they do for electricity from coal because it makes no difference to their overall network costs. “We pay more than fair value for the electricity produced, and we don’t avoid transportation costs as the solar industry seems to imply,” AGL said on Tuesday.
But here’s the thing, there is no real disagreement between the retailers and the solar industry over what needs to happen in the future – a 1:1 net tariff that can be applied to consumers after the initial 300MW cap and future installations. This has the dual benefit of leaving the PV owners in a better position than they would be with a gross tariff of 20c/kwh, at a much reduced cost to the state’s budget.
It removes the vexed question of windfall gains by any party – be they PV owners or retailers – in one fell swoop and guarantees solar PV owners of being able to hedge their future electricity costs. The PV owners are better off, and so are remaining consumers. It’s such an easy and elegant solution that it beggars belief that the NSW government has not embraced it.
Comments on this article
1:1 Net Tariff
Thank you, Giles for your excellent contributions.
I have a 5kW PV system in Tasmania, which has a 1:1 net tariff already. In summer I very comfortably export more than I use, and the energy credit on my bill usually covers the substantial standing charge.
Would you like to comment on two issues, please: to what extent should 1:1 net tariffs modify standing charges, and do retailers who offer Green Power at a premium (as mine does) make some profit from the electrons they buy from me?
Cheers for that Giles - all
Cheers for that Giles - all clear now.
It seems pretty simple. As the FiT debate evolves, it will be interesting as light is directed on what evidence or foundation the retailers choose to base their argument against a possible eventual 1:1 Tariff.
PV not economic?
Yannick, I doubt I will be able to convince you with my own numbers, so I suggest the following thought experiment. Get a quote or two from PV installers of your choice for a 5kW PV system. Ignore Solar Credits, RECs and feed-in tariffs. Look at the system cost free of any subsidies. Calculate the levelised energy cost assuming a good insolation region of NSW and a notional 5% interest rate (okay, perhaps a bit on the optimistic side). Compare this with the retail prices that will take effect in NSW from July. It's a bit of an eye opener.
Just for Clarity
Giles says "This is the principal of 1:1 net metering. All electrons consumed by house from rooftop solar are deducted from bill."
This actually happens now for those that don't use gross metering. Electricity is like water - it takes the path of least resistance. All the electricity produced by the PV panels is first consumed in the house. So while ever a house is consuming more electricity than it is producing no electricity is actually exported to the grid. In my house this happens most of the time - and probably does for most 1-1.5 kW systems.
Once the output from the panels exceeds the house demand then the electricity is exported. For those that have an analog meter they can watch the wheel running backwards and winding back the meter. This effectively reduces your electricity bill by producing a lower meter reading. You need neither a gross meter nor a net meter for this to happen. You just need to have the inverter connected to your house circuit.
Economics 3
Giles, I completely agree with your comment about interconnection. The key to integrating intermittent generation such as wind and solar is to expand inter-regional transmission capabilities. This could work very well in Europe because it is such a large system, in fact that’s why Denmark was able to integrate so much renewables, it is because its grid is quite small compared to the hydro storages of Norway and Sweden to the North and the German grid to the south. Australian being an Island type system though, it will have more trouble.
With regards to the capital cost of nuclear power stations in France being covered by the French Government, it’s true but on a $/kWh basis, I expect the cost of the subsidy to be in the order of 4c/KWh. This is roughly 10 times less than FIT subsidies.
As far as PV systems are concerned, I think they have good benefits in the sense that they provide distributed generation that is correlated with peak demand. What bothers me is the way they were over-subsidised. The underlying problem I see with PVs is that they are not economic yet and probably will not be for a while. In my opinion, the fair value of PV generation is around 75% of the retail tariff. Under this scenario, payback period would be between 15 to 20 years... which is way too much. I fear that unless carbon emissions are priced significantly and that distributions costs continue to increase, PVs will not be economic.
Learning finer points
Michel, Yes, we are all learning, including the retailers. The 50% they mention is the contribution of network costs to overall retail price. Retailers argue that this is a fixed cost, so any electrons they receive should be priced the same no matter where they come from - a coal fired station or a rooftop panel.
The solar industry says bollocks, the solar electrons should be priced differently and reflect the benefit of reduced demand on network and transmission and peak load, and a bunch of other things. In other words, it should reflect the cost of delivering the electrons to the house - coal fired electrons need transmission and distribution, solar electrons need an inverter and a meter box.
This is the principal of 1:1 net metering. All electrons consumed by house from rooftop solar are deducted from bill. Any surplus goes back into grid at prevailing retail price. Better for households than selling all energy produced at 20c/kwh (or even 6c) and buying it back at between 20c and 40c, and then at what price in 5 years time? Hope i've explained that well.
