Victoria joins the solar blame game

A new report has called on the Victorian government to slash solar PV feed-in tariffs well before flaws in the Australian electricity market that hinder embedded generation are fixed.

Following the lead of New South Wales, South Australia and Western Australia, the Victorian Competition and Efficiency Commission issued a report today calling for the Victorian government to slash feed-in tariffs for solar PV.

Similar to the recommendations of the NSW energy regulator, IPART, the Commission has suggested that the price paid for exported generation from solar PV should reflect a wholesale electricity market value of around 7 cents per kWh rather than the 25 cents that newly installed systems currently receive.

The report recommends that the Victorian government close the “Transitional Feed-in Tariff” of 25 cents per kWh for any new solar PV systems either by 31 December 2013, or once 75 megawatts of capacity has been installed, whichever occurs first. Based on very preliminary data, Nigel Morris, of SolarBusinessServices, suspects that this 75MW cap is likely to be met well before the end of this year, and well short of the 31 December 2013 deadline.

Importantly, the Commission has pointed out that customers currently on the Premium FiT of 60c/kWh should remain entitled to that rate until November 1, 2024. Also any customer who installs a system prior to the 75MW or 31 December 2013 cut-off that is entitled to the Transitional FiT should continue to receive 25c/kWh until its contracted expiry date of December 31 2016.

As pointed out in the March article, Solar’s electric price shock, it looks as though just as solar PV was about to grasp grid-parity in Australia, it will be kicked away from them.  

What I find concerning about the report is that the Commission freely acknowledges a range of flaws with the structure of the Australian electricity market that hinder embedded generation such as solar PV; but recommends that a feed-in tariff be removed before these flaws are corrected.

The report actually provides an excellent discussion on how the electricity market is economically sub-optimal in the way it treats embedded generators and makes it incredibly difficult for embedded generators to capture the fair avoided network cost value they might provide. The report states:

“The Victorian government should focus its efforts on barriers to distributed generation where there is market failure and current regulation is flawed. One such barrier is proponents’ limited ability to realise the network value of their generators.”

The report’s recommendations also build upon the long-running saga (which I’ve explained stretches back to 2002) of the failure to roll-out cost-reflective pricing in this country. The report states:

“Limitations on time of use and locational pricing – not all Victorians have meters which collect time of use and location aspects of their power use and production (such as smart meters). This limits the ability to develop FiTs that better reflect the value of distributed generation.”

Without more cost-reflective pricing in place, neither households nor electricity retailers have any incentive or capacity to adjust their demand to better fit with the output of solar or other embedded generation. This could mean that households – or electricity companies on their behalf – might employ other technologies and behavioural strategies to shift their demand to periods when solar PV has higher output.

Overall I’d say this report provides an excellent explanation for why the electricity market design must change to make more economically optimal use of embedded generation. Unfortunately the report, by recommending the dismantling of feed-in tariffs before these other flaws are fixed, fails to recognise the sorry history around efforts to reform electricity network regulation and pricing. Second-best solutions are necessary, and in fact are likely to help facilitate more substantive reform by pushing incumbents toward the negotiating table.