ISSUES PAPER SOLAR FEED-IN PRICING IN

October 2015

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Table of Contents

SUBMISSIONS

CLOSING DATE FOR SUBMISSIONS: 23 NOVEMBER 2015

Public consultation is an important element of the Queensland Productivity Commission’s (QPC) inquiry process. Submissions are invited from interested parties on solar export pricing for small customers in Queensland. The QPC will take account of all submissions received by the due date. Submissions, comments or inquiries regarding this paper should be directed to: Queensland Productivity Commission PO Box 12112 George St QLD 4003 Tel (07) 3015 0111 Fax (07) 3015 5199 www.qpc.qld.gov.au/get‐involved/how‐to‐make‐a‐submission CONFIDENTIALITY

In the interests of transparency and to promote informed discussion, the QPC would prefer submissions to be made publicly available wherever this is reasonable. However, if a submission contains genuinely confidential material, the person making a submission should claim confidentiality in respect of the document (or any part of the document). Claims for confidentiality should be clearly noted on the front page of the submission and the relevant sections of the submission should be marked as confidential, so that the remainder of the document can be made publicly available. It would also be appreciated if two copies of the submission (i.e. the complete version and another excising confidential information) could be provided. Where it is unclear why a submission has been marked confidential, the status of the submission will be discussed with the person making the submission. While the QPC will endeavour to identify and protect material claimed as confidential as well as exempt information and information disclosure which would be contrary to the public interest (within the meaning of the Right to Information Act 2009 (RTI Act)), it cannot guarantee that submissions will not be made publicly available.

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Table of Contents

Table of Contents

SUBMISSIONS III Closing date for submissions: 23 November 2015 iii Confidentiality iii

THE ROLE OF THE QPC V

ABOUT THE SOLAR INQUIRY VI Scope vi Key dates vi CONTACTS vi

1 BACKGROUND 1 1.1 Feed‐in tariffs in Queensland 3

2 A FRAMEWORK FOR ASSESSING SOLAR EXPORT PRICING 8 2.1 When should solar export prices be regulated? 8 2.2 What are the objectives of a solar exports pricing policy? 9 2.3 Policy and pricing principles 9

3 FEED‐IN TARIFFS: WHAT SHOULD BE REGULATED AND HOW 14 3.1 Factors that can be considered in estimating a price for solar exports 14 3.2 Structure and payment of feed‐in tariffs 17 3.3 Other approaches to valuing solar or solar exports 18 3.4 Review mechanisms and timeframes 19

4 BARRIERS TO A MARKET FOR SOLAR EXPORTS 21 4.1 Barriers to deployment 21 4.2 Barriers to determining value 21 4.3 Barriers to monetising and transferring value 22 4.4 Options to address barriers 22

GLOSSARY 24

APPENDIX A : TERMS OF REFERENCE 26

BIBLIOGRAPHY 29

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THE ROLE OF THE QPC

Our role is to provide independent advice on complex economic and regulatory issues, and propose policy reforms, with the objective of driving economic growth, lifting productivity, and improving living standards across Queensland. A wide level of open and transparent public consultation will underpin these functions. The QPC has initially been set up as a government entity under the Public Service Act 2008, and is part of Queensland Treasury. The Government has announced its intention for the QPC to be converted to a separate legal entity as a statutory body under its own legislation. The Queensland Productivity Commission Bill 2015 was introduced into the Queensland Parliament on 15 September 2015. Our work encompasses three key streams: • economic reform and policy • regulatory advice and guidance to departments • economic research into private and public sector productivity WE ARE COMMITTED The philosophy and principles under which we operate will be based TO PROVIDING A on independence, rigour, responsiveness, openness, transparency, TRANSPARENT AND equity, efficiency and effectiveness. CONSULTATIVE Our operation and reporting is independent, with tasks referred to the PROCESS TO ALLOW QPC by the Government. ALL INTERESTED The Government has said that the final report for each inquiry will be STAKEHOLDERS TO publicly released. The final reports will first be submitted to PARTICIPATE IN Government to allow a government response at the same time as the INQUIRY PROCESSES. public release where appropriate.

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ABOUT THE SOLAR INQUIRY

The has asked the QPC to determine a fair price (or fair prices) for solar power produced at the home or business premises of a ‘small customer’ and exported into the electricity grid. SCOPE KEY DATES

The terms of reference asks the QPC to investigate and report on: Terms of Reference 20 August 2015  A methodology for determining a fair price for solar energy generated by a ‘small customer’ and exported to a Queensland Issues Paper released electricity grid that: October 2015  is based on the public and consumer benefits of exported solar Due date for submissions energy 23 November 2015  does not impose unreasonable network costs on electricity Release of Draft Report customers; particularly vulnerable customers mid February 2016  can be realised in the current electricity system. Due date for submissions end March 2016  The price(s) for solar energy determined under the methodology. Final Report submitted to  Any barriers or constraints (technical, market, regulatory or government otherwise) to monetising the value of exported solar energy in 31 May 2016 Queensland in the current electricity system, and options to address those barriers. CONTACTS  How the fair price (or fair prices) may be designed and paid (structure, unit measure, gross or net payment, payment Enquiries regarding this mechanism). project should be directed to:  The mechanisms by which a fair price could be implemented in Queensland (mandatory or other). Kristy Bogaards Tel (07) 3015 5106  Appropriate review mechanisms and timeframes. The full terms of reference are provided at Appendix A.

REGISTRATION OF INTEREST - www.qpc.qld.gov.au/contact‐us If you wish to participate in the QPC’s inquiry process, please register your interest to ensure you receive our email alerts on key developments including release of reports, call for submissions and details of public inquiries.

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Background

1 BACKGROUND

Since 2008, when the Queensland Government introduced the Solar Bonus Scheme, there has been an exponential uptake of solar photovoltaic (PV) panels in Queensland. Prior to 2008, there were less than 1000 solar PV customers in Queensland — by 30 June 2015 this number had grown to almost 400 000 customers. Now:  almost one in four Queensland homes have solar PV  total installed solar PV capacity is 1328 megawatts, equivalent to the fourth largest generator in Queensland; and  Queensland has one of the highest levels of residential solar PV in the world. Small Customer Solar PV in Queensland

