Why Solar Feed-In Tariffs Are Likely To Fall Within 3 Years

Crystal ball

Ronald’s crystal ball says: “The future may bring lower feed in tariffs if wholesale electricity prices tumble.”

Increasing renewables will reduce wholesale electricity prices. Unfortunately that means feed in tariffs will probably fall too.

Solar feed-in tariffs – the payment households receive for surplus solar electricity they send into the grid – are likely to fall within the next three years along with wholesale electricity prices.

The bad news: a fall in both feed-in tariffs and grid electricity prices will reduce the returns from rooftop solar.

The not so bad news: solar’s value as an investment will fall from amazingly amazing all the way down to merely amazing.

I expect feed-in tariffs will drop by 2020 because I expect daytime wholesale electricity prices to fall by then. Wholesale electricity prices are the largest contributor to feed-in tariffs.  But it’s not a sure thing.  If rooftop solar received fairer compensation for all its benefits then feed-in tariffs would rise.  But this is unlikely to happen so I’m predicting they will decline. Come back here in 2020 and tell me if I was right.

Wholesale Electricity Prices Are Way High

We used to have some of the lowest wholesale electricity prices in the world.  While we couldn’t beat places like Norway with its huge hydroelectric resources, we could beat almost everyone else who didn’t have so much dam power.  Electricity was cheap to generate because of our oversupply of coal power stations, low natural gas prices, and plentiful hydroelectric power.  Direct investment in coal power and hydro by government also helped.

But Australia’s long run of low wholesale prices have come to an end.  So far this year spot prices for have averaged 8.3 cents per kilowatt-hour in the Eastern states.  This is more than twice the average in 2015. They are the highest they’ve been since we kicked off the National Electricity Market, or NEM, in late 1998.

There are three main reasons the cost of generation has soared:

  1. Domestic gas prices more than doubled after gas export facilities were built pushing prices towards international levels.
  2. We’ve started closing old, clapped out, coal power stations.
  3. Building new renewables has been retarded by the Coalition Government.

Expensive Natural Gas Means Expensive Electricity

Australia’s natural gas used to be the cheapest in the world, outside of some oil rich nations where it was considered a waste product of oil production and simply flared off.

via GIPHY

Our natural gas was cheap because it was a stranded resource, there was no way to export it. Its low price led to Australia becoming a world leader in natural gas buses and LPG1 powered cars.

But then a Liquefied Natural Gas (LNG) export terminal was built in Gladstone. Our gas could be sold overseas pushing its price towards international levels. Despite gas only powering 9% of electricity generation, gas generators often set wholesale electricity prices

The world economy is picking up, which could push gas prices even higher. But Malcolm Turnbull seems determined to reduce gas prices by fiddling with the domestic gas market, so I expect the cost of domestic natural gas to fall.

Coal Power Is On Its Way Out

From 1960 to 2000 electricity demand in Australia grew by an average of 6% a year.  Growth was expected to continue in the 21st century, but it slowed to a halt in 2009, then fell for 5 straight years, despite Australia’s growing population.  This caught the electricity sector by surprise and we ended up with excess generating capacity that, until recently, helped keep wholesale prices low.

Because of the oversupply, Australia’s last coal power station was completed at Kogan Creek in 2007 and will be the last coal power station built in this country. The cost of new coal generators simply cannot compete with renewable energy.  The average age of Australia’s coal power stations is now 33 years and they are increasingly unreliable.

Wholesale prices stayed low despite lots of coal capacity closing. But then the huge Hazelwood brown coal power station in Victoria was finally put out of our misery after 53 years of filling the air with fumes and and the lungs of its workers with asbestos fibers.  This large cut in supply was enough to drive prices up and, combined with high gas prices, has caused Victorian wholesale electricity prices to more than double.

The Coalition Has Blocked Renewables

You won’t be surprised to hear the Coalition doesn’t like renewable energy.  They have serious issues when it comes to accepting the reality of climate change and the cost effectiveness of renewables.  They love coal so much the next postal vote will be to decide if the definition of marriage should include politicians and coal seams.  Their devotion to the coal industry would be touching if global warming wasn’t touching off forest fires around the world.  They’ve always dragged their feet on renewables, but starting from the time Tony Abbott became party leader they have bent over backwards to discourage investment in renewable energy by creating sovereign risk.

To be clear, sovereign risk does not involve Queen Elizabeth playing a board game.

