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Power from the People Inquiry into distributed generation A draft report for further consultation and input May 2012 © State of Victoria 2012 This draft report is copyright. No part may be reproduced by any process except in accordance with the provisions of the Copyright Act 1968 (Cth), without prior written permission from the Victorian Competition and Efficiency Commission. ISBN 978-1-922045-76-8 (paperback) ISBN 978-1-922045-77-5 (PDF) Disclaimer The views expressed herein are those of the Victorian Competition and Efficiency Commission and do not purport to represent the position of the Victorian Government. The content of this draft report is provided for information purposes only. Neither the Victorian Competition and Efficiency Commission nor the Victorian Government accepts any liability to any person for the information (or the use of such information) which is provided in this draft report or incorporated into it by reference. The information in this draft report is provided on the basis that all persons having access to this draft report undertake responsibility for assessing the relevance and accuracy of its content. Victorian Competition and Efficiency Commission GPO Box 4379 MELBOURNE VICTORIA 3001 AUSTRALIA Telephone: (03) 9092 5800 Facsimile: (03) 9092 5845 Website: www.vcec.vic.gov.au An appropriate citation for this publication is: Victorian Competition and Efficiency Commission 2012, Power from the People: Inquiry into Distributed Generation, draft report, May. About the Victorian Competition and Efficiency Commission The Victorian Competition and Efficiency Commission (VCEC), which is supported by a secretariat, provides the Victorian Government with independent advice on business regulation reform and opportunities for improving Victoria’s competitive position. VCEC has three core functions: reviewing regulatory impact statements, measuring the administrative burden of regulation and business impact assessments of significant new legislation undertaking inquiries referred to it by the Treasurer, and operating Victoria’s Competitive Neutrality Unit. For more information on the Victorian Competition and Efficiency Commission, visit our website at: www.vcec.vic.gov.au Disclosure of interest The Commissioners have declared to the Victorian Government all personal interests that could have a bearing on current and future work. The Commissioners confirm their belief that they have no personal conflicts of interest in regard to this inquiry. Opportunity for further comment You are invited to examine this draft report and provide comment on it within the Commission’s public inquiry process. The Commission will be accepting submissions commenting on this report and will be undertaking further consultation before delivering a final report to the Government. The Commission should receive all submissions by Friday 15 June 2012. Submissions may be sent by mail, fax, or email; in electronic, paper or audio format. By mail: Inquiry into Feed-in Tariffs & Barriers to Distributed Generation Victorian Competition and Efficiency Commission GPO Box 4379 MELBOURNE VICTORIA 3001 AUSTRALIA By facsimile: (03) 9092 5845 By email: [email protected] Terms of reference Inquiry into Feed-in Tariff Arrangements and Barriers to Distributed Generation I, Kim Wells MP, Treasurer, pursuant to section 4 of the State Owned Enterprises (State Body – Victorian Competition and Efficiency Commission) Order (‘the Order’), in conjunction with Michael O’Brien MP, the Minister for Energy and Resources, hereby direct the Victorian Competition and Efficiency Commission (‘the Commission’) to conduct an inquiry into feed-in tariff arrangements and barriers to distributed generation. Background Victoria currently has in place a number of programs that are designed to reduce greenhouse gas emissions and facilitate an adjustment towards a low emissions economy. These programs include feed-in tariff schemes such as the standard feed-in tariff scheme for customers with installations up to 100kW capacity and the premium and transitional feed-in tariff schemes applying to eligible customers with solar inverter systems up to 5kW capacity. In the context of the implementation of a national carbon price, it is appropriate that the Commission undertakes a review of Victoria’s feed-in tariff schemes. Addressing any state and local regulatory or other barriers to the uptake of low emissions generation, including co-generation and tri-generation, is also important to ensure that any transition to low emissions generation occurs as smoothly and as cost- effectively as possible. Scope of the inquiry In this inquiry, the Commission is required to: (1) Assess the design, efficiency and effectiveness of feed-in tariff schemes, including market-based