A fair price for rooftop solar, Part 3: Are FiTs the best reward?

By Jack Gilding

This article was originally published in Renew Economy.

This is the third and final of a series of articles produced by the fair value for distributed generation project. In the first article we showed why exported rooftop solar energy is worth 10-18c/kWh when all the network, health and environmental benefits are taken into account. In the second article we looked specifically at the benefits from avoided use of the transmission network. In this article, we will look at why it is important to distinguish what exported solar energy is worth from the question of what is the best way to recognise this benefit.

What mechanisms are available for rewarding distributed generation?

Feed-in tariffs (FiTs) are the simplest and best known mechanism for supporting distributed renewable energy generation, but there are other ways that are increasingly being explored to better reflect the various benefits of distributed generation.

Below we explain some existing and proposed mechanisms and look at their advantages and disadvantages.

Finally we argue why we believe a regulated FiT should remain the base mechanism for rewarding this value.

Increasing self-consumption

It is worth first reinforcing the important but often overlooked point that the best way for solar owners to maximise the value of their solar investment is to use as much of the electricity they generate as they can at the time they generate it. Exported energy typically earns about 6c/kWh but using it in-house often saves 20-30c/kWh. This is one of the value propositions for household batteries in conjunction with solar – energy can be stored to avoid later purchase. Even without batteries many households can maximise the savings from their solar generation by changing the time tasks such as washing clothes and dishes, and heating hot water are done. For detailed practical advice on this see Chapter 5 of the ATA Life after FiTs report.

Feed-in tariffs

In some states[1] FiTs are set at the state level and all retailers required to pay them to customers (“regulated FiTs”). In other states it is left to retailers to decide how much (if anything) to offer solar owners (“retailer FiTs”), with regulators typically claiming that competition will ensure that solar owners are offered a fair price.

With the exception of the new arrangements in Victoria from July 2017 (see below), all FiTs in Australia are paid just for energy exported to the grid and some other minor benefits and are at a constant rate in c/kWh (although the rate varies between states and between retailers). Additional benefits, including network, health and environmental benefits, are ignored or regarded as out of scope.

Time and location specific FiTs

One of the arguments against FiTs is that they do not reflect the fact that, for retailers and networks, the value of energy fed back into the grid is highly dependent on both the time and location. The Essential Services Commission (ESC) in Victoria investigated these issues in detail and recommended that FiTs should be based on both the time of day (roughly reflecting times of peak demand) and location (to reflect greater line losses in remoter parts of the state).

The Victorian government rejected the ESC recommendation of a location based FiT on the grounds that it “would unduly complicate the FiT scheme”.

Implementing time-based FiTs requires communicating smart meters that record and report import and export of energy in half hour intervals. Victoria is the only place where this infrastructure is widely implemented, although it is currently being rolled out in other states on an incremental basis.

Renewable energy certificates

As part of Australia’s Renewable Energy Target legislation, solar owners are entitled to create and sell “Small-technology certificates” (STCs but commonly called RECs) that reflect the first 15 years anticipated renewable energy generation from their systems. STCs are typically signed over to the solar installation company and used to reduce the up-front cost of the system. From January 2017 STCs reduced to 14 years output and will be progressively reduced by one year’s output each year until they are completely phased out by 2030.

Network support payments

Distributed generation has a high value when it can reduce the demand on distribution networks at times they are running at close to capacity. Additional local generation (or demand reduction) can potentially avoid the need for multi-million dollar upgrades to the network. Current regulatory arrangements allow network operators to offer “network support payments” as a way to avoid or postpone costly network upgrades. These payments could provide a viable additional financial benefit for distributed generation in specific locations due to the advent of battery systems and smart software that can control when locally stored energy is fed back into the grid. While these payments have the potential to be quite high (around $1/kWh), the fact that they will only be paid at limited times and specific locations mean that they are likely to be only a useful supplementary financial benefit for some distributed generation systems. This is the basis of payments that will be made to owners of solar and battery systems on Bruny Island in Tasmania as part of an ARENA funded trial.

