Issues with the bill
The previous chapter discussed broad policy questions that arise when
considering FITs as a renewable energy policy option. This chapter looks at
some specific issues raised in the context of the bill currently before the committee.
Gross or net metering?
The issue most discussed in submissions to the committee's inquiry was
the basis on which electricity should be metered and a premium tariff paid to
householders generating power from renewable energy sources.
There are two metering options: net metering (also referred to as
net export, or import/export metering), and gross metering. Dr Prest
outlined the differences between the two, when discussing the different FIT
schemes currently in place:
The [South Australian FIT] law only offers its incentive on a
“net export” basis, that is, on the net quantity of electricity exported to the
grid after accounting for in-home consumption. In other words, Net Export =
Gross Production – Household Load. The liability for domestic consumption is
reduced by the output of the PV system.
Under a gross metering system (as in the ACT and Germany), PV
owners receive the premium tariff for all electricity produced by their systems
(whether consumed at home or exported). They pay full retail price for all of
their household consumption. Gross production metering offers higher returns
than under the ‘net export’ system.
As the committee noted in its report on the Save Our Solar (Solar Rebate
Protection) Bill 2008, submissions to that inquiry commented extensively on
this issue in support of a gross feed-in tariff, and that preference was also
prevalent in submissions to the current inquiry.
A gross FIT produces higher returns to the installer of a renewable
energy generator, making investment in renewable energy more attractive,
compared to a net FIT.
Individuals considering whether to invest in a renewable energy system
find it difficult to estimate the economic benefits of their investment under a
net FIT. A gross FIT allows investment decisions to be made with more
Mr Shone described the situation when an installer is setting out the
benefits to a household:
When selling a system I can say, ‘If you install this you will
generate around $1,000 or $1,500 a year. There you go.’ That is impossible with
net metering because it depends on the household behaviour of a person. As I
said before, circumstances change. People retire or they have children, and all
of a sudden they are using electricity during the day when they were not and
they are not getting the returns. There is no guaranteed certainty; therefore
we believe there will be a far lower uptake than there would be under gross
This may be critical if the investor is seeking a loan to assist with
the capital costs of the investment. As Mr Shone pointed out, 'under net
metering financial institutions will not lend you money because they do not
know what you are going to do in your home'. 
The ATA commented that the choice of a net FIT, made by some Australian
states, was out of step with prevailing practice:
Of the 45+ international examples of feed-in tariff, Australia
appears to unique in adopting this form of metering for feed-in tariffs.
International examples almost universally value all of the electricity
generated from renewable energy, and pay the generator via ‘gross metering’.
Some submitters argued that net metering was a poor approach because
small installations would export little if any energy after meeting their own
It is likely that in the majority of cases, at least in
residential homes, there may be little if any excess electricity generated.
Consequently, many residential users would get little or no benefit from a net
Data from the South Australian government suggests that even modest size
systems can export significant proportion of their output. Their study of over
1500 photovoltaic systems that had import/export metering (ie. net metering)
indicated that they were on average exporting half their output, even though
the mean system size was 1.5kWh.
It has been argued that net is preferable because it encourages home
owners to reduce energy use.
However, energy conservation still benefits the home owner under a gross FIT.
Under a gross FIT, the householder has to buy the electricity they use at the
regular tariff, so they make savings through energy conservation. Furthermore,
the committee notes that net metering can have a significant drawback when it
comes to energy conservation. A household using net metering cannot actually
determine its own energy consumption, and therefore cannot use the meter to
guide energy saving measures:
...one of the big problems with net metering—we have seen this in
South Australia and in Queensland and it is proposed for Victoria—is that it is
impossible to see, first, the amount of electricity that has been generated by
the renewable energy generator on the roof or in the backyard and, second, the
total in-home consumption. With the net meter you get two figures: you get the
amount that is exported, which is the generation minus what is being used in
the home at the time, and you also get a second figure which is the amount that
is imported, which is the household use minus what is being generated and used.
It is not possible to know how much electricity has been consumed by that home.
The Garnaut Climate Change Review also directly addressed the question
of whether FITs should be based on gross or net metering:
Some argue that a gross-metered feed-in tariff is undesirable
because, from a sustainability perspective, it does not encourage embedded
generators to consume less electricity, whereas under a net-metered scheme
profits can only be made by exporting more to the grid. This reasoning is
erroneous because the incentives to consume should come through the retail
tariff paid for electricity, not through the feed-in tariff system.
