Chapter 2
Feed-in tariffs and energy policy issues
Why have feed-in tariffs?
2.1
During its inquiry into the Save Our Solar (Solar Rebate Protection)
Bill 2008 (the SOS inquiry), the committee heard a lot of evidence supporting
the adoption of feed-in tariffs (FITs).[1]
They were supported by industry manufacturers, retailers and installers,
customers, NGOs and governments.[2]
Although virtually all stakeholders participating in both that inquiry and the
present one supported a FIT, they often put forward different reasons in
support of this type of policy measure.
2.2
Some submitters argued for a FIT because it reflects the full costs and
benefits of producing energy. They argued that current energy pricing
mechanisms omit benefits such as reduced atmospheric pollution, increased
employment and avoided network infrastructure costs.[3]
Current prices also do not accurately value solar power in particular, which can
provide generation capacity at times of peak demand. Existing energy retail
customers generally pay a flat retail tariff for power, however 'a flat
averaged retail tariff does not reflect the value of supplying energy in the
middle of the afternoon when it is at its highest demand'.[4]
2.3
In addition to correcting market failure, it was argued that a FIT could
in fact reduce energy costs to consumers, through 'reduced wholesale
electricity prices [and] avoided network augmentation' costs.[5]
2.4
Many submitters argued that a FIT would ensure the growth of Australia's
renewable energy generation capacity generally, and photovoltaic capacity in
particular. This was often linked to a desire to see greenhouse gas emissions reduced.[6]
The World Future Council described FITs as 'the most effective tool for
accelerating the rapid, low-cost, technologically-diverse deployment of renewable
energy'.[7]
2.5
Some saw the role of the feed-in tariff as supporting renewable energy
industry maturation. SunPower Corporation Australia for example suggested:
It is clear that the lack of a national feed in tariff (net or
gross metered) is the key impediment to the development
of a large scale renewable energy industry, particularly one using solar
photovoltaic technology.[8]
2.6
BP Solar, one of Australia (and the world's) largest solar energy
companies, made the argument well:
BP Solar recognises that if least cost carbon saving is the only
objective, then Governments would never adopt or introduce renewable energy
policies, but rather simply rely on achieving carbon reduction through Emission
Trading Schemes.
However, if the objective is to create innovation to overcome
the market failure that prevents long term carbon saving potential like solar
from developing, then there is a justification for targeted intervention to
differentiate between technologies – otherwise the cheapest, wind, will
predominate.
...
This [is] not about “picking winners” but recognising in the
case of solar PV there is a market failure that needs to be overcome with
explicit price support which creates growth opportunities and in tandem proves
up the technology, drives down costs, diffuses the technology and makes it
accepted.[9]
2.7
Dr Prest drew on international experience to suggest that bringing
renewable energy technologies to market maturity was an important role for FIT
policies:
Australia should have a look at some of the niches that might
exist in terms of what a feed-in tariff can do for a whole range of different
technologies, and scientists have a lot of interesting ideas that they have
been working on. These measures can assist to bring the further-from-market
technologies closer to the picture in order to become cost competitive
especially under an ETS.[10]
2.8
The committee also noted that Garnaut's Climate Change Review was
supportive of FITs to counteract market failure in the energy supply and
distribution sectors,[11]
while researcher Miguel Mendonca also identified market failure issues as
reasons to introduce FITs.[12]
2.9
While FITs can have a role in counteracting market failures, their
primary purpose is as a temporary mechanism (with a duration typically of
around two decades) to facilitate the maturation of leading edge renewable
energy technologies, assisting their transition to being competitive energy
technologies.[13]
Economic efficiency
2.10
While there is widespread support within the renewable energy sector for
FITs, some concerns about these policy instruments have also been raised. EnergyAustralia
queried how a FIT would interact with other renewable energy policies,
particularly the Mandatory Renewable Energy Target (MRET) and an emissions
trading scheme. While it emphasised that it supported policies to increase the
use of renewable energy, EnergyAustralia suggested that a FIT may be an
inefficient means of securing greenhouse gas emissions reductions:
In contrast, under the proposed feed in tariff scheme, a price
is set for renewable generation without taking into account the relative cost
effectiveness of the technology. Under these circumstances, low cost renewable
generators would not be able to gain a competitive advantage over more
expensive renewable generation. This would result in a market distortion and
higher average prices for consumers, relative to the MRET, for the same level
of greenhouse gas reductions. In addition, by setting the price for a period of
20 years, the scheme would lock in this market distortion and would not provide
ongoing incentives to reduce the costs of producing renewable energy.[14]
2.11
The committee recognises EnergyAustralia's concerns. However, FITs would
not normally be set 'without taking into account the relative cost
effectiveness of the technology'. On the contrary, the committee believes that
international experience shows that tariffs have been set, and varied, in order
to respond to technology costs, deliberately to try and enhance their cost
effectiveness.[15]
The committee believes the need to carefully set tariffs is the reason for the
bill's proposed new sections 34(D)(4) and 34(D)(13), which would facilitate
setting tariffs so as to avoid the problems foreshadowed by EnergyAustralia.
