Australian PV

Association

Australian PV Association
And
Centre for Energy & Environmental Markets
c/- Dr Muriel Watt
11 Cole Crescent
Liberty Grove NSW 2138

12 January, 2009
Mr Mark Duffy
Director-General
NSW Department of Water & Energy
GPO Box 3889
Sydney NSW 2001

Dear Mr Duffy,

NSW Solar Feed-in Tariff Taskforce

Thank you for the opportunity to make a submission to the NSW Solar Feed-in Tariff Taskforce and to
make a presentation at the hearings on Thursday.

Please find attached a combined submission from the Australian PV Association and the UNSW Centre for
Energy & Environmental Markets. A presentation will be forwarded tomorrow.

Yours Sincerely

Dr Muriel Watt
Chair, Australian PV Association
and
Centre for Energy & Environmental Markets

Encl.
 Australian PV
Association

Submission to the NSW Solar Feed-in Tariff Taskforce

January 2009

Australian PV Association

and

Centre for Energy and Environmental Markets, UNSW

January 2009
 Australian PV
Association

The Australian PV Association

The objective of the Association is to encourage participation of Australian organisations in PV
industry development, policy analysis, standards and accreditation, advocacy and collaborative
research and development projects concerning photovoltaic solar electricity.
A principal activity is to manage Australian participation in the IEA PVPS Programme. The work of the IEA
PVPS is arranged by Tasks, each with its own commitments of time and resources. At present Australia
participates in:
Task I – PV Information Exchange and Dissemination
Task 9 – PV Services for Developing Countries;
Task 10 – Urban Scale PV Applications
Task 11 – PV Hybrid Systems within Minigrids.
Current Association members: Alice Solar City, ANU, BP Solar, BT Imaging, Bushlight, CEC, Clear
Security, Conergy, CSIRO, Dyesol, Ergon, GE Trading, Green Solar Group, Greenbank, Greg Watt, GSES,
Honda, IT Power Australia, LJW Solar, Novolta, Peter Gorton, Regency Media, RISE, Selectronic,
Solarfarm, SA Government, Suntech, Sustainability Victoria, Solco, Sowilo Engineering, Spark Solar,
Tindoz, Trina Solar, Xerocoat, UNSW.
The Association receives $40,000 per year from the Australian Government to assist with the costs of IEA
PVPS membership and Task activities.

Contact:
Dr Muriel Watt, Chair Australian PV Association
c/- IT Power Australia
11 Cole Crescent
Liberty Grove NSW 2138
muriel.watt@itpau.com.au

The Centre for Energy and Environmental Markets

The UNSW Centre for Energy and Environmental Markets (CEEM) undertakes interdisciplinary research in
the design, analysis and performance monitoring of energy and environmental markets and their
associated policy frameworks. CEEM brings together UNSW researchers from the Australian School of
Business, the Faculty of Engineering, the Institute of Environmental Studies, and the Faculty of Arts and
Social Sciences, working alongside a growing number of international partners. Its research areas include
the design of spot, ancillary and forward electricity markets, market-based environmental regulation, the
integration of stochastic renewable energy technologies into the electricity network, and the broader policy
context in which all these markets operate.

Contact:
Dr Robert Passey, CEEM
c/- School of Electrical Engineering & Telecommunications
University of NSW
Sydney NSW 2052
r.passey@unsw.edu.au
 Australian PV
Association

Introduction
Before examining the specific questions posed by the NSW Solar Feed in Tariff (FiT) Task Force, we briefly
explore the nature of the FiT and market support in some of the IEA PVPS countries in which it has been
applied.1

What is a FiT?
In the world of grid-connected renewables, the term FiT simply refers to an explicit monetary reward for
producing electricity from a renewable energy source, at a rate per kWh somewhat higher than the retail
electricity rates being paid by the customer – which is why the measure is often more correctly termed an
“enhanced FiT”. In principle, the measure encourages efficient production of renewable electricity with the
output from the renewable energy system being monitored and recorded, and has consequently been
promoted as a performance-based market support measure.

The FiT does not provide direct support with the problem of the larger up-front costs associated with
installing a renewable energy system. Successful FiT policies globally have overcome this problem by
setting the FiT level at rate that encourages a positive financial return over the lifetime of the policy and
therefore enables the customer to access private sector finance to overcome the capital cost barrier. This
provides a financial driver to ensure systems are designed and warranted to operate reliably over their
lifetime.

