Feed-in tariff baby thrown out with bath water

A gulf between perception and reality surrounding renewable energy support schemes is leading to knee-jerk policy to counter concerns around electricity prices. This will hurt investment and ultimately increase the cost of low carbon electricity supply.

Yesterday, the Queensland Government broke its election promise to retain the 44 cent feed-in tariff for solar PV generation only three months after being elected.

Was this entirely foreseeable? Yes, in fact following Campbell Newman’s election I wrote that the solar PV industry needed to see the feed-in tariff promise spelt out in unambiguous detail that gave no wriggle room.

Still, given solar PV rapidly dropping cost, surging sales in Queensland, and the desire for the Queensland government to be seen to be doing something about electricity prices, a cut to the feed-in tariff was bound to happen.

Of course this change in policy will make barely any difference to electricity prices, but that misses the point – it’s about being seen to be doing something that matters.

According to the AEMC the feed-in tariff will contribute 0.2 per cent to the electricity price rises over 1 July 2011 to 30 June 2014, while the state-owned Queensland network businesses gold plating will contribute 46.2 per cent.  If the Queensland government really wanted to help consumers then it would address this gold plating.

The ability for people’s perceptions to diverge from reality is an incredible thing. This has been particularly amazing in this whole heated debate in Australia around electricity prices. Everyone that is heavily engaged in the electricity sector knows that the surging increases in electricity prices are primarily due to perverse incentives in electricity network regulation. But in media and politician land it’s all about green schemes and the carbon tax.

How does this happen?

Well it’s partly just down to politicians angling for political advantage irrespective of the truth. But it’s also due to genuine misunderstanding and the difficulty the public, media and politicians have in grasping the complexity of the electricity sector.

As an example let’s take the South Australian regulator’s recent announcement over variations to the regulated household electricity price. In this announcement the regulator outlined that the average household would face a hike in electricity prices due to the feed-in tariff leading to an extra $105 in their annual bill for electricity. This was of course leapt on by The Australian newspaper, and readers would have been left with the impression that this was an ongoing slug to their pocket. 

However the ongoing cost of the feed-in tariff was much lower, in fact around half this amount. The thing was that the regulator had made a major blunder in underestimating the uptake of solar PV back in 2010, when they made their original price determination. Consequently, they allowed for a one-off catch-up payment this year of $79 million to recover this unexpected cost. The one-off nature of this payment wasn’t made particularly clear in the summary fact sheet, and so media, including Climate Spectator, got it wrong.

Another example of this problem is NSW’s regulator, IPART, estimating the impact of the small scale RET on regulated retail prices.  IPART has assumed that the small-scale renewable energy certificate (STC) price would be $40 when in fact electricity retailers are paying $26. In addition the NSW government got itself into major difficulty two years ago with underestimating solar PV take-up under its feed-in tariff leading to major cost blow-outs.

Another ongoing issue with perceptions versus reality is that many people continue to believe that solar PV is predominantly being installed by the rich. This is informed by an Australia Institute 2010 paper, which found that based on data from 2001-2009, solar PV was predominantly being installed in wealthy postcodes. Subsequent analysis suggests that with the drop in solar PV prices, it is most prolific in postcodes that are far from wealthy.

But because most of the media and politicians don’t have time to delve into this complexity we end up with inaccurate perceptions of what is actually occurring. This is a real pity because it means the baby is being thrown out with the bath water.

The worst way to support renewable energy is via rebates and grants using convoluted criteria in an effort to achieve several policy goals like helping the poor or building-up industry exports.  It is far better to encourage renewable energy through a simple premium for the electricity actually generated, and deal with these other policy goals through other measures. 

A feed-in tariff could have been better than the current STC rebates provided to small-scale solar, but it needed to automatically adjust downward by amounts announced in advance as targets for installed capacity were achieved.  This would have avoided major cost blow-outs and boom-bust cycles that ultimately undermine investment confidence essential to long-term cost reductions. And it’s the long-term cost reductions which are the ultimate goal of policy to support renewable energy.

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