Economics 2
Yannick, Not sure of the costs, but i'd imagine it was at shoulder or peak times, so it was likely a healthy rate. France is almost totally incapable of meeting peak load generation - nuclear is too infexible - so it usually has to import peak energy (gas) at great cost anyway. France would export more nuclear to germany than it imports, but remember this too is subsidised as the French government met the entire capital cost of its nuclear fleet.
Your point about Norway and Denmark is important. All these countries have identified the fact that the key to making renewables work - and getting the grid balanced etc - is for a Euro-wide supergrid as they call it. That will also enable energy to be imported from solar etc from northern Africa. Germany needs to upgrade its grid anyway to make its offshore wind worthwhile, and Spain wants to string a bigger cable to France for similar reasons.
I am still learning the finer
I am still learning the finer details so it's difficult for me to draw my own conclusions on some topics but I did have a very interesting conversation yesterday with a very nice guy within a Victorian retailer with licenses Australia wide. They want to attract solar system owners etc etc and are providing incentives to do so. However other topics came up - I did mention that I had read a number of articles on CS about 1:1 tariff, but I did not know enough to debate it - but he did mention the 1-1 tariff will never work as "transmission costs were 50%" and not the 2c/kw mentioned above. can we clarify this? as he was adament 1-1 would never work and I begged to differ however my lack of knowledge was frustrating as I could not question the basis of his argument?
Cheers
Going too well
The solar incentives have worked so well. Wasn't it all designed to reduce greenhouse emissions, create employment and stimulus in a repressed fiscal environment?
All the boxes were being ticked, it just went too well so instead of making some adjustments to ensure low income earners weren't disadvantaged, B.O.F pulled the rug out and scattered the table. He's stopped it in its tracks. It's so unbelievably short sighted. Sigh!
Economics
Thank you for this article Giles.
I just wish to point out a few things. It seems to me that the Government would save a little bit more than 60c per week per household through the proposed retrospective changes. Assuming a 15% Capacity Factor, a 1.5 KW PV system would generate roughly 5KWh per day. With a 20c reduction in the FIT, this would result in a saving of around 1$/day/household.
Furthermore, the example in Germany is interesting and the numbers are quite impressive, but at what cost is this electricity being exported to nuclear powered France? I am sure that France would be very happy to receive low-cost electricity that is being subsidised by German tax payers. Denmark has had similar experiences, where on days when the wind is blowing strong, wind generation exceeds local demand, and surplus electricity is exported out to Norway at almost no cost. Norway is then very happy to export hydro-powered electricity back to Denmark at a high price on days when the wind does not blow.
This is almost a different issue though. All else being equal, it is unfortunate that the Solar PV industry is paying the price for bad policy design and Labour’s incompetence. I wish to see the implementation of a sustainable low cost policy through which retailers reflect the avoided cost of transmission in the tariff they offer to PV owners.
Why not extend the payment period?
Throughout this unfortunate saga, I have never heard anyone talk about reducing the feed-in tariff payment to, say, 35c/kWh and extending the payments from 7 years to 20 years, as used in other jurisdictions with successful FiT programs. This would have the effect of reducing the immediate cost of the program, while ensuring that solar investors still get their return, albeit over a longer timeframe.
Need to keep the public outcry going
Those who are affected by the O'Farrell plan need to keep lobbying to stop both the original proposal and the revised plan with its 'hardship' provisions.
On their website, the Solar Energy Industries Association say that they have engaged a firm of solicitors to look at the legality of the retrospective legislation and the possibility of mounting a class action. People who are interested can register with them. They also have a petition going and a suggested letter to Mr O'Farrell.
It would also be useful to write to local members, to the Greens, to Labor, to the Independents, to the Christian Democrats and to the Shooters and Fishers members. The Liberals will need support from some of these to get the legislation through the Parliament
Alternative savings?
Yes, 60 cents per kWh is generous but so are the subsidies offered to large electricity consumers. And what about the (some would say) overly generous salaries enjoyed by senior public servants, politicians and their advisers. No one is suggesting a retrospective adjustment to those costs are they.
Good article
interesting article - but could you provide a little more information about what a 1:1 solar tarriff would look like??
Excellent
5 Stars for this and many other superbly written artilces
Rainbow Power Company Ltd
It's a question of trust
BOF claims that this "cost blowout" was unknown to him prior to gaining government earlier this year. This statement beggars belief. There is no way he or his advisers didn't know the numbers - the maths is pretty simple. Yet the whole time prior to and during the campaign he and his shadow ministers said they would not make ex post facto changes in relation to those who got in before the rate was changed from 60c to 20c. Now we find out this is exactly what he is going to do. Well, I'd like to make an ex post facto change to my vote!