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Are Australian solar households getting ripped off?

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Households in Australia adding solar PV arrays to their rooftops have an important question to ask themselves: Are they getting a fair deal from their local utility for the solar power that they export back to the grid?

Why is it, they might wonder, that households in regional Queensland which pay 26c/kWh (even after state-sponsored subsidies) for their electricity from the grid will get just 6.321c/kWh for their solar exports? In some areas, such as south-east Queensland or NSW, there is no obligation to pay households at all.

Yet in Minnesota, a state in the US (think of the film Fargo), households which pay a retail electricity rate of just 12c/kWh are being offered 10.9c/kWh for the solar that they export back to the grid.

It all comes down to they way the solar is valued. In Australia, the amount paid for solar power exported to the grid by households and businesses is mostly framed around the value to the electricity retailers – not to consumers in general, or the overall grid.

Hence, in the deliberations by the state regulator the Queensland Competition Authority, it is only concerned with what it claims are the “avoidable” costs of delivery. This only includes the cost of wholesale generation, transmission losses, and some minor ancillary services.

Here are its calculations.

QCA FiT

But consider what Minnesota calculated – illustrated in the graph below. Not only did it take into account the avoided fuel cost, but various transmission and distribution capacity costs, avoided generation capacity costs and, most tellingly, the avoided environmental cost.

(It should be noted here that the total adds up to 13.5c/Wh, which is the Minnesota commission’s estimate of the levellised cost over the lifetime of the asset.)

morgan stanley minnesota

This has something to do with the different structures of electricity bills in the two different regions, but mostly it is about how the pricing regulators in Australia, and Queensland in particular, see their mandate.

As we remarked last year, the QCA sees its role as protecting the interests of business. When it was deliberating a special tariff on solar households, it came to the conclusion that it was unfair, ineffective, more expensive, and possibly illegal, but it recommended the course of action, anyway, because it would benefit the network operators.

Part of the problem in Australian states such as Queensland is that the ultimate arbiter of pricing is the state government – the very same entity that owns the network and generation businesses threatened by solar and distributed generation, and the same entity that appoints the regulator. It is a clear conflict of interest.

Compare the QCA findings with what others have suggested. The Australian Photovoltaic Institute, for instance, suggests that the tariff for exports should include avoided transmission costs, and the hefty retail margins and “head-room” components of the bill.

And there is a strong case for the household to benefit from the “merit order effect” – the downward pressure on wholesale prices caused by renewables – as well as some of the network benefits created by avoided infrastructure investment. Right now, all these benefits are being captured by the incumbent utilities.

The other point the APVA makes is that in regional Queensland, the real costs of delivery from grid-power are not reflected in the household bill because of the state government subsidy – which amounts to $600 million a year. Perhaps the tariff paid to solar households should reflect the real avoided costs, not just the subsidised avoided costs.

“Costs incurred merely to maintain an existing system, which may not be the most efficient or suitable in the longer term, would not be considered justifiable,” it wrote in a submission last year.

As Nigel Morris suggested in his piece on Tuesday, retailers are clearly making a profit selling the solar generated electricity from one household (which they buy for 6c/kWh, or 8c/kWh, or sometimes nothing at all) to the next-door neighbour at the full retail price – sometimes hugely inflated if they are on time-of-use tariffs. Morris puts that profit at around $10 million. I reckon that is barely scratching the surface.

In NSW, it will be interesting to see what happens when the households which signed up to the 60c/kWh gross feed-in tariff find their contracts ending in 2016. Right now, they have no real incentive to change their usage patterns, but when that tariff ends, there will be a huge incentive to consume more of that output on site – and quite possible to invest in the battery technology that can do that at a reasonable price.

This was one of the key points underlined in the Morgan Stanley analysis we wrote about on Tuesday. The more utilities respond by refusing connections, hiking fixed tariffs, and paying sub-value rates for exports, the more incentive there is for households and business customers to disconnect entirely from the grid.

There is no customer that has been so enamoured of their relationship with their utility that they would feel bad about breaking the link. RenewEconomy has been struck by the number of different proposals – and economic incentives – there are to take individuals and communities off-grid. Sooner, rather than later, that will happen, and the utilities will have no one but themselves to blame.  

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  • Barry

    Can you imagine a time when network payments will be based on the “value of the grid” in which the grid has to compete against the cost of solar plus storage? Company valuations are based on the sum of future net cash flows not past investments so current regulatory frameworks and business models do not seem well suited to enhancing competition, innovation and customer choice.

