Victoria turns the tide on value of rooftop solar and feed-in tariffs

Solar households in Victoria can look forward to feed-in tariffs that might net them more than 30c/kWh at times of “critical peaks” in the future, but the significance of the new tariff arrangements announced by the Victorian government this week go further than that.

For the first time since the generous, and in most cases over-generous, solar bonus tariffs were ended in most states, authorities are looking to reward rooftop solar owners for the environmental and network benefits of their systems, rather than through a narrow prism of treating them like mini coal-fired generators.

From next July, solar households in Victoria will be the first in Australia to receive a feed-in tariff that directly reflects an environmental value, and a time of use component, and this will then be followed up by a component that adds in the value of rooftop solar to the network.

The new framework will mean that the average price paid for solar exported from the grid will rise from around 5c/kWh now to between 6.5c/kWh and 7c/kWh. This reflects the avoided greenhouse gases, and in the absence of a carbon price, is based around Victoria’s energy efficiency scheme.

The price might go higher, to around 8c/kWh to reflect “peak rates” – from between 3pm and 9pm. But could also go to 30c/kWh or more in moments of “critical peaks”, when wholesale prices jump that high.

There are, typically, around 20 or more such critical peaks a year (half hour periods). However, the formula for this aspect and how that might be passed on to solar households is yet to be worked out.

The new prices will come into effect next July. The 70,000 or so solar households on the transitional and “standard” FiTs will transition to the 5c/kWh tariff when those schemes end on December 31. There will still be 89,000 early adopters who will continue to receive their 60c/kWh tariff until 2024).

The network benefit will be added in from July 1, 2018, after a report from the Energy Services Commission is completed next year. It is expected that this should add a few cents to the tariff, although this will be a particularly interesting exercise.

In most states, network operators have conceded that rooftop solar either reduces the peak, or narrows it considerably, and solar advocates have long argued that these benefits should be reflected in the tariff paid to solar households.

However, when pricing regulators in the past have been asked to identify the network benefits, such as the Queensland Productivity Commissions, they have said they could see none.

It was interesting that the ESC asked to separate those deliberations from the environmental ones. It was also interesting, and disappointing, to note that the ESC could not find a way to value environmental benefits, other than climate change, that could arise from using more solar – such as less particulates in the air from coal generation.

There is no doubt that its report will likely set a precedent for other states to follow, and that is the importance of what is happening in Victoria, given that mandatory solar tariffs are generally being removed, and indicative tariffs only raised when rising gas costs drive up the price of wholesale power.

The particularly galling thing for solar customers who have installed solar in recent years has been the reality that they have been receiving peppercorn prices for their solar exports, while that same output has been sold to neighbours at four, five or even 10 times the price at peak periods.

This differential is one of the driving factors behind the big push towards battery storage. As battery storage costs come down, consumers will find it makes financial sense to store their excess electricity in a box (a battery) for use later on.

Many will be watching how these time-of-use tariffs evolve. The next step, of course, is to see how battery storage can then be exploited, either individually or en masse via “virtual power plants” that can then be used to address peak demand, contribute to grid stability, and even avoid grid upgrades.

There can be little doubt that most of the premium solar tariffs instituted by the states were too generous for too long. Most should have been better managed, scaled back in price more quickly, and should not have locked in such high payments for 20 year periods as they did in Queensland.

But the response has swung too far the other way. Under pressure from utilities, pricing regulators and governments slashed the feed-in tariffs to reflect only the wholesale price of electricity, adding in some minor credits for avoided line losses. Other benefits such as network, environmental and social were ignored.

Some utilities have gone further than that, proposing demand tariffs that appear to unfairly penalise solar households, or even proposing solar “taxes”, either higher costs for network connections or “taxes” on the solar exported back to the grid.

Victoria energy minister Lily D’Ambrosio describes the new tariffs as a “step change” and a significant move to providing a “long-term sustainable pricing framework” for those who choose to invest in solar. What will be interesting to see is how this will be developed along with battery storage, which will be an important component of any high renewables scenario that the government is planning to implement – Victoria wants 40 per cent by 2025.

The Australian Solar Council says it welcomes the move as a “useful first step”, and it will be watching what happens to the network component, which could be significant given that networks are increasingly looking to solar and storage and other technologies to reduce network spending.

“It’s a fairer price, but not yet a fair price,” CEO John Grimes said.

The Clean Energy Council’s Darren Gladman says the recognition of the role that solar power plays to reduce emissions is also a welcome move from the government.

“This new system is simply better recognition of the true value of solar power when it flows back into the power grid. This will also help to provide an incentive to install home battery systems, which are coming down rapidly in price but still outside the reach of many working families,” he said.