The South Australian government also argued that net metering had the
advantage of utilising existing household electricity meters, reducing
While this is the case, metering replacement costs are an insignificant
proportion of the total investment involved.
Net metering was also opposed on equity grounds:
The problem with net metering as opposed to gross metering is
that it discriminates against people who are at home during the day, such as
the elderly, pensioners, retirees, single parents, and people with smaller
systems who cannot afford the larger systems. Proportionately they are
exporting less of their electricity to the grid, whereas with gross metering you
are valuing the entire electricity that is generated. That figure of 50 per
cent might be the average across the state but it might be made up largely of
people with double incomes and no kids, people with large systems, or people
with holiday homes down at the coast who are running a system.
The committee notes the strong preference of stakeholders for a gross
metering approach to FITs. It also notes that this is the prevailing practice
outside Australia, and is the basis for the world's largest FIT schemes, such
as in Germany and Spain. It recognises that gross metering has the advantages
of being more attractive to customers and more certainty when it comes to
The committee notes that there are a range of schemes in place around Australia.
Net metering has been used in some jurisdictions. There has been mixed evidence
received by the committee about whether the net metering approach has benefits
in terms of installation costs for meters, or in encouraging energy
conservation. The view of most experts appears to be that these benefits are
either limited or nonexistent.
Information about FITs provided to the public by those jurisdictions
with net metering schemes draws attention to the federal Solar Homes and
and in one case indicates that the net metering approach has been designed to
work in tandem with the federal rebate.
The committee does not wish to pre-empt discussions about a nationally
consistent approach to FITs in COAG that are currently taking place, but
recommends that governments consider carefully the evidence received by this
Senate inquiry, as well as the track record of existing FIT schemes overseas,
in designing a FIT framework for Australia.
The committee recommends that all governments consider carefully the
evidence received by this Senate inquiry regarding metering, as well as the
track record of existing FIT schemes overseas, in designing a nationally
consistent FIT framework for Australia.
Schedule 1, section 5 defines terms to be used in the Act that are
relevant to a FIT scheme as described by the bill. 'Qualifying generator' is
defined in the bill as a renewable energy electricity generator that:
(a) is installed after the commencement of the Renewable
Energy (Electricity) Amendment (Feed in Tariff) Act 2008; and
(b) complies with the relevant Australian Standard; and
(c) is connected to an electricity distribution network in
a manner that allows electricity generated by the renewable energy electricity
generator to be fed into the electricity distribution network, other than where
the electricity distribution network is an excluded network; and
(d) generates electricity from a source listed in section 17
as an eligible renewable energy source; and
(e) forgoes participation in the mandatory renewable energy
The committee received no comments from submitters relating to points
(b) and (c) above, indicating to the committee that their inclusion in the
definition is uncontroversial. Discussion of point (e) indicated support for
the approach in the bill.
Points (a) and (d) of the definition were the subject of concern to
Existing versus new generators
Point (a) of the definition of 'qualifying generator' indicates that
people with existing renewable energy generators will not be eligible to be
included in the FIT scheme proposed in the bill; and that only people who
install such a system after the Act is introduced will have access to the
scheme. Inquiry submissions were divided on this issue. In support for the bill,
some submitters claimed that this would prevent 'double dipping'.
Dr James Prest explained his support for point (a) of the definition:
I guess the argument would be that it would be a windfall gain
paid for by the community going to those early movers, and perhaps there would
be a double-dipping principle that these people should not get multiple forms
of incentive at the same time.
However, Dr Prest and other submitters provided solutions to the issue
of double dipping so that those who received a rebate and RECs could also
choose to operate under a FIT scheme:
My view would be that people would have to elect to choose
whether they wanted the RECs or they wanted the feed-in tariff.
It would be easy enough to accommodate whatever previous
subsidies they may have received, and they would be on a different tariff rate
or a different cut-off point. I think that would be more appropriate, because I
do not see any reason to punish those who have actually bitten the bullet
themselves and gone ahead.
Other participants were unhappy with the drafting of this definition.
They indicated concern that it would unfairly penalise 'early adopters' of
renewable energy technology who had installed the technology out of genuine
These submitters supported retrospectivity, to send a signal to 'early
adopters' that taking initiative will be rewarded, thus making future 'early
adoption' by those same market players more likely.