Variations in implementation
There are two main variations of the FiT approach: in the first case, all the electricity produced by the
renewable energy system, irrespective of how much is used by the customer or fed into the grid, qualifies
for the feed-in tariff (a Gross FiT). In the other situation, only the electricity generated that is surplus to the
customer’s requirements is paid under the feed-in tariff (a Net Export FiT). The remainder has the same
value to the customer as their retail electricity rate. The attractiveness to the customer of the FiT is further
reduced if net-billing is used and the grid import / renewable electricity export balance is calculated over an
extended period of time, rather than on a half hourly or even instantaneous basis.

The FiT can become more attractive for all parties when time-of-use metering and pricing are employed,
reflecting the real benefits to the electricity network of reducing customer demand or adding power to the
system when it is most needed. From the electricity utility’s perspective this may be either when bulk power
is most expensive to purchase or in locations where supply is constrained, or both. However, such
locational signals may change over the 10 years of a feed-in tariff, while both calculating paybacks and
estimating returns on investment may become more difficult if time-of generation rates are used.

Typically, funds for the FiT are raised through a levy on electricity bills across the board, which has two
main attractions: the scheme is not subjected to the usual budgetary whims associated with government
funds and, potentially, all electricity customers are contributing to improvements in their electricity supply
system.

Setting an appropriate FiT level

There are a number of ways that the level of the FiT can be set. Simple financial calculations can indicate
the cash flow required to provide a certain return on investment for a given renewable energy system in a
particular location – for example, to pay off the system within its warranty period. Estimates of the value of
externalities, such as the unfunded costs of pollution associated with traditional energy supply, can form the
basis of the tariff. The specific electricity network benefits that may be relevant, such as peak demand
reduction or line support, can also be monetized.

1
From the IEA-PVPS publication “PV Power”, Issue 26. Available from www.iea-pvps.org.
 Australian PV
Association

The target market

There are 3 distinct application segments that a FiT could target and support: Residential applications
(typically 1-3kW), Commercial Roof Top Applications (typically <250kW) and Large utility-scale power
(typically >500kW).

Residential segments < 1.5 kW are eligible for Solar Credits under the proposed revised RET scheme. An
additional and appropriately set FiT would further assist uptake, help encourage larger systems, and
provide an ongoing incentive to own and maintain a high efficiency, fully functional Solar power system
over its lifetime and not just take advantage of a capital subsidy at time of purchase.

The commercial roof top segment is currently only at demonstration level in Australia yet has a load
profile well matched to PV output. An appropriate FiT policy would encourage small to medium enterprises
to consider using their roof space to generate solar electricity through private sector finance. This, for
example, could help primary producers generate income streams that are independent of drought or
commodity price fluctuation, as has occurred on a larger scale with wind farms. It would also assist in
minimising network costs in servicing the rapidly increasing commercial sector.

The Large Commercial Power Plant segment is nonexistent in Australia. In Spain and Germany, FiT
policies have been successful in driving uptake of large power plants either in rural regions or on large
areas of unused industrial urban roof space.

The larger commercial and utility scale systems provide the economies of scale which have been critical in
driving down system costs, stimulating local manufacture and creating jobs in Germany and Spain. They
also create the scale required to make meaningful contribution to peak load supply and greenhouse gas
reduction.

Countries using a FiT

FiT schemes are becoming more widespread and are showing a variety of outcomes. Amongst the IEA
PVPS countries notable examples can be found in France, Germany, Italy, Korea, the Netherlands,
Portugal and Spain. Detailed data on growth rates in various national markets can be found in the annually
published report “Trends in photovoltaic applications”, available from www.iea-pvps.org. While a high tariff
level has been shown to be capable of driving substantial market growth, some of the controlling conditions
that have been placed on different countries’ schemes have resulted in difficulties in achieving such a result
or sustaining high levels of investment. These controlling conditions have included:
caps on capacity allowed under the scheme, which has resulted in the market being saturated
within minutes (eg. Austria) or create risk of a collapse of the market when introduced
retrospectively (eg. Spain and Korea)
exclusion of certain types of projects such as larger-scale plants (or lack of appropriate
differentiation of tariffs), which creates market distortion and does not create the scale required to
attract industry investment
inadequate period guaranteed for the FiT
overly complex administrative requirements.
In Germany, these problems have largely been avoided. Whilst the high level of initial uptake kept prices
higher than expected demand is now forecast to continue to grow and drive down price in a global market
where investments have been made to increase available product supply.

