NSW's 7.5c solar feed-in benchmark misses the mark

NSW's 7.5c solar feed-in benchmark misses the mark

NSW’s Independent Pricing and Regulatory Tribunal (IPART) has recently released its draft report into NSW solar feed-in tariffs for 2018-19. The draft benchmark rate is 7.5 cents per kWh. But is it a fair price for solar?

The 7.5 cent rate comes as no surprise to those in the electricity industry because the benchmark directly reflects the forward wholesale price of electricity for 2018-19. We don’t have benchmarks for any other electricity pricing component such as usage rates or daily supply charges, so why a benchmark for solar? Should we even care about IPART’s benchmark given it is not a mandated minimum, just a “guidance” for retailers and consumers?

What’s the benchmark for and does it actually help?

Established in 2012, the benchmark offered some very ‘soft’ pressure on retailers to pay feed-in tariffs (FIT) based on the wholesale cost of electricity. It gave the appearance that the government was doing something to support solar owners who weren’t on the generous state-funded premium feed-in tariffs (that at the time were paying an extravagant 60 cent gross FIT and 20 cent net).
IPART NSW says the solar feed-in tariff benchmark “helps … retailers in setting their solar feed-in tariffs and solar customers in deciding whether these tariffs are reasonable … the Independent Pricing and Regulatory Tribunal of NSW (IPART) has set a ‘benchmark range’ for solar feed-in tariffs for each year since 2012. Our benchmarks provide guidance on the financial value of electricity exported by solar customers in NSW in the coming financial year”. This is set to continue for the next three financial years to 2020-21.

Let’s look more closely at IPART claims that this benchmark is supposed to assist retailers and consumers.

Let’s start with retailers first. I strongly doubt that pricing analysts at electricity retailers will be relying on IPART to tell them the forward prices for their portfolio, which they use amongst other inputs to determine feed-in tariffs. Secondly, in terms of consumers being aware of the benchmark rate and using it to shop around I know that’s just not happening. Judging by Google rankings, consumers are seriously interested in the actual feed-in tariffs being paid. They are not interested in any guidance that IPART NSW is providing. I know that from our comparison service that includes all solar feed-in tariffs – both retailer and Government provided – none of WATTever’s users has ever mentioned the IPART NSW benchmark. We have provided thousands of solar comparisons since July 2017 and we get lots of savvy electricity shoppers, but not a single word about the benchmark.

Even if consumers did know the IPART NSW benchmark rate, it doesn’t actually help. Retailers offer whatever feed-in tariff they wish to attract solar customers. Some retailers offer nothing. Consumers can’t negotiate the solar feed-in tariff component of a retail offer based on a benchmark rate. What retailers are influenced by, are the feed-in tariffs of competitors. In reality, feed-in tariffs are determined by pricing analysts for the upcoming year and rarely change throughout the year. Contrast that to the usage and supply rates which retailers change frequently with many plans changing rates or discounts more than 5 times a year. Given the lower spend of solar consumers, it’s understandable that the retailers aren’t competing as aggressively for solar owners. However, there are still a wide variety of feed-in tariff offerings and shopping around for a better deal including feed-in tariffs is very worthwhile for consumers.

IPART NSW doesn’t understand solar in 2018. They’re not alone.

IPART’s draft report answers a number of questions raised by respondents to the Issues Paper. While I could take issue with many of their responses, I’ll focus on the idea that IPART seems stuck in 2012 and out of touch with solar in Australia in 2018. The draft report states that “We have found offers with higher feed-in tariffs are unlikely to result in cheaper bills overall for solar customers”. This may have been the case a few years ago due to small PV systems and for some retailers who offer high feed-in tariffs coupled with inflated (compared to their non-solar plans) usage and supply charges. However, there are many retailers that have competitive usage rates and above average feed-in tariffs in NSW. IPART uses an example of a solar PV system of just 2kW to substantiate their claim. Given that sized system would be unlikely to export very much solar at all and is in no way reflective of the average size of solar PV systems installed in NSW let alone the average size of systems currently being installed, it seems they have chosen an unrepresentative (or outdated) scenario that suits their statement that “higher feed-in tariffs are unlikely to result in cheaper bills”. Our experience with thousands of solar consumers is the opposite – lower feed-in tariffs result in higher bills for solar owners, particularly those who have systems over 5kW which is the average system installation size in NSW in 2018.