BP Solar, which objected to point (a) of the definition, believed that a
system of various tariffs depending on the age of the installation would not
work on practical grounds, because '(r)etailers will find it expensive and
problematic to manage separate systems for old and new installations and
therefore pay different rates'.
The committee also heard that point (a) of the definition was
considered by some to be problematic because it is 'unclear as to how to pay
owners that upgrade their systems'.
It was not clear whether and how owners who had installed a renewable energy
generator prior to the introduction of the national FIT envisaged by the
proposed bill, but then increased its capacity after the introduction, would be
eligible for a FIT.
The Australian Network of Environmental Defender's Offices (ANEDO)
raised two important concerns with an approach that allowed only new generators
to be eligible for a FIT.
If national FIT legislation were to supersede existing state and territory
laws, then persons who had installed a system after commencement of a state
scheme, but before the commonwealth scheme took effect, might find themselves
at a disadvantage compared to new installers.
ANEDO was also concerned that 'limiting the scheme to those systems installed
after the Bill’s commencement date could delay a person’s decision to install
renewable energy generators'.
The committee believes both these concerns could be surmounted, either
by making renewable energy generators eligible for a FIT regardless of the date
of their installation, or through other careful design of legislation. It
notes, however that any disruption to the industry would be highly undesirable,
and that the design of the legislation should be undertaken with the stability
and sustainability of the industry in mind. This particular issue serves to
underline the care that will need to be taken in moving to a nationally
consistent FIT framework given the presence of pre-existing state and territory
policies. The committee does note that the bill would allow the Minister to
vary the FIT by location so that the rate can allow for pre-existing state or
city (eg. Alice Springs) policies.
What energy sources should qualify
for a feed-in tariff?
Point (d) of the definition of 'qualifying generator' in the bill
defines the range of energy sources that qualify for a FIT. This is achieved by
reference to the definition of renewable energy sources under the Renewable
Energy (Electricity) Act 2000. That definition includes the following
(g) geothermal aquifer;
(h) hot dry rock;
(i) energy crops;
(j) wood waste;
(k) agricultural waste;
(l) waste from processing of agricultural products;
(m) food waste;
(n) food processing waste;
(p) black liquor;
(q) biomass based components of municipal solid waste;
(r) landfill gas;
(s) sewage gas and biomass based components of sewage;
(t) any other energy source prescribed by the regulations.
This definition is this far broader than that in any of the existing
state and territory FIT schemes. This broadly inclusive approach has the
advantage that governments and utilities do not try to 'pick winners' amongst
renewable energy technologies. It also allows investors to choose the best technology
for their situation.
However, different renewable energy technologies are at different stages
of development, and can have very different costs of electricity generation
(and different costs of greenhouse gas emissions abatement). One 2003 study compared
electricity generating costs in developed countries, in terms of cents per
kilowatt hour of generation. For coal, this cost was around 4.9 c/kWh, whereas
for wind, the range was 3 to 8 c/kWh, for biomass 2.8 to 7.6 c/kWh, and for
solar 8.7 to 40 c/kWh.
Applying the same feed-in tariff to all these technologies could give
the most cost-effective an unfair market advantage, while failing to encourage
support of others that need financial incentives if they are to undergo a
successful transition to being a mature renewable energy technology.
EnergyAustralia objected to the approach for this reason.
Under the proposed feed in tariff scheme, a price is set for
renewable generation without taking into account the relative cost
effectiveness of the technology. Under these circumstances, low cost renewable
generators would not be able to gain a competitive advantage over more
expensive renewable generation... In addition, by setting the price for a period
of 20 years, the scheme would lock in this market distortion and would not
provide ongoing incentives to reduce the costs of producing renewable energy.
EnergyAustralia's remarks also highlight the need for clarity about the
goals of a FIT scheme. EnergyAustralia's comments contain three suggestions:
- That the proposed legislation sets prices without regard to
relative cost effectiveness of the technology;
- That the policy would prevent low cost renewable generators from
gaining a competitive advantage over more expensive technologies; and
- Setting a price for 20 years would not provide ongoing incentives
to reduce the costs of renewable energy.
The committee will deal with each in turn. First, the committee notes
proposed new section 34D(4) in the bill. This would allow different FIT rates
to be set for different technologies, and thus would in fact allow the relative
cost effectiveness to be taken into account.
