Using Market-Based Approaches to Set Roof Top Solar Feed in Tariff Contract Prices

In the past rooftop solar feed in tariffs have been set by governments, government bodies such as productivity commissions and sometimes power retailers.  These FIT's have ranged from obscenely profitable down to unfair rip-off's.
Governments have also tried to use FIT price as a crude mechanism for controlling the rate of installation.  The result has been a rooftop solar business that has gone through a number of boom/bust cycles.

OFFSET CREDIT TRADING - WHAT IS IT?

Australia's successful RET emission trading scheme is an Offset Credit Trading Scheme (OCTS) that has been quietly driving investment in utility scale renewable energy since 2001.  Best of all, it has been doing this without causing any dramatic increase in power prices or political pain.  This quiet success  means that few Australian's have heard of the RET scheme let alone understand what offset credit trading is.
The main aim of this post is to explain what offset credit trading is and how it can be used.  In addition, the post compares OCTS with cap and trade schemes, as well as systems based on long term contracts. (Ex: Feed in Tariff (FIT) based schemes.)
All of these schemes can be used to drive a variety of changes. For convenience, most of the examples used are government run schemes aimed at emission reduction.
A: Offset Credit Trading Schemes (OCTS)
OCTS can be used to drive investment in desirable alternatives (Ex: Renewable energy) or to drive changes in the mix of desirable and less desirable products.  (Ex: Reduce the average emissions per km of new cars )
OCTS use market forces to set a levy on an undesirable alternative(s).  The money from the levy is then used to subsidize desirable alternatives.  Market forces drive the levy/subsidy to the point where desirables can compete with undesirables.  Details of offset credit trading schemes may vary.  The key features of a basic offset credit trading scheme are: 

1. OCTS  controls averages.  To do this it needs working targets expressed as averages.  (Ex: "average emissions per kWh").  
2. OCTS cannot be used directly to control things like "total power emissions" because this target is not an average.  However, it will often be possible to convert "primary targets" in an unacceptable form to "working targets" expressed as averages. (Ex: A "total power emissions" primary target could be converted to an "average emissions per kWh" working target by first working out what "average emissions per kWh" would have to be for the total emission target to be met.)
3. Better than target performance is rewarded by the award of free credits by the government.  (Ex: One credit per mWh renewable power.)  These credits can be held for future use, sold to others directly or sold via a credit trading market. 
4. Worse than target performance has to be offset by the surrender of credits to the government by "liable parties".  If necessary, credits will be purchased from others to meet this requirement.  (NOTE: Only credits that have been awarded for better than target performance can be purchased.) 
5. The number of credits that have to be surrendered will depend on the target.  (Ex: If the target is 25% renewable power, one credit would have to be surrendered for very three units of dirty power.)

Key points to note here are:

1. OCTS is not a tax.  The government does not get any money for the credits awarded for better than target performance. 
2. As the target rises from zero to 100% desirable, the average price will ramp up slowly from the price of undesirable (without any levy) to the price of desirable (without subsidy) - When the target is low it only takes a small levy on undesirable to make the price of desirable competitive.
3. The system ensures that the target will at least be met provided there is enough desirable product available.  
4. A single OCTS can be expanded by adding to the number of actions that generate credits or require the surrender of credits.  For example, the original RET scheme awarded credits for both renewable power and rooftop solar.  The risk here is that expansion can cause confusion and make the market for different types of action less predictable.  The RET scheme was split into separate large and small scale schemes because the growth in rooftop solar was disrupting the market for large scale renewables.  

NOTE: The RET OCTS scheme:

 "The  RET scheme was first introduced in Australia in 2001. It imposes legal liability to support electricity generated from renewable sources on retailers and large wholesale purchasers of electricity. These 'liable parties' are required to meet a share of the renewable energy target in proportion to their share of the national wholesale electricity market. Liable parties must prove that they have purchased the relevant proportion of renewable energy by surrendering renewable energy certificates (RECs) or paying the shortfall charge, which is a penalty for non-compliance....."  
The option of paying a shortfall charge protects the scheme from causing blackouts when there isn't enough renewable power available to allow the renewable target to be met. 

