NSW slashes solar tariffs to push households into battery storage

The New South Wales pricing regulator has slashed the value of solar feed-in tariffs in the state in what appears to be a deliberate move to push consumers to adopt battery storage, and to lock in long-term deals with major retailers.

The Independent Pricing and Regulatory Tribunal (IPART) on Monday announced in a draft determination that the recommended average tariff – which is voluntary anyway for electricity retailers  in NSW – had been cut by 14 per cent to an average 4.8c/kWh, the lowest in Australia.

The move will affect the more than 3,000 homes that add rooftop solar in NSW each month, and gives some indication of the tariffs awaiting the 160,000 homes on premium feed-in tariffs when those tariffs come to an end at the end of 2016.

IPART justified the cut – from an average 5.6c/kWh in the past year – on the basis that wholesale electricity prices had fallen because of a decline in expensive peak pricing events.

One of the principal reasons for this fall in wholesale prices is the proliferation of rooftop solar PV. IPART says solar PV has helped reduce the number of daytime peak pricing events in NSW and helped lower the average level of peak demand by 8 per cent.

This graph below shows the fall in peak demand over the last five years, during which time the solar PV market has boomed.

But while solar households are having their tariffs cut because of falling wholesale prices, there is no sign that lower wholesale prices have been passed on to the general consumer. Retailers simply increase their margins on the “retail” component of the business to offset the lower revenue they get from their coal plant and other generators. All major retailers have increased their margins significantly in the past year.

Indeed, when one regulator tried to force utilities to pass on lower wholesale prices to consumers – in South Australia a few years ago – the dominant retailer in that market threatened to pack up and leave. The authorities promptly caved in and prices in that state have since been deregulated.

But in NSW, IPART suggested that if solar households were feeling aggrieved by the cut in tariffs, then they shouldn’t be fussed.

Firstly, it argues that the tariffs are not really that important, because most electricity produced from solar panels are consumed by the household and not exported to the grid.

Then, it infers, if the owners of solar households are really angry about the situation, then they should just install battery storage.

“The uptake of battery storage will make it possible for PV customers to use more of the electricity they generate to meet their own needs,” it says.

Indeed, that is exactly what is expected to happen when the premium FiT finishes next year. It could result in a fierce battle between big and small retailers, and the providers of home energy management systems.

And in another extraordinary conclusion, it suggests that the FiT is also less relevant because of the move by leading retailers to offer products such as power purchase agreements, and their push into battery storage.

“These new products will make solar PV accessible to a broader range of customers, and make it possible for PV customers to use more of the electricity they generate to meet their own needs,” IPART says. “The structure of some of these products may mean that traditional feed-in tariffs become less relevant over time.”

The treatment of solar tariffs is a point of controversy in Australia. IPART, like other pricing regulators, treat individual rooftop solar systems as thought they were large centralised generators, like coal-fired power stations.

Solar arrays are credited only with the wholesale price and some savings on avoided transmission losses, while their asset as a key component of a distributed generation market – which virtually everyone concedes is inevitable and less costly than a huge grid – is ignored.

Solar advocates argue that the tariff for rooftop solar exports should recognise the other attributes of the technology – not just its ability to reduce wholesale prices, but its ability to defer network upgrades by lowering peak demand, and its environmental benefits, including its ability to force out coal-fired generation from the grid, an attribute recognised last week by the WA energy minister Mike Nahan.

In the US, solar households are paid the same as the retail price for electricity (known as net metering), because it is argued that if the grid is used less, then they should pay less.

There is a push by US grid operators to protect their revenues, but in Minnesota, the regulator recommended only a minor reduction from the retail rate, while in Maine an independent study found that solar brought such benefits the feed-in tariff should be nearly three times the retail rate.

In Australia, the networks – many of them state owned, as they are in NSW – protect their revenues fiercely. Even though electrons from one solar household to a neighbour travel a distance of just a few metres, the network charges are the same as if they were transported from one side of the state to the other.

This, obviously, is an artificial construct – those costs are only there because it is written into the rules by the regulators themselves. It plainly does not cost as much to transfer electricity from one consumer to another – those electrons will simply flow to the neighbouring customer.

But the rules allow the retailer – who might pay 4.8c/kWh for excess solar output from one customer – to sell it to the neighbour for nearly 10 times as much (46c/kWh) in the afternoon peaks.

Clearly, if a consumer was to sell the electricity himself, it would cost him no more than the price of an extension cord over the fence. That has safety, and other, issues but obviously there can be other more effective solutions – such as micro-grids and virtual net metering – that can meet the same goal. By erecting higher walls, the regulators, at the urging of the incumbents it should be noted, are simply preparing for a bigger fall.

NSW is not the only state to cut its tariffs. It has occurred in all other states. Just last week, the tariff in Victoria was cut to 5c/kWh from 6.2c/kWh, also due to the fall in wholesale prices caused by rooftop solar.

The new Labor governments in Victoria and Queensland have promised reviews to ensure a “fair price” of solar. The new director-general for the department of energy in Queensland is Paul Simshauser, the former AGL economist who once labelled solar household tariffs as a “scam”.

As Simon Hackett, the chairman of Australian battery manufacturer Redflow, told RenewEconomy this week, if the regulators cut the price of feed-in tariffs, then the response of the consumer is simply to say: “I accept”, and install more storage.

This will be a significant issue when some 230,000 households in NSW, Victoria and South Australia lose their premium tariffs next year, and it is a prime consideration for anyone installing new solar. Installers report that at least half of all inquiries are about battery storage.

In another interesting note, IPART also says that if the tariff were raised any higher, then the retailers would “lose money” and be less attracted to solar customers. This appears to be an implicit recognition that solar customers would be discriminated against by retailers, which is contrary to the rules of the market.