Risky Business

Nor is it the risk that Tony Abbott will send the Queen around to hit you with her handbag.  Rather, it was the Coalition threatening to remove support for renewable energy discouraging new private investment.  The threat was credible because the Abbott Government axed Australia’s carbon price and slashed our Renewable Energy Target by one-third.  This cut renewable development and increased wholesale electricity prices.

Fortunately, Coalition recalcitrance has been overcome – for now – and there is a mini-boom in renewable construction.  But Coalition policy has made it clear there will be no support for large scale renewable energy beyond 2020 when the the large scale Renewable Energy Target will be met2.

Zero Fuel Cost Lowers Wholesale Prices

Because solar and wind power have no fuel cost, they supply all their generation to the grid, even if the wholesale price approaches zero3.

This helps lower average wholesale prices because natural gas and hydroelectricity have fuel costs4 and will always charge at least enough to cover them.  The same applies for coal power, but because coal power stations are inflexible they will only shut down if they expect an extended period of low wholesale prices.

Renewables Reduce The Market Influence Of Gas

As more solar and wind is built, renewable energy will meet total electricity demand more often. Costly gas will set wholesale electricity prices less often and average wholesale prices will fall.

In South Australia when wind and solar production is high enough to meet state demand and when no more electricity can be squeezed down the interconnector to Victoria, wholesale electricity prices crash.  Or at least they used to before the state government started shutting down cheap wind power so it could pay expensive gas generators to keep operating, but that’s a story for another time5.

In other states, the periods in which renewables meet all demand will be brief at first, but grow increasingly common as solar and wind capacity grow.

The Clapped Out Coal Roller Coaster

Solar and wind power particularly harm the economics of coal.  The Coalition knows this and that’s why they oppose them so much.

Actually, I take that back.  There are people in the coal industry who know solar and wind power harm the economics of coal and they tell the Coalition what to do.

I have no confidence the Coalition actually understands what they are doing or why.

As solar and wind capacity expand there will be increasing periods where they force the wholesale price of electricity down to zero or close to it6.  Natural gas and hydro can easily shut down during these periods of low prices, but Australia’s ageing and inflexible coal power stations can’t and often will be forced to operate at a loss.  This eventually leads to a coal power station cutting its losses and shutting down for good.  This reduces the supply of electricity, which pushes wholesale prices up, which encourages more renewable construction, which lowers electricity prices and starts the whole cycle again.

Roller Coaster

We’re already riding the clapped out coal power roller coaster.  It was responsible for the shutdown of South Australia’s two coal power stations and contributed to the closure of Hazelwood.  The neat thing is, as renewable capacity expands, the process accelerates leading to the faster elimination of coal power7.

Daytime Wholesale Prices Will Fall The Most

Rooftop solar is by far the most cost effective source of renewable energy in Australia.  This is because it competes with the retail price of electricity rather than wholesale prices and saves on transmission and distribution costs.  With this year’s increases in electricity prices and feed-in tariffs, rooftop solar is expanding rapidly as homes and businesses take advantage of its economic effectiveness.  Plenty of large scale solar farms are now being built too.

All this new solar capacity will lower the average wholesale price of electricity during the day.  In the past we have seen renewables push the daytime price of electricity down to zero at times in South Australia and this will start to happen in other states.  First on Sundays and public holidays, but soon on normal sunny days during the week.

There are some factors that will mitigate this.  If solar farms can’t make enough money to turn a profit they will stop being built.  Also, new storage capacity, whether pumped hydro, electric cars, or stationary battery storage will help boost prices in the middle of the day.  But the average wholesale price of electricity produced by rooftop solar is likely to fall to a low level as the cost of solar continues to fall in price and its capacity expands.

Upside Risks

Upside risk is a silly name for the chance of something good happening.  Since it’s really the opposite of risk, surely a better term would be anti-risk or possibly ksir?8  The upside risk in this case is that solar feed-in tariffs won’t fall.  This could happen if I am utterly wrong about the general direction of wholesale electricity prices, but a better reason would be if solar households start being more fairly compensated for the benefits rooftop solar provides society.

In Australian politics, reducing greenhouse gas emissions is often a case of two steps forward and one step back.  Actually, I think the only time the Coalition takes two steps forwards is when they’re winding up to kick someone in the arse who is trying to do the right thing on emissions.  But the grip of the coal industry on Canberra is weakening.  While Australia’s fossil fuel farce has gone one much longer than I thought it would, when it does finally fall apart my guess is it will happen very quickly.  So while I am certain daytime wholesale electricity prices will fall, its effect on feed-in tariffs may be negated by fairer compensation for the other benefits rooftop solar provides.

