Lessons learned from the NSW Solar Bonus Scheme: An academic view

While last year’s debacle with WA’s feed-in tariff is already resolved, was still a reminder of the history that this policy mechanism has had elsewhere in Australia. The WA feed-in tariff, after all, was a program whose popularity caused it to quickly expand to a point that it had no chance of keeping within its budget over the course of its lifetime. This popularity is in turn rooted in the generous 40-cent-per-kilowatt-hour incentive rate initially on offer through the scheme; the government underestimated just how much appealing the incentive was to investors.

A paper published not long ago in the academic journal Energy Policy written by Professors Nigel Martin and John Rice (of ANU and Griffith University, respectively) examines the fate of the WA scheme’s counterpart in NSW–the Solar Bonus Scheme. NSW’s Solar Bonus Scheme ran a similar as the WA feed-in tariff, but in nearly every event more extreme than that of WA. Both schemes offered generous rates which set off a massive solar system installation boom and both schemes are slated to run over their allotted budgets. Now, they have also both been (ultimately unsuccessfully) threatened with retroactive reduction to mitigate their impact on state budgets.

The article, The solar photovoltaic feed-in tariff scheme in NSW, Australia, which the authors penned in hope of informing future feed-in tariff policy design, is a balanced look at how events transpired with the scheme, revisiting the NSW government’s original modelling to see where expectations diverged from reality. Feed-in tariff schemes, the authors note, are ‘key enablers’ of renewable energy supplies across the globe, but that results may be ‘less than ideal’ if they are not designed properly. Indeed, feed-in tariffs are what have driven the growth of the solar PV and renewable energy industries not only in Australia (which was by no means the first country to introduce such a scheme), but also in Europe (notably Germany and the UK), certain US states, China, and Japan, among others.

NSW’s Solar Bonus Scheme: What went wrong?

NSW’s Solar Bonus Scheme did not fall into the category of a ‘well-designed’ FiT, a fact that precludes the question of whether it could be effectively implemented. In line with the report produced in 2011 by the NSW Auditor General about the scheme, the article by Dr Martin and Dr Rice points out a number of the scheme’s failings. Among these were the fact that no market analysis was undertaken to estimate potential investor buy-in to the scheme, the lack of even ‘elementary’ operational controls, the overly generous nature of the 60c/kWh rate offered (despite warnings from the Sustainable Energy Association and others that it was too high), and the assumption that the average capacity of an installed system would be only 1.5 kilowatts. All of these factors contributed to the scheme’s now infamous billion-dollar budget blowout.

Despite its shortcomings, the authors nevertheless say that the scheme was a ‘resounding success’ in terms of how it sparked growth in uptake of distributed energy infrastructure in the state. Interestingly, the failures seem to give the best indications of the scheme’s success. In the government’s modelling prior to the scheme’s introduction, the purposefully optomistic, ‘high-uptake’ scenario estimated that about 72,000 homes would have a solar system installed. In reality, twice as many–over 160,000–ended up going solar under the scheme. Furthermore, the average system capacity was more in the range of 2.3kW than 1.5kw, showing just how eager people were to make the investment despite the high upfront cost of installing a system at the time (when prices were closer to $4-$5 per watt).

How to design a better feed-in tariff

The article’s authors neatly summarise the lessons learned from the case of NSW and translate them into solid advice points for any government thinking about introducing a feed-in tariff.

  • Feed-in tariff schemes must be ‘actively managed and contained’ so as to keep them within budget;
  • They should have a ‘set of controls’ so that governments can make adjustments large and small as needed, including caps on scheme & system capacity, not to mention expenditures;
  • Schemes should at all stages ‘reflect the costs’ of distributed energy systems such as solar PV, with plans to reduce FiT rates as appropriate and eventually transition into a non-subsidised scheme;
  • Wherever possible, state schemes should be ‘harmonised’ with federal schemes to head off conflicts and maximise outcomes; and
  • FiTs should be ‘integrated into electricity retailer and distributor business strategies … tak(ing) account of the distribution and retail segments of the electricity industry supply chain’.

In retrospect, many of these points appear obvious, but may never have been consolidated in such a easy-to-understand way if not for the scale and high-profile nature of the Solar Bonus Scheme debacle. Indeed, it seems that other states with feed-in tariffs–particularly Victoria and South Australia–did more or less adhere to the principles prescribed above, possibly learning from NSW’s example along the way.

The residential solar situation: Where are we now?

Wherever they can be found in Australia, feed-in tariff incentives were originally introduced with the intention of spurring distributed renewable energy system uptake, and have been massively successful in doing so. Fortunately, all the while and through the tumult, solar PV system prices have been coming down, making such incentives less and less necessary in sweetening the business case of for going solar–for both homes and businesses.

This is not to say that the solar industry and solar customers would not benefit from some kind of guaranteed minimum feed-in rate. In fact, this would help immensely by making the investment attractive even for those whose homes are unoccupied during the day. (And who’s to say that it’s not warranted, considering the substantial subsidies that the coal industry receives?)

Nevertheless, the fact that solar PV installation numbers continue to grow indicates that there are many who find the proposition enticing enough to act. And it is in no small part thanks to feed-in tariffs that ordinary homeowners across the country now think of solar power as a way to save money as opposed to an option only for off-grid homes or as ‘green bling’ for those who can afford it.

© 2013 Solar Choice Pty Ltd

James Martin II