Second, EnergyAustralia's concern about the effect of the policy on
generators with different costs highlights the range of views, and confusion,
about the purpose of a FIT. EnergyAustralia is correct to note that, under a FIT,
low cost renewable generators may have a disadvantage. However, this is
essentially the point of a FIT. As BP Solar, the industry associations
and others have pointed out, a FIT is a transitional policy designed to assist
leading edge renewable energy technologies through a transition to
commercialisation and cost-competitiveness. If it did not advantage high-cost
technologies, then it would probably be ineffective in achieving this aim. BP
Solar illustrated this in its submission:
Figure 3.1 Maturation of
technology leads to cost competitiveness
Source: BP Solar, Submission
116, p. 17.
Third, the FIT tariff is not set for 20 years: it is set for each
generator for 20 years. However the rate available each year to new
generators falls, a process often referred to as degression that is discussed
later in the chapter. This process is designed exactly to do what
EnergyAustralia is concerned about: to 'provide ongoing incentives to reduce
the costs of producing renewable energy'.
There were other concerns about the range of technologies covered by the
definition in the Renewable Energy (Electricity) Act (and adopted by the bill).
Environment Victoria objected to the inclusion of 'wood waste' on the list for
renewable energies qualifying under a FIT scheme because:
In some situations, whole forests can be cut down and are then
found to be 100% waste and burnt to generate 'green power'. We do not want the
waste ‘tail’ wagging the forest products ‘dog’.
The Wollongong Climate Action Network informed the committee that:
We do not think a feed-in tariff should automatically apply to
biomass. An evaluation process should be developed which considers criteria
such as the total GHG balance of the particular case, water use, impact on the
soil and impact of foregone food production.
ANEDO objected to the inclusion of wood waste and all hydro sources in
the bill's scope:
ANEDO does not support the inclusion of wood waste and all hydro
as an eligible renewable energy source. ANEDO has previously outlined its
concerns regarding the inclusion of wood waste as an eligible source of
renewable energy in the MRET scheme because of the significant environmental
impacts of logging activities on our forests and biodiversity. ANEDO has also
raised concerns about the inclusion of all hydro schemes as renewable energy
sources in the MRET scheme because of the significant detrimental environmental
impacts that new hydro electric power stations can have.
The committee also notes that some of these energy sources are likely,
if harnessed, to be the subject of very large-scale generation technology.
Indeed, Ausra, in their evidence to the committee, discussed a proposal for a
solar thermal plant that could power a city the size of Canberra.
Some submitters brought to the attention of the committee that an
advantage of the bill in its current form is that is does not 'pick winners',
with each different renewable energy source to receive a different FIT rate.
However, in light of the arguments put forward by participants, there may be a
case for providing a separate definition of 'renewable energy source'
specifically for technologies to qualify for a FIT. Such a definition would
need to be derived from a study of the impact, both financially and
environmentally, of supporting a renewable energy technology through a FIT
The committee is concerned that the broad range of energy sources listed
in the Renewable Energy (Electricity) Act is not necessarily appropriate to FIT
schemes. There are two reasons to consider restricting the range of
technologies eligible for FITs. First, it is important that the range of
renewable energy policy instruments complement each other and not compete (or
duplicate) efforts. A very broad FIT, such as that proposed in the bill, could
potentially overlap too extensively with the MRET. It may not represent an
efficient use of government resources in facilitating the installation of
greater renewable electricity generation capacity.
Second, if FITs are to assist in the development and maturation of
leading edge renewable energy technologies, they should be targeted at those
technologies. One of the successes of the German FIT scheme is that it has seen
a steady decline in the cost of installing PV systems. This is regarded as a
key purpose of FIT schemes generally – which is why most FIT schemes steadily
reduce the value of the FIT over time. This benefit can only be achieved if they
are targeted at emerging technologies, and not at mature renewable energy
technologies such as hydro. As Dr Prest put it, renewable energy policies:
will be most successful if designed so that the MRET provisions
apply for the end of the renewable energy and technology market closest to
price-competitiveness and FIT provisions are applicable to the further-from
Nonetheless, the committee notes that the Bill allows the Minister to
set a FIT rate of zero for any technology. This may be expected for large scale
wind for example, since that technology clearly benefits from the MRET.