Payments based on wholesale market prices

In the NEM, wholesale electricity prices are set every half hour and can vary widely from a few cents a kWh to a (very occasional) maximum of $14/kWh. Regulated FiTs are based on annual average wholesale prices. Paying distributed generators for exported energy that reflects wholesale market prices at the time of export would potentially provide benefits to solar owners, particularly when high wholesale prices match times of peak solar production as is often the case in heatwaves. This can also benefit retailers if they can buy energy from their customer more cheaply than from the wholesale market. These arrangement works particularly well if solar in combined with storage allowing energy to be fed into the grid at times of maximum value. This is the basis of the GridCredits100 product offered by retailer Diamond Energy in conjunction with software control systems supplied by Reposit Power.

Rather than sell energy back to the same retailer they buy electricity from, local generators have the theoretical possibility of selling their surplus power directly on the wholesale market. A business called a “small generation aggregator” can pool electricity bought from individual generators and sell it on the wholesale market. As with other options described above, this option requires smart metering infrastructure and is more valuable if battery systems allow control of the time of export.

Network rule changes

Current electricity market structures do not reward the fact that distributed generation makes less use of the transmission and distribution networks than centralised power stations. Various rule changes have been proposed to address this disadvantage.   In particular a rule change promoted by the Total Environment Centre, the City of Sydney and the Property Council of Australia proposes “Local Generation Network Credits”. These would be payments from distribution networks to owners of distributed generators that reflect the long term benefit of reduced network investment. The AEMC decided not to implement this rule change.

We believe a strong case for the rules to be changed to reflect the lower use of networks by distributed generation (see second article in this series). But NEM rule change processes are complex and incumbent businesses can lobby effectively against changes. Even successful changes can take years to come into effect.

Victoria setting new directions in FiT methodology

It is a very welcome change to see the far broader terms of reference and the detailed analysis that has gone into the process for establishing a new framework for rewarding distributed generation in Victoria. The work done by the Essential Services Commission (ESC) has been impressively detailed in identifying both energy value and network value components of distributed generation.

In Victoria from 1 July 2017 solar owners will be paid a FiT of 11.3c (see here and here for details).

For the 2017-2018 FiT the ESC has:

• based the wholesale value calculation on forward projections of wholesale price rather than historical figures (this is significant at a time of increasing wholesale prices),
• weighted the wholesale prices to take account of the time that rooftop solar is exporting based on actual historical data from a sample of solar installations,
• included for the first time an allowance (2.5c) for the “avoided social cost of carbon”.

Additional innovations that may be introduced in future Victorian FiT determinations are:

• a FiT rate that varies based on the time of day in three bands (peak/shoulder/off-peak) as well as an additional ‘critical peak’ payment at times of very high wholesale prices
• an allowance for the network value of distributed generation based on a final ESC report due shortly
• an allowance for “the avoided human health costs attributable to a reduction in air pollution”.

The impact of tariff reforms on distributed generation

Throughout the National Electricity Market there is a strong push towards what are called ‘cost reflective tariffs’. The theory is that consumers will be motivated to use the network more efficiently and costs will be constrained. New tariffs will tend to have higher fixed charges and lower consumption charges. This will discourage energy conservation and make exported solar energy less valuable. There is also a trend to time-of-use tariffs and demand-based tariffs (a charge based on peak consumption during a billing period). These tariff structures can also reduce the value of exported solar energy, but potentially increase the financial benefit of systems that combine solar with local storage. Stored energy can be used to avoid purchasing energy at peak price times (on a time of use tariff) or reduce a customer’s peak demand (on a demand based tariff).

Why FiTs are still important

The general trend over the last few years has been for reducing FiTs and for regulatory bodies to opt out of setting them on the argument that the problems will be solved by competition between retailers. There are two problems with this argument:

• Many of the benefits do not accrue to retailers, but to networks, society and the environment so retailers have no incentive to reward them.
• Retail electricity offerings are so complex that it is difficult for consumers to assess which offer is best for them and the FiT rate paid is only one small part of this consideration.

