A solar policy of ill repute
Australia’s leading mining and industrial groups, as well as the most powerful industry lobbies, are prone to raising the spectre of “sovereign risk” when campaigning against imposts such as the mining tax and a carbon price. They should be thankful they are not in the renewable energy industry.
The renewables industry has experienced multiple policy convulsions over the past decade that have stalled its development, but none may be so damaging as the decision last week by the NSW government to make retrospective changes to its feed-in tariffs.
The loss of faith and reputation from the breach of contract extends far beyond the 120,000 households that are impacted by this decision. The state government may be able to protect itself from legal action, but not from the hesitancy of international investors, who – already befuddled by the confusion of policies at a federal and state level in recent years – will take particular note.
The experience in Spain is instructive. Last year, the government announced similar retrospective cuts for ground-based solar installations. A group of high-profile international asset managers are now suing the government for more than $5 billion in losses, investment in renewables has slumped, Spain has been forced to reduce its renewable energy target for 2020, and is now reportedly considering raising its subsidies to try and attract new investment.
The situation in Australia is problematic because renewables, and climate policies in general, are clearly a political football. The sovereign risk – here about the consistency of policy rather than of government bonds going pear shaped – is compounded because the federal coalition has promised to repeal a carbon tax if elected, effectively applying a 50 per cent discount to the anticipated carbon price; the Victorian government has brought the local wind energy industry to a halt, and now NSW has taken this action with solar. Clearly, there must be something in conservative waters.
The NSW government defended its decision to cut the feed-in tariff for rooftop solar systems in the state from 60c per kilowatt hour to 40c/kWh, including those systems already installed, as being based on “social equity” and as a measure to reduce the impost on the budget.
The question of equity has been distorted. The government’s own figures show the highest uptake of solar panels has been in the mortgage belt of western Sydney and regional areas such as Bega, Dubbo, Taree and the northern hinterland, while two separate studies have suggested half the recipients have been on household incomes of less than $65,000 (AGL), or 70 per cent have been below $60,000 (University of Technology).
In any case, a far more equitable decision would have been to remove the windfall profits currently being enjoyed by the electricity retailers – who will receive electrons from some 350MW of installed capacity in the state for free, and then sell those electrons back to customers at the retail rate, as Warwick Johnston has noted in this piece. Those profits are about equal to the money being clawed back from households with solar PV.
In coming years, when retail rates rise further, and time-of-use tariffs – which already reach 39c/kWh and will no doubt rise as well – become more prevalent, the retailers will still receive those electrons for free. The value of that windfall – currently estimated at around $100 million a year, could double by the time the system ends in 2016.
(The value of this windfall will be hotly disputed. The retailers argue that the electricity from rooftop solar should have the same value as energy from large, remote utilities such as coal-fired power stations. The solar industry says this assumes rooftop solar shares the same transmission and distribution needs, which it doesn’t, because the electrons produced by the rooftop panels go through the household meter to be measured and then into the home, or perhaps into their neighbours’ homes. Indeed, the industry argues (see below) that rooftop appliances avoid network costs worth up to twice the value of the PV system, as opposed to air conditioning units, which usually impose a network cost on the community of at least three times their value).
It is not as though the NSW government was not aware of this windfall, because it was outlined by its pricing regulator, IPART. Even its own department of energy and resources canvassed cutting this windfall as one of the options available at the Solar Summit, 10 days ago. But the government chose against it.
Perhaps it decided that the power retailers were not to be messed with. The retailers would be delighted, given they are also making windfall profits from the federal government’s solar multiplier scheme which, at the moment, allows the retailers to pass on the full “fixed price” of a renewable energy certificate at $40 and then buy them on market for around $26.
Indeed, the power and influence held by the three big energy retailers on the eastern seaboard – Origin, AGL and TruEnergy – over the renewable energy industry – large-scale developers are beholden to them if they want to strike a power purchase agreement – has become an area of great disquiet, but that is another story.
The new NSW Coalition government also justifies the decision by saying the original rate was too generous. Everyone knows that, and no one disagrees, although it should be pointed out that the Coalition was an enthusiastic supporter while in Opposition, waving away the warnings of some of the more sensible voices in the industry. But by overreacting and making the cuts retrospective, and providing no guidance for new installations beyond the paltry 6c/kWh that will be offered by the utilities, it shows it is no more capable of sensible policy making than its much maligned predecessor.