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Background

Future market changes and technological advances, including cost effective battery storage, may have further significant impacts on solar and electricity markets. Rapid solar PV expansion has raised opportunities, but also challenges for the electricity sector, consumers and governments. Many of these challenges primarily relate to the fact that rooftop solar PV can impose costs and accrue benefits to parties inside and outside the solar export market. As a result, there has been considerable policy debate on:  whether solar PV owners are receiving a fair price for the electricity they export  whether non‐solar customers are paying more than they should for electricity due to solar PV; and  who should bear any costs associated with feed‐in tariff arrangements. In this context, the Queensland Government has asked us to investigate and report on a fair price (or prices) for solar exports for small customers.1 The terms of reference asks us to consider a number of factors including:  the public and consumer benefits from exported solar PV generation, including social, economic and environmental benefits  whether households and business are already fairly compensated for public and consumer benefits (such as through renewable energy programs, rebates and market contracts)  the costs and benefits across the electricity supply chain due to the exported solar PV energy, taking into account temporal and locational factors  the perception of electricity customers about whether any cost to them resulting from the fair value is ‘unreasonable’  mechanisms in the electricity system which may prevent the true value of exported solar energy being realised/monetised; and  the Government’s 1 million rooftops target by 2020 (or 3000 megawatts of solar PV). In considering these factors and making assessments, we will undertake a community wide assessment that extends beyond the interests of particular individuals or groups to consider the overall costs and benefits of feed‐in tariff options. This issues paper has been prepared to assist stakeholders to prepare submissions and highlights a number of key matters we are seeking feedback on. In preparing submissions, stakeholders do not need to address all of the matters raised, or be constrained to respond only to the published questions. Submissions may cover any matters relevant to the terms of reference. The coverage of this Inquiry is confined to issues related to solar feed‐in tariffs in Queensland. Other policy matters related to renewable energy and environmental programs in Queensland are covered by the concurrent QPC inquiry into electricity pricing.

1 A small customer in Queensland is defined as a customer (residential or business) with consumption of less than 100MWh per year. References to solar PV in this paper refer to small customer solar PV unless otherwise specified.

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Background

1.1 Feed-in tariffs in Queensland

A feed‐in tariff is the price paid for electricity generated by embedded generation (for example, rooftop solar PV) and exported (‘fed‐in’) to the grid. Feed‐in tariffs are only one factor affecting solar PV investment (Box 1.1).

Box 1.1 Factors affecting the return on a solar PV investment The return a household or small business receives from installing solar PV depends on system installation costs, the value of small‐scale technology certificates (STCs), solar export revenues and any savings from reduced imports from the electricity grid:  System installation costs: include the up‐front capital costs of installing the system — the price of the panels, inverter and other equipment costs, as well as labour installation costs.  Value of STCs: the Small‐Scale Renewable Energy Scheme (SRES) under the national Renewable Energy Target provides a financial incentive to individuals and small businesses who install small‐scale renewable energy systems. Installation of approved systems creates STCs, which most PV owners assign to their installer for a discount on their system.  Export revenue: the revenue generated by exports to the grid depends on the volume of exports multiplied by the rate at which the electricity retailer pays the household or small business for each kilowatt hour exported (the feed‐in tariff).  Import savings: under a net metering arrangement, solar generation reduces the monies paid to electricity retailers when household or small business energy demand is met by solar generation rather than imported. The size of the benefit is the reduction in imports multiplied by the variable charge component of the retail tariff.

The Queensland Government introduced the Solar Bonus Scheme (SBS) as part of the Clean Energy Act 2008. The SBS was established with the aim to:  make solar power more affordable for Queenslanders  stimulate the solar power industry  encourage energy efficiency. The SBS was made available to small customers who consume less than 100MWh per year. The initial feed‐in tariff was set at 44c/kWh for net2 eligible electricity supplied to the network. At the end of each billing period, the customer's meter is read to determine the total amounts of surplus electricity exported to and imported from the network. The solar bonus payment for the exported amount is then reflected as a credit on the retail bill. The 44c/kWh SBS is funded by the distribution network service providers, and . They are required to pay the amount of the feed‐in tariff, which is then credited to the solar PV customer by the retailer. As network charges are regulated, these costs are recovered through higher network charges for all customers.3 The SBS was closed to new applications from 9 July 2012 and replaced with an interim scheme until 30 June 2014. The interim scheme reduced the feed‐in tariff from 44c/kWh to 8c/kWh.

2 A net feed in tariff pays the PV system owner only for surplus energy they produce; whereas a gross feed in tariff pays for each kilowatt hour produced by a grid connected system. 3 QCA (2013a).

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Background

Participants on the 44c/kWh feed‐in tariff will continue to receive this amount for the duration of the scheme (to 2028) provided they maintain their eligibility.4 Growth of rooftop solar PV during the life of the SBS was exponential — driven by federal and state government incentives, rapidly falling costs for solar PV and rising electricity prices. Figure 1.1 shows that solar rooftop PV connected to the Energex and Ergon network rose from 5926 in 2008– 09 to 396 036 in 2014–15. As at 30 June 2015, 67 percent of the customers with solar PV are on the premium 44c/kWh scheme. This number will decline slowly over time as the account holders' move off the premises and thus terminate eligibility for participation in the scheme. Solar PV installations have continued to grow following the closure of the SBS, albeit at a slower rate. In 2014‐15, 40 107 additional solar PVs were connected in Queensland. Figure 1.1: Solar rooftop PV installations in Queensland 2008‐09 to 2014‐15

450000

400000

350000

300000

250000 Installations 200000 PV

of

150000 No 100000

50000

0 2008‐09 2009‐10 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15 Premium 44 c scheme Interim scheme and retailer funded

Source: Energex and Ergon Data. As a result of this expansion, Queensland has one of the highest levels of solar PV penetration in the world. Although Germany and California lead the world in terms of total installed capacity of solar PV, Australia; and in particular Queensland and South Australia, have the highest penetration of solar PV as a percentage of households (Figure 1.2).

4 QCA (2013a). To maintain eligibility, a customer must remain the electricity account holder for the premises where the solar PV system is connected. Changing the name on the electricity account (for example, if the property is sold or rented out) will render the premises no longer eligible for the 44 cent rate.

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Background

Figure 1.2: Proportion of households with solar PV by country/state

30%

25%

20% Penetration

PV 15% Solar

10% Domestic 5%

0%

Source: ESAA https://www.esaa.com.au/members/solar_pv_penetration_australia_first_daylight_second_1 The Queensland Competition Authority (QCA) estimates that the SBS adds around $89 to the average Queenslander's annual electricity bill for a residential customer on tariff 11 in 2015–16.5 The cost to electricity customers over the life of the scheme (until 2028) is estimated at $4.28 billion.6 Following the 2013 QCA review of solar feed‐in tariffs (Box 1.2), the Queensland Government announced that a regulated feed‐in tariff would apply for regional customers only — customers in could access market offers from competing retailers. Seven retailers in south east Queensland currently offer feed‐in tariffs ranging from 6 to 11c/kWh.

5 QCA (2015a). 6 QCA (2015b).

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Background

Box 1.2 Queensland Competition Authority 2013 Inquiry into Solar Feed‐In Tariffs In August 2012, the QCA was asked to estimate a fair and reasonable feed‐in tariff for PV exports in Queensland and investigate options to minimise or more equitably share the costs of the SBS. In March 2013, the QCA handed down its final report, Estimating a Fair and Reasonable Feed‐In Tariff for Queensland, finding that:  Future feed‐in tariff schemes should be funded by electricity retailers, rather than regulated network businesses, to avoid cross‐subsidies and the inequitable recovery of costs from those customers least able to afford them.  The fair and reasonable value of PV exports should be the direct financial benefit that electricity retailers receive when they on‐sell exported energy from their PV customers.  There is no compelling evidence to support a regulated, mandatory minimum feed‐in tariff for customers in the south east Queensland retail electricity market.  Regulated minimum retailer funded feed‐in tariffs should be established for regional customers depending on customer location.  The cost of the SBS could be controlled by introducing a mandatory contribution from retailers set at the estimated direct benefit to the retailer resulting from PV exports.  Government could move PV customers to a time‐of‐use tariff to expose them to a more cost‐reflective fixed charge than they face under flat residential tariffs. This would reduce the problem of PV customers avoiding some of the true cost of their network access due to their net consumption profile, which leads to higher average variable network charges.