Over time it is likely that some of the more market based mechanisms will provide a valuable addition to regulated feed-in tariffs. However we believe a regulated minimum FiT should be set in in all jurisdictions and should remain the main mechanism for rewarding solar exports because:

• Distributed generation has real value to retailers but, without a regulated FiT, retailers will pocket this benefit rather than reward households that export solar energy.
• Distributed generation at times of peak demand drives down wholesale energy prices which benefits all consumers.
• There are social and environmental values that are reasonably consistent across all locations and a FiT is the most practical way of recognising these values.

In the final article in this series we will look at what needs to happen to ensure that distributed generation receives a fair price for exported energy.

The future of distributed generation

In previous articles in this series we have shown that locally generated renewable energy is seriously undervalued in the current operation of our electricity system. In this final article we look at why this occurs, the contribution that distributed generation can make to the energy system of the future and what we need to do bring about the necessary transformation.

What’s stopping support for distributed generation? The electricity rules are based on the models of the past

Electricity prices are set by national rules that are designed for a centralised system of big power stations, big distribution networks and big retailers selling electricity to passive consumers. These rules are designed to finance the investments of the past, not to build the energy system of the future. Local generation is seen as either a minor distraction or a problem because it reduces the income going to pay for existing infrastructure.

Short term benefits are highly localised in place and time

In the long term moving to a system based on more distributed generation has many benefits, but the immediate financial benefits are very dependent on time and place. At some times and locations solar pv contributes to reducing network peaks. This can both reduce the need for multi-million dollar upgrades to network infrastructure and suppress peak wholesale energy prices, which saves all consumers money. In particular locations, the ability to feed energy back into the grid could avoid network constraints. Identifying these opportunities and finding mechanisms to reward them is complex and will require a much smarter grid.

Diverse benefits

Moving to a more distributed energy system has benefits for the electricity network, for households, for society and for the environment.

For households: lower energy costs, more control, long term price stability. With battery storage and EVs: ability to combine benefits of household and transport energy costs.

For networks: less investment in transmission and distribution infrastructure. Ability for energy to be fed back into the grid at times of peak demand. Contributions to power quality including voltage regulation and power factor correction[1].

For society: job creation, industry development, energy security, energy literacy, health benefits of reducing fossil fuel use.

For the environment: distributed renewable energy contributes to reducing the multiple catastrophic effects of climate change, as well as reducing direct pollution from fossil fuels.

The compartmentalised way that modern society works lacks mechanisms for recognising this cumulative benefit. The labour market economists say that investing in solar pv is not the cheapest way to create jobs. The big generators say it is not the cheapest way to generate electricity. Politicians claim there are cheaper ways to reduce CO₂ emissions. We lack mechanisms to look at the big picture of where we want to get to.

Vested interest

There are many complex issues in valuing distributed generation that are the subject of genuine debate. But there is also the simple fact that the current electricity system is run by billion dollar businesses (whether they are owned privately or by state governments) that make a lot of money selling electricity. In 2014-2015 generators on the NEM earnt $7.7bn. On top of this customers pay network costs (currently around $12bn a year) plus retailing costs.

On top of their financial power, generators, networks and retailers have additional power arising from monopoly provision (in the case of networks) or market concentration (in the case of generation and retailing). Three private businesses—AGL Energy, Origin Energy and EnergyAustralia—jointly supplied over 70% of small electricity customers at 30 June 2015. These three businesses are also increasingly dominant in generation. They increased their market share in electricity generation from 15% in 2009 to 45% in 2015[2].

The business model of incumbent generators, networks and retailers is under serious threat as new technology makes it affordable for people to produce and store some or all of the electricity they need. When the rules are argued over, it is a lopsided fight between huge businesses with big budgets, lawyers and professional lobbyists on one side, and small community and consumer organisations on the other. For big businesses, legal costs are an operating expense so ultimately it is the customer who pays for the legal battles.

What could the future look like?

