COMMENTS ON QCA REPORT ON FEED IN TARIFFS

These are some brief comments on the Qld Competition Authority (QCA) report “Estimating a Fair and Reasonable Solar Feed-in Tariff for Queensland” (March 2013) Table numbers are QCA report table numbers.  Key findings were:

1. The report admits that it was only concerned with being fair to the retailers, not rooftop solar PV (RTS) owners, power generation companies or consumers.  By implication, the QCA was also comitted to defending the payments made to power distributors.
2. When calculating the "fair" FIT the QCA managed to find excuses for not including most of the savings associated with the use of RTS.  This made an enormous difference.  If these savings are included, the FIT would have to be above 100 cents/kWh before RTS stopped reducing the power bills of Qld householders who dont have RTS.  The QCA exclusions reduced this figure to a measly 8 cents/kWh.
3. The difference in estimates highlights the problems associated with having bureaucrats or politicians set the feed in tariff.  It also highlights the problem of determining the FIT on the basis of the effect on household power bills.
4. This post is not advocating that the FIT be raised to $1.00 kWh.  It is suggested that auctions or some other market based system be used to set the FIT.

BACKGROUND INFORMATION:

Table 4.2: GROWTH in PV installations in Queensland since 2008

Financial year	08/09	09/10	10/11	11/12	12/13 Q1&Q2	TOTAL 08/13
Number of PV installations	5,926	24,514	66,355	97,042	68,624	262,461
Capacity Installed (MW)	9.5	42.9	159.5	293.4	258.6	764
Energy exported (GWh)	1.4	10.6	52.1	214.4	231.2	510
Solar bonus payments ($m)	0.6	4.7	22.9	94.3	101.6	224
Average Export MW	0.16	1.21	5.95	24.47	26.39	58.18
Calculated from above:
Average Growth Export MW	0.16	1.21	5.95	24.47	26.39	58.18
Average Export as % of 2011/12 Demand of 5842 MW	0.00%	0.02%	0.10%	0.42%	0.45%	1.00%

NOTES:

1. The number of installations at the start of 08/09 would have been small enough to ignore for calculation purposes.
2. No figures are available for total PV power generation because household meters only measure exported solar PV. As a rough approximation “capacity installed” will be the output from panels facing in the right direction in the middle of a sunny day.
3. The total solar bonus payments are only 29% of the drop in wholesale revenue between 07/08 and 11/12. The FIT would have to have been 151 c/kWh for the solar bonus to have been equal to this drop in price.
4. If one % of power was priced at the FIT rate of 44c/kwh, this would have added 0.44 c/kWh to the average price of power.

BASIS OF QCA “FAIR AND REASONABLE” EXPORT PRICE:

The whole emphasis of the QCA approach was on being fair and reasonable to the retailer, not the producer of the exported solar PV. (In effect, this approach is the equivalent of pricing payments to dairy farmers so that Coles could maintain its profit margin while it persists on selling milk at one dollar/litre) Protecting the profits of the monopoly power distributors was also considered important.

The QCA approach was justified on the basis of the first national COAG principle that: “The payment for PV exports should be at least equal to the value of that energy in the relevant electricity market and the relevant electricity network it feeds into, taking into account the time of day during which the energy is exported.” In the QCA approach the “at least” was ignored and replaced with “equal to”

NOTE: The COAG principle was developed at a time when no-one would have thought it possible that the fair and reasonable price to the retailer may end up being well above the minimum fair and reasonable price to the PV producer. The QCA avoids this problem by finding excuses to ignore all the major benefits that solar PV actually gives to the retailer – But it could come unstuck if these excuses are successfully challenged. These potential problems could be avoided by setting out to find “a fair and reasonable price to the PV producer” based on the PV producers costs.

In terms of the relevant market the QCA said:

“It is important to draw a distinction between the value of exported PV energy in the retail

electricity market and its equivalent value in the wholesale spot market. The Authority

considers that the relevant market in this case is the retail electricity market, not the

wholesale electricity market.

The QCA went on to say “Small residential PV exporters are not direct participants in the wholesale market and their exported energy only has realisable financial value in the

presence of the retailer as an intermediary. Without the retailer acting as an intermediary,

there is no market or mechanism for small PV customers to on-sell excess PV electricity, nor

any means of accurately valuing it. Therefore, the relevant market should be the retail

market. On this basis, it follows that the starting point for valuing PV exports should be the

value that the retailer ascribes to any exported PV energy that it can on-sell to its customers.”

Table 4.6 contains the calculation of the “fair and reasonable price.”

