Submission by
Renewablelogic
on the
West Australian Feed-in Tariff
Discussion Paper
20th November 2009
Introduction
Renewablelogic welcomes the opportunity to make comment on the proposed Feed In Tariff (FiT), and our submission that addresses the points put by the consultation paper is below. We also make additional comment on the scope of discussion in this paper.
In keeping with the objectives of the COAG national principles for Feed-in Tariff schemes, and the Western Australian scheme objectives which purport to be consistent with the former, we note that a FiT scheme should be designed:
- At lowest marginal cost to get the best ‘bang for buck’ from a levy or other funding;
- To provide a return for externalities that are as yet unpriced;
- To encourage the expansion of a local renewable energy industry that may eventually operate independently of government assistance of any kind;
- And not impose an inequitable burden on electricity consumers, particularly vulnerable low-income households.
In light of these objectives, some important considerations to be included in the design of any such scheme are as follows:
- Include commercial and small businesses (does not have to be at the same rate);
- A scaleable design;
- Acknowledge the benefits of disaggregated generation through the reserve capacity mechanism, and investigate the intrinsic value of such disaggregated generation to the network.
- Simplify interconnection rules for the Design a tariff rate and structure that is relative to the return on investment, ambiguity in export tariffs or variable import tariffs could dramatically reduce potential take-up.
1. Should the tariff rate decline for new participants over time, to encourage efficiency and innovation?
We believe the tariff should decline over time but only on the proviso that the return on investment reflects decreasing capital costs. As the capital cost of such systems in Australia are significantly affected by the exchange rate, particularly given our lack of manufacturing industry, there is a danger in setting arbitrary declines into the design of a FiT scheme when decreasing capital costs may not be experienced in the future, thus the effectiveness of the program in general will be significantly decreased.
If the tariff were designed to decrease over time this would encourage more rapid growth, but these declines should be open to independent review if it can be seen that capital costs are not seen to be decreasing because of macroeconomic conditions or otherwise.
2.1 What is an appropriate impact on domestic electricity costs to pay for a feed-in tariff for residential consumers?
Renewablelogic recognizes that the design of a feed-in tariff should not disproportionately affect low-income households which may be most sensitive to rises in electricity prices. However, it is important that the effect of this scheme relative to such policies as the WA uniform tariff, cost of network upgrades from air-conditioners and total system operating costs are kept in context. These costs are in all probability a much higher risk factor for increased electricity costs than a feed in tariff.
To date, conjecture and treatment of this policy in isolation appear to have driven policy and debate. The Government should concede that significant levels of cross-subsidisation already exist in WA, this policy is one such response to redressing some of the inequity that already exists between the electricity system and alternative forms of energy.
As this policy should be considered as both a development mechanism and an energy-efficiency mechanism to reduce demand, it would be complementary for existing tariffs to reflect these goals. The A1 tariff currently does nothing to complement energy-efficiency mechanisms, as the rate remains the same regardless of consumption levels. A graduated tariff that penalises higher users with a higher rate would:
- Encourage energy conservation;
- Encourage a reduction in emissions;
- Reduce the need for network expansion;
- Target high users most responsible for network upgrades;
- Provide equity whereby low users are not cross-subsidizing high users, and the impacts the proposed levy for this scheme are not met inequitably by low-income households.
We do not have an idea of the specific impost appropriate for electricity consumers, but probably should not increase the rate of electricity by more than 3% per annum. The proviso on this is that if the marginal cost of installing these systems were to fall significantly due to decreasing capital costs or economies of scale through larger projects, it would be socially beneficial to accept a larger impost if it could be seen to develop a competitive industry or improve the integrity of the network.
2.2 Design limitations
The most successful Feed-in tariff schemes which have developed local industry and provided relatively low marginal cost per installed kW are those that relate to the economic return of the investment. Those schemes that are restrictive or provide an ambiguous return are not efficient and do not acknowledge that the successful diffusion of renewable energy is an economic decision for proponents rather than a purely altruistic one.
