Policy overload: why the ACCC says household solar subsidies should be abolished

Lucy Percival, Grattan Institute

The keenly awaited report on retail electricity prices, released this week by the Australian Competition and Consumer Commission (ACCC), has made some controversial recommendations – not least the call to wind up the scheme that offers incentives for household solar nearly ten years early.

The report recommends that the small-scale renewable energy scheme (SRES) should be abolished by 2021. It also calls on state governments to fund solar feed-in tariffs through their budgets, rather than through consumers’ energy bills.

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The ACCC has concluded that offering subsidies for household solar was a well-intentioned but ultimately misguided policy. Solar schemes were too generous, unfairly disadvantaged lower-income households, and failed to adjust to the changing economics of household solar.

The lesson for policy-makers is that good policy must keep costs down as Australia navigates the transition to a low-emissions economy in the future. Failure to do this risks losing the support of consumers and voters.

Runaway rebates

Rooftop solar schemes were much more popular than anticipated. This might sound like the sign of a good policy. But in reality it was more like designing a car with an accelerator but no brakes.

Generous feed-in tariffs and falling small-scale solar installation costs encouraged more households to install solar than were initially expected. Premium feed-in tariffs were well above what generators were paid for their electricity production. Historically solar feed-in tariffs paid households were between 16c and 60c per kilowatt-hour, while wholesale prices were less than 5c per kWh.

At the same time, installation costs for solar panels fell from around A$18,000 for a 1.5kW system in 2007, to around A$5,000 for a 3kW system today. The SRES subsidy for solar installations was not linked to the actual installation cost or the cost above the break-even price. So the SRES became relatively more generous as installation costs fell.

As solar penetration increased, and network costs rose to cover this, it became increasingly attractive for households to install solar panels. In Queensland, the initial cost forecast for the solar bonus scheme was A$15 million. Actual payments were more than 20 times that in 2014-15, at A$319 million. And the environmental benefits weren’t big enough to justify that cost, as other policies have reduced emissions at a lower cost. The large-scale renewable energy target reduced emissions for A$32 per tonne, while household solar panels reduced emissions at a cost of more than A$175 per tonne.

In most states, premium feed-in tariffs and rooftop solar subsidies are funded through higher bills for all consumers. Everyone pays the costs, yet only those with panels receive the benefits. That means the costs fall disproportionately on lower-income households and those who rent rather than own their home.

The ACCC report recommends the SRES be wound up nearly 10 years ahead of schedule, because the subsidies are no longer financially justifiable. This would maintain the support for current solar installations but remove subsidies for new solar installations from 2021.

The report also recommends removing the direct costs of feed-in tariffs from electricity bills. Instead, state governments should directly cover the costs of premium feed-in tariffs. The Queensland government has already made this move.

Of course, governments still have to find the money from elsewhere in their revenues, which means taxpayers are still footing the bill. But the new arrangement would at least remove the current unfair burden on households without solar.

Fixing the mistakes

How can governments avoid making similar policy mistakes in the future? The ACCC’s recommendations, together with the proposed National Energy Guarantee (NEG), provide a solid foundation for Australia’s future energy policy.

First, the future is hard to predict, so good policy adapts to change. The NEG provides a flexible framework to direct energy policy towards a low-emission, high-reliability, low-cost future. Reviewing and adjusting the emissions target along the way will enable Australia’s energy policy to respond to new technologies and shifting cost structures, while maintaining consistency with economy-wide targets.

Second, it is hard to pick winners, so good policy creates clear market signals. The NEG provides the energy industry with clear expectations, but is technology-agnostic and minimises government intervention. This encourages the market to find the most cost-effective way to reduce emissions and ensure reliability.

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The ACCC report also recommends simplifying retail electricity offers, which would make it easier for consumers to find a good deal, and in turn making the market more competitive.

The ConversationPoliticians have an opportunity to draw a line in the sand on narrow, technology-specific policies such the SRES. An integrated energy and climate policy should focus on good design, and then step back and let the market pick the winners.

Lucy Percival, Associate, Grattan Institute

This article was originally published on The Conversation. Read the original article.

Solar households to lose subsidies, but it’s a bright future for the industry

Andrew Blakers, Australian National University

Solar households in Victoria, South Australia and New South Wales will this year cease to be paid for power they export into the electricity grid. In South Australia, some households will lose 16 cents per kilowatt-hour (c/kWh) from September 31. Some Victorian households will lose 25 c/kWh, and all NSW households will stop receiving payments from December 31.

