NSW stares at energy future and fades to black

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.