This is discussed further in chapter 3.
2.12
The committee acknowledges that some of the technologies that would be eligible
for a FIT are not the cheapest renewable energy generation options at present.
This is agreed by many of the businesses that are developing and selling these
technologies.[16]
The argument is that this is the very purpose of FITs: to assist in bringing the
most advanced renewable energy technologies to a cost-competitive position in
energy markets a decade or more from today.
Economic equity
2.13
During development of the ACT's feed-in tariff, the ACT Council of
Social Services (ACTCOSS) pointed out that feed-in tariffs have the potential
to be socially regressive because:
low-income households spend a higher proportion of their income
on energy, meaning that even a proportionate increase in the price of energy will
disproportionately disadvantage low income households. We also agree with the
statement that low-income households have less capacity to respond to price
signals, as their household use of energy is often dictated by the energy
efficiency of their home, which are more likely to be rental accommodation,
including both private rental and public housing.[17]
2.14
When a FIT was introduced in Victoria, the St Vincent de Paul Society
expressed concern about the economically regressive nature of the policy. The
Society argued that it was regressive in two ways: home renters would be
subsidising home owners, and the asset poor would be subsidising the asset
rich. In addition, the extent of the subsidisation will increase as carbon
pricing raises the cost of power consumed by those without the resources to
install renewable energy generating systems in their homes.
2.15
St Vincent de Paul made another point of concern to supporters of
renewable energy:
In addition to introducing a socially regressive tax, the
proposed feed-in tariff effectively double-charges those who are already
purchasing green-energy products.
This double-charging occurs because the increased energy charges
required to fund the tariff will also apply to those households already paying
a premium; households that have purchased green energy, such as energy from
wind turbines, through their energy retailer.
In effect, the feed-in tariff double-charges this group for
green energy.
Not only is there an argument that there is double-charging to
this group, there is the potential for this to result in a decline in the
take-up of market-initiated green energy. Fewer households may sign up to green
products, believing they are already purchasing some form of green product
through the feed-in tariff levy.[18]
2.16
Advocates of FITs have pointed out that even the world's most extensive FIT
program in Germany, which has resulted in the installation of thousands of
Megawatts of installed photovoltaic capacity, has resulted in only a small
increase in general household power bills of around 2.2 Euros per month.[19]
This represents around 3 per cent of household energy bills, and this
proportion is falling.[20]
Feed-in tariffs, energy policy and climate change policy
2.17
Australian governments are taking a range of actions aimed at supporting
renewable energy, reducing greenhouse gas emissions, and regulating the energy
sector. FITs would sit alongside these policies. The relationship between FITs
and other renewable energy and greenhouse emission reduction policies is an
important one.
2.18
The committee recognises that it is desirable that the range of policies
is coordinated and ensures harmonised action in support of policy objectives. There
are several policies that will support the transition to a low-carbon economy.
These include: the introduction of an emissions trading system; the maintenance
and expansion of a Mandatory Renewable Energy Target; the implementation of
measures designed to 'assist Australian households in the transition to the
Carbon Pollution Reduction Scheme'; and grants and rebates directly supporting
the installation of renewable energy sources.[21]
2.19
The Carbon Pollution Reduction Scheme (CPRS) or emissions trading
system, has the aim of reducing harmful carbon emissions through introducing a
cap on carbon pollution and requiring industries to gain a permit for each
tonne of greenhouse gas that they emit. There will be an annual cap on permits
each year. At the same time, these permits may be traded, encouraging industry
to either pay a high price for a permit or reduce their emissions.[22]
Because the carbon pollution reduction scheme will concentrate
on the biggest polluters, it will place obligations on around 1000 Australian
companies in total – those that produce more than 25000 tonnes of carbon
pollution each year.[23]
2.20
The term CPRS has been used interchangeably with Emissions Trading
Scheme or system (ETS) by participants in this inquiry.