Source: QCA (2013a). The QCA is required to set a regional feed‐in tariff annually under the Electricity Act 1994 (Table 1.1). The QCA's estimate of a fair and reasonable, cost‐reflective value of exported PV energy for regional Queensland in 2015–16 is 6.348c/kWh.7 This is based on the direct financial benefit that a retailer would receive if it on‐sold a kilowatt hour of exported PV electricity at a cost‐ reflective price. Table 1.1: Regional Feed‐in tariffs in Queensland 2013–14 to 2015–16

Cost component c/kWh 2013‐14 2014‐15 2015‐16 Wholesale cost of energy 6.858 5.575 5.570

NEM and ancillary services fees 0.070 0.095 0.083

Value of network losses 0.624 0.864 0.695

Feed‐in tariff 7.553 6.534 6.348

7 QCA (2015c).

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Background

During the 2015 election, the new Queensland Government committed to a range of policies to encourage solar PV, including:  an investigation into how Queensland can achieve a target of 50 per cent renewable energy by 2030  a target of one million rooftops having solar panels by 2020  a QPC inquiry to identify a fair price for solar power produced by small customers and exported to the electricity grid; and  a trial 40‐megawatt renewable energy auction to support private investment and jobs in the renewable energy industry.8

8 The Queensland Government announced on 9 September 2015 that it would exceed the original target, expecting to achieve a 60 megawatt target via the renewable energy auction.

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A framework for assessing solar export pricing

2 A FRAMEWORK FOR ASSESSING SOLAR EXPORT PRICING

A central task for this Inquiry is to investigate and report on a fair price for solar exports. Good policy outcomes depend on a well‐designed policy framework. A robust framework that has clear objectives, and requires policymakers and regulators to consider potential costs and benefits (under existing and future market conditions), increases the probability that a policy will provide net benefit to the Queensland community. This section outlines a framework for assessing solar feed‐ in pricing.

2.1 When should solar export prices be regulated?

The starting point to develop any policy framework is to identify and assess the size and scope of the policy problem the government is trying to address. Understanding the nature of the problem is fundamental to determine an appropriate response and has a greater chance of better targeting the problem in the most effective and efficient way. Prices for goods and services are generally determined in the market. In a well‐functioning market, prices coordinate buyers and sellers and allocate resources to their highest valued use. The adverse impacts of inefficient prices on producers and consumers mean that price regulation is generally confined to areas that exhibit substantial and enduring market failures, where there is no alternative policy and non‐policy options to deal with those market failures. A number of market failures may be relevant to solar exports in Queensland. These may include:  Lack of effective competition: where there is a natural monopoly or when the market has a small number of firms that can use their market power to materially reduce community welfare. For example, in regional Queensland, Ergon Energy is typically the sole retailer of electricity to small customers and the sole purchaser of exported solar energy.  Environmental externalities: where the actions of an individual or business create environmental benefits or costs on others and these effects are not reflected in market prices. For example, where solar PV displaces generation and this provides an environmental benefit, and the benefit is not compensated.  Imperfect or asymmetric information: where one party has more information about a transaction than the other, or where barriers prevent parties to a transaction from obtaining relevant information about the characteristics of a transaction and/or each other. For example, suppliers, electricity market participants and consumers may face informational constraints concerning the impacts of solar PV. The presence of these market failures provides an in‐principle case for government intervention. However, intervention must be designed in a way that the benefits exceed the costs. Governments have a range of policy tools to address these market failures — providing information (for example,

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A framework for assessing solar export pricing

energy efficiency information programs), establishing markets, setting regulatory targets and price regulation (such as feed‐in tariffs).

Questions 2.1 Is there evidence of significant and enduring market failures in the solar export market in Queensland? 2.2 Where market failures are present, how are they best addressed? 2.3 Do solar PV exports produce positive environmental and social impacts that are currently not paid for through existing programs and rebates? 2.4 If so, is the investment in solar PV suboptimal (from a societal point of view)? 2.5 Would a regulated solar feed‐in tariff be an effective and efficient tool to address environmental externalities?

2.2 What are the objectives of a solar exports pricing policy?

Establishing clear objectives supports policy and regulatory decisions that target the identified problem and minimise unintended side effects. Clear and well defined objectives also provide all stakeholders and the community with a transparent understanding of the aim of the policy and a reference point to measure its appropriateness and effectiveness over time. Policy documents and this Inquiry's terms of reference imply a range of possible objectives for solar export pricing, including:  encouraging solar PV investment  solar industry development and job creation  lowering electricity prices  improving environmental outcomes. Correctly specifying policy objectives is not always straightforward. It is not unusual for government policies to be underpinned by a range of objectives, and invariably there may be some tension between competing objectives. For example, if supporting solar power job creation increases employment in the solar energy sector, but this is achieved by shifting employment from other sectors and leaves aggregate employment unchanged, the Queensland community is no better off. Ideally, the objectives of a solar pricing policy should be tied directly to the problem it attempts to resolve (Section 2.1). Policies without clearly targeted problems and objectives are more likely to result in the direction of resources from higher value uses to lower value uses, in addition to the resources consumed by the policy process itself.

Questions 2.6 What are the objectives of a solar export pricing policy? 2.7 Where objectives are in conflict, which objectives take priority and why?

2.3 Policy and pricing principles

The objectives of a policy or regulatory framework are often underpinned by a set of principles to provide guidance to policymakers and regulators in interpreting and implementing the objectives.

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A framework for assessing solar export pricing

Such principles are particularly important where prices are regulated, and regulators are asked to determine mandated prices and balance competing objectives or interests. Regulators attempting to estimate prices face substantial information barriers. For a regulator to be able to determine efficient prices, it essentially needs to know everything that buyers and sellers know — an even greater challenge in complex markets with changing conditions. Well‐designed regulatory frameworks (Box 2.1) supported by appropriate regulatory guidance increase the probability of getting regulatory outcomes ‘right’.

Box 2.1 OECD principles for regulatory quality The Organisation for Economic Co‐operation and Development (OECD) principles of good regulation require regulation to:  serve clearly identified policy goals, and be effective in achieving those goals  have a sound legal and empirical basis  produce benefits that justify costs, considering the distribution of effects across society and taking economic, environmental and social effects into account  minimise costs and market distortions  promote innovation through market incentives and goal‐based approaches  be clear, simple, and practical for users  be consistent with other regulations and policies  be compatible as far as possible with competition, trade and investment‐facilitating principles at domestic and international levels.