Alternative market support approaches

Notable amongst countries that have not yet pursued the FiT approach but which, in many cases, have still
seen significant development of their grid-connected renewable energy markets, are Japan and the USA,.
In these countries the support mechanisms of choice have been direct capital subsidies, renewable
portfolio standards, green electricity schemes or tax exemptions, or some combination of these. Generally,
 Australian PV
Association

in these countries growth of the renewable energy market is slower than in the countries using the FiT. In
Australia, support has been focused on the residential sector and growth of grid connected PV has been
slow relative to countries where FiT policy attracts investment in the commercial and utility segments. For
example in 2003 the Spanish and Australian markets for PV where a similar size, in 2008 Spain installed 50
times (c1200MW) more PV than Australia as a result of the FiT policy,

Controlling the rate of deployment

A particular focus of policies that support deployment of technologies is to achieve a certain level of uptake.
This is certainly not easy to predict – as demonstrated by the rush of investment in the early stages of
MRET. Where a FiT is used, if the pool of potential investors is not adequately understood – their
motivations, financial positions and so on – overheated markets can result initially if the tariffs are set too
high. Set the tariffs too low and the investments could be negligible, consequently wasting the time and
effort that has been invested in development of the scheme.

The most obvious solution is to set the initial tariff at the ‘right’ level – but this is easier said than done if the
FiT is being used as a broad support mechanism. An advantage of a FiT over a market-based scheme
such as MRET is that it can be adjusted in response to changing circumstances and to help target a certain
level of deployment. As long as these adjustments are well anticipated and not retrospective for existing
customers, the key parameter of investment certainty can be maintained. It is also possible to use a
system of price ‘tiers’ that reduce as certain levels of deployment are reached. Such adjustments avoid the
need for setting a potentially problematic cap on the size of the scheme, which has been a source of
considerable angst in some international cases, with targets reached within minutes of the scheme being
opened, as in Austria, or severe market destabilisation when introduced later, as is the risk in Spain in
2009.

It is of course possible to target the approach onto specific, limited market segments, which can then be
expanded over time. Naturally this limits take-up rates and hence market and industry development.

Policy considerations
As with any proposed tool of public policy, a mechanism should be evaluated broadly against a number of
criteria. In the case of a proposed FiT, the outcomes that have been achieved elsewhere are becoming
easier to document. However, the local barriers to be addressed may not be the same as those tackled
elsewhere. The local electricity industry structure may also not be automatically compatible with the
approach. The scheme needs to be secure and flexible enough to survive political change. It may not be
sufficient on its own to transform the market or the local industry, so other issues will also need to be
addressed, including R&D, manufacturing and industry development. The administrative burden as well as
any potential free-rider effect needs to be minimised. Finally, the overall socio-economic and environmental
impacts of the measure need to be monitored.

The following box summarises the key design principles we consider necessary for a successful FiT for
renewables in NSW. These principles are derived from the international experiences cited above, and on
experiences in Australia with renewable energy support mechanisms. An illustration of the impact of
different FiT types, using a photovoltaics (PV) example, is also provided.
 Australian
Key Design Principles of a Renewable Energy PV
Feed-in-Tariff
Feed-in Tariff Rate:
Association
The initial FiT should be set so that the total income received by the system owner from the FiT + the prevailing electricity
tariff (and any further subsidies available, such as the recently announced Solar Credits) repays the system cost over the FiT
timeframe (assuming reasonable discount and inflation rates). Tariffs can be set higher in the early years to boost private
sector financing of installations and create product offers to encourage sustainable growth in later years when FiT rates are
reduced.

Timeframe:
In order to create market certainty, attract investment and deliver meaningful economic and environmental dividends:
A FiT should guarantee payment to the system owner for a minimum of 10 years after which net metering should
apply. The timeframe should allow investors to generate an appropriate rate of return over the lifetime to encourage
investment
Each technology should have its own FiT, with further breakdown by system size or application. For instance,
separate FiT rates should be specified for residential, commercial and large scale installations.
For each technology included, the programme should run for minimum of 10 years, meaning the FiT is paid out over 20
years (systems installed in year 10 will still earn a FiT for the following 10 years).