Connection to the grid
The committee heard from witnesses about potential barriers that would
affect the success of the FIT bill in its current form, particularly in respect
to connecting renewable energy sources to the grid. Section 34A of the bill
requires electricity retailers to 'permit an owner of a qualifying generator to
feed into the grid electricity generated by the qualifying generator'.
Witnesses, however, suggest that this inclusion does not go far enough:
However, to ensure a connection to the grid, an obligation to
connect must precede feed-in. For example, the German law states that grid
system operators shall immediately and as a priority connect plants generating
electricity from renewable energy sources or from mined gas to their systems.
Given the acknowledged success of the German model for a FIT, the
requirement to connect to the grid may be strengthened by following the German
While not pursued as an issue of concern by a majority of witnesses, Dr Prest
stated that the bill in its current form does not address the issue of the cost
of connection to the grid, an issue that is addressed in overseas feed-in
As a result, there is scope for electricity retailers to allow owners of
qualifying generators to connect to the grid, as required, but potentially
charge them a great deal of money for doing so.
According to witnesses, the success a FIT in Australia may cause further
difficulties with regard to grid connection should the grid not prove adequate
to handling an influx of renewable energy generators. The bill is silent on who
should bear any costs involved with upgrading or reinforcing the grid to ensure
that it is adequate to meet demands. These costs again have the potential to
provide a barrier to renewable energy generators. Dr Prest stated that:
One of the points about feed-in laws is that there is an
obligation to connect and then typically, overseas, there is a statement that
the renewable generator should not be responsible for the cost of any grid
strengthening, grid reinforcement or network reinforcement, so that extra cost
is shared across the community rather than representing a barrier to
Annual payment of tariff
The bill provides for owners of a qualifying generator to receive
payment for all of the renewable energy that they generate. Section 34G of the
bill states that:
The owner of a qualifying generator must lodge with the
Regulator within 30 days of each anniversary of the registration of the
qualifying generator an annual return in the prescribed form indicating the
metered energy produced by the qualifying generator.
The proposal for an annual payment for electricity generated may not be
a practical system for small renewable electricity produces who had taken out
loans to buy their generators and who, consequentially, had repayments to make
on their investment:
Senator WILLIAMS—Wouldn’t it also be advantageous to those
people, if they were to borrow money to put in their PV system or whatever, to
have a quarterly payment where they can then meet their commitments to the
financial institution instead of waiting for once a year?
Senator WILLIAMS—If they are going to go and put in a system of
2½ kilowatts, which might be up to $30,000 or so, they will want a cash flow to
help pay for that—if they want an incentive to do it, of course.
Dr Watt—Yes. It is more likely that that cash flow outwards for
them is going to be every month rather than even every quarter if they have
added it on to their mortgage or so on, so yes. But it depends on the
collection method and whether the revenue is there to pay back to the customer,
so how that happens will determine it to an extent.
Dr MacGill—A key part of it is that it has just been a historical
thing that meters involved people having to walk around and read them, and it
worked to do it every three months. The only thing on the meter was a single
number, so you could subtract away and work out consumption. With the
technologies emerging, it does not need to be that way, and time is
money—absolutely. So we should be looking for more flexible and more real-time
methods for payments.
Dr MacGill's comments indicate that the issue may not be clear-cut,
given that the frequency of payment may depend on how up-to-date the technology
on each meter is.
The committee recommends that a more regular system of payments to
generators be considered than the annual payments in the proposed bill.
Metering was addressed by a number of submitters. The committee
recognises that the installation of meters and the capabilities of those meters
is the responsibility of state governments. The Government of South Australia,
which has adopted a net FIT scheme, informed the committee that the cost of
replacing meters in order to undertake a gross FIT scheme was a factor in their
decision of which FIT scheme to undertake:
Those meters were already out there, already being read, already
going through the billing systems of the distributor and the retailer, and
tariffs were being attached and what have you. If we made the decision to move
a gross metering scheme, in our minds we would have had to rewire a lot of
Some people would have just said, ‘It is too difficult’ because
their solar system was way down one end of the yard and their meter was up the
other end. It would have meant extra wires that they did not need. For some
people the change would have been relatively simple. We would have changed the
metering arrangement at everyone’s output to the grid. It would not necessarily
have changed the billing systems and stuff like that, but that would have been
a significant change.