Despite recent parliamentary theatrics, finger pointing and talk of a role for ‘clean coal’, it is clear that the climate imperative and the march of technology will ensure that the electricity system of the future will have a much greater role for renewable energy.

The rear-guard actions to prevent the decline of coal-fired electricity are almost certainly futile, but the role of gas versus renewables remains an important issue for research and advocacy.

It is equally important that we have well informed debate and action about the nature of a future electricity system based mainly on renewable energy.

Possible scenarios include:

• The death spiral for networks: rapid advances in integration of solar, batteries, electric vehicles and energy management systems lead to households with the capital going largely or completely off-grid, even in densely populated areas.
• Business as usual but with renewables: Incumbent generators and networks will favour continuation of a centralised network that puts them in control. New large scale renewable energy generation is already competitive with new gas and coal generation, but a network that relies increasingly on central renewable energy generation will require significant new investment in transmission infrastructure and energy storage.
• Sharing the benefits of distributed generation: supportive regulation and innovative service offerings can ensure that decentralised generation and storage can reduce costs for all consumers and build a more resilient electricity network.

The death spiral is not in anyone’s interest. Networks will lose the potential benefits of distributed generation. Households going it alone will not be able to sell their excess generation and will pay more for backup that could be more cost effectively provided by the network. Those who cannot afford to go off-grid may end up paying for infrastructure that becomes increasingly expensive as it loses economies of scale.

Relying just on centralised renewable energy generation and storage would have valuable environmental outcomes but will not result in the most robust or cost effective system. But with the current regulatory framework that rewards networks according to how much they invest, incumbents have a strong financial incentive to continue promoting a centralised system.

What needs to change?

To achieve the maximum benefit from decentralised renewable energy:

• State Governments need to set minimum fair feed-in tariffs that recognise the energy and network benefits of distributed solar.
• FiT calculations should reflect the full wholesale value of energy from distributed solar, taking into account the value based on time of day and recent increases in wholesale energy prices.
• The environmental and health benefits of rooftop solar and other renewable sources should be recognised via the feed-in tariff or other mechanisms such as a carbon price on polluting generation.
• Rules for network charges should be updated to reflect the fact that rooftop solar makes much less use of network infrastructure. At a minimum, solar should not be charged transmission costs.
• The technology and regulation of networks needs to make it easy for distributed generation to provide services to the grid, including feeding in energy at times of maximum demand and providing power quality and other ancillary services.
• The retail market needs to be opened up so that rooftop solar owners can sell, share or gift their electricity on the grid paying an appropriate cost for using the local grid.

How do we achieve the required change?

Transforming our electricity system from a centralised, fossil fuel driven one-way distribution system to a smart system that maximises the benefits of decentralised generation, storage and energy management is a huge undertaking that needs to be undertaken at speed while minimising cost and not sacrificing energy security.

Achieving this transformation will require:

• Research and lobbying for the sorts of regulatory changes outlined above.
• Innovative technical products and services that can be implemented at scale in businesses and households.
• Public education to explain both the necessity and the benefits in terms of affordable energy and job creation.
• Political lobbying to counter the disinformation being spread about renewable energy and to support the necessary changes to the operation of the national electricity market.

Our project has made a start on quantifying the benefits. The research and advocacy materials we have produced are intended to assist with both public education and political lobbying. We urge you to make use of them and to sign on to the Solar Citizens Fair Price for Solar campaign to be stay in touch with future activities.

Transformation of our electricity system is both an environmental necessity and an enormously valuable opportunity to create the sustainable jobs and businesses of the future.

 [1] Different arrangements apply in SE Qld (no set FiT) versus the rest of Qld (regulated minimum FiT).

Jack Gilding is the Executive Officer of the Tasmanian Renewable Energy Alliance and was the project manager for the project “Research review and advocacy on the fair value of distributed generation”.

The project was funded by Energy Consumers Australia as part of its grants process for consumer advocacy projects and research projects for the benefit of consumers of electricity and natural gas. The views expressed in this document do not necessarily reflect the views of Energy Consumers Australia.