Why has my feed-in tariff changed?

Fast read

In the early days of solar (2008-2012), most Australian states offered premium Feed-in Tariffs (FiTs) above standard electricity rates to incentivise solar investment. However, as solar costs decreased, sustaining premium FiT rates became unviable, leading to their reduction and eventual removal.

Currently, FiT rates across the country range from 5 to 10 cents, subject to change depending on wholesale electricity prices and individual retailers' business models. Changes in governmental regulations and renewable energy targets can lead to adjustments in FiTs to encourage solar energy use.

Additionally, fluctuations in renewable energy availability and demand can affect FiTs, with rates rising during scarcity and falling during surplus. The dynamic nature of these factors ensures FiTs align with market conditions, offering fair compensation for exported solar electricity.

What influences the price of feed-in tariffs?

Australia has been at the forefront of solar energy adoption, with over 3 million households and businesses now equipped with rooftop solar systems.

This rapid expansion has been driven by a combination of factors, including government incentives, falling solar panel prices, the relatively high sun irradiation in the whole country, overall cheap system install costs, and a growing awareness of climate change. However, one of the challenges of this rapid growth has been the regular changes in solar feed-in tariffs (FiTs).

Understanding the FiT equation

A FiT is essentially a payment that electricity retailers make to households that generate solar power and export it back to the grid. This payment for exported solar will then be credited to the regular electricity bills and is a nice positive addition to the other financial benefits of a home solar system.

These payments are based on the wholesale price of electricity, which fluctuates throughout the day, due to a variant in the levels of supply and demand.

For example during the daytime, when solar generation is at its peak, wholesale prices tend to be lower. This is because there ample supply of renewable solar power from the evergrowing number of solar PV systems together with the electricity coming into the grid from traditional power plants, such as coal and gas generators.

The history of FiTs

In the early days of solar from around 2008 to 2012 most states in Australia had premium feed-in tariffs (FiT) which were above the standard consumption rates for electricity at that time. Various Australian State Governments created these incentives of solar export payments to encourage households and small businesses to invest in solar.

As the cost of solar decreased and the financial burden of keeping premium Fit rates became unsustainable, the authorities subsequently from 2015 onward reduced and eventually removed these extremely high rates, which in NSW were up to 60 cents for 1 kWh of exported electricity.

Across the country now feed-in tariff rates are between 5 to 10c. However, this does vary between retailers and does change from year to year. The key reason that these FiT rates vary is due to the changes in the wholesale price of electricity.

The retailer will calculate, based on their business model, what they can afford to pay for solar electricity that is exported to the grid. This will primarily be determined by the price they pay for electricity on the wholesale market to supply to their customers.

How prices are set

As the average wholesale price of electricity does change over time, the price that energy retailers can offer for solar electricity will change in line with this. The easiest way to think of it in regards to pricing is that if they can buy electricity at 5 or 6c of the wholesale market you can expect them to pay much more for this for solar power.

YearBenchmark c/kWh
2023/247.7 to 9.4
2022/236.2 to 10.4
2021/224.6 to 5.5
2020/216.0 to 7.3
2019/208.5 to 10.4

As an example in NSW, the Independent Pricing Tribunal (IPART) releases a suggested FiT pricing guide every year for exported solar as per below, where you can see these changes over recent years.

While you might pay a significantly higher rate for the electricity you use, these costs include the cost of using the powerlines to transmit the electricity, administrative costs etc of the retailer. These costs still need to be accounted for by the retailer to send the electricity to another household.

Several other factors can influence the price of FiTs, whether this be electricity prices, renewable energy demand, government policies etc.

electricity grid
Exported solar electricity to the grid in the middle of the day has seen lower and lower payments

Electricity prices 

Market trends and electricity pricing might also affect FiTs. Fuel costs, infrastructure spending, and demand-supply dynamics are just a few of the variables that can affect the cost of power generation. FiTs, which reflect the value of the extra electricity supplied back into the grid, can be affected by changes in wholesale electricity prices.

The market’s supply and demand for renewable energy are kept in check by the variation in FiTs.

Government policies

Changes in governmental policy and renewable energy targets are one of the main causes of the changes in FiTs. Governments frequently evaluate and modify their regulations to meet their objectives for renewable energy. Depending on how well they are doing in meeting their goals for renewable energy and the state of the energy market, the government may increase or decrease FiTs to encourage the use of solar energy.

Politics, a change in the composition of the government, or a change in the country’s energy goals could all influence policy changes.

In some states, such as New South Wales and Queensland, the government has now set minimum FiT rates. However, these minimum rates have also been declining over time. In addition, some states have introduced time-based FiTs, which vary depending on the time of day. This is designed to encourage solar owners to export their energy during peak demand periods when it is more valuable, and not just in the middle of the day.

Low FiTs lead to more battery sales

One of the other consequences of lower and lower Fits is that owners, especially of large solar systems are now installing more and more battery storage systems, to keep their renewable power and use it at night instead of exporting it at low prices.

Market trends and electricity pricing might also affect FiTs. Fuel costs, infrastructure spending, and demand-supply dynamics are just a few of the variables that can affect the cost of power generation. FiTs, which reflect the value of the extra electricity supplied back into the grid, can be affected by changes in wholesale electricity prices.

Since solar system owners already profit from selling excess electricity at a higher market rate, FiTs may decline if electricity costs rise. In contrast, FiTs may rise during periods of low electricity costs to give solar system owners more incentives.

The impact of FiT changes

The regular changes in FiTs have caused some confusion and uncertainty among solar homeowners. However, it is important to note that even with lower FiTs, solar power systems are still a cost-effective investment for many households.

A study by the Australian National University found that the average household with a 5kW solar system can save more than $2,000 per year on its electricity bills.

Future of FiTs

As the solar industry continues to grow, FiTs will likely continue to evolve. Some experts believe that FiTs will eventually be replaced by a system of market-based pricing, where solar owners can sell their excess energy directly to the grid at the current wholesale price. This could provide solar homeowners with more flexibility and potentially higher returns.

In summary

The story of feed-in tariffs in Australia is a complex and evolving narrative, shaped by the interplay of market dynamics, government policies, and the supply and demand of renewable energy.

As we look towards a future where renewable energy plays an increasingly pivotal role, understanding these factors becomes crucial in navigating and optimising the solar energy landscape in Australia. This journey, much like the path of the sun across the Australian sky, is ongoing and full of potential.

Of course, the ever-changing landscape of solar feed-in tariffs can be frustrating for solar homeowners. However, it is important to remember that solar power is still a valuable asset, even with lower FiTs.

By understanding the factors that influence FiTs, solar owners can make informed decisions about their energy consumption and investment strategies.

Sources:

Australian Energy Market Commission (AEMC)

SolarChoice

ABC News

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