Energy Spectrum Australia

Energy Spectrum Australia | Issue 18

Welcome to the eighteenth edition of Energy Spectrum Australia.

The below extract has been taken from our eighteenth edition, and if you have enjoyed reading this article and want to read more about the latest developments in the Australian energy market, please contact Ben Cerini, b.cerini@cornwall-insight.com.au for more information.

Victorian Electricity Feed in Tariff drops by more than 30% for 2021-2022 

The Essential Services Commission (ESC) reduced the flat rate of Victorian electricity Feed in Tariff (FiT) to 6.7c/kWh in its 2021-22 final determination, which represents a more than 30% drop from the previous year. The ESC cited the expected reduction in wholesale electricity cost as the key driver.

On 25th February the ESC published its final determination for the Victorian minimum electricity Feed in Tariff in 2021-2022. In Victoria, the FiT applies to customers who export electricity from their embedded onsite generation with less than 100 kW capacity, with rooftop PV making up the majority of the export. As the figure shows, both the flat and time-varying rates are set to fall significantly from their previous year levels. The flat rate, which applies to the most of customers, will decrease by nearly 34% to 6.7c/kWh.

The ESC sets the FiT based on the “avoided cost” to the retailer. The ESC currently considers the following types of costs are avoided as end consumers export electricity to the grid:

  1. Retailers do not have to buy the energy from the wholesale market and hence avoids the wholesale electricity cost.

  2. The retailers also avoid network loss and ancillary costs associated with unpurchased energy.

  3. The ESC also adds a pre-determined 2.5c/kWh avoided social cost of carbon.

 

At 7.3c/kWh in 2020-21, the wholesale electricity cost is the dominant component in the cost stack. However, the continued strong uptake at both grid and distributed levels is causing pool prices to fall across the NEM. It is worth noting that when calculating the FiT, the ESC (like many other Australian regulators) uses an export volume-weighted average approach. As FiT-related export mainly comes from rooftop PV, its volume is concentrated during mid-day, which is highly correlated with very low (or even negative) prices when grid solar generation is also at its peak. In its 2021-2022 determination, the ESC revised the wholesale electricity cost component down to 3.92c/kWh from its 7.3c/kWh level (a 46% reduction), which accounts for nearly the entire reduction in the value of Victorian FiT.

“The fall in the Victorian FiT is consistent with the basic economic law of demand and supply. More solar PV panels installed at grid level and on people’s roof means greater abundance of supply in mid-day and consequently lower value of the energy during that time. The inconvenience experienced by owners of rooftop PV is likely felt by owners of grid solar assets as well, especially if they are exposed to pool prices. In the long term, wholesale prices are expected to remain suppressed as more renewable settles into the NEM.

Unfortunately, for rooftop PV, low wholesale electricity cost might not be the end of bad news. Currently networks do not charge for export, as it is explicitly not allowed in the National Electricity Rules. However, this could change in the future as many in the industry, including network and regulators, have started to note the impact of bi-directional flow on network operation and maintenance. The AEMC has just published a draft determination which allows networks to charge for export. This will likely prompt the ESC and other regulators to revise their methodologies for setting the FiT, as export to the grid would incur (rather than avoid) an explicit cost to the distribution network. Holding everything else constant, this could cause the value of FiT, and payment to rooftop PV owners, to decrease further.”