December 28, 2016

Who’s afraid of feed-in tariffs?

CLIMATE SPECTATOR reports: Feed-in tariffs were always set to be controversial – they turn the electricity market on its head by opening it for true competition. But they got more controversy than they deserved thanks to the mistake of green groups who only lobbied for feed-in tariffs for small-scale generators, and the incompetence of state government energy departments for managing to draft legislation that didn’t learn from the spectacular success of the German feed-in tariff legislation, the Renewable Energy Sources Act – legislation that has undergone 10 years of tweaking, overhaul and improvement.

There are two ways that a feed-in tariff will turn the market on its head. The first is through guaranteeing to any private investor/generator (be it big or small, private, bank or equity backed) that they can have a connection to the electricity grid and  a guaranteed buyer of their electricity.

Independent power producers are already allowed, in theory, to participate in the “deregulated” Australian Energy market. Some commentators even claim that our market is one of the most liberal markets in the world, but is that really the case?

For an independent power producer of renewable energy, operating under current Australian market conditions requires lining up finance, establishing a grid connection and obtaining a contract with one of these very few electricity retail companies to buy their electricity for at least 10  years.

These are called offtake agreements, and if you’re relying on bank finance, or if the people you’re reporting to are doing their job, they’ll expect this to be done in a manner which guarantees that you can pay off your bank loan, or give a healthy return to investors relative to other investment options of a similar risk profile.

As a result of this, independent power producers are forced to cosy up to the big three and beg them for a bite. And while the big three might eventually agree, after bargaining them down, they don’t have to, which makes many projects impossible to get up.

Now let’s spin to the other side of the globe. There, the markets are truly competitive for getting new generation, and in particular renewable generation, onto the grid. In total, 72 countries use feed-in tariffs.

They have achieved the bulk of the global deployment in renewables, far more than any other incentive scheme in existence. In fact, Germany now has in excess of 18,000MWe of rooftop photovoltaic solar and, within 12 months, will have the same amount of rooftop solar as the entire Australian annual average demand for electricity.

As part of Germany’s comprehensive Renewable Energy Sources Act, independent power producers can build a project, get the grid extended out (a grid connection is guaranteed) and start producing. That electricity then gets added to the electricity price stack which gives the final price for electricity at the meter.

This method for funding the offtake agreement and passing it 100 per cent through to the consumer leaves the retailer with little opportunity to manipulate the market and make more profit than it may otherwise have in a RET-style portfolio standard market.

A feed-in tariff for large-scale installation in Australia would, in fact, disempower TRU, AGL and Origin, who believe that their company’s shareholder value is not only derived from the value of their generation assets and their portfolio of customers, but also from the exclusive position they hold which ensures new entrants cannot get into the market without going through them first.

In simple terms, they don’t want the competition that a feed-in tariff brings and the loss of what they believe is a significant portion of their asset value.

What we’re seeing is the big three vertically integrated electricity retailers and generators heading the feed-in tariff bogey man off at the pass. If they let this menace through then where will it stop?

That’s how AGL suddenly transformed from being a conventional electricity retailer to a maverick of social justice campaigning when it began railing against the “regressive” impacts of feed-in tariffs, outdoing even St Vincent De Paul, the Brotherhood and the Salvos in their zeal to demonise feed-in tariffs.

The total amount of money being paid for electricity in NSW is $8.5 billion, rising above $9 billion over the next five years. The feed-in tariff would cost $140 million a year, or just 1/60th of what we’re spending on buying electricity from the old coal-dominated sector, while obtaining no additional value in driving a new clean economy.

This is not the full story though. The feed-in tariff proposed would cost $140 million but would result in a lowering of the wholesale power price. So the net cost would be closer to zero. For future installs the net cost would actually be positive, delivering a dividend to all consumers. This is called the Merit Order Effect. Of course that’s just it: the traditional coal energy giants will bend over backwards and climb any mountain to avoid competition and a reduction in their profits from a new renewable sector getting a kick start and then a hold in the market.

Solar photovoltaic has dropped in price by half in the last 24months. It’s expected to drop again by half within three years. If a feed-in tariff keeps stimulating the solar industry from its correct rate today (40c/kWh electrical) it could be weaned down to 30c/kWh electrical in three years. The traditional energy companies will then be left with no market for most of their highest priced and most profitable power – daytime intermediate and peak power.

Not only that, but much of the inflexible night-time generation of old baseload plants is barely saleable for the cost of production. With the success of distributed solar and a more rapid uptake on the back of feed-in tariffs, the generators won’t even be able to offset that by the higher prices the market affords them during the day.

Solar photovoltaics will break the back of the coal generation industry. The Big Three companies see this and are desperately scrambling to head it off at the pass with a massive lobbying campaign resulting in the attempted most extreme action of the NSW O’Farrell government – a retrospective knockback of the previous government’s sovereign guarantee, shaking the foundations of conservative government’s commitment to providing a stable platform for investment and economic
growth. Fortunately this move was rejected by the people of NSW and failed, however electricity consumers are now being ripped off for putting Solar PV on their roofs in NSW, as the value of the wholesale price suppression of PV is not accounted for with the current unregulated situation with PV feed-in tariffs.

The real fear of the big three is a feed-in tariff at all scales. For example, mid-scale projects up to 30MW with photovoltaic installations adorning Bunnings warehouses and Woolworths supermarkets being guaranteed to get a network connection and being paid as soon as they start generating.

Add to that new large-scale baseload solar thermal plants getting built with an initial feed-in tariff of 25c/kWh, driving down the cost of that technology so that within a few years the feed-in tariff has dropped to 15 cents and flooding the market with clean, renewable energy and displacing generation from the Big Three “gentrader” companies that own the existing coal and gas generation assets (remember they’re vertically integrated, owning both retail and generation).

The opposition of such energy giants isn’t new. Germany and Spain have been through this and seen very serious lobbying by the German big utilities Vattenhall, E.ON and RWE, who very publicly play their hand, claiming they will lose $5 billion as a result of the feed-in tariff over the next four years, due to a combination of selling a bit less electricity and accepting lower prices for what they do sell.

Why shouldn’t Australia use this process, as so many other sovereign nations have done, to drive renewable energy into our grid, to drive the cost of clean renewable energy down and to drive the fossil fuel generator business to its end?

We need Origin, TruEnergy and AGL to get on board, lobby for feed-in tariffs for all commercial technologies and all sizes and use what relevant market and industry knowledge they have from their 19th century power play to mobilise capital and build the renewable energy sector so that they can be a part of the 21st century renewable energy economy. Or else they will be replaced. It’s only a matter of time.

Matthew Wright is executive director of Beyond Zero Emissions


This article was first published on Beyond Zero Emissions

Beyond Zero Emissions Inc. is a not-for-profit, volunteer run organisation. Our core goal is to develop blueprints for the implementation of climate change solutions that will rapidly reduce emissions and give our society and global ecosystems a chance of surviving into the future. We also run broad-based education campaigns based on this research

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