Why are feed-in tariffs so low?

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Many Australians are puzzled by the current low solar feed-in tariffs, especially recalling higher rates a decade ago. From 2009-2013, Australian state governments heavily subsidised solar energy through "premium Feed-in Tariffs", even surpassing electricity supplier rates. These tariffs were incentives to promote solar adoption.

However, as solar technology became more affordable and prevalent, these tariffs began decreasing. Today, the Australian Independent Pricing and Regulatory Tribunal (IPART) sets the feed-in tariffs based on the wholesale electricity price.

Consequently, the current solar feed-in tariffs closely mirror these wholesale prices. Although present-day tariffs might seem low compared to the past, the reduced cost of solar installations ensures that solar remains a beneficial choice for consumers.

Why are my solar feed-in tariffs per kWh payment so much lower than what I get charged by my energy retailer for the same kWh?

If you’ve recently glanced at your energy bill and found yourself asking, “Why is my feed-in tariff for solar power so low, especially when I remember it being higher a decade ago?”, you’re not alone.

This has become a frequently asked question, particularly in Australia. Understanding the answer requires a deeper look into the evolving landscape of solar energy, governmental policies, energy retailers and electricity costs in general.

Historical context of solar feed-in tariffs in Australia

Between 2009 and 2013, many Australian State Governments rolled out what is termed “premium feed-in tariffs”  (FiT). The design of this initiative aimed to promote the adoption of solar energy among businesses and residents. These tariffs, in many cases, were higher than the rate consumers paid for electricity from suppliers.

However, these lucrative rates paid for each kWh were not indicative of the true value of solar power fed back into the grid. Instead, they were an incentivised offering, heavily subsidised by State Governments. The reason was to expedite solar installations across the country. In order to generate some sort of certainty to early adopting solar system purchasers, the State Governments often guaranteed the FiT for long periods. For example, for 7 years at 60 cents in NSW and 20 years at 44 cents in Queensland.

Around the same time the Federal Howard Government provided an $8000 rebate for a 1.5kW solar system, they introduced these incentives. At the same time, more and more people started adopting solar energy, and the prices of solar panels and systems started falling. Increased competition and the entrance of China as a major panel and inverter manufacturer caused these drops.

Over time the high solar adoption rate, coupled with a rise in electricity prices, made these high subsidies less necessary. This led to a gradual reduction and cessation of these generous offers around 2012. Then, they were replaced by a more modest rebate scheme and lower FiTs.

The role of the Australian Independent Pricing and Regulatory Tribunal (IPART)

Today, the Australian Independent Pricing and Regulatory Tribunal (IPART) plays a crucial role in determining the Feed-in-Tariffs (FIT). Annually, IPART releases an updated report detailing the recommended minimum charge for exported solar. The primary basis for their recommendations is the prevailing wholesale price of electricity across the nation.

The rate your energy retailer offers as a solar FiT closely mirrors this wholesale electricity price. This is the same rate energy retailers pay when purchasing power to supply their customers. This includes your supply during night-time or cloudy days when your solar installation does not produce as much electricity.

solar panels and energy grid affecting feed-in tariffs
The energy retailers argue that the FiT amount paid per kW should mirror what they pay for electricity on the wholesale market

Deconstructing your electricity bill

To understand the seeming disparity in tariffs even further, one needs to analyse the composition of a residential electricity bill. Typically, a residential home with solar comprises an electricity bill including:

1) The supply charge – usually charged per day.

2) The price you pay per kWh (consumption charge) for the used (imported) electricity from the grid, measured in kWh. If you are on a standard tariff, this charge can be a flat rate, or if you are on a “time-of-use” tariff, it can be charged at three different price points. In such a case you will have a rate for off-peak (cheapest, shoulder and peak (most expensive).

3) The price you get paid for the solar power you export is then credited to you and again measured in kWh and offset against the other 2 charges (including feed-in tariff).

Your consumption charge, denoted in kWh, encompasses four key elements. They are:

  1. Wholesale electricity cost –  This is the base cost your retailer pays to buy the electricity you consume from the power station or solar/windfarm farm owners.
  2. Transmission and distribution costs –  This chunk of your bill covers the expenses of transporting electricity from its generation point (like power stations and solar farms or big batteries) to your premises. These include charges for the use of both distribution and transmission networks.
  3. Rebate schemes – this is the cost for the solar rebate and other support for the solar and renewable industry to encourage uptake. The recovery of the solar rebate occurs through the general electricity tariff.
  4. Retailer’s operating margin – A significant portion of your bill goes towards the retailer’s operational costs and profit margins.

An important point is that transportation  (both distribution and transmission) can make up to half of your overall electricity charge. Therefore the actual electricity generating cost is usually just around one-third of your total bill.

A sample breakdown of the numbers

So in real numbers let’s say the price per kWh you pay is 36 cents ex GST.

  • 11 cents will go towards the purchase of the electricity from the power station (wholesale price).
  • 16 cents will go towards the upkeep and rebuilding of the grid infrastructure.
  • 3 cents will go towards financing the solar rebate scheme, and
  • 6 cents being around 20% of your cost is the retailer’s operating and profit margin.

The low solar feed-in tariff  and the economic logic

When you feed your solar-generated electricity back to the grid, the electricity company must cover the grid infrastructure maintenance costs. If they were to compensate you at the full retail rate, they’d invariably operate at a loss.

Why? Because the value of the electricity you provide through solar isn’t considered superior to what they can buy from the wholesale electricity market. Electricity generation occurs through either fossil fuel power stations or renewable energy power stations. Rates charged in this market can go as low as 3 to 4c per kWh. Overall the dynamic nature of the National Energy Market means these figures are subject to fluctuation and usually hover around between 6 and 15 cents per kWh.

To simplify transactions and maintain consistency, energy companies peg the solar feed-in rate close to the wholesale price. The approach aims to strike a balance between supporting residential solar and allowing for the recovery of energy network infrastructure costs.

And while this seems all fair and reasonable in an explanation, in general overall it seems the FiT over the past years has always been 2-4 cents below wholesale costs. This means the relatively low credits have been calculated to underpin energy retailers profits, to the detriment of solar system owners.

electricity poll being worked on
The continuous addition of solar and wind farms to the electricity mix necessitates substantial upgrades to the grid infrastructure, further adding to electricity bills.

The takeaway from all of this?

Solar FiTs in Australia have evolved since 2007. They began as a high payment to encourage solar adoption. Over time FiTs aligned with the wholesale price of electricity. Current tariffs are much lower than what early solar system owners enjoyed. It’s good to remember that the cost of solar PV parts has significantly reduced too. Therefore the benefits of solar energy, especially quality systems, continue. They include a solid long-term financial return for system owners.

In a world grappling with climate challenges, every step towards sustainable energy matters. Solar energy, even with current lower feed-in tariffs, represents a sustainable choice.

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