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Would Coalition states tax the sun to protect utilities?

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Over the past few weeks, the solar industries in Spain and the Czech Republic have been rocked by decisions by their governments to impose a tax on the output from solar energy installations, including those on household rooftops.

The decision has been justified – particularly in Spain – by efforts to tackle the “tariff deficit”, built up over many years by governments intervening in markets and regulating prices, mostly to keep them artificially low. Taxing solar, which is emerging as a cheap alternative for households to produce their own electricity, has proved an irresistible target.

Don’t think it could happen in Australia? Think again, because Australia has all the ingredients – it has market conditions that investment bank UBS earlier this year described as a “no brainer” for household solar –high consumer prices and lots of sun.  And it also has massive tariff deficits in two key states, Western Australia and Queensland, and solar is threatening the business models of a lot of state-owned electricity businesses.

All this means that the Australian electricity utility model is one of the most vulnerable in the world – were it not for the strength of regulatory protection (which is set by the state governments). And that makes solar vulnerable to regulatory change.

Australia often boasts of having among the cheapest wholesale electricity prices in the world, courtesy of its National Electricity Market and its access to “cheap” coal reserves. Remarkably, the influence of wind energy and rooftop solar, along with reduced demand, has pushed wholesale electricity prices (net of carbon) even lower.

Not that Australian consumers notice. The overwhelming cost of grid infrastructure, including the gold plating that has occurred in recent years, along with high retail margins and special gifts such as the “retail headroom” – a cross subsidy that allows retailers to offer “discounts” to some users –  mean that Australian consumers pay among the highest tariffs in the world.

For all its access to “cheap” coal, it costs as much to boil a kettle in Australia’s suburbs (using mostly coal-fired electricity) as it does for a remote mining camp hundreds of kilometres from the nearest grid.

But it’s actually worse than that, because even those consumer costs are heavily subsidised. In Queensland, the cost of subsiding regional customers of Ergon Energy amounts to more than $600 million a year. In Western Australia, the government says it will pay $420 million to Synergy and Horizon power to subsidise the difference between the cost of supplying its (90 per cent) fossil fuel electricity, and the tariffs they charge consumers. In both states, the cost of subsidising fossil fuels dwarf by at least a factor of six the cost of the discontinued feed-in-tariffs for rooftop solar, against which they often rail.

Australians have a sense that this is unsustainable, and so are embracing solar PV in huge numbers. Even with most subsidies removed, and a pitiful price paid for excess electricity exported back into the grid, Australians are finding it cheaper to install rooftop solar than to rely entirely on poles and wires.

In turn, this is causing an even greater problem for utilities – particularly the state-owned network operators and retailers – because their business model is geared towards selling more electrons, not less.

As more consumers sign up for solar, the utilities are forced to find other means to protect their revenues, leading to what many have described as an “energy death spiral” – a situation that is expected to accelerate as battery storage becomes commercial.

Even though the Australian Energy Regulator has been given new powers to more effectively regulate new investment in grids, the overwhelming problem remains the tens of billions invested in recent years – much of it clearly un-necessary.

The only real solution to reducing the built-in costs of the network is to write down the value of the networks. We suggested it here, but the only politician we know to have spoken publicly on the issue is maverick South Australia Senator Nick Xenophon.

The budget problems faced by WA and Queensland means those states won’t have a bar of any such suggestion.

WA recently sought to claw back $50 million in tariffs from customers who had signed up for the feed in tariff. It provoked a huge reaction and it dropped the plan almost immediately. But the cut in its credit ratings means that it is under huge budgetary pressure, including on how to reduce the growing tariff deficit – which according to its recent budget papers is growing by another $620 million out to 2017.

In Queensland, the independent pricing regulator, the Queensland Competition Authority, last year sought to impose special tariffs on solar households, even though it admitted they were ineffective, costly, unfair and possible illegal. But they recommended it on the basis that it would boost revenue to the utilities.

To consumers, and advocates of a decentralised grid, solar provides an obvious solution to growing grid costs. But even the major energy companies are at loggerheads. AGL’s Tim Nelson last week said utilities would have to adapt, even though it would be tough. Last month, origin Energy CEO Grant King said that solar was effectively “free-riding” on the grid.

Many of the grid assessments by independent pricing regulators deliberately ignore the potential grid benefits of distributed solar. Their assessments are almost entirely geared towards rating the effectiveness of solar compared to a coal fired generators.

Alan Pears, from RMIT, argues that consumers are already paying effective welfare to protect the network operators.

That is why the Australian PV Association is pushing hard for a distributed model to be included in Australia’s electricity network business model. “Everyone thought bigger was always going to be better,” says APVA’s Muriel Watt. “But the amalgamations of networks have made them large and unwieldy, so along with a regulatory system which takes decades to change, has meant they have been unable to respond when the market changed around them.

“If we were going to spend $50 billion, we should be doing it to make grid smarter, rather than just making it bigger. We spent money in wrong way. Ended up with stranded assets.. Now we got other options, we got to ask how much we cross subsiding this grid, and when should we look to other solutions, such as solar and mini-grids.”  

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  • Coaltopia

    Axe the tax! Except this one!

  • Name

    So a tax on solar.
    Does that mean the excess solar electricity I might produce for which my retailer very generously gives me 8c/kWh and then on sells to my neighbour for 38c/kWh (rural NSW tariff – great retail business for Origin) would now be taxed.
    Perhaps the tax model for the retailer could be at the corporate tax rate 30% – so I would still get 8c/kwh, the retailer 21c/kWh and Abbott 9c/kWh…… No that would not work for Origin – they are struggling to make a profit already and their revenue would drop, so I would have to pay the 9c/kWh tax for the hard done by retailer and pay them 1c/kWh to take my excess electricity away!
    As for Grant King saying solar is free riding on the grid – what I already see is Origin is free riding on solar – if only I could buy a commodity at 8c and sell it at 38c over a fence.

  • Bob_Wallace

    Stick a tax on solar and you only increase the pressure for people to quit the grid.

    I don’t know the AU price numbers, but if they are as Name states 8c for sales and 38c for buyback it makes sense to store ones own. Lead-acid storage is around 20c/kWh. Using ones own for 28 and buying 38 only when absolutely necessary makes sense to me.

    A tax that makes the buying price of solar less or the purchase of backup from the grid more would seem a bad idea. Right now the utility is charging 30c to “store and backup”. The larger that number, the more people are going to become self-sufficient.

  • Chris Fraser

    As usual, expect a market response. We already agree batteries are becoming more economical. No export to the grid will be considered if it invokes a tax.