Source: OECD (2005). Some common policy/pricing principles and how they may apply to solar export pricing are discussed below.

2.3.1 Fairness The terms of reference asks us to investigate 'A methodology for determining a fair price for solar energy generated by a small customer and exported to a Queensland electricity grid'. The Council of Australian Governments (COAG) National Principles for Feed‐in Tariffs states that micro renewable generation should receive fair and reasonable value for exported energy. Governments agreed that payment for solar exports should be:

…at least equal to the value of that energy in the relevant electricity market and the relevant electricity network it feeds in to, taking into account the time of day during which energy is exported. 9 Both solar PV owners and electricity customers have expressed concerns with the fairness of solar pricing arrangements. Solar PV owners may hold the view that the price they receive for solar exports is too low, while others perceive that solar PV owners are subsidised (particularly through the premium SBS) and do not make a fair contribution towards network costs — meaning that their own costs are higher than they should be.

9 COAG (2008).

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A framework for assessing solar export pricing

In a market, the value of a good or service is not determined by either any inherent property of a good or service or the cost of its production. Rather, the value of a product is determined — or revealed — through the process of buyers and sellers seeking to exchange (trade) to improve their own welfare, each having their own valuation that they place on the good or service.10 Buyers would prefer to pay less for a good or service so that more income was available for other things. Sellers would prefer to obtain a higher price for the same reasons. Consequently, when fairness is used in policymaking, it is best defined by some objective measure. Efficiency In several ways, efficient prices can be described as fair prices:

… prices that reflect the cost to society of producing a good or service is fair in the sense that lower prices would imply that the beneficiary is not paying a fair share. Prices above [efficient] cost imply that the producer is receiving a benefit at the expense of the consumer.11 Economically efficient solar export pricing would send price signals to both consumers and suppliers of electricity to support efficient outcomes (Box 2.2). The price would signal to consumers the costs of providing energy so that consumption occurs when consumers value the energy more than or equal to its cost of supply. Suppliers receive information which informs their production and investment decisions so that investment occurs when, where and in the firms and technologies that can more efficiently meet consumer demands, compared to alternatives. An efficient price would also support the efficient operation and use of existing assets.

Box 2.2 Economic Efficiency Many policy and regulatory pricing regimes have efficiency as the guiding objective or primary principle. Economic efficiency is about maximising the aggregate or collective wellbeing of the members of the community. An economically efficient outcome is attained when individuals in society maximise their utility, given the resources available in the economy. There are three aspects of economic efficiency:  Productive efficiency is achieved where individual firms produced the goods and services that they offer to consumers at least cost.  Allocative efficiency is achieved where resources used to produce a set of goods and services are allocated to their highest valued uses  Dynamic efficiency reflects the need for industries to make timely changes to technology and products in response to changes in consumer tastes and in productive opportunities.12

Efficiency also embodies a ‘user pays’ approach, where individuals or businesses that use a good or service pay the cost of that good or service. Moving away from efficient pricing results in subsidies or cross‐subsidies. The COAG National Principles for Feed‐in Tariffs states that governments should:

avoid policies resulting in cross‐subsidies between customer groups. Where governments wish to subsidise a particular group, subsidies should be provided directly through government expenditures.13

10 See Menger (1871). 11 QCA (2013, p. 21). 12 Hilmer Committee (1993, p. 4). 13 COAG (2008).

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A framework for assessing solar export pricing

Cross‐subsidies mean that some businesses or consumers are paying for benefits enjoyed by other businesses or consumers (that is, a cross‐subsidy cannot assist one person without harming another). Equity considerations Assessing fairness generally involves a consideration of the equity impacts of a policy. The terms of reference for this inquiry require a fair price that is based on the benefits of exported solar energy but ‘does not impose unreasonable network costs on electricity customers; particularly vulnerable customers’. Equity is difficult to define, but for policy assessments it is often characterised as treating individuals in similar circumstances equally and treating individuals in different circumstances in proportion to their differences. It can be framed in terms of vertical and horizontal equity:  vertical equity implies that policy should take account of different individual circumstances (for example, in general individuals that have a higher income should contribute and pay more tax than those who have a lower income)  horizontal equity requires that individuals in similar circumstances should be treated equally (for example, individuals with similar income and assets should pay the same amount in taxes). Subsidies can raise equity issues, for example, if they are funded by taking a dollar from a non‐ solar, low income household and transferring it to a high income, solar household. Even if subsidies are paid from government revenues it also involves both winners and losers because government revenues are taken from households. Other fairness considerations There are influences on perceptions of fairness other than the specific level of the price paid for a good or service. Where prices are regulated, some aspects of how prices are determined and changed can influence perceptions of fairness. For example, whether regulatory governance is transparent, accountable and the minimum required to achieve the desired outcome. Similarly, where households and businesses make capital investment decisions, the conditions under which investments are made can influence perceptions of fairness when subsequent changes occur (for example, changes to policy or regulatory settings which alter the returns to an investment). Conversely, where policies are retained to support ‘investor certainty’, but have adverse impacts on other groups of Queenslanders, this also has fairness implications.

2.3.2 Neutrality Policy frameworks typically include a principle that policies should be technologically neutral. The idea is that what is important is the quality and price of the service, not the specific platform, technology or approach to delivering the service. The focus is on the long‐term interests of consumers and not the industry or the development of a specific technology. This is consistent with the observation that welfare is maximised through functioning markets where customers determine which supply option best meets their needs and budget, thereby determining which technologies contribute the most to welfare improvement. Policy or regulatory attempts to 'pick technological winners' risks damaging industry development, resulting in lower quality or higher priced services being offered to consumers. A number of objects of the Electricity Act 1994 are consistent with the idea that regulations should not distort competition between alternative solutions to supplying a service. In the context of solar exports, a technological neutrality principle would require that regulated feed‐in prices do not

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A framework for assessing solar export pricing

either advantage or disadvantage any particular suppliers based on the technologies used to generate energy.

2.3.3 Simplicity and robustness Where feed‐in tariffs are regulated, the method for calculating the prices should be as simple as possible. This will improve transparency and consumer and industry understanding of how the prices are determined. This can assist in reducing the scope for misunderstandings and perceptions of unfairness. Solar PV owners, industry participants and electricity consumers need to have a high degree of confidence in the robustness of the feed‐in tariff estimates determined by a regulator. This implies limitations on the matters that can realistically be taken into account in determining prices. Where there are highly uncertain impacts of policy relevance, or where impacts cannot be reliably quantified, it may be best to address these impacts through alternative policy instruments rather than impact the development of electricity markets. Confidence in cost and price estimates is improved when estimates can be externally replicated. This suggests that the models and data used to produce the estimates should be made publically available as part of normal consultation processes.

Questions 2.8 What principles should be used to guide solar export pricing policy and any regulation of feed‐in tariffs? 2.9 How should fairness be defined?