2.21
In 2001, a Mandatory Renewable Energy Target (MRET) scheme was
introduced. Its current target is to ensure that 20 per cent of Australia's electricity
supply comes from renewable energy sources by 2020. The MRET underpins a market
in Renewable Energy Certificates (RECs), which are a form of electronic
currency established under the Renewable Energy (Electricity) Act 2000.
These are currently available to owners or operators of eligible renewable
power stations and owners of eligible small generation unit installations.
Small generation unit installations include the following technologies:
2.22
RECs play almost no role in the development of photovoltaic or solar
thermal power: in 2006 only 0.04 per cent of RECs were for solar electricity,
with the majority being issued for wind energy, solar water heaters and
landfill gas generation.[25]
The Council of Australian Governments (COAG) is currently working towards
implementing a renewable energy target (RET), that 'will bring the MRET and
existing and proposed state and territory targets into a single national RET
scheme'.[26]
A discussion paper has been released on design of the RET.[27]
The RET effectively comes under the umbrella of the CPRS.
2.23
The Australian Government currently offers up to an $8,000 rebate to
households with a taxable income under $100,000 for the installation of a solar
photovoltaic system under its Solar Homes and Communities Plan[28].
A rebate for the installation of solar PV has been available to households
since 2000, although the rebate has varied in amount over the period.
2.24
In addition to these measures some state and territory governments have
policies and programs that are directed toward reducing greenhouse gas
emissions and encouraging renewable energy generation. Most relevant to this
inquiry are existing feed-in tariff regimes in the Australian Capital
Territory, Queensland, South Australia and Victoria. These were briefly
outlined in chapter 1.
2.25
Energy utilities may also have commercial programs to encourage
customers to use renewable energy. These programs may or may not rely to some
extent on government support for renewable energy. EnergyAustralia for example indicated
that it was:
-
...the first utility in the world to mandate interval metering and
Time of Use tariffs for all new and replacement meters.
-
We have been on the forefront of demand management initiatives,
implementing more demand management projects than any other Australian
distributor.[29]
2.26
Considering the diversity of renewable energy policy instruments already
in place, there was remarkably little doubt amongst stakeholders that FIT
schemes are a valuable addition to the policy mix.
2.27
The Australian Industry Group (AIG) has argued that, with the decision
to implement an emissions trading scheme, other renewable energy policy
measures should be phased out, not expanded.
Ai Group maintains that the Carbon Pollution Reduction Scheme
(CPRS) should be designed to meet Australia’s emission reduction target. A CPRS
that does this will generate incentives that will favour low-emissions energy
at the expense of other energy sources... In the context of Australia’s overall
direction on climate change policy... it would appear that [the] better national
approach for the Commonwealth to take would ensure that existing renewable
energy initiatives were wound back rather than extended.[30]
Aside from AIG's reservations, however, the committee's
evidence strongly favoured the adoption of a FIT, either to complement other
existing policies, or as a more efficient substitute for other policy
mechanisms, such as rebates.
2.28
The committee heard expert evidence that a CPRS, while desirable, is not
sufficient to meet the need for policies that will create a successful response
to the challenge of climate change:
In terms of policies, there are no likely magic technology
bullets or some sort of thing that is going to solve all our problems. There
are no magic bullets in policy either, and that includes emissions trading. Why
would we expect that a price signal on emissions would be able to achieve all
the changes in transformation that we need to see in order to address climate
change? We do not have the expectation in any other really serious area of
policy development that a single price signal can do it.[31]
2.29
A number of submitters argued that existing policy mechanisms are not
adequate. The Alternative Technology Association (ATA) argued that MRET and
other schemes do not adequately value photovoltaic systems and the energy they
produce, and that a FIT was necessary to fill the policy gap left by other
government programs.[32]
Dr Prest argued that ideally a FIT would replace tradeable certificates that
result from the MRET, but that a hybrid of the two would also work.[33]
2.30
Experts, NGOs and industry representatives all drew on international
experience to indicate that policies other than feed-in tariffs would not, on
their own, be sufficient. Researcher Dr Iain McGill commented:
With the expanded MRET here, we now have a serious target, and
we should not underestimate the challenges for MRET to actually deliver on that
target given that we also see changes in the circumstances; our electricity
industry infrastructure looks to be getting increasingly stressed and the
structure of the players within it is also changing. So the feed-in tariff
experience with different feed-in tariffs in Europe for wind—onshore wind and
offshore wind—and so on has to be seen in that light. The Europeans have looked
at green certificate schemes and they have a lot of questions about them.[34]
2.31
Greenpeace International's campaign director on renewables, Mr Teske, made
a related point:
In the past 10 years, emissions trading did not contribute at
all to the acceleration of renewable energy within the EU for two reasons.