Industry view
Warwick Johnston of advisory group Sunwiz has emerged as one of the more insightful analysts on solar PV in this country. On Monday we published this commentary on the FiT decision, but Johnston also points out how government bureaucrats and policy makers misunderstand what they are dealing with, and don’t seem to understand the abatement potential.
The government has been advised that the cost of abatement in solar PV is possibly more than $500 a tonne of C02e. But that’s not where they need to be now. Costs of PV have more than halved since 2004, Johnston notes, and distributed PV offsets retail electricity charges rather than competing directly with coal and gas-fired power.
“An $8000 unsubsidised investment in a 1.5kW PV residential system reaps $13,700 of offset electricity expenditure and offsets 42 tonnes of CO2 at today’s emission intensities, albeit at a (highly-simplified) net present value (NPV) of $-2,390 (assuming 4kWh/kWp/day with 0.5 per cent annual degradation, 20c/kWh electricity price indexing at 5 per cent per annum, 7 per cent discount rate). Government injections of $2,390 could effectively abate 42 tonnes of emissions for approximately $50.48/tCO2-e today, and would leverage private investment, thereby growing the industry until grid parity is reached.
“Though the abatement cost of PV is currently more expensive than other methods, once grid parity is reached (which in NSW could be within about five years) the cost of abatement for the system owner will be zero (on the basis that they pay the full cost of this system without any government assistance). After this time the cost of emissions abatement will be negative.
“It should be remembered that policy interactions led to the boom, just as they are now leading to the bust, for the reduction in the value of federal subsidy is compounded by the pull-back of state-government support. Having invested a billion dollars in the development of the NSW solar industry, the most wasteful use of that money happens when the industry collapses. It is more financially prudent to invest a further amount in a self-correcting support mechanism that transitions the industry to grid-parity’s self-sufficiency over the next three to four years."
Comments on this article
Legislative risk is not the same as sovereign risk
Giles, I know that the term "Sovereign risk" has a nice ring to it, but it has been overused and abused of late, not least by you.
Legislative risk is the subject of your article, not sovereign risk.
If you cannot use the language correctly, learn to use a dictionary.
16 years of NSW Labor
There are two issues here. The 16-year-old NSW Labor government was certainly both lazy and careful in blithely committing to 7 years at unsupportable rates, while legally protecting itself against legal liability for the inevitable policy reversal that now looks so bad for the Liberals. So the rate simply had to be cut. But the second issue is what does a sustainable solar industry look like?
Directly funding R&D is the cheapest way to efficient and affordable commercial rooftop solar systems which people will buy without subsidy. This is what the federal Government should be doing.
Solar concentrators on Liddell's Hunter Valley coal power plants now pre-heat the cold water to as much as 40% C before it enters the boiler, slashing the coal emissions to drive its turbines which supply so much of NSW's baseload electricity.
Many more dams would also help in making more hydro options possible, apart from their myriad other benefits. And NSW's silly 1986 Cold War ban on uranium prospecting has not stopped detailed geological maps revealing our rich ore deposits, though we will probably go down the cleaner Thorium reactor route which China is starting to plan for.
In the meantime, most people are trying to use as little electricity as they can, so punitive electricity pricing will certainly hurt people but certainly not reduce emissions.
Misinformation re Increases in Power Prices
There seems to be a consistent message that the NSW Solar Bonus scheme adds to POwer prices. From my reading of the IPART draft report into NSW power prices (http://www.ipart.nsw.gov.au/investigation_content.asp?industry=2§or=...) I understand that there is no pass through effect of the NSW Solar Bonus scheme into retail power prices. The NSW government has previously made a decision to fund this scheme from uncommitted funds from the Climate Change Fund (Page 1 of draft report). So this means that the NSW Government is acting to limit their own budget issues rather than acting to help household bufdgets. Indeed the IPART report suggested that the NSW solar bonus scheme be closed to new participants - as the only impact on NSW power prices comes via a flow through effect from STC's being purchased by the liable entities. Or have I misread the situation?
Deceptive and Misleading Conduct
When I was researching whether to install a rooftop system I was told that the NSW Government had promised that the 60c tarrif would be in place for 7 years. Regardless of whether the rate was too generous, the 120,000 households who proceeded on that assurance have now been mislead.
My next email will be to Slater and Gordon.
Solar Flagship - NSW projects
Questions for Premier O'Farrell?
