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NSW stares at energy future and fades to black

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Last November, when I reported on the draft IPART report on NSW solar feed-in tariffs, I suggested that the big energy retailers could hardly have anticipated a better outcome had they written the report themselves.

How wrong was I!

The initial finding that solar PV customers should get a voluntary payment of 8c-10c per kilowatt hour for the energy they put back into the grid clearly made the retailers choke on their Weeties. They grabbed IPART’s homework, scrawled “must do better,” and wrote in a new bottom number in a revised range of 5.2c to 10.3c/kWh.

All IPART had to do, the retailers argued, was imagine that rooftop solar panels are just like centralised coal-fired power stations, and their produce should be treated as such. Tragically, IPART has swallowed that argument and could not even bring itself to recommend that the desultory payment should be compulsory.

The treatment of the solar energy industry in NSW continues to lurch from the absurd to the ridiculous. Both major parties are to blame, for blindly pursuing their individual ideological bents, and so are the statutory bodies that are supposed to act as some sort of independent arbiter. Professor Ross Garnaut was right to note in his review that the biggest impediment to the evolution of Australia’s energy industry is the degree of regulatory capture.

The real significance is not that the NSW government will fail to force utilities to pay a fair cost for solar, although this is bad enough and condemns the solar industry in this state to several more years of hardship (another solar retailer has gone into administration, the grapevine tells me). The most egregious aspect is the failure to imagine the future – even after nine months of careful analysis. This decision is rooted in the past.

IPART might argue that its terms of reference were so narrow it could not produce an alternative outcome than the one that the NSW government wanted. It was instructed by the government to ensure that any feed in tariff did not involve a cost to the government or to the consumer, and to be “subsidy free” – a condition which is not extended to the government-owned coal-fired power stations, which enjoy subsidized coal supplies worth billions.

But IPART went further, deciding to ignore system wide benefits such as the merit order effect (the ability of solar PV production to lower wholesale electricity costs), the impact on retailer load profiles (they need less peak load) and the benefit of reduced losses from networks.

It argued that these either could not be directly captured by a retailer or were too hard to calculate. It effectively stuffed these considerations into the too-hard basket and in doing so summarily rejected all the industry-based submissions which had used these benefits to justify pricing that ranged from a 1:1 tariff to paying 35c/kWh for net exports.

A study led by The Melbourne Energy Institute, for instance, suggested that a 35c/kWh net tariff would not impose any additional cost or burden on the electricity consumer base. That study argued that such a scheme could be considered a progressive measure, rather than regressive as painted by certain energy retailers, with those that install capacity creating a benefit for those that cannot. Extraordinarly, the IPART report agrees with this, but then argues that reallocating some of those benefits to PV customers would amount to a cross-subsidy.

One interesting piece of information is the estimate revenue had the retailers been required to pay a share in the original Solar Bonus Scheme. The fact that they thought there was value in that was revealed by the fact that they offered a voluntary payment of between 6c and 8c/kWh.

IPART estimates that had retailers been required to pay 6.5c/kWh (reduced from 7.5c/kWh under protest from the retailers), then the cost of the scheme would have been reduced by $25 million in 2012/12. Averaged over 7 years, that is a considerable saving in a scheme that is now estimated to cost around $1 billion, little more than half of the $1.8 billion estimate the government used to justify its abrupt closure last May.

The costs, however, could have been much less, even negligible, had the NSW Labor government listened to the industry in the first place, and set a more realistic tariff, or even a net tariff such as that in Queensland, which has come at an estimated cost of 0.03c/kWh to customers.

Indeed, these graphs below show the impact of poor policymaking in NSW, compared to other states. In the NSW over the last year, the number of installations has plunged 85 per cent to just 110,000. Granted that the original scheme was the result of an unstainable boom, predicted by the industry itself, but NSW is now installing less solar than Western Australia, which like South Australia has a mandatory payment. In NSW, however, the retailers won their campaign for a :light-handed approach”. Queensland continues to lead as the most sustainable and cost effective market, although there are concerns about what happens next.

While IPART granted the utility’s call to extend the bottom range of pricing to include the “wholesale” cost of energy, it rejected calls to extend the top end of the “retail value” calculation. This is despite the fact that the IPART report includes data that show that Energy Australia is making a retail profit of more than 15c/kWh (even after 22.24c/kWh of “unavoidable network costs”) from both home and business customers for solar energy supplied at peak times, which is from 2pm on weekdays, when PV panels oriented vaguely to the west are at, or near, the peak of production. Such benefits are ignored in the pricing range. Not too hard to calculate, but too hard to compensate, it would seem.

As some solar industry insiders are suggesting, if the energy industry continues like this it is effectively inviting energy users to look after their own needs. The utilities need to be careful – the price of the energy they deliver is going nowhere but up, and quickly. By the time battery and other storage options fall in price, their services may no longer be required.