First, an emissions trading scheme fluctuates, which means that there is no
reliable payment for producers of renewable energy. That means that it is a
very insecure mechanism and therefore nobody will invest for such a short-term
profit—not even a profit. Secondly, the amount of money per tonne is just not
high enough to make it interesting for investors. That might change at the time
when the industry is competitive, but I would say that for the next 10 years
feed-in tariffs are still needed.[35]
2.32
Representatives of renewable energy producer BP Solar reached similar
conclusions using different evidence:
Mr Jackman—A trading system such as the CPRS will support lowest
cost technologies. Because of the market failure that exists at the moment for
solar PV, the CPRS will not of itself overcome that. I will quote from the
Stern report, which is included on page 17 of our submission. Stern actually
says:
Comparisons between deployment
support through tradable quotas and feed-in tariff price support suggest
feed-in mechanisms achieve larger deployment at lower costs.
He goes on to say:
Central to this is the assurance of
long-term guarantees.
That is a useful summary from Stern.
Mr Vigneswaran—We certainly think that in the early years of an
emissions trading or carbon pollution reduction scheme that carbon prices will
not be high enough to drive the investment required for solar at the large
scale that is required to reduce the cost and to build the level that is
required in the industry.[36]
2.33
Moreland Energy Foundation argued that a FIT would help rather than
hinder other policies, again through the targeting of particular sectors:
by creating an incentive for households, small-medium businesses
and community enterprises to participate in the shift to a decentralised, low
carbon energy network.[37]
2.34
The committee is aware of a range of views about the cost, and
cost-effectiveness, of different policies targeted at carbon emissions
reduction and renewable energy generation. EnergyAustralia thought that a FIT
would not be cost effective.[38]
2.35
Other recent studies however suggest that FITs can be cost effective
compared to tradable permits or certificates. A recent analysis comparing
German and UK renewable energy support mechanisms suggested that Germany's
feed-in tariff was delivering renewable energy at a lower cost per
kilowatt-hour than the UK's tradeable certificates.[39]
2.36
Professor Blakers argued that FITs are better than capital subsidies
(such as rebates):
A FiT is a far better method of supporting the PV industry than
a capital subsidy such as [Photovoltaic Rebate Programme] PVRP.
Large capital subsidies for PV fail to discourage the use of
cheap, short-lived PV modules. Such modules could out-compete more reputable
brands if there was a capital subsidy, but would fail to develop an improved PV
industry.
Large capital subsidies for PV fail to discourage poor
installation (eg partially shaded) by shonky installers
In contrast, a FiT provides a strong incentive for households to
purchase and maintain quality systems in order to reap on-going financial
benefits from a long-lived system.[40]
Committee view
2.37
The committee believes that the evidence internationally indicates that
FITs can be an effective means of driving industry cost reduction and increasing
installed renewable energy generation capacity, through offsetting of
installation costs of renewable energy generators. It did not receive evidence
that FITs cause significant regressive effects through higher energy costs:
even large-scale FIT schemes appear to have minimal price effects on all
consumers' energy bills.
2.38
However, while there was wide support for FITs in general, there are a
number of issues, outlined in chapter 1, that have to be addressed if a FIT
scheme is to be effective. This is particularly important to achieving national
consistency, given that some states and territories already have schemes in
place.
2.39
Given the complexities involved, the committee believes that the current
process of negotiation through COAG to achieve a nationally consistent FIT
framework is the appropriate one.
Recommendation 1
2.40
Noting strong industry, consumer and government support for FIT schemes,
the committee recommends that the Commonwealth government, through COAG, work as
quickly as practicable to implement a FIT framework that is as far as possible
nationally uniform and consistent.
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