At 20 cents per kwh should we forget about the Suntech backed project at Tarago - or do you have special deals for corporates?
Have you informed the Commonwealth Government that you intend canning the large scale solar projects proposed for NSW; (SOLAR FLAGSHIP program)?
Enduring Consensus
I note in the comments a lot of negativity toward the NSW government. The author laments that "the renewables industry has experienced multiple convulsions over the past decade."
The debacle in NSW has its roots in federal government. The federal government has planned poorly for the solar industry. They have not proven very good at planning and detail and they should be caned for it. Back when the solar programs got started, you have governement where the Resources Minister only finds out about a major resources tax a few hours before it is announced. More recently a major announcement on an offshore asylum seeker centre on East Timor only to find later, within the day, that East Timor was not consulted about it.
The solar feed-in tariffs were far too generous from the start - kind of a "train wreak waiting to happen." Perhaps part of it was their origin pre Copenhagen when there was great expectation for global agreement on climate.
It appears history will repeat itself. Before the federal election Gillard talked of building "an enduring consensus" on climate policy that would not get overturned by a change in government. This federal government has not "walked the talk." They will pass unpopular legislation without a care for "enduring consensus" and ahead of the rest of the world, and it appears it will get overturned. Then we will have a similar article here as to this one!
True cost of coal fired power is hidden!
The coal fired power industry is getting far more subsidies than any other power generation industry. If we consider the environmental value lost by huge tracks of land taken up by power stations, cooling towers, coal train tracks, loading facilities, mines, cooling ponds, ash ponds, large power lines and substation then any comparison with benign domestic solar installation becomes ridiculous. We should also consider that virtually all the coal mined is “given” away to the power utilities for a nominal fee. They don’t pay for full impact of air pollution caused by burning coal. Many mines may never be fully rehabilitated as the cost may be too high and ongoing water pollution from acid mine drainage will continue for centuries. I argue that the true cost of coal fired power is currently higher than solar generated power. The trouble is that most of the costs are hidden and paid for by the community over a long period
$3 per quarter saved!
An average home uses 7300kWh per annum or 1825kWh per quarter. The scheme used to cost 0.5c/kWh, now with the changes it will cost 0.333c/kWh so thats a savings of 0.167c/kWh. So multiplying this through as a result of Barry's heroic retrospective legislation the households will save ....
Drumroll please as this is impressive ...
$3 per quarter!
Wouldn't even get you a morning coffee.
Responsibility
Peter, I won't argue that the Scheme wasn't an ill-thought out piece of unsustainable policy. I am no fan of metro roof solar installations as a cost effective policy. However, a contract is a contract. Government's do not have the moral right to create a mess then walk away with investors and industry holding the bag. They wanted private dollars to help build out solar and they got them. They have a moral and legal commitment to the Scheme. This is not a separate and new issue. It is the issue.
The efficacy of solar as an abatement policy is a separate and debatable issue.
A solar policy of ill repute
The Govt of South Australia offers a similar level of FIT return that continues for many years longer and they don't find it necessary to renege on the contract as the NSW Govt under Farrell proposes to do.
The NSW Government invited ordinary people to invest our savings and reduce our emissions by installing solar panels and provided a financial incentive for us to do so. This was an opportunity to do our bit to counter the effects of climate change.
Now that we have been so induced, have made the necessary investment, the NSW Govt has pulled the rug from under us and inflictedequivalent capital loss to our super fund as the GFC did, where so many of us have lost heavily.
If a financial institution tried to do this, it would be successfully prosecuted for misleading practices, and those in charge who made the decision, would be thrown in jail.
In my view, this will be a serious corruption of enormous proportions of ethics, natural justice and democracy in NSW.
That they even consider betraying the trust that ordinary Australians have given them at the ballot box is yet another measure of how the Greenhouse Mafia and extractive industries now control the energy and climate change policies of both major parties in this country.
..the comment "...and the
..the comment "...and the large fossil fuel companies profit, yet again" How do you figure that any money is going to a fossil generator??.
The current size of PV would be miniscule compared to ambient conditions, seasonality induced droughts and heat wave induced revenue variations to a generator.
Rational debate is needed rather than knee-jerk and wrong assertions.
The disaster was funding a sheltered workshop industry over abundantly in the first place...if politics must come into it, then blame the previous Governments spin and ineptitude. Compunding the politics and creating a perception of increasing sovereign risk dealing in Australia is a separate and new issue.