But it seems that NSW, the state that once led the world with the introduction of a carbon trading scheme, has got the answer it was looking for and, in doing so, shown it is incapable of developing the sort of policies that will be required to usher Australia into a low-carbon economy.
In Antoine de Saint-Exupéry’s delightful book, The Little Prince, the main character was asked to draw a sheep. He didn’t know how, so he drew a box and invited the viewer to use his imagination. NSW Premier Barry O’Farrell and his energy Minister Chris Hartcher were invited to draw a picture of our energy future. They, too, didn’t know how, so instead they chose to paste an image of their fleet of coal-fired power stations. No imagination required.
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  • Tim Buckley

    What an unbelieveable example of the classic regulatory capture! All at NSW tax payers cost. We will now have to help pay for a multi-billion tranmission and distribution system ‘upgrade’ to lock in the existing legacy fossil fuel system of the 1900s. Here come higher electricity bills; nothing to do with reducing pollution, increasing efficiency and allowing consumers choice. It is way overdue that IPART wake up and move to a time of use pricing system and allow consumers the right to protect themselves from energy cost inflation by encouraging distributed solar via net feed in tariffs. NSW cant afford to spend billions of capital ‘investment’ on the grid just to protect the incumbent oligoplists’ priviledged position.

  • Chris Fraser

    Shame ! IPART stood for Independent Pricing Tribunal. How can anybody have faith in IPART price increases on retail energy from smokestacks when their “terms of reference” are so obviously dictated by this Government ? So much for Independence.

  • http://www.todaesolar.com.au Danin Kahn

    Great article Giles. This sort of policy making is quite disturbing, as is the “I” for “Independant” in IPART. You have done a great job of simply removing the smokescreen and showing the situation for what it really is.
    I also agree that if the energy companies keep pushing this sort of approach, they will force the market into bypassing their services. At Todae Solar we are already looking into feasible methods of energy storage to allows customers to generate their own “Feed in Tarif” by not selling their energy back to the grid and using it onsite when they choose to.
    Danin

    • Jake

      Good to know that Todae solar is not the one going into administration, keep up the good work!

  • http://www.dmgpr.com Susan Fitzpatrick

    Great article Giles!

    AuSES responds to the report with the following:

    “This is not a Fair Price for Solar. It is a Great Price for the old economy power companies producing coal-generated power using 100 year-old technology.”

    You can see the full press release here.
    http://www.aapmedianet.com.au/MNJ/Release.aspx?R=731335&K=7355903

  • http://beyondzeroemissions.org Matthew Wright

    IPART Solar rip off.

    Consumers in NSW are being ripped off by an IPART decision to not value rooftop solar systems.

    The rip of is occurring to both consumers who install or want to install solar panels and those who do not.

    A pensioner in western Sydney is now missing out on lower electricity bills which would eventuate if solar system owners were paid the fair price for the power they export to the grid.

    Rooftop solar panels which can be installed by home owners or on rental properties produce electricity when the market has its highest prices. This well timed production has a levelling effect which reduces the wholesale price. This levelling effect is known in electricity markets around the world as the “Merit Order Effect”

    University of Melbourne Energy Research Institute has done a study into the Merit Order Effect and shows that Australian’s are missing out in billions of dollars in savings in the electricity market that could cheapen their bills. They’re also missing out on solar powers and the beginnings of the renewable energy revolution.

    In the future a large shift towards rooftop solar is inevitable due to falling costs and increases in efficiency. If IPARTs unfair ruling, a ripoff for consumers is allowed to stand then it will give the large gentrader oligarchs a short term reprieve.

    It will help their share price for another 2-3 years before they crash and burn under a major market restructure similar in scale to the shift from chemical print film to digital and typewriters to computers.

    • Jake

      You can bet they’ll be bailed out and sail away on golden parachutes while the poorest suckers get stuck with the bill and the climate. There is no justice once you hit seven figures.

  • Paul O’Reilly

    Thanks for nothing IPART. Looks likes your role is to protect retailer profits, not consumers rights to cheap, safe, sustainable electricity options.

    Instead of promoting a cooperative approach to transforming the grid, IPART’s decision will force the solar industry to start providing solutions so their customers can “Get off the grid”.

    It’s now their turn to lie in the bed they make.

  • Peter R

    Good work Giles. I appreciate your work on this site.

    As always individuals have no market power, especially when big corporations and government do cosy deals. But what if rooftop solar power station owners together acted like the power station the retailers say they see them as?

    The traditional way for individual consumers to get a better deal is to form a cooperative. What if rooftop solar power station owners could join a cooperative? Would 10,000+ electricity customers with solar rooftops together have the market power to negotiate a realistic voluntary FIT with retailers?

    Has this been considered? Could it work? Would it be supported by the industry? A better FIT should attract many solar owners. All you might need is a critical mass of members willing to sign up. If it was workable it would make the government and IPART’s derisory outcome irrelevant.

