The REC Agents Association has released analysis today indicating the cost of the small-scale (primarily solar) component of the Renewable Energy Target (the ‘SRES’) is likely to decline by 62 per cent between now and 2015.
The table below outlines the underlying basis for this calculation, showing that the cost per megawatt-hour of electricity purchased by consumers drops from $7.19 today, to $2.73 in 2015.
Cost impacts of small-scale renewable energy target (SRES)
Source: Green Energy Markets on behalf of the REC Agents Association
This decline in costs is a function of reductions in the number of renewable energy certificates known as STCs awarded to solar PV systems, which act like a rebate on the purchase price. In the 2010/11 financial year solar PV received five STCs per megawatt-hour of electricity they generated, this dropped to three in 2011-12, is two now and just one from 2013-14.
So even though the price of these STCs is expected to increase from $30 in 2012 to $37 in 2014, the total number of certificates that government requires retailers to acquire (the ‘target’ in table above) drops by nearly 70 per cent.
This reduction in costs partly hinges on sales growth for solar PV dropping markedly as the rebate for systems becomes smaller, making them less attractive to customers. In recent years these sales growth forecasts have tended to seriously underestimate PV sales, but it’s clear that costs are still likely to be well below what we’re experiencing for 2012.
Unfortunately, prominent lobby groups are choosing to promote a mistaken overestimate of the cost of the RET from NSW’s utility regulator IPART. The Business Council of Australia, the Australian Coal Association, the Australian Industry Greenhouse Network and Origin Energy all cite IPART’s estimates of the cost of compliance with the RET for 2012.
IPART estimated the cost for retailers of complying with the RET would equal $102 per household, with the SRES making up $64, or $9.14 per MWh. Yet on 19 September Climate Spectator reported how IPART staff concede their estimate of the compliance cost for the RET, and in particular the SRES, is a significant overestimate.
Based on RAA estimates for 2012, which are based on actual market prices to date, IPART has overestimated the cost by 27 per cent. And Origin Energy’s submission to the Climate Change Authority illustrates in a chart that the cost faced by retailers to comply with the RET as a whole (not just the SRES) is around $70 per household, not $102.
Not only are the lobby groups using an IPART estimate for 2012 that is a major overestimate of actual costs, but in addition these costs are likely to decline considerably in the next few years for the SRES.
SRES cost of abatement lower than gas-fired power
Another myth which the PV sector must contend with relates to out of date data on the cost of carbon abatement which opponents are quoting.
In the past the government subsidy provided to solar PV was very substantial relative to the amount of CO2 emissions avoided. The cost per tonne of CO2 saved was in the realm of $200 to $400. This compared very unfavourably against a switch from coal to gas for electricity in the realm of $30 per tonne of CO2, based on past gas prices.
However things have changed such that the SRES will deliver abatement at a cost potentially lower than gas-fired power. Based on RAA figures for 2015, for each MWh of electricity displaced by solar PV, it will require $37 in support. Based on the Australian average grid emissions intensity (0.9tCO2), this equates to an abatement cost of $41.10 per tonne of CO2.
At the same time a range of energy forecasters expect the gas price on eastern seaboard to double to around $7 per GJ out to 2020 and possibly quite higher (WA prices are already at this level).
Even with a carbon price of $41.10, an efficient gas power plant, similar to the one operating at Tallawarra, would struggle to displace any major coal generator at a gas price of $7 per GJ. This is outlined in the table below using a range of large NSW and Victorian coal generators using cost data prepared for the Australian Energy Market Operator's 2011 transmission planning.
Operating cost of gas versus existing coal generators with $7 per GJ gas price and $41.10 carbon price
Source: Worley Parsons and Intelligent Energy Systems
If we adjust for the fact that solar PV gets its subsidy upfront so the government could have earnt interest instead of subsidising abatement upfront and also adjust for the fact that the solar system will last 20 years, the cost per tonne of CO2 abated is still competitive with what gas could achieve at $7 per GJ.