Solar industry up in arms over 10-year payback limit

In the decade between 2010 and 2020, Australian homeowners are expected to invest more than $20 billion in rooftop solar installations. Some private forecasts suggest it could be as much as double that. But should these homeowners be limited to a rate of return that is substantially less than that of big utilities investing in fossil fuels or new transmission lines?

The question is being raised by the solar industry after the Climate Change Authority’s controversial suggestions last week that incentives for rooftop solar PV should be indexed to what appear to be arbitrary benchmarks – to ensure that homeowners and commercial businesses do not enjoy a payback of less than 10 years, and a cost impact on other users of more than 1.5 per cent of electricity bills.

The issue has now been taken up by both the Australian Solar Council and the REC Agents Association (RAA), which described the 10-year ROI (return on investment) as a “radical” change and accused the CCA of “overkill” and introducing an impractical and arbitrary rule. It said that if it was adopted, it  would require the minister to regulate financial returns to homeowners to ensure they did not exceed 5.5 per cent over a 15 year period (or 7.5 per cent over a 20 year period). This is considerably less than the returns that other technologies receive.

“The impact of this approach could be to dramatically shrink the size of the solar industry in Australia,” the RAA wrote in response to the CCA discussion paper. “It is expected that very few systems could be sold at less than 10 years payback (or 5.5% return).” The impact on the emerging commercial solar PV sector could be even more dramatic. “Businesses typically do not undertake energy efficiency improvements where payback is more than 3 years, so it is not clear why they would invest on solar with a payback of more than 10 years.”

The CCA’s discussion paper on the renewable energy target has largely been applauded by the clean energy industry because it resisted the self-interested pleading by the coal and gas generators to wind back the deployment of wind and solar energy. The CCA said the 41,000GWh target for large-scale renewables should stay in place, even if it delivers more than the anticipated 20 per cent share of generation, because the benefits outweigh the costs.

The small-scale sector – essentially rooftop solar – was considered more vulnerable, and was the focus of intense pressure, including from bodies such as the Australian Industry Group and the aluminium industry. Utilities are also fearful about the impact of widespread deployment rooftop solar PV on their business models because it reduces demand from the grid, and revenues from their business.

Chief among the concerns is the danger of a blow-out in costs from solar PV incentives, particularly given recent experience in an industry which has achieved dramatic cost reductions in recent years. The industry itself accepts that a limit – such as the 1.5 per cent of electricity bills proposed by the CCA – is appropriate. Where it differs is how this should be implemented, and on the 10-year payback rule, which it argues is unnecessary and impossible to implement.

The RAA suggested a form of cap to protect the 1.5 per cent spending limit, but the CCA rejects this, saying it feared a boom/bust scenario. This is surprising, given that on its own analysis, and even with an anticipated trebling in the number of panels installed on Australian rooftops over the next 8 years, the cost of the SRES (small-scale renewable scheme) would fall below 1.5 per cent by 2014/15 and to 0.8 per cent of customer bills by 2019/20.

The RAA says it is fearful that the mechanism proposed by the CCA to enforce the 10-year payback rule (which is more likely to be broken, if it hasn’t already) is cumbersome, and involves discounting the number of renewable energy certificates allocated to small-scale solar to below the 1:1 factor. It could be eliminated altogether, even as certificates for larger scale solar generation continues to be allocated. It is also fearful that a “downward ratchet” is proposed, meaning that the discount could never be revised upwards, and that the yearly review would make it extremely difficult for the solar industry to have any confidence in pricing systems to customers, or investing beyond the next discount setting cycle, particularly given the CCA’s own recommendation that the overall review of the RET should now take place every four years.

“It is difficult to see financiers providing funding to support an industry, whose parameters are subject to change annually and with seven months’ notice,” the RAA says. “This fails to give the industry the sort of predictability that it needs.”

The RAA also suggest that the approach proposed by the CCA would not be workable because of the different solar conditions from state to state and locality, and because of systems sizes, orientation, customer use and varying technologies. The CCA proposes to take an “average” of the most popular systems and locations. “It would be extraordinary difficult to predict and cumbersome to calculate,” the RAA says. It also says it is wrong to apply the same rules to both solar PV and solar hot water.

Another issue, raised in our article last week, was about the proposal to reduce the size of the systems eligible for the small-scale scheme from 100kW to 10kW. The RAA said that this could have unintended consequences on both the small-scale scheme and the large-scale scheme.

It could also have an impact on the ability of local councils to install solar on their council buildings. Lake Macquarie, a council in NSW that boasts one of the highest levels of solar penetration with 7.3 per cent of households installing 11.9MW of rooftop solar, said its ability to install new capacity on council sites could be impeded by planning provision, particularly if those installations had to be classified as “power stations” rather than rooftop installations.