Table 4.6: Estimated Fair and Reasonable Value PV Exports in SEQ (2013-14)
Cost Component	Retail Cost (c/kWh)	Unavoidable Costs (c/kWh)
Wholesale electricity costs	6.86	0
Green scheme costs	1.00	1.00
NEM and ancillary services fees	0.07	0.00
Prudential capital	0.06	0.06
Subtotal	7.99	1.07
Plus losses	0.62	0
Plus network costs	12.59	12.59
Plus margin (5.7%)	1.21	1.21
Subtotal	22.42	14.87
Plus headroom (5%)	1.12	1.12
TOTAL (excl. GST)	23.54	15.99
Less unavoidable costs	-15.99	n/a
Direct Financial Benefit to the Retailer (c/kWh)	7.55

A number of things were not included in this calculation. For example, the following benefits to the retailer were not included in the calculation:

1. The premium retailers such as Origin add to the price when customers want “Green Power”. (3.08 c/kWh according to http://www.originenergy.com.au/1544/GreenPower-Green-Gas) The excuse appears to be : “The Authority understands that some green scheme costs, including the Queensland Gas Scheme, are levied on gross energy sales, which means that retailers do not avoid these cost when they on-sell exported PV energy. The Authority notes the concerns raised by the Clean Energy Council and SunWiz regarding the way in which some green scheme fees may be levied, but the manner in which these schemes are applied is outside the scope of the Authority's review.” Once again solar PV is disadvantaged by ways of calculating costs that are not designed to deal with rooftop solar
2. The reduction in the wholesale price of power caused by the entry of solar PV replacing expensive sources of power and generally putting downward pressure on prices. The excuse for not including this benefit to retailers was: “As discussed in Chapters 3 and 4, the Authority does not consider it appropriate, or necessary, to consider the apparent price suppressing effect of PV generation when estimating fair and reasonable feed-in tariffs. The Authority noted that this effect (also described as the merit order effect) is not purely a consequence of PV generation - it may be observed as a result of a number of influences from both the demand and supply side, for example, the entry of other forms of low marginal cost generation.” Comment: Given the size of the price change, it should be unacceptable  excluding all of it on the grounds of “too hard to calculate”. This is particularly true given that solar PV appears to be the dominant factor. (Almost all the price reduction occurred during the time when solar PV would have been producing power.)

In addition, network costs were changed at the same rate that is charged for all power sources no matter how close the user is to the power source. The QCA stated that “network costs or benefits, whichever they might be, should not be included in a fair and reasonable value for a feed-in tariff”, (The excuse was that, at the moment, retailers pay the distributors 12.59 c/kWh on the basis of the meter reading – This approach may be an acceptable simplification when power is coming from a variety of distant generators. Comment: It is not reasonable to apply this charge when trying to work out a fair and reasonable price for a power source that will usually be less than a few hundred meters from the user.

In revised table 4.6 the calculation includes the benefits of the green premium, removes the outrageous network charge and includes the JD estimate of the effect of wholesale power price. The new direct benefit to the retailer was calculated for both the inclusion and exclusion of the effect on wholesale price (101.73 and 23.23 c/kWh).

REVISED Table 4.6: Estimated Fair and Reasonable Value PV Exports in SEQ (2013-14)
Cost Component	Retail Cost (c/kWh)	Unavoidable Costs (c/kWh)
Wholesale electricity costs	6.86	0
Premium for Green power	3.08	0
Green scheme costs	1.00	0
NEM and ancillary services fees	0.07	0
Prudential capital	0.06	0.06
Subtotal	11.07	1.07
Plus losses	0.62	0
Plus network costs	12.59	0
Plus margin (5.7%)	1.21	1.21
Subtotal	25.50	2.27
Plus headroom (5%)	1.12	1.12
TOTAL (excl. GST)	26.62	3.40
Less unavoidable costs	-3.40	n/a
Direct Financial Benefit to the Retailer (EXCLUDING effect of solar PV on wholesale price )	23.23
Effect PV on wholesale price	78.50	0
Direct Financial Benefit to the Retailer (INCLUDING effect PV on wholesale price )	101.73

The message here is that setting the FIT to provide a fair and reasonable outcome to the retailer can result in FIT’s that range from unfair to grossly overpaying the PV owner depending on how the calculation is done. A similar problem would have been encountered if the calculation had been based on being fair and reasonable to households that do not have solar PV.

So what do we want? The important features of a good system might include::

1. Reduces emissions and creates and maintains stable jobs by delivering steady growth in rooftop solar.
2. Minimizes the average cost of rooftop solar power:
   1. Maximize the size of rooftop installations to provide scale related savings.
   2. New contract prices fall to take account of the declining price of roof solar.
3. Provides a fair and reasonable return.
4. Provides certainty to investors in the form of long term contracts. with a fixed FIT price.

The QCA report highlighted the difficulty of coming up with a fair and reasonable price based on a study of something as complex as the power supply pricing system. It would make a lot more sense to use a market driven system to set contract prices such as a variation of the ACT reverse auction system for large scale renewable production.

This is a topic for a separate report.

Go here to see the pdf version of the full QCA report