These “feed-in tariffs” were employed to kick-start the Australian solar photovoltaic (PV) industry. They offered high payments for electricity fed back into the grid from roof-mounted PV systems. These varied from state to state and time to time.

For many householders, these special tariffs are ending. Their feed-in tariffs will fall precipitously to 4-8 c/kWh, which is the typical rate available to new PV systems. In some cases households may lose over A$1,000 in income over a year.

But while the windback may hurt some households, it may ultimately be a good sign for the industry.

What can households do?

At present, householders with high feed-in tariffs are encouraged to export as much electricity to the grid as possible. These people will soon have an incentive to use this electricity and thereby displace expensive grid electricity. This will minimise loss of income.

Reverse-cycle air conditioning (for space heating and cooling) uses a lot of power that can be programmed to operate during daylight hours when solar panels are most likely to be generating electricity. The same applies to heating water, either by direct heating or through use of a heat pump. For heating water, solar PV is now competitive with gas, solar thermal and electricity from the grid.

Batteries, both stationary (for house services) and mobile (for electric cars), will also help control electricity use in the future.

A boost for the industry?

The ending of generous feed-in tariffs is likely to modestly encourage the solar PV industry. This is because many existing systems have a rating of only 1.5 kilowatts (kW), which could not have been increased without loss of the generous feed-in tariff.

Many householders will now choose to increase the size of their PV system to 5-10kW – in effect a new system given the disparity in average PV sizing between then and now.

A new large-scale PV market is also opening on commercial rooftops. Many businesses have daytime electrical needs that are better matched to solar availability than are domestic dwellings.

This allows businesses to consume the large amounts of the power their panels produce and hence minimise high commercial electricity tariffs. The constraining factors in this market are often not technical or economic, and include the fact that many businesses rent from landlords and tend to have short terms for investment. Business models are being developed to circumvent these constraints.

The rooftop PV market also now has large potential in competing with retail electricity prices. The total cost of a domestic 10kW PV system is about A$15,000. Over a 25-year lifetime this would yield an energy cost of 7 c/kWh.

This is about one-quarter of the typical Australian retail electricity tariff, about half of the off-peak electricity tariff, and similar to the typical retail gas tariff. Rooftop PV delivers energy services to the home more cheaply than anything else and has the capacity to drive natural gas out of domestic and commercial markets.

According to the Australian Bureau of Statistics, there are 9 million dwellings in Australia, and the floor area of new residential dwellings averaged 200 square metres over the past 20 years. Some of these dwellings are in multi-storey blocks, others have shaded roofs and, of course, south-facing roofs are less suitable than other orientations for PV.

However, if half the dwellings had one-third of their roofs covered in 20% efficient PV panels then 60 gigawatts (GW) could be accommodated. For perspective, this would cover 40% of Australian electricity demand. Commercial rooftops are a large additional market.

Solar getting big

Virtually all PV systems in Australia are roof-mounted. However, this is about to change because ground-mounted PV systems are becoming competitive with wind energy. We can see the falling cost of solar in the Queensland Solar 120 scheme, the Australian Capital Territory wind and PV reverse auctions and the Australian Renewable Energy Agency Large Scale Solar program , which all point to the declining cost of PV and wind.

Together, wind and PV constitute virtually all new generation capacity in Australia and half of the new generation capacity installed worldwide each year.

The total cost of a 10-50 megawatt PV system (1,000 times bigger than a 10kW system) is in the range A$2,100/kW (AC). A 25-year lifetime yields an energy cost of 8 c/kWh. This is only a little above the cost of wind energy and is fully competitive with new coal or gas generators.

Hundreds of 10-50MW PV systems can be distributed throughout sunny inland Australia close to towns and high-capacity powerlines. Australia’s 2020 renewable energy target is likely to be met with a large PV component, in addition to wind.

Wide distribution of PV and wind from north Queensland to Tasmania minimises the effect of local weather and takes full advantage of the complementary nature of the two leading renewable energy technologies.

The declining cost of PV and wind, coupled with the ready availability of pumped hydro storage, allows a high renewable electricity fraction (70-100%) to be achieved at modest cost by 2030.

The Conversation

Andrew Blakers, Professor of Engineering, Australian National University

This article was originally published on The Conversation. Read the original article.