ROOFTOP SOLAR IS DRIVING DOWN EVERYONE'S POWER BILL

This is a summary of an article of mine  Why Utilities will Pay a Premium for Rooftop Solar published in REnewEconomy on 14 Dec 2012.  It was written to counter claims that people without rooftop solar (RTS) were paying more for their power so that RTS owners could be paid a 44 cent/kWh feed in tariff  much higher than the current tariff of about 23 cents/kWh .

Claims are being made that ordinary householders are subsidising rich rooftop solar owners. For example, Mark McArdle, (Queensland Minister for Energy and Water Supply) issued a media statement saying “the QCA analysis showed the solar bonus scheme currently added $26 per year to everyone’s annual electricity bill, which will increase to $90 next year if an application by Energex to the Australian Energy Regulator was successful.”

He added, “Rooftop solar costs are projected to add more than $240 per year to average electricity bills within five years.” (These claims were based on the previous government’s feed in tariff of 44¢/kWh)

So what is rooftop solar actually doing to household power bills in Queensland? And how high could the feed-in tariff go before it really would be increasing household power bills?

In the detailed section below, a comparison of demand and revenue vs time of day for 2008 and 2012 is used to answer the above questions. The quick answers are:

1. Rooftop solar is actually saving the “typical Queensland household” (without PV) $65/yr.

2. The feed-in tariff would have to rise above 96¢/kWh before rooftop solar actually stopped saving households (and power companies) money. Power companies can actually become more competitive by locking in extra contracts for the supply of rooftop solar, even if it means paying the small premium that was offered to me.

3. It is difficult to say what effect rooftop solar would have on household bills in five years’ time. My guess is that investment in rooftop solar will be justified at feed-in tariffs below what householders will be paying for power and that it will still be saving households money.

PHASE CHANGE MATERIALS – BACKGROUND INFORMATION

This post was initially written to provide background information for this article on the potential benefits of moving air conditioners to off peak power. (published by RenewEconomy on 21 Sept 2012) The article argues that that gradually moving air conditioners to off peak would allow most of the proposed power system upgrades to be deferred for a long time.  The use of phase change materials (PCMs) to store cold or heat would allow this conversion to be done without reducing people's comfort levels.

PCMs are finding a markets as a compact way of storing heat or cold.  This post provides background information on the characteristics and uses of PCMs.  

DEFINITIONS:

Phase:  Many materials can exist in more than one phase.  For example, water can exist in the solid, liquid or gas phase.  Some materials can also exist as different crystal phases.

Phase change: The change from one phase to another.  For example, the melting of ice to liquid water.  Phase changes can be driven by changes in temperature and/or pressure.

Phase change material (PCM): A mixture or pure substance that can change phase.  The term is often restricted to materials that change phase over a narrow temperature range.

A BETTER COMMERCIAL MODEL FOR ROOFTOP SOLAR PV?

Revised 11 April 2013

The dominant commercial model for rooftop solar PV has the individual house holder owning the panels and getting the resulting income/free power.  In this post it is argued that it may make sense to give home owners the option of leasing rooftop space to power companies who own the panels and the power produced by the panels.  Advantages of this approach include the reduction of power costs by making it easier to use competitive tendering to set the feed in tariff,  allowing a mix of location and panel orientation better suited to the needs of the total power supply system as well as providing an income stream for home owners who cannot afford to buy panels.
Breaking News:
Since I first started talking about the advantages of competitive tendering for the supply of clean electricity , the ACT introduced their "Reverse Auction" for driving investment in large scale solar.  I don't know all the details of their system except that it is a competitive tendering system.
I have now found this article in the Australian (Giles Parkinson 7 Sept 2012) that announced that the ACT auction process had reached the point where the first contract has been awarded to  Spanish group FRV for a lower than expected fixed price of 18.6 cents/kWh for 20 yrs.  This price may seem a bit high but, based on Qld experience it should actually reduce ACT power bills by replacing more expensive sources of day-time power. End of breaking news.

COAL AND LNG - LIFE CYCLE EMISSIONS

The following link compares life cycle emissions for the use of natural gas and coal in the US:

http://www.ce.cmu.edu/~gdrg/readings/2005/10/12/Jaramillo_LifeCycleCarbonEmissionsFromLNG.pdf

In particular look at fig 4 and 8.  Fig 4 suggests that, for the LNG cycle, at least 0.3 tonnes of emissions will come from non emission sources per tonne combustion emissions with about half this coming from LNG production, tanker transport and regasification.