Dr Muriel Watt rejected this argument by the South Australian Government
as being a valid reason for adopting a net FIT scheme over a gross FIT scheme,
but she and Dr Ian MacGill both agreed that the lack of consistency in metering
was problematic for a national FIT scheme. Dr MacGill added that:
[W]e need a smarter interface between end users and the industry
for a whole range of reasons, as Muriel has noted. Consistency is important
there, but there is also a fairly high level of specification. Once you put
these meters out there, they hang around. There are lots of 40-, 50- and 60-year-old
meters out there, so there are good reasons to specify high, particularly with
electronic meters, because it is not a whole lot more money to add additional
The committee noted good arguments for more modern metering of
electricity for homes. This has benefits beyond just the administration of FIT
Size of eligible installations
In chapter 1, FIT schemes across Australia were outlined. With the
exception of the ACT legislation, each existing FIT scheme was capped in some
way, often with more than one limit. The Victorian scheme for example limits
both the size of individual installations, and the total generating capacity of
all installations that will be eligible for the scheme. The ACT scheme, though
not capped, reduces the FIT for large generators. The ACT legislation discounts
the FIT rate to 80% of the full rate for generators between 10kWh and 30kWh in
size, and 75% of the full rate for generators larger than this.
These levels may be further reduced by regulation.
Concerns were expressed that restrictions on installation sizes would
affect the sorts of installations that were supported, and this would determine
whether the FIT would support development of the renewable energy industry:
...just putting in one-kilowatt systems does not allow you that
economy of scale that the 100 to 200 system would provide to bring the costs
down in Australia. So that is a really important market for us to be looking
at. There is also a whole new set of customers there in small industry, commercial,
local government and that kind of size of customer that at the moment we are
not even allowing to participate at all in the renewable energy market. They
can really drive all sorts of different things that we have not even seen
happen so far, so it is an important market to try and pick up.
South Australia, Victoria and Queensland all have feed-in
tariffs that are strictly limited to residential photovoltaic applications and
do not encourage the deployment of large scale solar thermal plants...
Ausra supports the view of the Federal Government that there
should be a consistent national approach to feed-in tariffs. This would provide
greater certainty for business and greater clarity in operating across State
and Territory boundaries.
A national approach should not, however, be a lowest common
denominator approach. It must build on the ACT approach and ensure that
appropriate incentives are provided for the development of commercial solar
Dr Prest noted that the ACT approach, using discounted rates but
covering all sizes of installation, is that adopted in most international
This approach is consistent with international practice in
Austria, Germany, Italy, Luxemburg, Portugal, Slovenia and Spain where
different tariff levels are applied according to the plant capacity, with
larger capacity plants (in MW) being paid a lower tariff.
The committee found that the bill does not specify the scale of the
renewable energy generation that it supports. However the committee acknowledges
that the intent behind the bill is to support utility-scale production of
renewable energy electricity, the cost of which would be shared by all
The committee has one concern about the effects of allowing large-scale
generation capacity to be eligible for a FIT. A FIT effectively works as a
system of cross-subsidy, in which all energy consumers subsidise the energy
price received by renewable energy generators who are eligible for a FIT. One
of the reasons that a FIT is economically advantageous is that the additional
costs levied on consumers are relatively small, but can generate significant
industry stimulation. However the effect on consumers' energy costs would be
more noticeable if a FIT-eligible generator was providing power to, say, half
of all consumers in a city or region.
The bill addresses this issue by providing for the Minister to vary the FIT
according to the size of the installation. Larger generators can generally
produce electricity at a lower cost and therefore require lower FIT rates to
become viable. This effect is recognised in the ACT law, which lowers the FIT
as the size of the generator gets larger. The Bill also allows the Minister to
set targets for the installed capacity of each technology. If the predetermined
target is achieved, that Minister has the flexibility to reduce the FIT rate as
deemed appropriate. That is, the degression rate is not limited to 10 per cent
per year (discussed below). An alternative way of achieving this is exemplified
by the Californian scheme, which has a sliding scale that reduces the FIT
benefit as the amount of generating capacity installed grows.
Another approach to limiting the costs of a FIT, reflected in current
Australian state FIT schemes, is to limit which technologies are eligible for
the FIT, and deliberately exclude technologies that are likely to be large
scale. Each of these approaches has strengths and weaknesses, some of which
were not discussed by witnesses before the committee.