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Feed‐in tariffs: what should be regulated and how

3 FEED-IN TARIFFS: WHAT SHOULD BE REGULATED AND HOW

The terms of reference asks us to report on a fair price for solar exports, including the design, methodology and structure for feed‐in tariffs. This section outlines some methodological and regulatory issues that can be considered in estimating the costs and benefits, and any implications for export tariffs, from solar PV.

3.1 Factors that can be considered in estimating a price for solar exports

Deciding what should be regulated and by what form of regulation depends on the nature of the problem and the objectives of regulation (Sections 2.1 and 2.2). Some regulatory options will be more effective at addressing particular objectives, such as environmental goals. Identifying the most effective regulatory approach will require an assessment of the costs and benefits of each option. Any approach also needs to recognise that the solar export market forms only one part of the broader electricity market, which has a number of distinct characteristics and is affected by a range of state and federal policies and regulations. Embedded solar PV and the electricity market

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Feed‐in tariffs: what should be regulated and how

Where feed‐in tariffs are regulated, most jurisdictions in Australia have adopted an ‘avoided costs’ approach in determining the value of electricity generated by solar PV (Table 3.1). This approach identifies what costs can and will be avoided by retailers in sourcing the energy from solar customers instead of from the wholesale market. Table 3.1: Feed‐in tariffs (FiT) in Australia

State Closed Subsidy Scheme(s) Current FiT ‐ Policy / Regulation QLD 44 c/kWh net scheme until 2028 No regulation in south east Queensland. Market Available to customers consuming less than 100 offers. MWh per annum Mandatory FiT in regional Queensland based on retailers’ avoided cost. FiT of 6.348c/kWh in 2015–16 for customers consuming less than 100MWh pa with max. inverter capacity of 5kW NSW 20 c/kWh or 60 c/kWh until 31 Dec 2016 Voluntary benchmark solar FiT set at 4.7 to Gross scheme grandfathered, but option 6.1c/kWh available to convert to net scheme Mandatory retailer contribution towards the Available to customers consuming less than 160 closed SBS of 5.2c/kWh MWh per annum Victoria Three closed net schemes Mandatory FiT paid by retailers ‐ 60 c/kWh to 31 Dec 2024 Minimum FiTs for 2015 and 2016 are 6.2c/kWh ‐ 25 c/kWh until 31 Dec 2016 and 5.0c/kWh respectively ‐ 1‐for‐1 until 31 Dec 2016 WA Net scheme available for 10 years Retailers, Synergy and Horizon Power must Pre 1 July 2011 – 40c/kWh offer customers a buyback scheme at rates Post 1 July 2011 – 20 c/kWh subject to regulatory approval Synergy customers receive 7.135c/kWh Horizon Power (regional) rates are 10 – 50c/kWh depending on location SA 44 c/kWh to 30 June 2028 and 16c/kWh to 30 R‐Fit of 5.3c/kWh to apply for 2 years from 1 September 2016 January 2015. Maximum export of 45kWh per day applies in Available to customers consuming less than some circumstances 160MWh pa system up to 10kVA (single phase) or 30kVA (three phase) Tas Net 1‐for‐1 FiT until 1 January 2019 Mandatory FiT of 5.5c/kWh for 2015–16 ACT Five premium FiT rates (30.16c/kWh– No regulation. Market offers are 6.0–7.5c/kWh 50.05c/kWh) gross scheme for 20 years based on net metering ActewAGL’s 1‐for‐1 gross FiT until 2020 NT For new connections, the Northern Territory feed in tariff is 1‐for‐1 (based on the customer’s consumption tariff). Customers under the Alice Springs Solar City initiative receive 51.28 c/kWh, capped at $5/day.

The ‘avoided cost’ approach is based on estimating the direct financial benefit that a retailer receives if it on‐sells exported PV electricity at a cost‐reflective price. Costs of electricity include wholesale energy, network costs, line losses, retailing costs and other market related costs such as system operations and metering. Exported energy from embedded generation may avoid some of these costs such as wholesale energy, network losses and market fees. Solar PV may also impact retailing, network and hedging costs as well as the wholesale market merit order. Besides the financial benefits and costs of solar PV, there may be other environmental or social benefits from solar PV generation, such as a reduction in pollution. This inquiry is seeking evidence on the full range of costs and benefits from exported PV generation, and the implications for feed‐in pricing.

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Feed‐in tariffs: what should be regulated and how

Some of the main factors influencing the value of exported solar PV are briefly discussed below. Wholesale electricity The cost of is a key determinant of the value of solar exports. It is usually measured in terms of the forecast wholesale market cost of energy (cents per kWh) which varies on a half‐hourly basis. In Queensland, settlements for customers without interval data are based on profiling using an aggregate average net consumption profile of all consumers over each half‐ hour of each day. Network losses Traditionally, electricity is transported from central generation to load centres over long transmission and distribution lines. Along the way, some electricity is lost. One of the key benefits of embedded generation, such as solar PV, is avoiding the transport of energy over long transmission lines. Some losses in the distribution network could also be avoided, but it will depend on the characteristics of the network, times of day and the level of penetration of embedded generation on a particular feeder. Market costs (NEM Fees) There are two market costs incurred by retailers operating in the National Electricity Market (NEM); NEM participation fees and ancillary services charges. Both the NEM participation fees and ancillary services fees are paid based on net energy purchased from the wholesale pool. As exported solar PV displaces purchases from the wholesale market, retailers will avoid NEM and ancillary services fees. Transmission network costs Electricity exported from solar PV does not generally need to be transported through the transmission network. So, in principle, embedded solar PV avoids transmission network costs. However, given the largely fixed costs associated with the transmission network, a significant part of network costs will be the same if a small or large amount of electricity is transmitted. As such, transmission cost impacts, at least in the short term, may be low. Distribution network costs The value of solar exports depends on the availability of the distribution network to transport the energy to another user. There may be benefits from solar PV in particular locations where it defers network investment. However, there may also cases where solar PV generation causes increased network expenditure to manage power quality issues, particularly in areas of high solar PV penetration. Retail services Retailer service costs include costs associated with billing, marketing and customer services. It is unlikely that these costs will be avoided when a customer exports electricity into the distribution network. The cost of managing solar customer accounts may be relatively higher than non‐solar customers. Hedging Solar PV exports may reduce or increase retailer costs associated with risk mitigation through hedging contracts. For example, if the time‐profile of embedded generation exports is correlated with demand it may provide a 'natural hedge', and reduce hedging requirements, but if the effect of embedded generation is to make the overall patterns of net demand more peaky and volatile, then the opposite could be the case.

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Feed‐in tariffs: what should be regulated and how

Merit order effect The ‘merit order effect’ refers to the impact of reduced demand on the wholesale market. PV generation (or any demand management measures) will reduce the amount of electricity that retailers need to purchase from the wholesale market. This may lead to a lower supply requirement resulting in a lower bid in the merit order despatch and thereby lowering wholesale spot prices. Externalities Embedded solar PV generation may produce positive externalities such as environmental benefits (from reduced carbon and non‐carbon pollution) from generating power using solar PV systems rather than coal or gas generators.