But it is certainly possible we will see a reduction in both electricity prices and feed-in tariffs within a few years.  My personal feeling is political opposition to renewables is rapidly approaching its used by date and so any reduction in feed-in tariffs won’t be significant.

But I could be wrong about this, so when working out the return on your solar system, I suggest taking into account the the possibility that both solar feed-in tariffs and electricity prices may fall by a modest amount in the fairly near future.

Footnotes

  1. Natural gas is mostly methane while LPG is mostly propane and butane.  LPG is easier to use as car fuel because it is more energy dense and more easily compressed into a liquid than natural gas.
  2. Currently, the Coalition has not revealed plans to hasten the gradual phase out of support for rooftop solar that is already occurring.
  3. Currently large scale wind and solar generation will supply electricity even if the cost falls below zero in order to generate LGCs or Large-scale Generation Certificates as part of the Renewable Energy Target.
  4. The water stored in hydroelectric dams can be thought of as its fuel, even though it doesn’t burn like petrol does.  That only happens near Queensland coal seam gas sites.
  5. A horror story with no perfect solutions for anyone involved.  A tragedy of stupidity.
  6. Or potentially below zero.
  7. To replace coal power dispatchable power capacity is also required.  Dispatchable power includes includes gas, hydroelectricity, pumped hydro storage, thermal storage, and battery storage.  But solar and wind plus dispatchable power will still out compete coal.
  8. If anyone asks you who came up with this word, tell them it was Slekarb Dlanor.
About Ronald Brakels

Many years ago now, Ronald Brakels was born in Toowoomba. He first rose to international prominence when his township took up a collection to send him to Japan, which was the furthest they could manage with the money they raised. He became passionately interested in environmental matters upon his return to Australia when the local Mayor met him at the airport and explained it was far too dangerous for him to return to Toowoomba on account of climate change and mutant attack goats. Ronald then moved to a property in the Adelaide Hills where he now lives with his horse, Tonto 23.

Comments

  1. Feed in tariffs become less important as the cost of storage falls. Currently storage is hovering around $1000 per kWh of usable capacity Or more relevantly about 30 cents per kWh usable per day. A high feed in tariff makes storage less attractive. Volume and proliferation of storage will bring storage costs down progressively to the point of economic sense. If the feed in tariff falls it will improve this equation which will be a good thing. The problem with the network is meeting peak demand which domestically occurs in the evening. Solar self consumption exacerbates this with a corresponding trough in network demand during the day. Reducing the peak consumption during the evening will be the best thing to reduce pressure on the peak network demand. Ideally the cost of storage will halve from its current 30 cents per kWh per day to 15 cents per kWh per day.At that point with a daytime generation cost of 7 cents per kWh or less and a storage cost of 15 cents peretail night use would cost 22 cents per kWh which is now less than current retail rates. Daytime usage would be only 7cents per kWh. Depending on ratio between day and night use the average would be significantly less than current retail rates. At 50/50 day night use it would average 14.5 c.kWh. The mass adoption of batteries IS THE ANSWER to solving multiple issues.
    1.It will increase renewable portion of overall enerhy use
    2 It will lower the average cost of electricity to consumers
    3. It will increase return on investment to consumers
    4. It will balance out the peaks and troughs in electricity demand
    5.,it will reduce the pressure on the network and reduce expenditure
    6 It will extend the life of non renewables as an export earning commodity.
    7 It will make the FiT less relevant.

  2. Ray Tinkler says

    It’s a pity the 5th of November is now past. It would have been a good date to put gunpowder under the Coalition seats in Parliament. Can we now, since that date has departed, put itching powder ON those seats instead?

    • Go for it Ray!!…. Don’t forget we’re in a different timezone! 🙂

    • More like a different planet up here mate. Too many been out in the sun without a hat. Now if someone designed a hat with a solar panel on it and could radio or Bluetooth the power to a battery, we wouldn’t need to worry about power prices going up.

    • Is the suggestion that we put gunpowder under politicians’ seats and bloq their brains out….?

  3. Csaba Urbaniczky says

    All new gas plants can reduce their capacity easily, But how many of the remaining old fossil fuel plants in South Australia can not trottle.their capacity. And what capacity do they have?