If fingers are to be pointed then below the radar characters are the retailers and the GOVERNMENT owned transmission and the distribution companies who add the lions' share of the costs to the householder not, in your view, the bad guy fossil fuel generators. Reminder: if PV is on a householders roof what part of the system misses out the most? Yes, retailers and networks/grid owners.
Commercial lenders and government contracts
Interesting point from another writer:
"All Governments must set an example to the wider community, you cannot uphold consumer protection legislation and break your own contracts - O'Farrell Government has set dangerous precedent by announcing its intentions to renege & pass retrospective legislation - Banks & other commercial lenders may not lend money to private contractors who hold government contracts as security as the contracts would be deemed unenforceable"
So this means that it will cost government more in future to do business as people who contract to it will need to pay higher interest rates due to higher risk ratings from their financiers and this will be passed straight through to the taxpayer. This will dwarf any perceived benefit.
The power of large fossil fuel companies
The Australian consumer pays and the large fossil fuel companies profit, yet again. Surely our governments should be representing all Australian voters, rather than the self-serving, well funded lobbyists of the fossil fuel industry. The long term national interests dictate that Australia needs a vibrant solar and wind industry. Well written Giles.
Risky policy
Nice note submitted at 11:50am. The implied outcome of your calculation is that Barry is destroying trust and the sanctity of a contract thus adding to sovereign risk perceptions... to save households less than $10 a quarter.
This will be imperceptible as the infrastructure spend currently underway dwarfs the renewables contribution to price increases.
NPV calculation backsolve
It is indeed possible to confirm some of the calculations in the article. If you assume a 20 year life span with a 20c/kWh tariff escalating at 5%, you will get $13,704 in revenue using 4kWh/kW/day with 0.5% degradation pa. This produces 41.78 MWh of electricity so 42 tonnes of CO2 reduction is reasonable for NSW. The ORER website estimates 31 tonnes of CO2 for 1.5kW in postcode 2000 over 15 years, so this estimate seems entirely reasonable. However, using those same annual revenues with a 7% discount factor and an $8,000 up front cost, the NPV comes in at -$951.
Let's not forget the SRES, which is being wound back to a 3X multiplier from July and take $25 a certificate (rather than $40) and multiply by the estimated 31 certificates which gives you $2,325, which is surprisingly close to $2,390. On that basis the NPV is effectively zero, so any improvement in the price of panels, should make this kind of investment more compelling.
Claiming that the CO2 reduction per tonne is only about $50 is misleading as approximately half the retail price is network charges. The author is doing a disservice to the industry by this approach.
Where is the 'certainty' now O'Farrell?
"Companies in the solar industry have indicated the adoption of a gross feed-in tariff policy will deliver certainty, allowing them to attract new customers and expand business, all whilst helping reduce the state’s reliance on non-renewable energy."
Link to the press release
http://www.modernsolar.com.au/downloads/news/Barry-OFarrell-visits-Moder...
Barry O'Farrell has misled the people of NSW
"Barry O’Farrell MP
NSW Opposition Leader...
MEDIA RELEASE
Friday 10 July 2009 NSW LIB/NAT SOLAR POLICY WILL DELIVER JOBS
NSW Opposition Leader and Shadow Minister for Western Sydney Barry O’Farrell and Liberal Member for Baulkham Hills Wayne Merton today toured Modern Solar at Norwest to discuss the jobs growth that will result from the NSW Liberal/Nationals gross feed-in tariff solar policy.
Last month the NSW Liberal/Nationals announced it supports a “gross feed-in tariff” solar energy policy, which is a credit or payment to households, institutions or businesses for all the renewable energy they produce.
Modern Solar, which has sites in Norwest Business Park, Wollongong, Newcastle and on the Central Coast, predicts a gross feed-in tariff policy would allow it to double its solar workforce, adding upwards of 200 jobs to the NSW economy.
“At a time when NSW has the highest unemployment rate in the country because of 14 years of State Labor incompetence we need to do all we can to deliver jobs,” Mr O’Farrell said.
“Our gross feed-in tariff solar policy will deliver hundreds of jobs in Western Sydney, Newcastle, Wollongong and on the Central Coast,” he said.
“Companies in the solar industry have indicated the adoption of a gross feed-in tariff policy will deliver certainty, allowing them to attract new customers and expand business, all whilst helping reduce the state’s reliance on non-renewable energy.