The fact that this scheme rewards only exported electricity means that an economic return is both difficult to ascertain for an investor at current consumption levels, and even more difficult to determine over the systems life. Because of these uncertainties a tariff rate for exported electricity would need to be much higher than a gross tariff to compensate for this uncertainty.
A much more successful scheme that would provide greater take-up of renewable energy whilst keeping the cost of the scheme low for installed capacity is a gross feed-in-tariff. Intuitively the required return for participants on this scheme is much lower than net feed-in tariffs due to the certainty of return. Provisions could be designed into the mechanism to limit the total impost on consumers if this is the major element holding such a scheme back.
Metering should not be advanced as an argument against a gross feed in tariff as metering is an extremely minor cost with respect to the overall costs of a solar power system.
2.3 How long should system owners receive the tariff for?
Noting the implicit ambiguity in returns of the proposed net Feed-in Tariff, the scheme should be designed so system owners received the tariff for longer than the expected average pay-back period of the system. Internationally, 20 years appears to be an appropriate scale for the life of these contracts. Bearing in mind that the cost of meeting this tariff will reduce as electricity prices increase, this will not impose as high a total cost on electricity consumers as many opponents may suggest.
3. Are there any other scheme design mechanisms that encourage industry to pass through cost savings?
3.1 Competition of renewable providers
Cost savings from renewable providers will implicitly be passed on to consumers through competition. For efficient competition to exist, inequities between renewable energy companies conferred by the utilities or state Government should be removed. This includes the relationship Synergy currently has with Solar Unlimited which blurs the impartiality of Synergy and may imply a guarantee to the customer that does not exist. It could be perceived as anti-competitive for a state-owned monopoly to have such a relationship.
In recognition of the technical nature of these systems and the sometimes complex forms of assistance available, we comprehensively support an active role from consumer and competition regulators that verify the quality of information, and installation of renewable systems. This quality control approach is an important part in preventing market spoiling from poor service or products. It can also be extended to distinguish those installers who do act responsibly, who would have preferential access to any state tenders.
Renewablelogic suggests that any company tendering for works that receive a feed in tariff should be a part of a regulated industry association, perhaps run by an organisation such as the WA Sustainable Energy Association. This will serve to increase quality and maintain control of the industry via means of a peak body.
3.2 Inclusion of commercial and business customers
The capital cost of a project is relative to the demand of the product in general and how efficiently it can be installed. For this reason, penetration of large jobs are very efficient in bringing the average cost of installing renewable energy down.
The inclusion of commercial customers will be of great benefit to the design of the scheme because:
- They provide a reduction in demand at feeders that are best correlated with solar production;
- Expansion of demand for renewables in general and particularly large projects will bring the average cost down and provide an impetus for local manufacturing and job creation;
- It is consistent with The Electricity Industry Act 2004. Failure to apply the scheme to commercial premises fails to meet the objectives of promoting economically efficient competition.
- It is inconsistent with the national principles for Feed-in Tariffs and would isolate WA from the rest of Australia
4 Options for scheme life
The scheme life should be ongoing, with the scheme duration fixed for each individual participant. This is consistent with our view that the tariff should relate to the average economic return of investment rather than an arbitrary target or scheme cost.
As mentioned previously, the cost of the scheme will reduce as the cost of electricity and providing peak-load demand rises.
5. Review process
Renewablelogic supports the inclusion of review periods on the basis of effective return on investment. This should not be open to influence from political expediency, and as such any review process should be approached from a multi-lateral position with a number of key stakeholders represented, including the renewable industry peak body and members as major contributors.
The review board could consider the impact of the scheme, effective economic return of system owners, suggest improvements and assess actions by any independent arbiter in minimizing network related issues. It may be appropriate for review processes to be triggered by installed capacity targets or dates, however excessive or prejudicial use of this mechanism will reduce investment certainty and hamper growth of local industry.
7. Size limits on Feed-in Tariff
The size limits of the scheme should not be the same as the current REBs program. In the interest of reducing the marginal cost of the scheme and improving equity among all consumers and producers, we can see no logic in limiting the system capacity to 5kW. These restrictions have already significantly deflected investment in renewable industry at the REBs rate. Existing REBs limits are arbitrary, and set by a quasi government organisation for their own needs, not the needs of the public.