  4. Chris Thaler says

    The FIT is relatively unimportant to average households. As long as the renewable installation at the premises is capable of regularly producing, at a minimum, enough power to equal the total daily consumption and a little bit more to offset the availability charge of “the poles and wires” then all is well.

    • Des Scahill says

      I fully agree Chris. A combination of changing your consumption patterns, doing ‘obvious’ things such as using LED globes, progressively replacing high consumption items with lower consumption ones as the opportunity or need to do so arises etc all helps. There’s lots of websites around with good tips on reducing overall electricity consumption. Do those things, then concentrate on increasing your self-consumption proportion of total usage and the rest pretty much takes care of itself.

      I’d add that avoiding the ‘latest and greatest’ technological devices can help. Do you really need a 65 inch, wall mounted ultra HD TV costing over $4000 to begin with, along with all its ‘must have’ extra add-on equipment items so you can watch TV in the toilet or elsewhere if you want to?. No mention of the power consumption in its product manual either.

    • I guess I’m not average but the SA premium fit is very important to me.
      According to AGL IQ last week I exported 93kWh and imported 8.24kWh
      At 60.3c Fit that is a good investment in anyone’s book.

      • Des Scahill says

        When did you install your system and what’s its size Woddles? Is the 60.3 cents you quote the sum total of a 44 cent Transitional FIT and a 16 cent Retailer contribution? (the days of the 44 cent TFIT portion are probably numbered)

        • The 1st array in 2000 and upgrade before the cutoff in 2008.
          2.6 kW peak and I am very tight with usage. 2028 the premium FiT ends.
          yes 44c + 16.3c from AGL

      • Des Scahill says

        Just out of curiosity, I finally managed to dig up the estimated power consumption of the TV I used as an illustration – 560 Kwh per year.

  5. What also needs to be factored in is that the cost of the equipment for solar systems is also reducing. Mainly the panels are becoming cheaper, due to increases in efficiency of the panels, improvements in manufacturing processes and increases in manufacturing volume. While the labour costs of installation are not going down, installation costs are being kept in check through increased efficiency of panels, which reduces the number of panels required for a system.
    As has also been pointed out, increasing affordability of domestic battery systems will also offset decreases in feed-in tariffs.

  6. Adam in Tas says

    Just wondering whether you on the big North Island generally have two power circuits or are most of you on gas for heating ? Here in Tasmania most of us using electricity as opposed to gas have “light and power” on one circuit and “hot water” on the other. Many use a reverse-cycle heat pump for heating which if greater than 3.4 k/w (from memory) on the heat cycle can be run on the hot water circuit. The light and power is about 25.9 cents per kw/h and 16.8 per kw/h for the hot water circuit. There is also a supply charge of 93 cents per day for the “light and power” and 17.3 for “hot water”.

    I have only had my solar up for about three months and all my solar is generated on the light and power circuit and therefore will have to pay the hot water circuit charges out of any credit I can make from the relatively miserable FIT of 8.9 cents. I have a battery which lasts me through the night as there is always about a 200 watt drain through until morning which would be mainly fridge I guess as I turn off all other appliances completely so as not have them on standby. I guess the inverter and my optimisers draw some power too.

    I am really hoping that battery prices come down significantly as I would definitely get another battery and then try to do any heating at night time with smaller convection or fan heaters on the Light and Power circuit. However with the cessation of the generous FITs in most States I reckon there will be a surge in uptake of batteries and that demand will keep the prices higher for a while – unless some manufacturer in another country starts pushing them out very cheaply. Just wish I had bought shares in nickel and lithium a while ago !

    • Yeah….a lot of people overlook the ‘Service Charge’.
      Couple of easy ideas Adam: and they do work.
      1…..build your own solar hot-water system for a couple of hundred dollars ~ or less if you look around a few tips (I’ve see ’em boil water on a good day – and that doesn’t necessarily mean a HOT day ) and add a few refinements for back-up; eg run a loop through a combustion heater….or even a small chip-heater that runs on about a handful of anything combustible for an hour or so. A lot of people in the inner suburbs used to run them just to fill the bath-tub, and one trick they used up north was to have a bucket of coral bits soaking in kerosene all day for use in the (mainly) bathroom/laundry. One lump of saturated coral would half-fill the tub, run a shower, fill the washing-machine, etc…..and NO service to property charge! (probably saved on water too: not much loss in lengths of cold pipe when the distance from heater to tap was about a foot.
      Central hub is an old HWS cylinder, with extra insulation if you want to get flash.

