To understand why the solar feed-in tariffs are comparatively low, you need to know how your electricity bill sausage is made. Photo credit
In this article, I’m going to take a typical utility bill and break it down into its component parts.
But the main reason is that I hate utility bills and enjoy breaking them to pieces.
By the time I’m done, you should have a good idea of how many different buckets your electricity money will be thrown in and roughly what serving size each will get. I will also show that energy fed into the grid by solar panels on the roof is worth more than just the wholesale price of electricity at the time – but unfortunately it is still considerably lower than the retail price of electricity.
In this article, I’m going to focus on the National Electricity Market, or NEM. This applies to all states except Western Australia, including the Australian Capital Territory and Jervis Bay « Nobody Knows I’m a Territory ». The Northern Territory and pretty much every other territory are left out. Especially the Australian Antarctic, which will join the NEM if Hell freezes over. Or freezes depending on the case.
Here is what households in the NEM capitals are currently paying for grid electricity in cents per kilowatt hour. This is based on a home on a standard tariff that uses an average of 14 kilowatt hours of utility electricity per day, which is 5. 110 kilowatt hours per year corresponds to:
I got these numbers by looking up the cheapest Origin Energy plan in each city. Since Origin is the largest electricity trader in the country, these prices should be reasonably representative of what people are paying. The exception was Hobart. Tasmania only has two electricity traders and neither of them are Origin. That’s why I chose Aurora because they are the most used.
If these prices seem high, it’s because I’ve included the daily utility charge, which typically accounts for at least a quarter of a household’s utility bills, and adds a significant cost to the total utility bill per kilowatt hour.
If I average the above city capital prices after weighting with the population of the state or territory, I get an estimate of the average electricity price for residential property in the NEM for a house with an average grid consumption of 14 kilowatt hours per day:
Conveniently, it’s the same as Sydney. While this is less than what European households are paying, there is nothing to boast about given our lower tax and generation costs, let alone the fact that our grid is not as reliable as most developed countries that don’t USA are.
I’ve listed the seven main components of utility bills below. I think my breakdown makes sense, but it is possible to split it into multiple parts or to group some together. If other people do it differently, it doesn’t necessarily mean I left out or added steps for fun.
Wholesale prices: Large generators such as coal-fired power plants and large solar parks are paid for to supply the grid with energy. What they get can be specified by a contract or they can sell it on the wholesale electricity market at whatever price is available at that time. This is known as the spot price.
Long-distance transmission: high-voltage lines transport energy from large generators to cities and suburbs. The cost of building this infrastructure must be paid for, and the significantly lower cost of maintaining it must also be considered.
Local Distribution: This is the distribution of electricity to households and businesses on site using substations and poles and wires. This is done by Distributed Network Service Providers (DNSPs). .
Measurement: The cost of reading electricity meters. This has been done by humans, but they are gradually being replaced with smart meters that automatically transmit the information. This – along with inflated charges for people who reject smart meters – means the cost of the measurement should come down.
Environmental protection: There are four systems that are designed to reduce the damage caused by the electricity sector. They promote the growth of renewable energies, improve efficiency or ensure that coal-fired power plants don’t blow their ashes everywhere. The schemes are:
Retail: Retailers get paid to send utility bills, receive payments, handle customer inquiries, and convince people to use them in place of another retailer.
GST: We have a 10% tax on goods and services. This is less than most developed countries who tax their electricity.
While our electricity bills cover some environmental costs, these are nowhere near enough to cover the entire burden of the health and environmental externalities1 of fossil fuel production. This means that the real cost of utility electricity is higher than the cost we are charged on our utility bills because we pay for it in a different way. I won’t go into externalities in this article, but these additional costs are real and should not be forgotten.
Unfortunately, our existing environmental costs are stupidly charged as they apply to all measured products, no matter how clean, and not primarily to the most damaging energy source – coal.
I will provide a breakdown of the average utility bill for the NEM. Since no one owns a very large and oddly shaped home that extends into all of the states and territories of the National Electricity Market, this will not represent an actual human bill. What it will do is show where the money that most Australians use to pay household electricity bills goes on average.
My numbers are only estimates. I’m not going to try to get to the heart of it for the following reasons:
I will be using the numbers that were forecast in this AEMC (Australian Energy Market Commission) report for this fiscal year. The average wholesale price they use is higher than it is now, but I don’t think they can be blamed for not predicting the pandemic. The other values should be more or less correct as, according to this AEMO report, the pandemic only reduced demand for utility power by 2% 3 in the second quarter of the year. This skips the Melbourne resurgence of Rona in the third quarter, but with the rest of Australia improving by then I don’t think it’s going to be much of a change overall.
According to the AEMO, the spot wholesale price for electricity in the NEM averaged 5. 3 cents per kilowatt hour in the past 12 months. However, what was actually charged is closer to 8. 8 cents. As far as I can tell, this is due to long term contracts which result in the average wholesale price overall being higher than the spot price on the wholesale market. Usually it’s the other way around as spot wholesale prices are on average slightly higher than contract prices, but the pandemic has turned things upside down.
When I use the 8. 8 cent figure for the average wholesale price of electricity, while keeping the other figures as in the AEMC report, the cost of electricity bill components in cents per kilowatt hour is:
If I change these percentages and put them in a delicious pie chart, we get this:
This way we can easily see that local distribution is the bulk of the electricity bills, followed by wholesale generation, with retail being a distant third.
