Solar feed-in tariffs have fallen up to 99.93pc. Why and where to now?

It seems hard to believe now, but in the not-so-distant past, Australians installing solar panels on their roofs were once handsomely rewarded.

From 60 cents for every kilowatt hour of output your solar panels exported to the grid, to 60 cents for every kilowatt they produced regardless of how much you used yourself, times were heady.

How different it all is these days, as returns for exports to the grid have been all but been wiped out.

At play are two characters who — according to energy wise man Daniel Yergin — are the only ones that have ever truly mattered in the market.

“One is named supply,” he said.

“The other is named demand.

“You see that again and again.”

Yergin, author of the Pulitzer Prize-winning history of the oil industry The Prize, was largely discussing that commodity.

But he may as well have been passing judgement on the forces playing out in rooftop solar tariffs.

Nobody likes to see the returns on their investment dwindle.

So what is causing the value of solar power being fed back into the grid drop so low? And how much does it really matter in the context of our changing energy systems?

Solar returns fall off the cliff

For more than half a decade now, payments for solar exports — or feed-in tariffs, as they are known — have been on a downhill slide.

New South Wales’ economic watchdog recently dashed hopes for consumers holding on to the idea that their solar exports could be worth much at all.

The Independent Pricing and Regulatory Tribunal said that, from July, consumers could expect to be paid as little as 4.9 cents for every kilowatt-hour of solar they sent to the grid, and no more than 7.4 cents.

Following it was an even more miserly determination from Victoria’s Essential Services Commission (ESC), which set a flat payment of just 0.04 cents/kWh for next financial year.

Both decisions are only the latest downgrades to the value ascribed to households for their surplus solar power.

Finn Peacock, the founder of comparison website Solar Quotes, said the reasons were simple, and very much as Mr Yergin diagnosed.

“It’s supply and demand,” Mr Peacock said.

“It’s what happens when you’ve got too much of something and not enough demand.

How different it all is from 15 years ago.

Back then, state governments were falling over themselves to shower more and more generous subsidies on rooftop solar in a bid to encourage uptake.

Mr Peacock said Victoria, for example, once offered feed-in tariffs as high as 60 cents/kWh.

New South Wales went one step further.

It offered a 60 cent gross feed-in tariff, meaning people were paid generous incentives even for the solar power they used themselves.

Expensive no longer

At the time, he said the incentives were needed to make the maths “add up” for solar panels, which used to be far more expensive to produce.

But he said those days were long gone.

The costs of manufacturing solar had plummeted more than 90 per cent, he said, and the carrot of lucrative export payments was no longer necessary.

As the costs of solar have fallen, demand has risen to extraordinary highs.

From practically no installations barely 15 years ago, there are now more than 4 million solar systems on household and business rooftops across the country.

In Victoria alone, the number of solar installations has jumped from fewer than 450,000 in 2019 to almost 800,000 by the end of November last year.

The rise and rise of rooftop solar has caused a plunge in the price of wholesale power in most jurisdictions in the middle of the day.

IPART, in its draft report, said the abundance of solar in NSW had pushed daytime spot power prices into negative territory — where generators pay someone to take their output — at least 50 per cent of the time in October.

It was even more pronounced in Victoria, where there were seven months “in which at least 50 per cent of daytime spot prices were negative”.

Mr Peacock said it had long been true that the value of solar was not in the feed-in tariffs that might be available but in the freedom they gave their owners from the grid.

“In the cold arithmetic of buying a solar system, it’s less and less relevant,” he said.

“Well, your surplus solar energy that is exported to the grid is worth less and less.

“But the stuff you use in your house is still very, very valuable.”

Self-consumption ‘key’

Indeed, the ESC outlined the point in making its draft ruling.

The commission noted that “even though the feed-in tariff is lower than previous years … any electricity used in the home from the household’s solar is ‘free’ as customers avoid paying retail electricity prices”.

Those retail prices, according to the regulator, ranged from 26 cents to 35 cents/kWh for Victorian customers of default offer.

And they can be much higher still.

“These are the actual costs that solar customers avoid,” the ESC noted.

To that end, the ESC recommended consumers with solar try to shift as much of their demand as possible to the middle of the day to capitalise on their system’s output.

Mr Peacock agreed, saying if a householder wanted to maximise the value of their solar investment, they should use as much as humanly possible of the electricity it generated.

“For a long time, the payback of a solar system has been less and less about how much you export and mostly about how much you self-consume,” he said.

Anything that involved heating air or water — and which therefore used a lot of energy — should be shifted where possible to the middle of the day.

“The really good news is that you have agency,” he said.

“You can use that solar to power your own appliances in your house.”

IPART calculated doing so would save a typical household $450 a year on their power bill based on the assumption they had a 5kW solar system.

Can storage catch up?

Mr Peacock said an interesting question was whether the growth in storage — from batteries and electric vehicles to pumped hydro — would reverse the fall in daytime wholesale prices.

He said continuing demand for solar was likely to counteract this and “common sense would tell you that it’s all about which grows faster, the installation of batteries or the installation of solar”.

But in the face of calls for feed-in tariffs to be higher, the NSW watchdog, IPART, was unapologetic.

The tribunal said feed-in tariffs needed to be grounded in economic reality.

In other words, retailers should have to pay no more for rooftop solar exports than they would for electricity in the wholesale market.

And since rooftop solar was setting the price of wholesale pay so low during daylight hours, IPART said feed-in tariffs should be reflective.

The regulator said setting feed-in tariffs artificially high would only end up hurting those customers without solar given retailers would recover the costs through higher charges.

“Households without solar panels should not have to pay more to reduce the bills of customers with solar panels,” the tribunal noted.

“This would disadvantage the households who are unable to install a solar system themselves, for example, because they rent or they cannot afford the up-front costs.”

Breaking a mindset

Amid the spiral downwards of feed-in tariffs, Mr Peacock said it was natural for many consumers to complain about the falling value of their exports and the disincentive it might provide for investing in the first place.

And he said there was some truth to suggestions regulators ought to put more emphasis on the financial benefits provided by rooftop solar to the electricity system.

Chief among these, he said, were the savings in distribution costs.

“I think it needs to take into account the cost of distribution of electricity because your solar energy generally will go into a house on the same street.

“And so you’re cutting out a load of distribution costs.”

Even then, however, Mr Peacock said the trend was clear — the growth of rooftop solar would continue to put downward pressure on daylight power prices and depress the value of exports.

He suggested a rethink was in order.

“If you’re as old as me and were born 50 years ago, you were brought up to conserve every kilowatt hour of electricity because generally it needed fuel, usually coal, to power that,” he said.

“It literally was a waste.

“But when your power is coming from the sun, there’s no fuel. We’re not short of sun. It’s not really wasting it.

“I don’t think many people do worry about wasting what’s coming out of the sky. So it’s a paradigm shift.”