  • Rob Campbell

    I know I’m banging the same drum as I have for months, but as the article is Qld related, I still haven’t had a response to my inquiry to the Qld energy minister about the legitimacy of recovering the Qld solar FIT (44c) from all consumers. This method is by the governments reckoning, a major cause of spiraling electricity prices, yet has nothing to do with the cost of production or distribution of electricity, Its a government subsidy….how will we know when these “costs” diminish?, right now how can we tell?

    • Jennifer Gow

      The only reason our household has not already installed batteries and gone off grid is because we are on the old feedin tariff. Of course as soon as we move from this house we will lose it and go on joke of a feedin tariff that now prevails. At that point we will install a 5Kw off grid solar system with some sort of backup generator (hopefully fuel cell based). The cando government keeps saying that the 44 cent tariff is driving up electricity costs and chants “la la la la” when people mention escalating network charges and the merit order effect. but the assertion is still absolute bullshit. They are simply taking their “riding instructions” from the power industry.
      I would suggest it would be “most courageous” (in Sir Humphrey’s terms) for LNP to abolish the old FIT particularly given the impact on the cost of electricity for people still on the grid of a large number of consumers taking their solar power off grid.

    • Gina Mckenzie

      Your government, in which you participate, through your vote, made a binding contract with your fellow citizens to pay a certain rate for electricity that they export to the grid. If they cannot honour that then they cannot be expected to honour any other contract, in addition, they cannot expect anyone else to honour their contracts. Those on fixed interest payments for their morgages could refuse to pay the banks . Employers could justifiably cut wages after receiving the benefit of employees time and effort because they find the going tough. Maybe intensive care doctors or nurses could leave patients on their life support unattended because they are tired or have other more pressing social engagements to amuse them. Sorry mate, your word is your word and you will honour that even if it hurts.

      • Rob Campbell

        Gina, Sorry you have missed my point, I have two 44c contracts and I will scream blue murder if they try and take them away. My point is that the 44c is a subsidy, pure and simple and, like the NSW government did with their 60c FIT, it should be paid from a government fund, not recovered from electricity consumers. My point is that the recovery of this subsidy from Consumers of electricity is equivalent to a tax or excise, because it has nothing to do with electricity at a technical level. History shows that states cannot legally charge excise (petrol,tabocco etc.) this is my question to the minister.

  • JohnRD

    This link analyses the previous Qld “fair” FIT calc. http://pragmatusj.blogspot.com.au/2013/12/comments-on-qca-report-on-feed-in.html
    Table 4.6 in this analysis provides more information. It has fascinating things like the same network charge being levied for power from Central Qld and power from my roof going to to the next door neighbour.
    One of the problems in Qld is that the government owns a fair slab of the Qld power industry and is scared it won’t be able to priatise while pesky solar PV is destroying the profits.

  • adam

    If they de-regulated the tariff then wouldn’t, over time, someone come in pay more because the value of this ever growing commodity (solar PV kwh’s) can be used to supply consumers below the average price of consumer energy.

    …or can someone just pay more now?

    Fair enough on the QLD link but the other states don’t have such high levels of public ownership and thus lesser conflict of interest. They still have equally low tariffs.

  • sean

    As much as I love your pro solar approach Giles, I don’t understand how you can support a price based on avoided costs.
    Feed in tariff should be the current wholesale price of power plus (as determined by the AEMO) and if you really want to be generous, a small amount for not polluting the environment (to be subsidised by putting a fee of the same amount on polluting plants.) This ensures that there is not over-saturation of solar (wouldn’t that be nice) as well as providing incentive for market based storage and provides proper compensation to solar generators.

    the amount paid to transmission companies should be based on the minimum costs of transporting power(cost * %utilization) (not the incredibly corrupted, dollars invested * 10% model) thus bringing both the price of wholesale power and transported power down.

    (this could be modelled with a market approach, higher returns being generated for network congestion, encouraging complete utilization of the current infrastructure)

    Rent seeking makes everything unaffordable. Running a giant hedging scheme for power (ie, fixed prices) is not only incredibly expensive, but prevents competition.

  • Le Clair

    If the QCA is adding distribution and transmission losses, they are assuming that exported rooftop solar is not being transmitted or distributed (hence no losses from that activity). Fair enough and correct.
    Therefore when that exported rooftop solar is sold to the next door neighbour, as there is no transmission or distribution involved, the cost of that electricity will, of course, be discounted by the amount of the distribution and transmission costs not incurred.
    I don’t think so.
    So, one is left with the unavoidable conclusion that the retailer (the Queensland government) will simply pocket that as additional profit.
    At the least, dishonest, more likely fraudulent as it would violate the terms of the Electricity Act 1992 insofar as the terms of reference when setting the Regulated Tariff, currently 26.73c/kWh ex GST.
    Something to follow up on Giles?