Further evidence that IPART doesn’t understand solar is the promotion of the Energy Made Easy service through the IPART Solar feed-in tariff page. It states that “Customers with solar panels can shop around for a feed-in tariff using the Australian Government’s website Energy Made Easy”. Well, actually, no they can’t. Energy Made Easy has never and as of May 14th 2018 still doesn’t support solar owners as it doesn’t value their feed-in tariffs. But IPART isn’t alone in their misguided understanding of how solar owners can shop around for a better deal. The Queensland Competition Authority also promotes Energy Made Easy by stating that “Customers can now compare competing solar and electricity offers from electricity retailers at Energy Made Easy”. Just like in NSW, Queensland solar owners can’t compare plans effectively using Energy Made Easy as it doesn’t include the value of solar exports in the comparison results.

In regard to system-wide net benefits for networks IPART states that “We have found that solar exports are unlikely to contribute to meeting peak demand on the distribution and transmission networks (because the peak occurs in the late afternoon when the proportion of exports is very low), and therefore are unlikely to defer network costs”. This may have been the case 6 years ago with small solar penetration in the grid, but in 2018 there are plenty of examples where solar generation runs up to 8pm in the evening and actively reduces the peak that IPART acknowledges as occurring between 4:30-6:30pm. However, IPART neglects to state that the greatest peak demands are in summer in NSW (where we have daylight saving) and in summer, solar systems continue to generate power which is valuable in reducing peak network loads. The incidents we saw in Victoria in January – with transformers overloading and failing occurred around 5:30pm – would have been reduced by increased solar in those locations (driven by greater solar penetration or a time-varying feed-in tariff). We can only wonder how many more transformers would have failed if all the solar owners in Victoria shut their systems off at that time.

Fundamental flaws in the approach

There is a problem with the basis of the IPART benchmark itself. IPART is required to “set a benchmark range that should not lead to solar feed-in tariffs that contribute to higher retail electricity prices”. I’ll point out the obvious issue here – any feed-in tariff paid to solar owners may lead to increases in retailer electricity prices versus not paying a feed-in tariff. If retailers choose to pay no feed-in tariff, that will reduce their cost base and allow them to lower electricity prices (in theory). A reduction of feed-in tariffs would result in lower electricity prices if we assume no change in retailer profits. IPART, and more particularly the NSW Government who set the rules for the feed-in tariff benchmark, need to accept that there is real value in the solar that is exported. This includes the benefits of solar supporting lower wholesale electricity costs, reducing network utilisation, plus the health and environmental benefits of renewable energy. These benefits created by solar owners are shared by all, so it’s reasonable that something is returned.

IPART is just not listening

IPART Solar feed-in tariff submissionsThe draft report goes on to state that “Many … stakeholders submitted that solar feed-in tariffs should be higher than our preliminary estimate of 8.3 cents per kWh … Most of the arguments they raised to support this view are issues we considered in our previous reviews of solar feed-in tariffs”. These arguments include:
• feed-in tariffs should include a subsidy to reflect the value of the environmental and health benefits that solar electricity provides to the broader community;
• that as solar exports have contributed to the lower wholesale prices upon which our solar feed-in benchmark calculation is based, that solar customers should receive some of this benefit;
• feed-in tariffs should also reflect the financial benefit to electricity network suppliers, particularly the potential to defer network investment; and
• retailers should be required to pay a minimum, mandatory feed-in tariff rather than IPART recommending a voluntary benchmark range.
These arguments from hundreds of solar owners and representatives that their benchmark numbers aren’t fairly valuing solar are robust and reasonable. But IPART continues to replay a benchmark based on the wholesale rate. Their inability to see the fair value provided by solar and their lack of real power to set a minimum rate makes IPART irrelevant to both consumers and retailers.

Time for NSW to follow Victoria’s lead

Victoria has done a better job through the Essential Services Commission.