      • Meant to add: DON’T run your fridge at night. Get a couple of cheap solar-panels and run them all day exclusively to the fridge. Except on rare occasions your fridge will stay cold all night….until the sun rises again.
        Some extra insulation is in order too. (Works well on older fridges with the external cooling element on the back) I used to glue tongue-and-groove pine-lining on the box: matched the décor of the house, is cheap and flexible enough to fit even moderately-curved fridges.

        • Hey! my wife’s got enough jobs lined up for me now!

          • I had a wife once…..or twice?. Not much fun, but she was real handy for keeping the beer cold. Just used to give her a phone and sat her on the Esky for a couple of hours..
            No wiring, either. 😉

  7. That’s the biggest load of confirmation biased codswallop I have seen on this site.

    The rise in electricity prices correlates exactly with the rise in the percentage of unreliables *cough* Renewables *cough* in AEMO.

    People forget two very important things…first EACH and EVERY Megawatt of installed Wind/Solar MUST be backed up with a Megawatt of fast reaction gas/diesel backup generation.

    i.e. the most expensive possible power to produce.

    Secondly, EACH and EVERY Megawatt/hr of coal or gas fired electricity produced *MUST* (by law in the RET) buy an offset certificate from a renewables producer at ~$90 MW/hr, or pay the fine (a choice which has sometimes been taken) of ~$60 MW/hr.

    This has the effect of *immediately* adding a fixed cost of 9 cents per kW/hr to the production cost of coal/gas fired electricity on top of their normal costs ( as a byproduct it also ensures ~ $3 billion of profit annually goes overseas to foreign owners of wind/solar all paid for by YOU, when you get your power bill)

    As an aside, the cost of panels is about to skyrocket, due to the shortage of polysilicon in China…

    And Cobalt is the limiting factor in the production of Lithium batteries..buy shares in that…

    • Ronald Brakels says

      Average wholesale spot prices starting from 2017 and then back ten years for:

      Queensland:
      93 60 53 58 67 29 31 33 34 52 52

      And South Australia:
      109 62 39 62 70 30 33 55 51 73 51

    • CRAP!……”People forget two very important things…first EACH and EVERY Megawatt of installed Wind/Solar MUST be backed up with a Megawatt of fast reaction gas/diesel backup generation”………..Says who?

      I keep saying ‘get off the grid ~ and fuck the ‘rules’. (or simply don’t tell ’em what you’re doing.)
      One old timer used to run a 200-cow dairy ~ and his house ~ off large concrete gas-producers.
      (you’ll understand they’re not extremely polluting) which would burn ANYTHING combustible…..and the neighbours even brought him their lawn-clippings, etc.
      The gas produced was fed through a stone-aged International truck engine on blocks, which ran several (old-fashioned hence not very efficient) generators.
      I don’t think much of your attitude ~ and expect you’ve got more money than Creosus, given the way you warble on about bureaucrats and large sums of money. Most of us deal in dollars and cents ~ not in billions. Get a grip!

    • Eep, did we run out of sand and rock? Did silicon somehow slip all the way down to THIRD most abundant element in the Earth’s crust?

    • … and I guess you also believe in the tooth fairy…

      One of the least stated drivers in the SA energy debacle is due to AEMO / NEMO allowing companies like Engie to pick up a few lazy billion by NOT turning their generator(s) on. Qld has been hammered by this travesty even more than SA in terms of $$$ and wholesale spot prices. At least the SA gov is doing something about it. Personally, I would do an audit of this practice and introduce penalties of (say) ten times their excess profits – that should halt their market manipulation fairly promptly & effectively. Rationale: sometimes statistically they may be able to get away with it to a limited extent.

      Naturally total national electricity usage has flat-lined – anyone with roof top solar knows that their own “self generated consumption” is not recorded at all. In my case the average of 15kwh/day has dropped to less than 2kwh per day so the grid is showing an overall drop of 13kwh per day “for no apparent reason”.

      I am in WA, and we have our own set of incompetent bureaucrats to contend with. Simply “when the cost of battery / heat transfer / whatever storage” is lower than (say) 20 cents then 90% of the feed in tariffs will become irrelevant – either the amount paid will be enough to cover the “daily supply charge ripoff” and people will stay connected to the grid or it won’t be cost effective and expect massive grid defections.

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