    Maybe a cooperative is a natural development for BZE Matthew.

    • http://www.solarwiseww.com.au Alex Manley

      Great idea Peter

      I have had similar ideas and i know my customers would support the idea.

      i think we could possibly go a step further and create our own non for profit energy retail company and all the profits are shared evenly to its members.

      what about the name ‘people power’

      Alex Manley

      Solar Wise Wagga

    • http://Www.solarquotes.com.au/blog Finn Peacock

      CSIRO have the technology to make this happen: http://virtualpowerstation.com.au

  • Warwick

    This article is emotive but unfortunately throws a number of spurious arguments out there. There are some obvious questions to answer by the PV industry:

    1) If the retailers such as AGL, Origin and TrU are really making such so much free money from PV, then simply get a NSW electricity retail licence. $10K per annum plus $4000 per %1 of market share. The price of a few PV panel sales…

    2) PV is subsidised nationally already through SRES, where 3 times the estimated annual production is assumed for 15 years and paid up front. Why is this always overlooked?

    3) No distribution companies appear to be extolling the virtues of embedded rooftop PV in delaying network investment. Do PV companies really believe they understand network businesses better than the network businesses?

    4) The Clean Energy Council used SKM-MMA to estimate the fair value of solar in NSW including distribution and transmission and arrived at 8.6c/kWh which is in line with IPART. Where is the error in their logic?

    5) If solar and back up is really so cheap, when can we expect a large shift to off-grid PV in urban areas? … Who has done this already? Anyone thought about the large amount of battery banks using lead, cadmium, lithium and other heavy metals in the urban environment?

  • Howard Patrick

    This debacle is hardly surprising. The Commonwealth and State Governments seemingly did little to try to learn from the experience of FIT schemes around the world.

    Instead we saw the likes of the absurd but now defunct 60 cent scheme in NSW; (from which I benefit). During the period that scheme existed the cost of a 3Kw system dropped from more than 20K to about $10K.

    How much better it would have been if a national scheme had been developed whereby those prepared to install PV systems were guaranteed that they would get back their capital outlay back within say ten years. (In other words they get their capital back while also receiving a return on their investment of say roughly the same as the coal generators make.)

    After the capital outlay had been recovered, (with electricity into the grid being paid at the shoulder rate), owners of systems would continue to receive the off-peak rate for a maximum of say twenty years.

    That would hardly be difficult to record, calculate and manage with the IT available to the retailers. Minimum performance parameters could be set to ensure against sub-standard installations; (shaded sites).

    Such a scheme would take into account improving technologies and declining capital costs.

    Yes the various PV FIT Schemes have been a debacle but the Commonwealth should urgently be working towards a national scheme along the lines outlined.

    A perfect scheme is impossible but the present shambles is a blight upon the Government’s overall policies concerning a renewable energy future.

  • Sam Khan

    If you have not read the book: The Silent Take Over/By Noreena Hertz- then its a must read. This is a classic example of how big business along with our impotent politicians,have taken over our lives, our society, and our future and are threatening the very basis of our democracy.Now can anyone please explain to me, as to why me or any one else on earth, should spend $15,000 to install a solar p/v system on my roof??

    • Howard Patrick

      Sam, no I can’t explain why you would install a PV system. I expect Martin Ferguson, Barry O’Farrell,those corporation that control the industry and others are pleased with the current state of affairs.

      If system owners sell their properties the new owners will only get a rip-off price per Kwh IPART has kindly “suggested” to its masters.

      I wonder what price is being talked about with respect to the Solar Flagship project at Moree?

      Even if it does get up I guess we will be told that the public can’t know because it is “commercial-in-confidence”.

  • Aaron Lewtas

    Disappointing result delivered by iPart. Shame the NSW Government is hooked on fossil fuels. You’d think that a sensible short term Feed in tariff (to 2016-18) would be enough to get the industry to some sort of widespread grid parity. By then solar system prices should be low enough to require little subsidy and it’s value to peak demand realised.

    The Vic government’s TFIT seems close at 25c + retailer loading, but this is also up for review, through the Victorian Competition and Efficiency Commission’s (VCEC) Inquiry into Feed-in Tariffs & Barriers to Distributed Generation. Submissions are due by March 19th if you want to have a say.

    http://www.vcec.vic.gov.au/CA256EAF001C7B21/pages/vcec-inquiries-current-inquiry-into-feed-in-tariffs—barriers-to-distributed-generation

    Environment Victoria are also running a campaign at http://environmentvictoria.org.au/i-want-a-solar-future-for-victoria

  • Malcolm

    On regulatory capture, I take it you meant Professor Ross Garnaut.

    • Giles Parkinson

      Why Yes! John would be his son. Corrected and thanks for pointing out.