3.2 Structure and payment of feed-in tariffs

The terms of reference asks us to determine how a fair price (or fair prices) may be designed and paid (including the structure, unit measure, gross or net payment and the payment mechanism). The most appropriate structure and payment mechanism for a feed‐in tariff will, in part, depend on the regulatory approach adopted and the costs and benefits of different structures within the constraints of system.

3.2.1 Gross or Net Scheme Feed‐in tariffs can be applied on either a gross or net basis. Table 3.2 provides a summary of the two approaches. Table 3.2 Gross versus net metering

Gross Scheme Net Scheme  Measure total electricity generation and in‐  Solar PV generation is first used on the home consumption independently premises  Customer paid for all generation  Excess generation exported to the grid  Customer charged for all consumption  Import and Export metered separately  Entire solar PV generation valued  Export = generation minus consumption  Total consumption metered  Import = Consumption minus instant generation  Customer paid for exports  Customer charged for imports

Each metering arrangement has different impacts which will vary in size depending on the efficiency of network, retail and feed‐in tariff prices. For example, under the solar bonus scheme where the feed‐in tariff was higher than retail prices, a net metering arrangement distorted incentives for efficient consumption by discouraging use during the day and shifting use to the evening peak. Similarly, under the current volume based network charge, a net metered customer can avoid paying the full share of network costs. Gross metering can overcome some of these issues as solar PV customers will be charged for all of the energy used and therefore pay a network charge for all of their consumption (fixed and variable components) the same as other non‐PV customers. A gross feed‐in tariff also allows investment decisions to be made with more certainty. Customers are able to more accurately estimate the payments they are likely to receive under a gross scheme as payments can be estimated without needing to know consumption patterns. As net metering depends on the behaviour of the householders, such certainty is not possible.

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Feed‐in tariffs: what should be regulated and how

That said, as net metering is the current approach in Queensland, any benefits of alternative metering options would need to offset any change costs.

3.2.2 Unit Measure Feed‐in tariffs have traditionally been paid on a cents per kilowatt hour basis due to the simplicity and ability of metering devices to capture the data accurately. Further, most customers have a good understanding of the kWh unit of measure and have generally accepted the measure as a good proxy for the valuing solar energy. A gross metering approach may allow alternative measures to value solar. Under a gross metering arrangement, feed‐in tariffs should not distort efficient in‐home consumption. As gross energy generated is largely dependent on the size of the inverter and panels, a payment by size of the inverter and panels could be considered in lieu of a kWh measure.

3.2.3 Single or Multiple Feed-in Tariffs Due to size, geographic and network topology differences in Queensland, solar PV generation can have different cost and benefit implications for networks and retailers. Generally, customers in high cost of supply areas will provide the most savings when it comes to solar PV generation. This provides a rationale for varying feed‐in tariffs depending on location. However, there are considerable challenges in accurately estimating a locational value, particularly where other prices are not cost reflective. Moreover, as the Uniform Tariff Policy ensures that regional customers can access the same tariffs as south east Queensland customers despite their higher cost of supply, locational variation may raise equity issues. Another factor to consider is a time‐based value of solar. The wholesale electricity market is measured and settled on a half‐hourly basis which varies throughout the day depending on supply and demand. Time varying solar feed‐in tariffs may contribute to more efficient outcomes, but where feed‐in tariffs are regulated, it depends on being able to determine accurate time‐based prices in a cost effective way.

3.3 Other approaches to valuing solar or solar exports

Various studies have been conducted locally and overseas on the appropriate methodology to value solar energy. In addition to the avoided costs identified above, other costs and benefits considered include solar integration costs, financial risks, system security, environmental benefits and social benefits. In 2015, the Clean Energy Council (CEC) commissioned a study into calculating the value of small‐ scale generation to networks.14 The study identified value categories that may be included in the assessment of costs and benefits impacting networks. Each value category could either impose a cost or benefit to the network depending on various factors including the level of penetration of solar PV generation. Internationally, the Maine Public Utilities Commission conducted a project into the valuation of solar.15 The methodology quantifies the cost and benefits of gross energy produced by solar PV systems based on identified components such as avoided energy costs, avoided generation

14 Clean Energy Council (2015). 15 Maine Public Utilities Commission (2015).

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Feed‐in tariffs: what should be regulated and how

capacity, solar integration costs, avoided transmission and distribution capacity, voltage regulation and social costs.

Questions 3.1 What are the costs and benefits of exported solar electricity? 3.2 Who incurs the costs and accrues the benefits from exported solar electricity? How will future market developments impact on costs and benefits? 3.3 Where there is a case to regulate feed‐in tariffs, is the existing approach to pricing solar exports appropriate? If not, what alternative approach would be the most effective and efficient way to price solar exports? 3.4 How should the price be structured and paid? Should feed‐in tariffs account for variations in value due to location and time? 3.5 Would market, regulatory or policy changes be required to implement feed‐in tariffs? If so, what changes would be required?

3.4 Review mechanisms and timeframes

Any regulated feed‐in tariffs will need to be reviewed and re‐determined over time to ensure they remain appropriate. Under the existing arrangements in Queensland, the QCA conducts an annual review. Most other Australian jurisdictions have their independent regulators review solar feed‐in‐tariffs, but the timeframe and scope of reviews do vary:  In New South Wales and Victoria, IPART and ESC respectively, conduct annual reviews of the solar feed‐in tariff.  In South Australia, the ESCOSA conducts biennial reviews of the solar feed‐in tariff with a mid‐ period update where adjustments are made if certain parameters are met.  In Tasmania, the OTTER conducts annual reviews by recalculating the FiT based on its established methodology. An appropriate review mechanism should seek a balance between:  certainty for PV customers, retailers and other market participants  flexibility to ensure the feed‐in tariff remains appropriate  costs of the various review options, including the regulatory costs, for all stakeholders; and  timing the review to align with the retail price review on notified prices, if necessary. Some possible approaches include:  an annual review of the value(s), to apply for the following 12‐month period  a multi‐year review which establishes a fixed value or values for two or more years; or  a multi‐year review which establishes a variable value or values for two or more years, updated at defined intervals, or as necessary. In general, shorter review periods allow for greater flexibility to adjust or modify settings in response to changing market circumstances. The drawback, however, is that reviews impose costs on all stakeholders that participate in the review process (including direct review costs).

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Feed‐in tariffs: what should be regulated and how

In contrast, longer review periods allow more time for the collection of evidence and to assess the effectiveness of its regulatory settings in the market. More evidence and the opportunity to consider this evidence would assist in the deliberation of any future determinations. A longer review timeframe would provide more certainty for stakeholders. However, it does impose the risk on customers and industry of unforeseen changes to determinants of the value not being reflected in the price. If the value is inflexible to respond to significant changes, customers and industry may find themselves locked into an inappropriate feed‐in tariff rate potentially for a number of years. One possible means of mitigating this risk would be to allow for updates to the estimate, either at defined intervals or in response to certain changes. Under this approach, it may also be necessary to develop criteria or materiality thresholds for deciding whether the value should be updated.

