Why solar feed-in tariffs are falling, and why they will keep falling.
It was no big surprise when schemes offering 60c/kWh premium feed-in tariffs were discontinued roughly a decade ago. Even with the small, low-efficiency solar panels of the time, a premium feed-in system could yield a large return for the owner, and as with everything in the energy system, someone had to pay for it (hint: it was everyone else consuming energy or paying taxes).
To their credit, those early schemes built the foundation for a solar energy industry in Australia, and with their job done, they gave way to net-metered retail feed-in tariffs set by energy retailers. With the solar industry in place, the cost of solar panel installation was still well-matched to the return from feed-in tariffs, and solar installs began to boom. Over the last few years however, feed-in tariffs have fallen steadily from above 20c/kWh, to down below 5c/kWh, depending on location and retailer. This has shifted the value proposition of solar panels significantly, and creates a lot of consumer uproar whenever the annual tariff updates roll around. Let’s talk about it.
There are a couple of sections to cover here. To try and paint a complete picture, I will run through:
- The idea of “the consumer always pays” and how money and energy interact
- Energy market forces
- Infrastructure costs
- Where this leaves consumers - is solar still worth it?
1. The Consumers Always Pay
The Australian energy system operates on the “consumer pays” model, which means that when you consume energy, you pay for the generation of the energy, as well as the transmission and distribution of that energy to get it to your switchboard. We could charge generators for those transport costs, but then they would just charge us more for the energy that they generate, so it ultimately doesn’t matter.
There is a key difference between “consumer pays” and “consumers always pay”, though. “Consumer pays” is the model the overall market runs on, but it leads to the latter idea: no matter how you try to re-organise things, consumers, as a collective, will always pay for everything involved in the energy system - a good deal for one customer necessitates that another customer must be getting a bad deal. Or, as we often see with feed-in tariffs, the best deal on feed-in comes with the highest price for grid consumption.
This idea extends to every part of the energy system - your distribution network might charge you $700 for an upgrade to a three phase supply, or $5000. It might cost them $5000 to perform the upgrade, but if they charge the lower fee, then the other $4300 is probably recouped through the network usage costs that are included in everyone's electricity bills. It’s not always you that pays, but it is always everyone that pays.
We can also look at government subsidies - governments can artificially reduce the dollars that appear on a bill, but generally this will necessitate more taxes, so you pay for your energy either way. The laws of thermodynamics tell us that energy cannot be created or destroyed, but governments certainly can print money (the last bit isn’t thermodynamics), so you have to actually build more generation to make prices go down - there are no other artificial economic levers that can work for long, and energy economics leans right into inflation. We could start to talk about whether or not the energy system should have been privatised in the first place… but we’ll leave it at:
“It’s very hard to get the privatisation genie back into the bottle” . - Alex Leemon (if I remember correctly)
Overall, just know this: the government can’t bail out feed-in tariffs, and you can only sell your energy for what someone is willing to pay for it. So, let’s look at what someone is willing to pay for it then!
2. Retailers & Electricity Market Forces
A quick summary of the energy market
The spot price of energy is set by a sort of backwards auction - a process known as economic dispatch. As a consumer, you just want to turn your toaster on when you want toast, so it would be silly to make you bid for energy before you can do that. Instead, the Australian Energy Market Operator (AEMO) models you and every other consumer as “operational demand” - the demand that must be met. Then, generators do the bidding - they bid a power output, and the price they would like to be paid to provide that output. AEMO then instructs the cheapest generator to deliver first, followed by the next cheapest, and so on, until the demand is met. The price is set by the most expensive generator that must be dispatched to meet demand. This repeats every 5 minutes, 24/7, to set a different price for every 5-minute interval. These prices can go as high as $17/kWh, or even negative, down to $-1/kWh. Yes, dollars, not cents. The energy market can be volatile and unpredictable. Remember - the grid can’t store energy, only batteries, pumped hydro and a few niche technologies can store energy, so supply and demand need to be matched in real-time to prevent blackouts.
