Why are solar feed-in tariffs decreasing?

What will be the long-term effect of lower feed-in tariff (FiT) rates?

Australia is known for its abundant sunshine, and as a result, the solar industry has significantly grown in recent years. Many homeowners and businesses have installed solar systems on their roofs, and they can generate more electricity than they consume. This excess can then be sold back to the energy grid.

However, energy retailers are paying less and less for exported solar electricity in Australia, causing concern among solar system owners. This trend has led to some homeowners asking for the reason for lower feed-in tariffs, and if they are being ripped off?

Feed-in-tariffs

When the Government first started supporting and encouraging the installation of residential solar systems, they introduced regulated premium feed-in-tariffs (FiTs) for any electricity that was sent back to the grid. While these slightly varied across the country, at their peaks, they were a 1 for 1 payment equivalent to what you would buy electricity for (20c to 30c per kWh) in the Northern Territory, 44 cents in Queensland up to 60c per kWh in New South Wales.  

However, as the uptake of solar increases and the costs of solar systems decrease, the FiTs were reduced. Today, most payments of FiTs for exported solar electricity are between 5c to 10c per kWh. But why is this the case when the same electricity is sold to your neighbour for 35 to 45cents per kWh? Is there a massive scam going on via the energy retailers? 

Electricity price factors

The first thing to look at is the breakdown of electricity prices for residential and small commercial customers. While you might pay 30 to 40c per kWh for the electricity you buy, this includes several cost factors.

The wholesale cost of the actual electricity, the distribution and transmission costs to use the infrastructure to get the electricity to your home, and retail operating costs and some profit are all contributing factors to the final price. When the electricity pays for your electricity, and you are selling it to someone else, the price will need to accommodate these factors. 

Changes in government policy

Since the initial implementation of FiTs, there have been various changes in government policies. The various State Governments and the Federal Government over the past 15-20 years have eliminated and reduced some subsidies for solar energy. These changes could have made it more expensive for businesses and homeowners to install solar systems, except that solar panels and inverters have become much cheaper at the same time. This is because production volumes increase sharply and China has perfected the fully automated process of solar system manufacturing.

So overall, despite a reduction in Government support, PV system costs have decreased, as panel price reductions were bigger than the reduction in government rebates.  As a result, the growth of the solar industry has increased, and the average size of Australian solar systems has grown from 3kW in 2014 to 6.6kW in 2019, then 8kW in 2021 and now 10 to 14 kW. This system size increase has also increased the amount of exported solar during the day.  

Technical limitations

Initially, the energy grid in Australia was designed to transport electricity from a central source, the power stations, to homes and businesses. Today, there is a lot more electricity being produced by residential homes. As a result, the grid is much more complex, which can lead to issues in managing the electrical supply, including grid instability and, in rare cases, blackouts. 

This also means investment in the grid infrastructure has increased significantly in the last decade, and more is required when the switch to EVs becomes mainstream. So energy retailers have to make solid profits to be able to invest into these necessary upgrades.

The wholesale price of electricity

So  in the eyes on the energy retailer the electricity you send back to the grid has the same value as the wholesale price, which is the money the energy retailer pays to the owners of power stations for each kWh.

Wholesale of electricity price explained

The wholesale price of electricity is traded in line with demand, so it’s a little bit like shares on the share market. If there is demand the price rises, and if there is little demand the price drops.

The energy trading market updates prices every 5 minutes, and during very hot days for example, when many air-conditioners run and demand is at its peak, the wholesale price can increase by factors of 100 or even 1000 in short periods. But most of the time, wholes sale prices for one kW/h fluctuate between 4 and 15 cents. That’s why the FIT amount per kW/h paid to you by the electricity company matches these amounts.  

As a general rule, in Australia, the wholesale price of electricity has decreased over the past few years (till the war in Ukraine made it spike).

The key contributor to his decrease has been the growth of renewable energy generation. An increase in renewable energy, especially during sunlight hours, has led to the highest supply of electricity in the middle of the day, while daytime electricity demand with the reduction in manufacturing has dropped. As a result, midday electricity’s value has dropped, and energy retailers are paying a lower price for the exported electricity.

An oversupply of electricity

There have been regular situations where the supply of renewable electricity has been so high it the wholesale electricity price moved to a negative territory. This results in generators paying for electricity being sent back to the grid. Likewise, the electricity that the homeowners send back to the grid is costing the retailers money to accept.

For Q1 2023, the average price of electricity was $63 per MWh (megawatt hour), which is 6.4c per kWh. If you are getting paid close to this, it is a fair price. But there is good news right around the corner. With the increased uptake of EVs, the daytime demand for electricity is expected to increase significantly (for charging) and therefore, the price of the FIT cents per kWh is expected to rise significantly over the next few short years.  

What should you do?

Unfortunately, it is getting to the point where electricity sent to the grid is worth little. If you are getting frustrated, there are some things you can do to mitigate the declining value.

The first is to purchase a battery storage system. This will allow you to store your excess electricity for yourself to use at a later time. By storing the excess, you increase the value of the overall electricity you produce throughout the day, not just what you use.

Another option when you have the battery is to join a virtual power plant (VPP) program. VPPs are groups of small-scale solar and battery systems treated and managed as a singular system. If the grid needs more power, the VPP can provide emergency electricity. By joining the program, your excess electricity will go from the battery into the grid, and you will be paid a premium FIT such as 30 cents, 60 cents or even more for 1 kWh. 

Alternatively you can use the excess solar to make hot water by sending it into your standard hot water tank, or utilise a heat pump to make hot water with the excess solar. For this reason hot water tanks are nowadays called “the poor man’s battery”.

Solar is still very much worth it

Even though FiTs are decreasing, the value and financial benefits of solar systems is still high. You will still save significant amounts on your electricity bill through renewable energy. Due to the high electricity prices, having your electricity consumption during the day backed by your own rooftop power station will make a big positive impact.

So the lower FIT right now is not that important, as the general benefits are so great already. And maybe, ironically, it will lead to more home storage battery sales. So “greedy” energy retailers – watch out, maybe in the future, homeowners will not need you as much.