The Victorian government has just made a move unprecedented in recent Australian solar history – they have moved to mandate a higher minimum solar feed-in tariff rate than what was previously on offer. From 1 July 2017, the new mandatory minimum rate for solar fed into the grid will be 11.3c per kilowatt-hour (kWh), up from 5c/kWh the previous year.
Why the increase?
The overarching trend over the last few years has been for states to reduce solar feed-in tariffs and/or remove mandatory minimum payments. The NSW and Queensland regulators, for example, haven’t mandated any minimum rate for years; instead, they leave electricity retailers to compete for solar customers with voluntary rates on an open market, with only ‘benchmark’ recommendations to light the way. South Australia recently did away with its mandatory minimum (the RFiT) as well.
Over the last two years in Victoria, the Essential Services Commission incorporated only wholesale electricity prices (i.e. the cost of ‘raw’ electricity on the National Electricity Market) and various avoided costs into their formula for determining solar feed-in rates. The first component comprised the vast majority of the feed-in tariff value (4.6c/kWh in 2016), while the latter odds & ends contributed only 0.4c/kWh.
Two things have changed in the ESC’s most recent determination. Firstly, they’ve forecast the wholesale electricity price at 8.1c/kWh. Secondly, they’ve added a new component that accounts for the ‘avoided social cost of carbon’ (which you can read more about in section 2.2 of the ESC’s final report). The regulator has put this component at 2.5c/kWh, bringing the full total to 11.3c/kWh.
Great news for Victoria’s solar homes
This is unequivocally good news for Victorians with pre-existing solar systems (but no generous feed-in tariff) and households thinking about going solar. At present the highest rate voluntarily offered in the state is 10c/kWh, but most retailers offer about 5-6c/kWh.
The higher rate will help to decrease solar PV system payback periods by about nine months, according to some rough calculations undertaken using our Solar System Payback Estimator Tool. In reality, however, outcomes will depend on a number of factors – most importantly the proportion of the solar energy used directly by the home (‘self-consumption‘). Even with the new, higher solar rate, households will still generally be better off using the solar energy themselves, but it will be slightly less crucial than under the older, lower rate.
The two tables below compare payback periods for 3kW and 5kW solar systems on the 5c/kWh and 11.3c/kWh rates, and under two solar self-consumption scenarios (50% vs 70%). As you can see, payback periods are shorter for the 70% scenarios than for the 50% scenarios, and the new, higher rate has less of an impact for homes that use most of their solar energy in the first place (n.b. achieving 70% self-consumption may require some extra effort, a solar hot water diverter or an automated energy management system).
Not-so-good news for retailers & market innovation
While the new minimum solar rate is unequivocally good for solar system owners, there is also the concern that the higher rate will stymie competition between retailers, and hamper innovation around creative ways to value solar & battery energy export into the grid (e.g. retailers who offer plans deploying Reposit Power’s GridCredits). Additionally, the costs of the rate increase are likely to be spread across non-solar customers on the retailers’ books – a ‘cross subsidy’ which may not pan out well with all voters. (Read more about the negatives in the Australian Financial Review – subscription only.)
© 2017 Solar Choice Pty Ltd
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