Questions 3.6 When should the feed‐in tariff be reviewed or updated? 3.7 How should the feed‐in tariff be reviewed or updated?

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Barriers to a market for solar exports

4 BARRIERS TO A MARKET FOR SOLAR EXPORTS

The terms of reference asks us to investigate and report on:

… any barriers or constraints (technical, market, regulatory or otherwise) to monetising the value of exported solar energy in Queensland in the current electricity system, and options to address those barriers. Some barriers may be direct impediments to pricing solar exports, but there may be other indirect barriers to a well‐functioning solar export market.

4.1 Barriers to deployment

Some small customers cannot install solar PV systems, and thus cannot participate in the embedded generation 'market'. This occurs for several reasons. Obvious barriers include:  housing tenure (renters, on‐supply receivers)  housing type (mobile homes, unit blocks, townhouses, asbestos roofs)  search costs; and  metering arrangements (for example, pre‐pay meters in the isolated networks, or embedded networks without individual meters). Beyond the obvious barriers, there are processes and regulations that may act as barriers or restraints to participation. The Clean Energy Regulator regulates solar PV installation designs and componentry under the Renewable Energy (Electricity) Act 2000 to ensure that components are of a high quality and installations are safe, and both network providers in Queensland apply connection guidelines to ensure that distributed generation does not impact on the safety or reliability of the network. Although these and other regulation aim to ensure public safety, they may increase costs and act as a barrier to new entrants or new designs.

4.2 Barriers to determining value

As discussed in Section 3.1, there are a number of issues to be addressed in determining a value for solar exports, but there are also barriers that can prevent the regular determination of accurate or reasonable values. These may include difficulties in:  isolating the benefits from an individual system when network impacts are the result of aggregate impacts  separating the impacts of embedded generation from demand management and energy efficiency when determining the merit order and foregone investment benefits

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Barriers to a market for solar exports

 identifying and valuing environmental benefits, and where they exist, determining who should pay for them  accounting for the impacts of other regulations and government policies, such as the Small‐ Scale Renewable Energy Scheme; and  determining and distributing the network cost impacts of the augmentation required to support and integrate widespread embedded generation.

4.3 Barriers to monetising and transferring value

Even where a value can be determined, there are barriers that may prevent the monetisation of value, or the transfer of that value to the party which creates it. These barriers may include a lack of market interfaces (for example, to facilitate direct interactions between embedded generators and small consumers). Some of these issues are being considered through the ‘New products and Services’ work being conducted by the COAG Energy Council and the Clean Energy Council (CEC) (Section 3.3).16 Other issues may include:  The limited ability of the network businesses to monetise the value of demand and peak load reductions and delays, and the lack of financial pathways to provide any benefit back to the embedded generators that create the value.  Tariff and feed‐in‐tariff structures that do not reflect the time‐value costs and benefits of embedded generation.  Challenges of identifying and quantifying the value of environmental benefits, particularly when there is no market for those benefits (e.g. how to value reductions in non‐carbon pollution) and, where present, challenges to determining who should pay for those benefits.  How to transparently present and implement an export rate to both embedded generators and consumers when the rate is determined through regulation.

4.4 Options to address barriers

Not all barriers to solar PV and solar export pricing are policy relevant — some barriers may simply represent market characteristics that exist in many other markets. Even where barriers are caused by market failures, they may not be amenable to correction by government action or may not be able to be addressed in a cost effective way. Even so, there may be a range of technical, market or regulatory barriers that could feasibly be addressed in a cost effective way to remove impediments to solar exports. The QPC is interested in identifying such impediments and efficient and effective ways to address them.

16 Clean Energy Council (2015).

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Barriers to a market for solar exports

Questions 4.1 What are the main barriers to pricing solar exports? How significant are these barriers? 4.2 How may broader market changes (e.g. metering) impact barriers? 4.3 Can these barriers be overcome in an effective and efficient way? 4.4 Are there other barriers to a well‐functioning solar export market? 4.5 Are there examples where efficient investments in solar did not proceed because of technical, market or regulatory barriers? 4.6 Are there cost‐effective ways to remove or address those barriers?

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Glossary

GLOSSARY

A ACT Australian Capital Territory

ActewAGL Joint venture between Australian Gas Light Company (AGL) and Icon Water Limited (formerly ACTEW Corporation), an ACT Government owned corporation C c/kWh Cents per kilowatt‐hour

CEC Clean Energy Council

COAG Council of Australian Governments D D‐FiT (South Australia) Distributor‐paid feed‐in tariff E Electricity Act Electricity Act 1994 (Qld)

Embedded generation A generating unit that is connected within a distribution network rather than connected to the high‐voltage transmission network, also known as distributed generation

Energex Energex Limited

Ergon Energy Ergon Energy Corporation Limited (electricity distribution arm and parent company)

ESC Essential Services Commission ‐ VIC

ESCOSA Essential Services Commission of South Australia ‐ SA F FiT Feed‐in Tariff G Gross feed‐in tariff A gross feed in tariff pays for each kilowatt hour produced by a grid connected system I IPART Independent Pricing and Regulatory Tribunal ‐ NSW K kW Kilowatt – 1000 watts (a watt is a unit of electrical power or the rate of doing work)

kWh Kilowatt‐hour – The standard unit of energy representing consumption of electrical energy at the rate of one kilowatt over a period of one hour M MW Megawatt – 1000 kilowatts

MWh Megawatt hour – The standard unit of energy representing consumption of electrical energy at the rate of one megawatt over a period of one hour N NEM National Electricity Market

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Glossary

Net feed‐in tariff A net feed in tariff pays the PV system owner only for surplus energy they produce

NSW New South Wales

NT Northern Territory O OECD Organisation for Economic Co‐operation and Development

OTTER Office of the Tasmanian Economic Regulator P PV Photovoltaic Q QCA Queensland Competition Authority

QLD Queensland

QPC Queensland Productivity Commission R R‐FiT (South Australia) Retailer‐paid feed‐in tariff

RTI Act Right to Information Act 2009 S SA South Australia

SBS Solar Bonus Scheme

SEQ South East Queensland

Small customer A customer that consumes less than 100 MWh of electricity per year

SRES Small‐scale Renewable Energy Scheme T Tas Tasmania V VIC Victoria W WA Western Australia

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Appendix A: Terms of Reference

APPENDIX A: TERMS OF REFERENCE

Queensland Productivity Commission ‐ Public Inquiry into a Fair Price for Solar Exports Terms of Reference

Objective The aim of the inquiry is to determine a fair price (or fair prices) for solar power that is produced at the home or business premises of a ‘small customer’ and exported into the electricity grid (both National Energy Market (NEM) connected and isolated grids). A fair price for exported solar energy:  is to be determined based on an assessment of public and consumer benefits from solar generated electricity; and  must not have an unreasonable impact on network costs for non‐solar users.