Firstly by mandating a minimum feed-in tariff and secondly, by recognising some of the broader benefits of solar. Their benchmark rate is 9.9 cents for 2018-19 including 2.5 cents for the value of the avoided social cost of carbon. At 7.4 and 7.5 cents, the two benchmark rates are virtually identical. The most important difference is that the benchmark feed-in tariff in Victoria is a mandatory minimum for all retailers. In NSW, it is not and for that reason, it holds no weight. The Essential Services Commission also created a transitional time-varying solar feed-in tariff of up to 29 cents per kWh in the evening peak. This is a very progressive approach and incentivises solar consumers to use their solar when its value is low and share it with the market when it is high, helping to reduce peak demand in the network – something all consumers benefit from in reduced infrastructure costs and avoided blackouts (but don’t expect IPART to reward solar owners for that anytime soon). Thankfully IPART NSW “have also been asked to set time-dependent benchmark ranges for solar feed-in tariffs“. We note that IPART NSW feels this may be a futile exercise as “retailers may continue to prefer to set an all-day rate”. And here we have an epiphany! Retailers are free to pay whatever feed-in tariffs they want and make them flat rate or time varying. If IPART thinks that retailers are going to “prefer” to do something else then perhaps they appreciate the futility of their own benchmark rate! What IPART needs to do is reassess the purpose of the benchmark. Is it just a press release mirroring the wholesale electricity cost for the next financial year or is it providing thought leadership to retailers and consumers on what solar feed-in tariffs should be. Solar feed-in tariffs are a payment that incentivises the uptake and use of solar in a manner that brings benefits to all electricity consumers by:

  • reducing wholesale electricity prices through the merit order effect
  • reducing air pollution
  • reducing electricity distribution network loads e.g. avoiding transformers overloading on hot summer days
  • avoiding high voltage transmission network costs (as household and small business exported solar doesn’t use HV networks)

If the IPART NSW benchmark is just a press release on forward electricity pricing let’s stop wasting the time of 410 respondents and buckets of taxpayer money. Tell the respondents that IPART NSW has no intention of recognising the fair value of solar, shut down the consultation farce and peg the benchmark to the forward wholesale electricity price. Consumers and retailers can continue to ignore the benchmark without the cost and angst of the public consultation process.

What can you do about it?

I’d question spending any time making a submission. We certainly won’t be. Thankfully there are a number of retailers in the market who will ignore the advice provided by IPART to reduce solar feed-in tariffs to 7.5 cents for 2018 and set it based on its value to the retailer from a financial, environmental and customer perspective. Progressive retailers are not bound by the constraints in IPART’s pricing approach and recognise that solar owners also provide retailers:

  • greater capacity to support demand response initiatives;
  • the ability to share solar between customers; and
  • increased loyalty through recognition of the environmental and health benefits of their solar exports.

WATTever’s comparison service will continue to support solar owners and show the savings potential of adding solar to homes or small businesses. Your decision to buy electricity from retailers that you feel are best for your solar is your opportunity to drive change.

What’s next for IPART?

A Government body sets a price guideline for a service that is being offered exclusively by commercial operators in a competitive market. I’ll be brutal – if it’s not a mandatory price, it won’t do a thing.”

Perhaps IPART would benefit from meeting with some of the many retailers who will be exceeding the NSW IPART benchmark figure while continuing to grow their customer base in a very competitive market. That would help IPART establish a feed-in tariff range that included thought leadership around the greater value of solar to retailers and energy consumers as a whole. The forward wholesale rate should be the mandated minimum with a high-end range valuing the additional benefits provided by solar. That would put the challenge to retailers, government, networks and the industry regulators to ensure that value is recognised and flows back to solar owners.
From our perspective as a comparison service supporting thousands of solar owners, if consumers want to know what the going rates for feed-in tariffs are, they can simply visit our solar feed-in page. The market pressure of having retailer’s rates shown side-by-side against their competitors provides more pressure than iPART could ever achieve; and sites like WATTever who inform Australian’s with a transparent comparison, haven’t cost taxpayers a cent.

Reference: IPART NSW Draft Paper, Solar feed-in tariffs, The value of electricity from small-scale solar panels in 2018-19

About the Author: I have a solar PV system currently paying 12.8c feed-in tariff in NSW. I also run an electricity comparison service that has provided thousands of electricity comparisons for solar owners, who like myself, want their solar valued fairly by retailers (and fairly valued by others like IPART who claim to support solar owners).