While these figures are all about US alternatives, they clearly emphasize the importance of challenging the gas industry to publish site specific data.  Also suggests that there is lots to be said for locating generators close to the gas source.

Would be interesting to compare life cycle emissions from Australian LNG and coal used in Chinese power stations.

WE NEED TO PUT THE CARBON PRICE TO ONE SIDE AND GET ON WITH WHAT WE NEED KNOW WE NEED TO DO

  This is a copy of aletter sent to a number of MPs during Jan 2011.  The key message is that the government will have very little tangible action to show for 5 years of Labor government unless it puts the search for the carbon price magic bullet to one side and gets on with some of the things that clearly ned to be done.

The letter also argues that the carbon price approach is far less effective than alternatives that leave the price of dirty unchanged and only charge for the higher price of clean (if applicable).  In the case of driving investment in clean electricity the price increase per tonne emission reduction will be four times the value for the alternative suggested at the point where emission have been reduced by 25%.

ETS IS THE PROBLEM - NOT THE ANSWER

This post was first published as a  guest post   in Larvatus Prodeo (June 23 2010).  It discusses the problems of systems for driving climate action that depend on a carbon price as well as the additional problems that arise as a result of the carbon price being set by a market that can change the value of emission credits very rapidly.  This more recent post based on a letter to MPs  (15 Jan 2011) looks at how staying with the carbon price approach will make it difficult for Labor to have anything tangible to show when it goes into the next election.  It also points out that the carbon price approach results in a much higher price increase per tonne emission reduction than some alternatives that do not depend on using a carbon price to artificially increase the price of dirty :

WHAT CLIMATE POLICY SHOULD LABOR AND THE GREENS HAVE NOW?

 This post was first published as a guest post by John Davidson before the 2010 federal election.  Much of what was said then is still very relevant:

Since their last change of leaders both Labor and the Coalition have placed “putting a price on carbon” as the key driver of climate action on indefinite hold. They also look like moving to some form of direct action for at least the next few years. In addition, while the polls are continuing to show support for climate action this support has softened since Copenhagen. There is a reluctance to support changes that will have much effect on people’s lives or the economy, particularly if certain large countries with much lower per capita emissions than Australia don’t start reducing their emissions first. (In 2007, even the US per capita figure for emissions from the consumption and flaring of fossil fuels was 9% lower than Australia.)
So in this changing political environment does it still make sense to continue urging the Labor party to include putting a price on carbon as part of their election promises or to concentrate on arguing for an effective direct action program?

DRIVING INVESTMENT IN CLEAN ELECTRICTY

Revised 11 April 2013

This post is essentially an extract from Submission 572 to the Senate Climate Committee (John Davidson - April 2009).

It considers the issues involved in driving major investment in clean-electricity and compares one "case specific" approach with emission trading and carbon tax comprehensive schemes.  A case specific approach  is an approach  developed for a particular opportunity to reduce NCP (net carbon pollution).  In this example, the case the approach selected was the use of regulation and contracts for the supply of cleaner electricity   The attraction of this particular strategy is that it is able to deal with the issues associated with the clean up of electricity, gives a very predicable growth in clean electricity capacity, satisfies most of the needs of the various stakeholders and only requires the average price of electricity to ramp up slowly in line with average costs.  Problems with both the emission trading and carbon tax approach include much faster price increases, a much less satisfactory resolution of stakeholder concerns and a far less predicable rate of investment in clean electricity.
Note:  A different approach  may be appropriate for driving minor investment such as the installation of rooftop solar cells.
Breaking News: Since I first started talking about competitive tendering, the ACT introduced their "Reverse Auction" for driving investment in utility scale solar.  I don't know all the details of their system except that it is a competitive tendering system.

I have now found this article in the Australian (Giles Parkinson 7 Sept 2012) that announced that the ACT auction process had reached the point where the first contract has been awarded to  Spanish group FRV for a lower than expected fixed price of 18.6 cents/kWh for 20 yrs.  This price may seem a bit high but, based on Qld experience it should actually reduce ACT power bills by replacing more expensive sources of day-time power.