Retailers
The job of energy retailers like Origin & AGL is to manage all of that volatility and risk, and give consumers a simplified price offer, such as a flat-rate at $0.30/kWh. Sometimes, the spot price will be beneath this and they will profit when you buy energy, and other times, the spot price will be above this, and they will lose when you buy energy. Overall, they should have sufficient energy-nerd horsepower to come out ahead, but not always. And when you sell your excess solar energy? They earn at the spot market price, too, and give you a cut - that’s the feed-in tariff. Remember - when you consume, you pay all of the network and other costs, but when you generate, you don’t earn them back because the consumer pays for those*. That’s why even if you choose a retailer like Amber Electric or Localvolts, who expose you to the market spot price, you still pay more for energy you buy than for energy you sell.
*more on this in the network segment!
So why are retailers paying an ever-decreasing amount for feed-in? Well, they’re earning a smaller amount, and in some cases paying for your exports if the spot price is negative.
The Market Price
Here is the median spot energy price for each interval in the day, over the last 12 months, in each state of the National Electricity Market (sorry WA & NT, you’re on your own, and the ACT is part of NSW here).
You can see two “peaks” - a small morning bump when everyone gets up and turns on the toaster, and then a much bigger peak at around 6pm, when it’s time to cook dinner and cool down the house after getting home from work.
In the middle of the day, prices are driven low, with a curve that largely follows solar production. This makes sense - everyone generally produces solar at the same time, and so there’s much less demand.
We can see that SA and VIC like to go into negative price territory in the middle of the day quite a bit, with QLD also getting down there too. In the last couple of months, NSW has had negative prices more than ever too, but it’s still lagging behind the other solar-heavy states.
Imagine this: It’s 1pm, The market spot price is $-0.05/kWh, and your feed-in tariff with Origin Energy is $0.05/kWh, and you’re exporting excess solar at 5kW. One hour of this would earn you $0.25, but Origin will have to pay $0.50 because they have to pay you, and pay the market operator. This is why retailers have been reducing feed-in tariffs so much - your excess solar is spilling into a market that is already free or possibly even negatively-priced.
Origin would be much happier to pay you $0.20/kWh if you were exporting solar at 6pm.
If energy is so cheap, why aren’t my consumption costs lower, too?
Unfortunately, you probably consume the most energy from the grid at the times when it’s most expensive, and it’s expensive at those times because everyone is consuming the most at those times - it’s a circular problem. Here’s a graph from 2019 (there are newer versions but I like this one) showing what AEMO had forecast for operational demand (load, after rooftop solar is taken into account):
This is the infamous “duck curve” that you’ll hear energy nerds talk about. This shows that the ongoing trend is less operational demand in the middle of the day, and slightly more demand at night time. What this means for retailers, is that even though it’s pretty much free to serve energy to their customers during the day, it’s getting more expensive to serve them at night, so when they come up with a flat-rate tariff that they think will be sustainable, they end up padding it out to cover the fact that if you have solar, you probably won’t buy any energy during the day, but you’ll buy plenty at night.
There’s still a case for critique of retailers here though. While some innovative retailers have started offering free or very cheap energy periods in the middle of the day, many still don’t pass on the low daytime costs to their customers, which is a shame. Even if they aren’t going to pay me much for my solar, I would like to think that my solar-less neighbour could see the financial benefits of a cheap daytime market driven by solar energy.
One reason for retailers lagging in this area is that Time of Use electricity tariffs, where prices vary throughout the day, are usually initiated by timings set by the distribution networks, which haven’t really created cheap daytime periods until recently. So, let’s move on and explore the distribution side of this feed-in tariff tragedy.
3. Infrastructure, and Distribution Networks
We’re right in the middle of a big transition in the distribution network service provider (DNSP) space, so I’m going to start with what their model looked like 3 years ago, and then explain the changes that have started to take place.