“Our policy is a win-win. It will deliver hundreds of additional jobs in areas of high unemployment and will help empower families to reduce their carbon footprint."..."
PV generators should get together
I wonder if it is possible for all the solar PV generators to get together and sell the power they generate on the market at spot prices - that might side-step the big retailers and stop their abuse of the current sytsem?
Ill repute
This is a sorry state of affairs. Once again government is showing that renewables are readily sacraficial. That will only end when voters take steps to another government.
But what is horrible about this is the retrospectivity of the move. Not only does it iterate a perceived lack of trust in government, it actually confirms it.
If you reckon that 60 cents is too high, and wish to wind it back to say, 44 cents like Queensland, you do so in steps. For new contracts for (say) the next few months you honour the promise, and you specify that it is a rate that will be progressively wound back. Same message to existing solar people on 60 cents. You could also explain just why this is being done.
Hopefully this clumsiness can be attributed to being out of office for so long there is a touch of atrophy present, and hopefully the government will try to repair the damage it has done.
Lastly, the article by Giles Parkinson is excellent, showing true understanding of the issues.
NPV Calculation Questions
Over what time is them cash flow of the NPV nade?
Is the 42 tonnes abatement over 7 years, 15 years or 20 years?
Why is the discount rate chosen at 7%?
Is the 0.5% degradation compunded or can it be mitigated by maintenance such as high pressure water cleaning?
Budget deception
In a bid to justify their move, the NSW Government appears to have engaged in deception in allowing thesuggestion that this scheme is a threat to their state budget. They have even duped the presenter on radio national this morning. The NSW Treasury does not fund this scheme, it costs 0.5c/kWh to all electricity users in NSW. Its easy to calculate the cost. NSW generates about 80TWh of energy each year. The Solar Bonus scheme will generate around 0.6TWh per year. So you multiply 60c/kWh by 0.6TWh and then divide by 80TWh to get a little under 0.5c/kWh for cost of the scheme. This will amount to about 2% of a household power bill over the life of the scheme. Probably a lot less as people naturally move and their systems fall out of the scheme.
A pattern of deceptive behaviour will be received very poorly when it comes time to hear the case.
Political will and political whim
Ah politics! The enemy of every technology that cannot stand on its own two feet without a subsidy.
Just last year I attended a renewable energy conference in Sydney where the NSW Government representative was waxing lyrical to German solar and wind companies about how generous and stable the renewable energy tariffs were in NSW and why they should invest their hard earned Euro in NSW! Amazing what a change of political ideology can do to a business model.
I look forward to the day when renewables reach the "escape velocity" where they can break free of political influence. With ridiculous politically driven (and merchant bank driven) "robbing Peter to pay Paul" ideas like emissions trading and carbon pricing on the drawing board I'm not holding my breath.
Class Action - a contract is a contract Barry
Mr O'Farrell took credit for the Keneally Government's 60c gross FiT in 2009 and called it "mimicking policy". He is morally and legally bound in a contract with Scheme participants. The contract prerequisites of Offer, Acceptance and Consideration have been met. He is attempting to use the unique power of Government to extricate the energy sector (not the Government) from the liability of the Scheme thereby undermining the sanctity of contract law which is a pillar of Australia's democratic capitalist system. The ramifications of this unilateral breach of trust go well beyond the solar industry and will cripple Government incentives as a policy tool Australia wide. Imagine Gillard saying, "I'd like that Baby Bonus back thanks... we're a bit short."
Slater & Gordon are running a Class Action suit in an attempt to prevent or provide remedy to this breach of contract. If you are a Scheme participant call 1800 555 777 to register with the action.
(Note, I am not with S&G, just really peeved at the impunity of bad Governance and the unintended consequences it generates)
ill repute indeed
Giles
You have have highlighted a swag of important and relevant issues wrt to the solar FIT and NSW electricity policy.
These incredulous decisions and the Governments willingness to ignore internal and external advise wreaks of one of two things to me; staggering arrogant naivety or perhaps slightly more likely, clear evidence that this Government gets policy advice from the electricity industry and prefers to listen to their concerns over and above voters, adviser's and its own departments.
Between kneecapping Mr Baird within days and beheading the solar industry, at least we have a clear view of how Mr OFarrell is likely to behave. All hail Ghengis OFarrell!