In designing FITs, the committee considers it important to keep sight of
the key objective, which is to assist the development and commercialisation of
leading edge renewable energy technologies, rather than merely to provide a
subsidy for renewable power generation. This objective will affect how
installation size will affect eligibility for a FIT, as different technologies
tend to operate in different size ranges.
Changes in FIT payments over time
In the previous chapter the committee pointed out that a downward trend
in the value of FIT payments is necessary to achieve FIT scheme objectives of
driving down the costs of emerging renewable energy technologies. However,
there are many factors to consider in setting both tariffs and their variation
over time, and many ways of structuring them to achieve this goal.
The different ways in which the value of a FIT can be varied over time
include that it can be:
- Reduced over time for new installations, a process often referred
to as degression, or as a depreciating tariff;
- Set as a dollar value, or set in relation to an existing energy
- Available for varying periods of time;
- Reduced over time as generation targets are met;
- Subject to periodic review
or review following achievement of targets.
Decisions on all of these points are crucial in designing FITs,
but the most significant is degression.
Degression of FIT payments
Dr Prest concisely summarised how degression works and its importance to
FIT legislation. He explained that degression:
refers to legislative provisions which reduce annually the
amount of premium tariff payable by a specified percentage. For example in Germany
in relation to Geothermal plants, the tariff payable is reduced annually by 1%.
Tariff degression encourages early investment and speedy completion of
projects. The measure is also designed to take account [of] technological
innovation and learning by doing benefits, and to discourage investors from
delaying the commencement of projects in the hope of reduced future costs.
Tariff degression provides additional incentives for technology
improvements and cost reductions. It serves to reduce risks of rent seeking and
over-payment of feed-in premiums to those installations in later years which
are more financially viable due to ongoing cost reductions. Ideally, rates of
degression applied are derived from empirical observation of cost reductions
for ... each band of renewable energy technology.
Conergy and others emphasised that the setting of the rate was critical:
The reduction rate is crucial - and a very sensitive factor: if
too low it will lead to less demand; if too high the market will not be able to
handle the demand... A digression rate of 7% is recommended on the guaranteed FIT
rate and every year, the tariff offered to newly connected systems is lowered
by the rate.
BP Solar thought that the maximum degression allowed by the bill was, at
ten per cent, too high and should be limited to seven per cent.
The Alternative Technology Association thought the rate should be five per cent,
which is the rate for photovoltaics under the German scheme.
Most Australian discussion of a FIT scheme focuses on the stimulation of
photovoltaic generation. This may be in part because, with the exception of the
new Australian Capital Territory legislation, all Australian schemes to date
have been confined to photovoltaic units. However, there is a range of
renewable energy technologies being developed around the world, including solar
thermal, different wind technologies, and many others as well. These
technologies are at different stages of development and facing different likely
rates of reduction in generation costs.
The logical consequence is that they should face different degression rates, if
FITs are going to have the desired impact of stimulating innovation and
improvement in those technologies. This is reflected in the degression rates of
FITs in the German scheme:
Renewable energy generation technology
2 per cent
5 per cent
Zero at present, then
1 per cent commencing 2010
1.5 per cent
Source: German Federal
Ministry for the Environment, Nature Conservation and Nuclear Safety, EEG –
The Renewable Energy Sources Act: The Success Story of Sustainable Policies for
Germany, July 2007, Submission 41 Attachment 4, p. 7.
While there is widespread agreement on the need for degression, the
committee received almost no evidence explaining why particular rates
should be adopted. Suntech declined to nominate a particular figure, instead
focussing on the process by which a rate should be developed and implemented:
The Government should consult widely to carefully design the
value of the tariff and then undertake regular, publicly-reviewed
modifications. Australia should consider pricing reductions via either an
annual downward adjustment or an annual review based on review of current
market prices, market impacts of new climate policy regulations, electric
tariff reform, incentive program modifications, or other factors. Reducing the value
over time should help build a self-sufficient industry.
Fixing degression rates has the advantage of increasing transparency and
certainty for investors, and setting production goals for manufacturers and
installers. However, unpredicted factors that impact on production costs can
make degression rates challenging to meet. In a previous inquiry, the committee
heard about the significant impact on the renewable energy industry of major
price rises for silicon, a major component of photovoltaic cells.
These price rises may have made meeting degression rate targets temporarily
unachievable for the sector, which could have caused significant disruption to
industry development. A 'pause' in the operation of degression rates would be
necessary to overcome such disruption.