gross feed-in tariff schemes, in the context of a national carbon price. (2) Prove a recommendation as to whether existing feed-in tariff arrangements should be continued, phased-out or amended. Where phase-out of existing arrangements is proposed, the appraisal should give consideration to whether any transitional arrangements may be necessary. Any changes to existing arrangements would not be applied retrospectively. (3) Identify and State and/or local regulatory and other barriers to the development of a network of distributed renewable and low emission generation in Victoria, including co-generation and tri-generation. In conducting this inquiry, the Commission should have regard to: recent reports by the Australian Energy Market Commission on planning and connection arrangements for distributed energy generation; reviews currently being undertaken by the Victorian Government; and relevant reports by Commonwealth forums and bodies such as the Productivity Commission. TERMS OF REFERENCE V Inquiry Process In undertaking this inquiry, the Commission is to have regard to the objectives and operating principles of the Commission, as set out in section 3 of the Order. The Commission must also conduct the inquiry in accordance with section 4 of the Order. The Commission is to consult with key interest groups and affected parties, including representatives of end-use electricity consumers, and may hold public hearings. The Commission should also draw on the knowledge and expertise of relevant Victorian Government departments and agencies. The Commission is required to produce a draft report for public consultation, ahead of a final report to the Government within 6 months of receipt of this reference. KIM WELLS MP Treasurer Received: 13 January 2012 VI POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION Preface The release of this draft report gives interested parties the opportunity to comment on the Commission’s analysis in relation to its inquiry into feed-in tariff arrangements and barriers to distributed generation. The Commission will consider comments received prior to developing and presenting the final report to government. In preparing this draft report, the Commission invited public submissions and consulted widely with a range of individuals, businesses, organisations, government departments and local councils. The Commission invites written submissions on the draft report. These submissions may address any of the issues covered by the terms of reference. In light of the submissions received, the Commission will hold further consultations as necessary. At the conclusion of consultation on the draft report, the Commission will prepare a final report to be presented to the Victorian Government by 13 July 2012. The Order in Council establishing the Commission says that the Treasurer should publicly release the final report and that the Victorian Government should publicly release a response to the final report within six months of the Treasurer receiving the report. The Commission looks forward to receiving feedback on the draft report. Deborah Cope Dr Matthew Butlin Presiding Commissioner Chair PREFACE VII Contents Terms of reference V Preface VII Contents IX Abbreviations XI Glossary XIII Key Messages XVII Summary report XIX Draft recommendations and information requests XXXV 1. Introduction 1 1.1 Background to the inquiry 1 1.1.1 What is distributed generation? 1 1.1.2 What are feed-in tariffs? 2 1.2 Context and why this inquiry is important 3 1.3 The Commission’s approach 4 1.4 Inquiry process 4 1.5 Structure of the report 5 2. Distributed generation in Victoria 7 2.1 The Victorian electricity industry 7 2.1.1 Market for distributed energy 8 2.2 Regulation of distributed generation in Victoria 13 2.2.1 Regulation of the NEM 13 2.2.2 Connecting to the distribution network 15 2.2.3 Selling excess electricity generated 18 2.2.4 What does this all mean for the inquiry? 21 2.3 Policies for distributed generation and renewable energy 27 2.3.1 Commonwealth policies 27 2.3.2 State policies 29 2.4 Future trends 30 2.4.1 Cost trends 30 2.4.2 Improved metering technology 33 2.5 Conclusions 34 3. The Commission’s approach 35 3.1 Introduction 35 3.2 Issues raised by participants 35 3.2.1 Connecting to the network 36 3.2.2 Selling electricity 41 3.3 A framework for analysis 43 3.3.1 What are the policy objectives? 44 3.3.2 Barriers to distributed generation 46 3.3.3 How might markets fail to achieve efficient outcomes? 48 3.3.4 Equity considerations 52 3.4 Conclusion 53 4. Connecting generators to the distribution network 55 4.1 Context 55 4.2 Overview of barriers to efficient distributed generation connection 57 4.3 Barriers to medium-scale distributed generation 58 4.3.1 Information and planning 60 4.3.2

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