The distribution networks do not participate in the energy market. They don’t generate, and they don’t consume, all they do is maintain and operate the infrastructure that transports energy from one place to another. As a result, they do not pay feed-in tariffs* because they have little use for energy. Feed-in tariffs come entirely from retailers. People often think DNSPs earn their money from the daily supply charge on your bill alone, but that’s not true - a component of the supply charge does indeed go to the DNSP, but they are also part of the volume-based (energy) costs too. Since they aren’t part of the market, they set their prices based on a different set of goals - their short and long run marginal costs to operate the network. In normal speak - they want to make sure they recoup enough money to replace broken power lines, transformers and other gizmos. Their pricing is heavily regulated and periodically approved by the Australian Energy Regulator (AER), to protect consumers from being gouged by these monopolies, so they have to carefully justify their pricing.
*OK grid nerds, there are some exceptions to this, and this has changed now for some networks - remember, we’re starting from the model they had 3 years ago, we’ll get up to speed shortly…
Networks: The Many-Toasters Predicament
To understand how they justify pricing, let’s look at the network infrastructure itself, with a familiar example. Your house has circuit breakers. If you plug in too many toasters and turn them all on, the circuit breaker for your wall sockets will trip, turning off all the sockets. Why? Circuit breakers are a protection device. A water pipe will carry less water if it’s too small, but an electrical cable will just keep carrying more and more electrical current until it melts or bursts into flames, which is no fun if it happens in your ceiling cavity. Therefore, we put circuit breakers in, so that things switch off before sparks fly. The network has the same kind of setup, at a bigger scale, with a lot of more complicated components, but the principle is the same - every wire has a limit to how much current it can carry before things go wrong.
One way to handle the many-toasters predicament is to put in bigger cables, and a bigger circuit breaker to match. This allows for peak-toast-making to occur without issue, but it’s very expensive. In the industry, we call this “gold-plating” the network. If we do this everywhere, network tariffs need to rise dramatically.
Another idea is to take turns, only turning a couple of toasters at a time, waiting for them to finish, and then turning on others, to stay below the limit of the circuit breaker. This is free, but either requires coordination or randomness across a population - for example, me and my neighbour probably both run our toasters between 7am and 8am, but it’s unlikely we’ll both run them at exactly the same time. With a whole neighbourhood, we can smooth out the peak load over a peak hour. However, if we get it wrong and coincidentally happen to all turn on our toasters at the same time one day, we’re going to have a blackout - not because there’s not enough energy in the NEM, but just because we overloaded a cable or transformer that serves our street.
In reality, networks take a managed-risk middle road, where they try to make sure reliability is high, but without gold-plating everything. One method they came up with for this is the Time of Use tariff, where energy is more expensive at certain times of day. This encourages people to shift loads that they don’t need to run at 6pm to another time, and that means the network doesn’t need to build up the infrastructure too much - I can make my toast at 7am, but I’ll wait until 10am to run the washing machine. Demand tariffs are another attempt to handle this in a different way (penalising you for the maximum number of toasters you run at once), but they come with their own issues and consumer impacts (probably deserving of another blog post).
Solar Panels: The Anti-Toasters
So what does this have to do with solar feed-in rates?
In an ideal world, if people mostly self-consumed their solar and only tiny amounts of energy needed to be exchanged between homes, we could have cheap low-throughput network infrastructure to handle it.
In reality, the networks also have to handle all the excess solar that households export. If everyone heads off to work on a sunny day, then plenty of suburbs can turn into net-generators instead of consumers, and networks need to transport that energy back to where there is load. That’s easier said than done - the networks are old and were designed for power to flow a particular direction efficiently. Backwards powerflow is much less efficient, and that lost energy? It turns to heat in the wires and transformers that carry it - not good. Even worse, as we saw above looking at the energy market and operational demand, there are ever-fewer places that need the energy in the middle of the day, so it becomes increasingly challenging for networks to offload all the excess. In the worst case scenario, tariffs no longer matter, and it’s up to the solar backstop mechanism or fancier tools like Dynamic Operating Envelopes to prevent blackouts.
