A small win for rooftop solar as Victorian regulator outlines fairer tariffs

Victoria’s pricing regulator has come down on the side of the state’s solar households in its final report on the Energy Value of Distributed Generation, recommending changes to tariff structures to reflect the true value of rooftop solar and other small renewable electricity generators – to the grid, to the environment, and to society.

Marking a first among Australian regulators, the Essential Services Commission report, tabled in Victorian Parliament on Thursday morning, concludes that the state’s current feed-in tariff design does not adequately reward the value of distributed energy generation on a number of levels.

It says the tariff should be changed to factor in time of export, location of generator, and avoided greenhouse gas emissions – a finding it flagged in its draft report, published in May.

The final determination of the ESC has been a long time coming – and many will argue it has still failed to adequately factor in such clean energy benefits as avoided health costs, as well as those of avoided investment in network infrastructure.

But it is considered to be a step in the right direction in a regulatory environment that has seemed to favour the incumbent energy market players, while steadfastly ignoring the benefits distributed wind and solar offer to the grid.

“The current FiT in Victoria makes payments based on the price of electricity in the wholesale electricity market and any distribution and transmission losses avoided by the supply of distributed generation electricity,” the report said.

“(It) does not include the value associated with a reduction in greenhouse gas emissions. …Moreover, the FiT currently makes no provision for payments based on environmental or social value.

“(And) by being limited to a single rate, the existing FiT framework does not reflect the way wholesale prices vary across time and location.”

To remedy this, the ESC recommends the introduction of an overarching Distributed Generation Tariff (DGT), which is structured around two elements: one a multi-tariff mechanism to mirror wholesale market value; the other a mechanism accounting for environmental and social value.

The first part, called a flexible feed-in tariff (Flexible FiT) would value exports from small solar and wind generators based on the time and location of the export. The payment would be flexible in the sense of having different rates for different times of day, and for different locations. (See chart and table below)

The ESC says the advantages of such FiT include that it aligns with the existing set of time blocks in the retail electricity market and thus should be more easily understood by market participants.

Additionally, the report says “a critical peak price (on the assumption that being significantly higher than the base rates) has the greatest potential to provide a strong signal for behavioural change.

“This payment structure provides market reflective outcomes for all forms of distributed generation. It also introduces a price signal that indicates to investors in distributed generation how the value of their electricity changes over time and across locations.”

In terms of location, the report notes that Victoria can be divided into two regions reflecting differences in average line losses across the state (i) Melbourne, Geelong and the east of the state; and (ii) the north and west of the state.

“Higher line losses apply in the north and west of the state,” the report says. “Different multi-rate FiTs in each region would reflect these differences in average line losses,” it says.

The other element of the DGT, the deemed output tariff (DOT), would account for the annual monetary value of the environmental and social benefits of the distributed generation system’s deemed output. This payment would be calculated for the year in advance, using the defined methodology that accounts for the type and size of the distributed generation system, the ESC said.

Of course, the changes will have a sting in the tail for retailers, who, the ESC estimates would face costs of between $4.5 million and $6.8 million to implement the tariff structure changes, the majority of which is attributable to the DOT.

This may explain why, in their response to the ESC’s draft report, energy retailers reiterated the view that the RET already recognised – and adequately compensated – the value of greenhouse gas emissions reduction achieved by distributed generators.

Origin said in its submission that “the SRES already represents adequate compensation for avoided emission,” says the report. AGL proposed “customers are already well-compensated for the emissions reduction benefits provided by their distributed generation.” And “EnergyAustralia supported this view.”

But the ESC is offering retailers some measure of flexibility: “In the event an electricity retailer is able to offer a FiT that fully reflects the half hourly prices in the wholesale market, and the distributed generator provides express and informed consent when accepting that tariff option, then the retailer obligation to offer the regulated Flexible FiT rates as set out in this report should be suspended for the duration of that agreement,” the report says.

Retailers will still be required, however, to provide payments under the Deemed Output Tariff (DOT) component of the DGT, which as suggested above is where the main costs for retailers lie.

To help defray the costs to retailers, the ESC has recommended staggering the introduction of the tariff changes over a period of three years, starting June 2017.

In year one, starting July 2017, time-of-use pricing would be introduced within the FiT, including different rates for different times of the day, and a critical-peak price. See charts and table below.

Year 2, starting July 2018, would see the DOT be implemented, providing “additional time for further deliberation on the value for a unit of avoided greenhouse gas emissions,” the ESC said, as well as ”further lead time for retailers to incorporate this new element of the tariff into billing systems… (which) may also help lower the cost of implementation (as estimated int able 7.2).”

Year 3, starting 1 July 2019, would see the introduction of location-based pricing, allowing time for the Commission to further consult on the location of relevant boundaries.