Solar subsidies – what are they, who pays and what do they achieve?

Topic
Liam Thomas25 January 2019

Discussions around the future of Australia’s electricity generation capacity often lead to a debate about the economics of renewables and whether they are actually competitive with fossil fuels. Historically, renewables have required subsidies to be competitive, but what are these subsidies and who funds them?

Australia currently has two Government-mandated incentive schemes under the Renewable Energy Target (RET): the Small-scale Renewable Energy Scheme (SRES) and the Large-scale Renewable Energy Target (LRET).1 The schemes, explained in greater detail in my previous article, are targeted at small residential systems or large power stations and work by creating a number of renewable energy certificates based on the amount of renewable electricity the generator produces.2 These certificates can then be sold to ‘liable entities’ – which generally means electricity retailers who are not producing or acquiring enough clean electricity to assist in meeting the RET.3

Contrary to much of the anti-renewable commentary and, in particular, a recent article claiming that “the Government is subsidising the solar-loving rich”,4 these incentives aren’t Government funded. Rather, they are funded by electricity retailers who are required to procure a mandated number of the renewable energy certificates under the SRES or LRET – or pay a penalty. It is true that these costs are passed on to consumers in their electricity bills, with environmental obligations estimated to make up approximately 6% of an average residential bill in 2017–18.5 Some commentators point to this as a source of the significant increase in electricity prices over recent years but, as we’ve noted before, most of the increase in electricity prices is because of increasing network charges, high gas prices and the retirement of old, carbon-intensive coal generation.

As Australia gets closer to meeting the RET, the price of Large-scale Generation Certificates (LGCs), which make up a significant portion of the environmental obligation cost stack,6 is expected to fall.7 The spot price of LGCs has already fallen by more than 50% to below $40 per megawatt hour (MWh) since 2018 and, based on current forward pricing, is expected to continue to fall to around $10 per MWh by 2022.8 This decrease in LGC prices could in turn reduce the environmental costs borne by consumers over time.

So, given that they do come at some cost to the consumer, what have these subsidies actually achieved? During their time in operation, both the SRES and LRET have contributed to the rapid fall in the cost of renewable electricity generation. The cost of installing a 3-kilowatt rooftop solar system, for example, fell more than 45% between 2012 and November 2018.9 The more staggering development, however, has been the drastic cost reduction in utility-scale solar generation, which can now deliver daytime electricity at a lower cost than a new fossil fuel plant. The levelised cost of electricity – that is, the price at which a new plant needs to sell electricity to generate a return for its owner – for a utility-scale solar power plant in Australia has fallen from $217 per MWh in 2014 to as low as $37 per MWh in 2018.10 This makes solar the cheapest form of new build utility-scale generation in Australia.11 Environmental costs –the 6% of the average residential consumer’s bill referenced above – have helped to drive this decrease, with unsubsidised renewable generation now so cheap that, according to one of Australia’s largest utilities (and the owner of Australia’s largest coal-fired power station),12 it costs less to build and operate a new renewable generator than it does just to keep a coal-fired power station running.13

While these subsidies have come at a cost, albeit relatively small, it’s clear that the LRET in particular has put consumers in a position to benefit from lower electricity prices over the longer term. This subsidy has helped to push development in utility-scale renewable electricity generation, lending a much-needed hand in addressing a largely miscommunicated reality – Australia’s fleet of coal-fired power stations is ageing rapidly14 and is no longer “reliable and inexpensive”,15 as some articles would suggest. With the recent retirement of the Northern and Hazelwood coal-fired power stations in South Australia and Victoria in addition to the scheduled closure of Liddell in 2022,16 Australia is going to need new generation capacity to replace the old. As the cheapest option available, renewables look to be an obvious choice – with or without subsidies. Of course, the intermittent nature of solar and wind means that dispatchable generation technology such as gas, or storage technology such as batteries is required to ensure consistent electricity supply. In the US, for example, the adoption of renewables has been supported by the abundance of cheap natural gas.17 

Rather than debating the benefits of subsidies, policymakers should be focusing on a sensible, long-term approach to energy that ensures Australia can benefit from its abundant renewable and non-renewable resources, including solar, wind and natural gas.

Liam serves as Chief Investment Officer for New Energy Solar. He has 15 years’ experience in M&A, corporate and business development, projects, and commercial management in the energy, infrastructure, mining and agribusiness sectors.

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