Weighing the perfect solar subsidy

With the election finally done and dusted, focus now turns to the likely new policies of the incoming Abbott government. When it comes to environment and climate change there will be some significant changes from the approach taken in the past and while some headline commitments have been made, there are opportunities for new policies and initiatives.

The challenge for environmental and climate change policy, like most areas, is to work out how government should intervene to implement changes that deliver effective and substantial change with the most effective use of taxpayers’ money. This is a legitimate question. Policies should not be introduced to subsidise a few to 'do the right thing'; they should be about transforming markets or behaviours to deliver substantial and sustained change that would not occur or not at the same pace otherwise.

One of the great environment success stories in recent times has been the take-up of solar PV. This year we reached an important milestone, more than one million roofs across the country with solar panels. At a recent industry event former Howard government environment minister, Robert Hill, told the audience that this achievement was significant but that he had no idea how we got there.

If we are going to get policy right in future, then we should know how it happened, and learn from it.

Six years ago the solar industry was in turmoil with the government introducing a means test on its subsidy otherwise, the $150 million program would have been fully utilised within a year or so – more than three years earlier than planned.

This followed similar stop-starts since the original PV Rebate Program was introduced by the Howard government, which provided a rebate of up to $8000 per system to support the uptake of solar power. Solar support programs were popular, but when they got too popular, they were stopped or cut back. Clearly, if they couldn’t afford to be successful then they weren’t the right programs.

But even with the 'success' of the various incarnations of solar PV subsidy programs, the total number of households in Australia with solar PV was miniscule, less than 20,000 by 2008. In effect, taxpayers were subsidising those citizens who wanted to do the right thing rather than driving industry transformation to such a level that the costs could reduce substantially so that solar PV could become within everyone’s reach and for significant environmental and industry benefits to be reaped.

What was needed was to implement a policy that would not only be successful, but also could afford to be successful. It needed to encourage a significant number of people to put solar on their roofs and drive industry developments so as to lower costs to such a level that solar could become affordable for most, without subsidy.

As a renewable energy advocate I saw the commitment by the Labor Party to an expanded 20 per cent Renewable Energy Target as providing the mechanism for the market transformation that was needed. Compared with the obviously larger cost for industrial scale renewable energy projects, the scheme provided ample funding for household take-up of solar.

As the amount of renewable energy produced from a household system was so small, the total subsidy was fairly insignificant in the way it was being applied. Recognising this, I presented to the government a plan where household solar systems should not only get their subsidy upfront, instead of each year like large projects, but also that they should get five times the amount for each unit of clean electricity they produced. This would provide a roughly equivalent subsidy to that provided by the previous grants but without the limit on how many could apply. The plan’s modelling showed that with greater take-up this would drive costs down and, as it did, the subsidy could be reduced so that in time it could disappear altogether.

There were also good reasons why household solar should get an extra helping hand. At the time, I argued this was because they generate most at times of peak demand; encourage their owners to be more energy efficient, therefore effectively increasing the energy benefit of the system; are distributed, producing electricity where it is need and cutting distribution losses; and finally, help ordinary Australians do their bit to help Australia address climate change.

The 'ambitious' plan would see 500,000 homes solar powered by 2020 and bring solar PV within everyone’s reach.

The approach was taken up by the government and the rest, as they say, is history. The seemingly ambitious target was overshot so quickly it took everyone by surprise. The modelling forecast that by 2013 there would be just 100,000 homes with solar PV; we have more than 10 times that.

What wasn’t foreseen was that state governments would join the party and provide generous feed-in tariffs – providing significant payments for electricity produced. This was something the industry had been lobbying hard for. But the feed-in tariffs were too generous and when combined with the federal subsidy, the offer became so attractive we saw an explosion in demand for solar. With the huge increase in households with solar, these feed-in tariffs became too expensive for governments to maintain – one of the reasons I argued against using this approach to support the development of solar (if a program can’t afford to be successful don’t implement it), and they acted to cut them.

This is not to say the approach using the RET was perfect. It was far from it. One mistake was anticipating the cost reduction of solar PV systems, or perhaps more accurately thinking we could forecast future costs. The EU Renewables Strategy in 2007 forecast that installed costs of PV was expected to halve by 2020. The plan reflected this, with a relatively gradual decline in the subsidy. But global and local drivers saw the price decline much more significantly than expected; meaning the subsidy quickly became too generous. This was finally addressed by government but later than perhaps it should have been. In hindsight, it would have been much better to implement some sort of market mechanism at the outset to ensure the subsidy remained appropriate and changes were made in an expected and smooth manner.

It is also worth looking back at some of the reasons argued why domestic solar deserved an added boost.

National Electricity Market analysis shows that solar PV has had a profoundly positive impact on our electricity system. Expensive peak demand has been drastically reduced, our household demand has decreased for the first time and literally millions of people are now directly engaged in climate change mitigation through the solar panels on their homes.

But most importantly, the policy has meant that costs have dropped sufficiently and industry capacity and capability increased sufficiently so that solar PV can become within the reach of most Australian households – helping transform how Australia addresses climate change. This was my intention, but it is important from a public policy perspective that we learn from it.

The experience now tells that we need to keep climate change policies constantly under review and flexible to emerging circumstances but avoid sudden and drastic changes which created the boom bust cycle in the solar sector. We also must consider the way in which policies interact. The other thing we have learnt is there is no such thing as a cost-free policy. The RET shifted the cost of subsidies from government to industry but the cost was still born ultimately by consumers either through taxes or cost of power. 

Armed with this knowledge we need to now do something else ambitious.

Rupert Posner is chief executive of Good Environmental Choice Australia.