The committee recognises that the setting of the right degression rates
is crucial to the success of a FIT, and should be addressed in a national FIT framework.
While there needs to be flexibility in the setting of rates and they cannot be
the same for every renewable energy technology, there also needs to be
stability and predictability, so that research and development in the sector
has targets at which to aim.
The bill aims to address degression rates by providing for a maximum
rate of degression. It does not require a pre-determined rate of degression,
but allows for the possibility of an increase of the FIT in the future. This
approach also has the advantage of allowing degression rates to be revised in
light of lessons learned in the early years of the scheme.
The committee recommends that tariff degression rates form part of the
nationally consistent FIT framework, but that there also be capacity for degression
rate 'pauses' to be instituted following a rate review procedure.
The committee recommends that tariff degression rates be
Other evidence on the variation of
FITs over time
In the bill's current form, witnesses noted the absence of indication of
whether the FIT would be indexed to inflation. BP Solar (in a statement
supported the Clean Energy Council)
believed that 'the FIT should be paid on all electricity generated by the
system and should move in line with inflation CPI'.
A FIT may be set as a price on top of whatever the standard retail
tariff for electricity might be. 
This was explained by Dr Watt:
the feed-in tariff would best be placed as a premium on top of
existing tariffs so your competitive market continues to operate and your
retailers can offer you whatever tariff they wish and try and attract you as a
customer, but the feed-in tariff stays on top of that. So if you are now
paying, say, 16c a kilowatt hour then you would add your feed-in tariff on top
of, say, another 30c or whatever it is, and you do not destroy the
competitiveness of the market. I think that is a key point and a difference in
how we will need to implement such a scheme in Australia compared to Germany.
It also means that, as electricity prices go up—as we know, in all our states
now we have quite high trajectories of electricity price increases regardless
of anything to do with renewables—you are not eroding the feed-in tariff. If
you have a fixed feed-in tariff that is inclusive of your retail tariff, as the
retail tariff goes up the amount that you are being paid for your renewable
electricity is going to go down unless it is kept as a separate item on top of
The committee was unclear about whether setting FITs as premiums above
energy prices, regardless of how those energy prices varied, was necessary in
order to provide investment certainty. If investors are assessing the net
present value of an investment or loan, then knowing the absolute value of
their return would seem to be sufficient information on which to base a
decision. It is not clear whether it is desirable to ensure that a FIT rate for
current investors should stay above prevailing energy prices no matter how high
those prices go. The rate should be high enough to attract investment and
stimulate innovation; however it would be undesirable to impose greater costs
on all energy consumers beyond those needed to secure that investment and
The committee heard numerous suggestions that FITs should last for 20
years, which is the period set in the German scheme, as well as many others.
The Alternative Technology Association has suggested 15 years.
The committee did not receive sufficient evidence to comment on this point, but
acknowledges that it is one of the many details that must be carefully designed
as part of an effective FIT framework. The period should not necessarily be the
same for every technology, a fact reflected in schemes such as that in France,
which sets different periods for each renewable energy technology.
The committee was fortunate in having the opportunity to take evidence
directly from Mr Hans-Josef Fell, member of the German Bundestag, and one of
the architects of Germany's feed-in tariff law. He was emphatic that the details
of a FIT framework require very careful design if it is to succeed. The
committee recognises that any FIT scheme will require detailed consideration of:
- Coordinated action in light of pre-existing state and territory
- The eligibility of different renewable energy sources;
- Tariff values available for different sizes of generator;
- The parameters within which FIT payments will decrease over time
- Whether and how FIT payments will be indexed; and
- Information management for the administration of the scheme.
The committee also had its attention drawn to some other design issues
that, in the committee's view, seemed to be important matters, but were the
subject of very little evidence given during the inquiry. These include in
- The administrative design of the scheme, involving reporting by
individual generators, payments by a regulator to generators and collection of
a levy to fund the payments: a model criticised as unnecessarily complex,
and not supported by some key witnesses;
- Questions about the interaction between FIT eligibility and
energy efficiency measures.
In light of these issues, and given current inter-governmental
discussions around a national approach to FITs, the committee recommends that
the current bill not proceed. The committee notes that the bill has been a
useful mechanism to examine in detail the desirability, viability and practical
issues surrounding FIT schemes in the Australian context.
While strongly supporting a nationally consistent feed-in tariff
framework, the committee recommends the current bill not proceed.
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