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25 Nov 2009

The value of solar electric energy to the electricity market - gross versus net feed-in tariffs

by Naveena Rajaretnam

The NSW Solar Bonus Scheme will apply to all customers in NSW who consume less than 160 MWh per year and who install a solar PV system (and also wind turbines) of a size of 10kW or less.

The NSW Government's recent announcement that its Solar Bonus Scheme will be based on a gross feed-in tariff for electricity generated by small customers' solar photovoltaic (PV) systems and wind turbines has gone against the trend in other jurisdictions which have adopted similar schemes but with a net tariff. The NSW Scheme will apply to all customers in NSW who consume less than 160 MWh per year and who install a solar PV system (and also wind turbines) of a size of 10kW or less.

What is the difference between a gross and net tariff?

A gross feed-in tariff pays the customer for electricity generated from a renewable energy system for all electricity generated from the system, whereas a net feed-in tariff pays the customer based on excess electricity exported from the system into the national electricity grid.

How is the gross energy measured?

A net tariff system only needs a meter at the customer's connection point with the network, to measure the amount of energy exported back into the network.

A gross tariff system will also require a meter on the generating unit itself, to measure the energy produced by the unit (which may either be used at the customer's premises or exported back into the network). Details of who will cover the cost of the gross tariff meters (as the national electricity grid already has in place net tariff meters) and how the information from the meters will be disseminated to relevant parties (particularly retailers and distributors) is yet to be released. However, the NSW Feed-in Tariff Taskforce's report into feed-in tariffs contemplates that the customer will be liable for the costs of ensuring it has the requisite metering.

The metering arrangements for the NSW Scheme will also need to consider how the arrangements will be affected by the national roll-out of smart metering across the country.

Who will give the customer the credit for its solar energy under the NSW Scheme?

The credit will be paid by the retailer to the customer as a credit on the customer's electricity bill. The credit will be calculated by multiplying the applicable feed-in tariff rate (ie. 60 cents per kWh) by the total generation of the solar PV system.

The credit represents a significant saving. By comparison, EnergyAustralia's standard regulated tariff for household customers for excess energy consumed from the grid is 25.14 cents per kWh. As the gross tariff is quite favourable for customers, it is highly likely that many households will be able to fully net out their electricity consumption, resulting in a credit balance on their electricity bills. The NSW Government has not yet released details as to whether the credit balance gives the customer a continuous right to the amount of the credit or whether the credit will be extinguished at some point in time. Victoria, by comparison, allows retailers to extinguish the credit after a certain period of time has passed.

How will the feed-in tariff under the NSW Scheme be funded?

As part of its most recent announcement, the NSW Government has not released information regarding how the NSW Scheme will be funded. However, the NSW Feed-in Tariff Taskforce (which was charged with developing options for the NSW Scheme) recommended that the NSW Scheme be funded by a distributor levy. This is likely to be the method of recovery and is consistent with other jurisdictions.

A distributor levy effectively means the cost of the feed-in tariffs for solar generation on a distribution network will be regarded as a cost incurred by the distributor in the course of reducing network losses and loads on the network. These costs will be recovered by additional network tariffs charged to all customers on the network. The funds recouped by the network in this manner will then be paid to the retailer responsible for the customer that has the solar PV system as a credit against network charges for that customer, and the retailer will pass this credit onto the customer as credit for network charges on the customer's invoice from the retailer. Effectively, the costs of the feed-in tariff paid to a customer with a solar PV system will be spread across all customers on the network.

The decision to adopt a gross feed-in tariff

The NSW Solar Bonus Scheme is a reversal of the Government's earlier decision to pay customers for renewable energy generated on a net basis. For the customers who have already installed solar PV systems with net metering, transitional arrangements will be put in place. The Government is yet to release details of these arrangements.

Whether to pay the customer on a gross or net basis (or if at all) for the electricity generated from a solar PV system raises the question of how best to measure the value of solar energy to the national electricity market and to reducing the impact of carbon emissions. Should the customer be rewarded for investing in renewable energy regardless of how the electricity generated is consumed? Alternatively should the customer be rewarded for minimising its electricity consumption and maximising electricity exported into the national electricity grid? Is a feed-in tariff beneficial at all or does it distort electricity prices?

How have other jurisdictions implemented feed-in tariffs?

Apart from the ACT (which offers a gross feed-in tariff of 50.05 cents per kWh for generation from participating renewable energy systems up to 10kW (annually reviewed) for an expected period of 20 years), all other States with similar schemes have taken the view that the net tariff option is the most appropriate way of rewarding customers for solar PV generation. While eligibility for the legislated schemes is largely the same amongst the jurisdictions, the tariffs paid and the length of the schemes are different:

  • Victoria: Eligible customers receive 60 cents per kWh for excess electricity fed back into the national electricity grid from participating solar PV systems regardless of the time of day or year. The scheme is expected to run for 15 years subject to aggregate capacity of the systems reaching 100MW.
  • Queensland: Eligible customers receive 44 cents per kWh for excess electricity fed back into the national electricity grid regardless of the time of day or year. The scheme is expected to run for 20 years, however the scheme will be subject to a review after the earlier of 10 years or when 8MW of capacity has been installed.
  • South Australia: Eligible customers receive 44 cents per kWh for excess electricity fed back into the national electricity grid from participating solar PV systems regardless of the time of day or year. The scheme is expected to run for 20 years subject to the aggregate capacity of the systems reaching 100MW.

While WA appeared to be heading down the same path as NSW and the ACT, it has reversed its earlier decision to adopt a gross feed-in tariff and will commence a legislated net-based scheme in July 2010. The Northern Territory and Tasmania do not have legislated schemes as yet although feed-in tariffs are offered by retailers.

While the NSW Scheme may seem the more lucrative scheme, it only runs for seven years, so customers who sign up earlier will receive more financial benefits from the Scheme (and a higher chance of covering the cost of the solar PV system) than those than sign up later. Of the net tariff schemes, Victoria pays the highest tariff, although the scheme is not expected to operate for as long as those in South Australia and Queensland. Whether the other States will follow and convert to a gross payment scheme for feed-in tariffs is yet to be seen and is likely to be dictated by any Federal Government policy initiatives in this area. At least for the short term, solar electric energy appears more valuable on the NSW side of the Victorian border where, for customers, earning 60 cents per kWh for electricity generated from a solar PV system is a lot easier to achieve.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.