We do however support a graduating tariff rate, so the larger the system the less each unit of electricity is worth. This lowers the overall cost of the scheme for installed capacity and recognizes that bigger systems generally exhibit economies of scale. The current Western Power rules allow for up to 10kW per phase so it is recommended that the threshold size for the first tier be either 10kW (consistent with other Australian schemes) or 30kW.
A differentiated commercial rate in parallel to a residential scheme is recommended recognizing the different contributions to reducing peak-load feeder demand, different network carrying capacity and various tax incentives available for commercial properties. It is also recommended that there be a framework for larger systems rather than the current all-or-nothing approach. This is a least-cost approach to meeting installed capacity rates and will reduce the overall system cost more rapidly than relying on small-scale residential systems alone.
8. Requisite to purchase Greenpower for imported electricity
Any conditions on the consumption of electricity for participants will reduce the return of investment. It stands to reason then that the tariff rate would have to be higher to compensate, needlessly shuffling money around and increasing the ambiguity of return for potential participants.
No extra conditions on the consumption of electricity should be placed on participants, as this effectively penalises those with renewable energy and is contrary to the national feed-in tariff principles. A recent example of these penalties are the Western Power proposal to charge differential reference services for import-related network access service fees, this contravenes the Network Access services Code which states ‘the charges paid by different users of a reference service differ only to the extent necessary to reflect differences in the average cost of service provision to the users’.
10. Should the scheme be legislated, or implemented as a non-legislated program?
The scheme should be legislated to provide certainty in return for participants that their contract will be honoured, and certainty for local industry to invest. A review process as discussed in 5. could provide some flexibility in the scheme.11. Other mechanisms that are appropriate to provide a least-cost effective scheme are as follows;
Other mechanisms
11.1 Reserve capacity mechanism
Existing market rules mean that small-scale renewable generation is not rewarded for its contribution to peak-load shedding or reserve capacity. A number of international and Australian studies have shown that PV generation does correlate well with peak demand in the Summer, which is responsible for the expansion and operation of expensive peaking plant and network feeder upgrades. Allowing aggregation of these embedded generators to access these reserve capacity credits is a solution to this inequitable situation.
Explicit consideration should be made for small-scale renewable generation which properly rewards the contribution of these systems to the network, and could be designed as a direct payment to system owners or help pay for the tariff itself. This would concurrently reward energy-efficient system owners. Such a system would also contribute toward an industry transition away from direct subsidy, by levelling some of the playing field between small-scale and large-scale/network.
Additionally, treatment of reserve capacity credits for renewable generation should also be relative to its contribution to peak-load shedding and reserve capacity, rather than its load-factor. This is especially relevant for photovoltaics which may exhibit a very low load-factor but high correlation to peak-loads when the costs of providing capacity are highest.
For example, at a reserve capacity rate of $135/kW at a 70% loading for PV, an average Perth system would earn $0.06/kWh[1] in reserve credits gross, which translates into nearly $0.18/kWh if applied to a net FiT with 1/3 exported. This would cover almost half of the difference between a 60c/kWh export rate and the standard A1 tariff.
11.2 Simplification of interconnection costs and explicit schedule for network access costs and responsibilities
Proposed new network access costs by Western Power for bi-directional services imposes a technical penalty on system owners. This appears unwarranted and the network have not provided any evidence as to the effect of small-scale renewable generation on their network. By changing any electricity consumption rates can significantly increase the ambiguity of return, reduce return on investment and must be accompanied with evidence.
Additionally, claims of network upgrade costs should be measured in the context of increasing demand rather than holding bi-directional consumers accountable in isolation. We propose an explicit schedule for network rules that determines:
- Responsibility of any network upgrades relative to system sizes;
- Publication of cost of network services to assist project proponents in feasibility studies;
- Independent assessment of technical penalties consistent with international best practises; and
- On-going independent reviews of network provisions in accommodating intermittent generation.
[1] Assuming 1600kWh/kW per year