Context Solar power installations on small customers’ premises can at certain times generate more electricity than is required by the customer resulting in the surplus electricity being exported into the local electricity grid. Payments to the customers for their exported solar energy are known as Feed‐in tariffs (FiTs). FiTs are currently available in different forms for small electricity customers (those consuming less than 100 megawatt‐hours (MWhs) of electricity per year) across Queensland. In south‐east Queensland (SEQ), FiTs are offered by participants in the competitive retail market, with no minimum amount mandated. There are currently six retailers in SEQ offering FiTs which range from 6 – 12 cents per kilowatt‐hour (c/kWh). The Electricity Act 1994 mandates a FiT for regional Queensland customers as there are no market FiTs available. The mandated FiT is determined annually by the Queensland Competition Authority, and is paid by Ergon Energy’s retail business, and by in the case of Queensland customers connected to the New South Wales electricity network operated by Essential Energy (around the Goondiwindi/Inglewood region). The regional FiT is based on the financial value to the electricity retailers from their receipt of exported solar energy. The FiT is calculated by summing the avoided generation costs, avoided NEM and ancillary service fees, and avoided costs of network losses. The regional FiT in 2015‐16 is 6.3486 c/kWh. In addition, a large number of existing customers are in receipt of the now‐closed 44c/kWh FiT under the Solar Bonus Scheme, for which the electricity distributors are responsible. Under the National Electricity Rules the distributors can recover the costs of paying the 44 c/kWh FiT from all distribution network customers through the distributors’ network tariffs. The Queensland Government is also considering opportunities to grow the renewable energy sector in particular, the uptake of solar PV installation for both households and businesses. The Government has set a target for one million rooftops or 3000MW of solar panels by 2020. In addition, new emerging technologies such as battery storage at the household level, may over time, increase distributed energy generation. Battery storage together with smart metering also has the potential to reduce . A fair price for solar may also encourage households to use and see value in the network.

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Appendix A: Terms of Reference

Scope The Queensland Productivity Commission is to investigate and report to Government on: 1. A methodology for determining a fair price for solar energy generated by a ‘small customer’ and exported to a Queensland electricity grid that: a. is based on the public and consumer benefits of exported solar energy; b. does not impose unreasonable network costs on electricity customers; particularly vulnerable customers and c. can be realised in the current electricity system. 2. The price(s) for solar energy determined under the methodology. 3. Any barriers or constraints (technical, market, regulatory or otherwise) to monetising the value of exported solar energy in Queensland in the current electricity system, and options to address those barriers. 4. How the fair price (or fair prices) may be designed and paid (structure, unit measure, gross or net payment, payment mechanism). 5. The mechanisms by which a fair price could be implemented in Queensland (mandatory or other). 6. Appropriate review mechanisms and timeframes. The scope does not include consideration of the 44 c/kWh FiT rate under the Solar Bonus Scheme. This matter will be considered by the Commission’s broad public inquiry into electricity prices. In its investigations, the Commission should have regard to the following factors:  The public and consumer benefits from exported solar PV generation, including social, economic and environmental benefits.  Whether households and business are already fairly compensated for public and consumer benefits (such as through existing government renewable energy programs and rebates and market contracts).  The existing tariff structures and the impact these are having on the market.  The value / avoided costs and any cost imposed or benefits across the electricity supply chain due to the exported solar PV energy, taking into account temporal and geographical / locational factors. One example may be the value being recovered from consumers for use of the transmission network when exported energy is on‐sold, where distributed solar energy does not utilise the transmission network.  Whether the fair value for exported solar PV energy is sufficiently different between local areas or regions to justify the administrative costs to government or market participants of administering separate values for those areas/regions. This should include how different values could be implemented in conjunction with the Government’s commitment to the Uniform Tariff Policy.  Any additional cost that may be incurred by electricity customers from implementation of the fair prices/s recommended by the Commission.  The perception of electricity customers about whether any cost to them resulting from the fair value is ‘unreasonable’.  Wherever possible that the entity receiving the benefit of exported solar energy should be the entity to pay for that benefit.  Impacts on competition in the retail electricity market.

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Appendix A: Terms of Reference

 Existing mechanisms in the electricity system which may prevent the true value of exported solar energy being realised/monetised (e.g. metering constraints preventing the premium value of daytime generation from solar PV being realised by retailers; the use of Net System Load Profile in NEM market settlement processes, etc.).  The Government’s 1 million rooftops target by 2020, noting that the Government is not intending to return to a premium tariff, and any FiT will be at significant discount to the retail cost of electricity.  Any other matters the Commission considers relevant. Resourcing It is expected that the Commission will engage expert advice from external sources where necessary, including the support and expertise of the Queensland Competition Authority. Timeframes Issues Paper The Commission must publish an issues paper outlining the issues associated with its investigation. Draft Report The Commission must publish a draft report on its investigation into a fair price for solar. The Commission must publish a written notice inviting submissions about the draft report. The notice must state a period (the consultation period) during which anyone can make written submissions to the Commission about issues relevant to the draft report. The Commission must consider any submissions received within the consultation period and make them available to the public, subject to normal confidentiality considerations. Final Report The Commission must publish a final report on its investigation into a fair price for solar within 10 months of the start of the work. Stakeholder engagement The Commission should consult with stakeholders, and consider submissions, within the specified timeframes.

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Bibliography

BIBLIOGRAPHY

Clean Energy Council (CEC) 2015, Future proofing in Australia’s electricity distribution industry project, http://www.cleanenergycouncil.org.au/fpdi/, accessed 17 September 2009.

Council of Australian Governments 2008, National principles for feed‐in tariff schemes, Canberra, November.

Hilmer Committee (Independent Committee of Inquiry into Competition Policy in Australia) 1993, National Competition Policy, Australian Government Publishing Service, Canberra.

Maine Public Utilities Commission 2015, Maine Distributed Solar Valuation Study, Report to the Joint Standing Committee on Energy, Utilities and Technology, 127th Maine Legislature, 1 March.

Menger, C. 1871, Principles of Economics, Reprinted in 2007, Ludwig von Mises Institute, https://www.mises.org/sites/default/files/Principles%20of%20Economics_5.pdf, accessed 9 September 2015.

Organisation for Economic Co‐operation and Development (OECD) 2005, OECD Guiding principles for regulatory quality and performance, OECD, Paris.

Queensland Competition Authority 2013a, Estimating a fair and reasonable solar feed‐in tariff for Queensland, Final Report, , March.

Queensland Competition Authority 2013b, Statement of regulatory pricing principles, Brisbane, August.

Queensland Competition Authority 2015a, Regulated retail electricity prices for 2015–16: Final determination, Brisbane, June.

Queensland Competition Authority 2015b, Industry Assistance in Queensland, Final Report, Volume I, Brisbane, July.

Queensland Competition Authority 2015c, Solar feed‐in tariff for regional Queensland for 2015‐16: Final determination, June.

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