System sizes and caps:

No caps should be placed on system size, as this creates perverse incentives to separate larger systems into smaller ones.
However, the FiT rate can be varied for different size ranges. Caps on overall capacity should also be avoided as they create
panic in the market, with rapid uptake followed by market collapse, rather than steady industry development.

Reducing tariffs:
The FiT should be fixed only for the systems installed in any one year and be gradually reduced for the systems installed in
successive years. A predetermined system of reducing FiT price “tiers” over the scheme timeframe provides predictability for
investors. The FiT for installations in successive years should decrease (by say 5% - 10% pa) to capture and encourage cost
reduction potential as the industry moves down the cost learning curve.

Contestable Retail Electricity Markets

The FiT should be paid as a separate tariff in addition to and independent of the prevailing retail electricity tariff. This
ensures all systems receive the same benefit, regardless of their local tariff, and there is no loss of competition between
retailers.

Payment on total generation:

The FiT should be paid on all electricity generated by the system. This simplifies calculation of future revenue streams as it is
not dependent on time of electricity generation or electricity usage profiles, and so provides investment certainty. The graphs
on the following page illustrate this point.

Source of subsidy money:

The revenue to pay for the FiT should be raised through an across-the-board levy on network providers so as to remove any
issues of competition at the retail level. The retailer pays the appropriate end-user electricity tariff for each kWh generated
and the network provider pays the FiT for each kWh generated.

Interaction with other support mechanisms:

To maximise new deployment, to prevent double dipping and to facilitate the introduction of standard metering arrangements,
the FiT should take into account any other support received for the system – so that the net impact of all financial support
repays the system cost over the FiT timeframe. An interval meter with at least 2 channels should be used so as to enable
metering of total generation.

Guaranteed connection and purchase:

Electricity retailers and network providers should be required to guarantee that renewable energy systems which comply with
technical connection requirements imposed by Australian Standards and State or Territory regulators will be connected and
all their generation purchased.

Standardised grid-connection agreements:

Application and approval for installation and connection of PV systems to the grid should be streamlined via standard local
government and electricity industry processes so that these cannot be used to delay approvals. Ideally the FiT arrangements
should be incorporated directly into these processes.

Standards and warranties:

Customers taking advantage of the FiT should be required to use certified installers and products which meet Australian
standards. System warranties of at least 10 years should be mandatory.

Monitoring:
Since the FiT is providing transition market support prior to grid parity being reached, some form of monitoring/assessment
program should be incorporated into any FiT program to:
assess PV’s contribution to total generation and during times of peak demand, and any issues arising
collect demographic energy information, and
assess take-up rates, drivers, significant price points, customer preferences and any issues arising.
 Australian PV
Association

Empirical assessment of different FiTs

A Photovoltaics Example using Newington Solar Olympic Village data

The UNSW Centre for Energy and Environmental Markets (CEEM) conducted a study of the PV systems installed in
2
the Newington Solar Olympic Village for the NSW government in 2006. Using the correlated half hourly household
load and PV output data from 30 houses in this study, they found that, on average, just over 4% of the output of a
1kW PV system was exported over the year.

Given that the Newington houses were passive solar designed with gas hot water and cooking, they may have a lower
daytime load than the average Australian house, thus increasing the net PV export. Similarly, it is possible that
households that choose to install PV may use less energy than average and so have greater PV export.
If we assume the Newington half-
hourly load and PV data is
representative of households
generally, it is possible to change
the effective PV system size and
residential load and recalculate
net export for each half hour
period - see Figure 1. It can be
seen that the average net export
is significantly dependent on the
interaction between load and
system size. This highlights a key
issue for developing FiT policy if
a Net Export FiT is used, ie.
estimating the financial returns to
householders and therefore costs
of providing the FiT.

Using average solar insolation

data, this can be estimated with a fair degree of accuracy for a Gross FiT based on total generation, but is much more
difficult for a FiT based on net export because this is also affected by the household load by time of use, which is
difficult if not impossible to estimate for a 20 year period. For other technologies, such as wind, it would be even more
difficult to estimate.