This is what has led to the “sun tax” - DNSPs introducing network tariffs that charge customers for exporting solar. This has created a lot of anger, but it’s important to understand some of the other reasons they would want to charge for exports. At the surface, this is a break from the “consumer pays” model that the electricity system normally follows, because it applies a charge to generation, but only on the distribution system - not the large generators connected to the high-voltage transmission system. A detailed breakdown of the regulatory changes that allow export charges was published by Localvolts, if you want to dive in a bit more.
There are lots of opinions on this, but here is my perspective. Many houses now have a solar export peak (in kilowatts) that is greater than their import peak. This means they require a bigger wire (more network capacity) when exporting that importing, so the cost of maintaining the network to service them is driven by their solar, not their load, but the old model only charged them for load. Additionally, network capacity for solar has been gobbled up for “free” for many years by those who own a home and could afford solar panels. These households can then self-consume to avoid paying network charges - even better if you add a battery - but the cost of operating & maintaining the network doesn’t actually fall that much. This creates a socioeconomic problem, where vulnerable households are unable to get away from rising energy bills, and DNSPs have to pass more of their costs onto those vulnerable households in order to continue maintaining the network. This makes charging for using the network to export solar a necessary evil.
It sucks to have an export charge added, but most of these charges are tiny compared to consumption charges. Many DNSPs have created offers which now also pay an extra feed-in reward at certain times of day, to try and encourage people to reduce their peak export. There are also initiatives that may change the network cost landscape significantly. Reposit Power partnered with Ausgrid to pioneer Project Edith, which uses dynamic network prices rather than fixed network tariffs, which can indicate the needs of a customer’s local network on a particular day and at a particular time. This means that the price can reflect things like weather - yes, there are export penalties on sunny days when everyone is exporting, but if it gets hot and lots of air conditioners turn on, then there are also rewards. Cloudy days? Small rewards. Evening peaks? Big rewards if you have a battery. The idea is that flexible & responsive devices should be rewarded for helping out. One of my colleagues made an excellent post about this on LinkedIn.
4. Conclusions: Where does this leave residential consumers?
If you’ve read through everything above, hopefully you can see now that there are multiple pressures driving the value of solar feed-in down, and it’s not going to stop any time soon.
Many people say to maximise the size of the solar system you install. I think this still holds, within reason. If you put a huge system on but can’t self-consume from it and don’t have a battery, you will no longer get enough return from feed-in tariffs alone to cover your investment, so don’t do it. Remember, a typical solar sales business makes more money when they sell more hardware, so be wary of how they calculate the benefit to you. With that said, a large chunk of the cost is getting a team on the roof, installing rails and running cable, so the additional cost of each extra panel is minimal. Even if you aren’t targeting exports, a large system will still perform reasonably well in winter, when the sunshine is least powerful - I give this advice for Canberra often, where heating load in winter is more costly than air conditioning in summer.
It has been said a million times, but increasing self-consumption is an excellent way to recoup your solar investment. If you’re struggling to do this in your household, a battery may be the key, allowing you to shift your self-consumption to non-solar hours. You might be thinking “if energy has a negative price during the day, why aren’t there more big batteries being built to resolve this?” - and there are - but big batteries typically rely on being connected to the transmission system, which has its own energy transition challenges, so the opportunity right now is primed for residential batteries.
All of this increasing complexity in the energy system is why we came up with the Reposit No Bill product - we know how to trade energy, control solar exports, and manage risk, so that regular consumers don’t have to.
Remember how I said to be wary of how solar sales businesses assess your energy needs?
We recently launched a free tool which uses your smart meter data to assess whether solar, solar & battery, or a No Bill system is the best choice for your household. Why would our tool be better than someone else’s? Because if we sell you a No Bill system, we’re on the hook for bills for seven years, so we want to make sure we size up household energy needs as precisely as possible, to ensure eligibility and the best possible design. Check it out here: https://info.repositpower.com/reposit-free-home-energy-assessment
Marlon is an Operations Engineer. Reposit Power is a an Australian energy technology company that helps households completely remove their energy costs, and applies technology to guarantee those costs won't come back.