Figure 2 shows how the financial outcome

for different sized systems is affected by
net metering, payment on total generation
or payment on net export (assuming a
5000kWh/yr load,3 a 22c/kWh retail price
and a 44c/kWh FiT). It can be seen that for
a 1kW PV system a net export FiT is little
better than the current net metering
arrangement; for a 1.5kW system (the size
limit for Solar Credits under eRET) the
extra annual earnings are around $100. As
expected, payment on gross export
provides a predictable and higher financial
return.

2
This report, An analysis of photovoltaic output, residential load and PV’s ability to reduce peak demand, can be provided on
request. Note that some members of APVA are CEEM staff.
3
The Newington systems were 1 kW and the average annual load was about 5,850 kWh.
 Australian PV
Association

Wider Benefits of a Feed in Tariff Policy

Employment and Investment

Policies that support the uptake of Renewable Energy have been proven globally to generate significant
employment. It has been estimated that 40-50 jobs are created per MW of PV manufactured and installed
(ref pp 48 Solar Generation V – Greenpeace & European PV Industry Association, 2008). In 2007, in
Germany alone, 42,000 people were employed in the PV sector – 70% in field installations which, by
definition, are local. A sustainable NSW FiT policy that supported on average 100MW per annum of
installation by 2020 would be expected to create employment for c4,000 people, the majority in the small to
medium business sector, located in all areas of the State, that would install and service the equipment.

World-leading research facilities at UNSW are well recognised in providing technical leadership that has
contributed to the establishment of today’s $10 billion global solar PV industry. A successfully FiT policy
will allow the State to participate in this high-growth market where investment, and hence employment,
follows areas where uptake and deployment scale is significant.

Network Reliability

Solar PV output typically supports network supply during periods of peak demand. At a feeder and
substation level, PV output is particularly well matched to commercial and light industrial loads, which are
daytime peaking and can have a high airconditioning component. The majority of forward investment in the
NSW electricity networks is forecast to help meet growth in peak demand.

13,500 350

12,500 300

11,500
250 NSW Demand
10,500 Nov-Mar
200
9,500 Solar PV Output
150
8,500
NSW NEM Price
100
7,500 Nov-Mar

6,500 50

5,500 -

Figure 3: Solar PV output versus 5-year average NSW demand & NSW NEM price
(Nov. - Mar., 2000-4)

Environmental Impact

A FiT policy that supported installation of 1500MW of PV by 2020 would offset 2 million tonnes of CO2 per
annum.
 Australian PV
Association

Answers to Specific Questions Posed by NSW Solar FiT Task Force

The following answers are drawn from the above.

1) What factors should be considered in setting a tariff rate?

Current and projected PV system prices
Likely PV system electricity generation
Interest rates, inflation rates and discount rates
System life-times
Current and projected electricity prices
Other support available, such as Solar Credits
Estimated average household energy use and profile if a Net FiT is to be used
Potential market size and correlation with load
2) Should the tariff be set for gross (all energy generated from the PV system) or net (energy
generated less energy used by household)?
The FiT should be paid on all electricity generated by the system. This simplifies calculation of
future revenue streams, as it is not dependent on time of electricity generation, or electricity
usage profiles, and so provides investment certainty. It also simplifies calculation of the cost of
the scheme.
3) Should the tariff be based on a fixed rate or a variable rate consistent with time-of-use
pricing for consumption?
A fixed rate ensures maximum PV generation over the system lifetime. A variable rate could be
set to encourage west facing arrays and afternoon rather than midday peak generation,
however, this may not suit all locations and would result in higher overall PV electricity
generation costs, because of reduced output compared with an optimally oriented array.
4) Should the tariff be paid to solar PV owners by the electricity distributor or the electricity
retailer?
If the FiT is paid via a distribution levy, the cost would be borne by the distributors. However,
this would need to be passed through to the retailer.
5) How long should the Government maintain the FiT and should the rate be fixed for the entire
life of the program or varied in over time?
For a particular system the FiT should be maintained at the same rate for a minimum of 10
years, otherwise the FiT rate would have to be very high to ensure system payback in a shorter
time.
The FiT rate implemented in successive years of the scheme should decrease with time to
encourage price reduction and system efficiency.
6) What eligibility criteria should exist for the FiT?
Components and systems should meet all Australian standards