Although it is interesting to know the average for the NEM, it is not very useful as the NEM average is a mythical place and nobody lives there. What people really want to know is the utility bill breakdowns for their state or territory, and I’ve decided that the easiest way to put the information is in a table. Sure, it might look like a wall of numbers, but all the information is there if you’re interested:
These numbers are from the AMEC report and I have not revised the wholesale component down to reflect lower pandemic prices as I don’t have this information and can only give an estimate. 4 In other words, I chose to use wholesale price numbers that I know are definitely wrong, rather than guessing estimates that would likely be wrong.
If your solar system feeds excess electricity into the grid for other people, this is recorded on your electricity meters as grid consumption. You will be charged the electricity price for the retail trade, while the household that provided it receives a feed-in tariff.
Some components of the electricity bill are not affected by the fact that one kilowatt hour of electricity comes from a solar system on the roof. For this reason, the feed-in tariffs are significantly below the retail price for electricity. Measurement, retail and GST costs remain the same and have yet to be paid. However, other billing components are eliminated or changed, making energy from solar energy on the roof more valuable than energy from coal-fired power plants, gas turbines or large solar parks.
Wholesale price: The energy supplied to the grid is worth the wholesale price for electricity at the time of delivery. Solar power systems only generate during the day, so the average wholesale price that solar receives is different from the average wholesale price for all electricity. Currently, the average wholesale price of solar energy is generally not far from the average, but is gradually falling as increasing solar power production brings prices down during the day.
Long-distance transmission: Currently, almost all of the energy that is fed into the grid by solar panels on the roof is consumed nearby, eliminating the cost of long-distance transmission.
Local Distribution: For both long-distance transmission and local distribution, the solar roof load reduces the grid load when the overall demand is highest, and this helps to reduce costs. However, with the expansion of rooftop solar energy, some changes are needed to the local distribution to accommodate this and while this is modest on a grand scale, this is a real expense. The pros and cons of rooftop solar for local distribution is a complex topic I won’t get into as I would have to write at least a thousand words to get into the details – and I feel too fat for that, think for now even think about it.
Environmental Protection: Providing clean energy is the whole point of environmental charges. So it would be pretty stupid to apply this to energy from solar panels on the roof, as it is as clean as possible.
One way to quickly estimate what a fair feed-in tariff should be is to do the following:
If you do so with the information about the cost of various utility bill components in the table above, you will get decent value even if you are very careful about cutting the average wholesale price in half to get through the pandemic and downward pressure on electricity prices Day.
Only one state that comes close to the rough and prepared method for determining solar feed-in tariffs outlined above – and that’s Victoria. The following table from this report shows a breakdown of the components of your minimum feed-in tariff for this fiscal year:
To cover the average wholesale price for energy supplied to the grid from rooftop solar panels, they allow 7. 26 cents per kilowatt hour. That’s only 72% of the AEMC report’s forecast of 10. 1 cent for the average wholesale price for electricity in Victoria for that fiscal year.
While they allow for some avoided losses in transmission distribution, they do not allow solar energy on the roof, which generally avoids long distance transmission altogether. It seems they think the whole generation has to help pay for the long lines.
Solar energy on the roof is also not exempted from the costs of environmental protection, but rather receives 2. 5 cents for the « value of the avoided social costs of carbon » which is greater than the 1st. Eight cents per kilowatt hour environmental protection costs in Victoria.
While rooftop solar energy fed into the grid is unfortunately not worth the retail price for electricity, it is worth more than the wholesale price at the time it was fed into the grid. This is the case even if the avoided health and environmental costs of producing fossil fuels are not taken into account.
This is a good thing as wholesale prices will continue to trend lower during the daytime – although they may rise temporarily as the world recovers economically from the pandemic. However, policymakers who set feed-in tariffs need to recognize that distributed solar energy is worth more than just wholesale prices and ensure that feed-in tariffs reflect this.
Ronald Brakels was born in Toowoomba many years ago. He first gained international fame when his community picked up a collection to send to Japan. This was the furthest they could achieve with the money raised. After returning to Australia, he was passionate about environmental issues when the mayor met him at the airport and said it was far too dangerous for him to return to Toowoomba because of climate change and mutant attacking goats. Ronald then moved to property in the Adelaide Hills, where he now lives with his horse Tonto 23.
My Tango bill includes peak and off-peak times. Weekdays from 11pm to 7am and all weekend outside of rush hour.
The Origin Go plan currently offers so much for a home using an average of 14 kilowatt-hours of utility electricity per day. However, it is for the zip code of 3000 and there may be slight differences for different areas.
What really annoys me about retailers is the way they charge solar homes more for the same service. The daily utility fee for the same house is higher for solar households. Per Kw fees also higher than not solar. . Why the federal government hasn’t done anything to reconcile these villains makes me wonder when they keep talking about cutting electricity prices.
You should ignore WA, where State Labor ideology means betraying those who want a cleaner, greener state . . . and our government actually subsidizes coal . . .
« … policy makers setting feed-in tariffs need to recognize that distributed solar energy is worth more than just wholesale prices and ensure that feed-in tariffs reflect this … »
WA Home tariff 26. 2 cents per unit. Still cheaper than the « competitive » private companies that we know are driving prices down.
When paying solar power suppliers 3 – 10c per kWh … .
Monopoly utility cash cow. Buy for 3c, sell for 26c.
Worse, tear down our tenants on Contract 47. 135 c per kWh.
(Students, salespeople, teaching assistants, single mothers, etc.. . )
I thought networks always get a regulated return. Thus, the cost is not avoided, just passed on to someone without solar, or I assume that over time it will be more of a daily charge than a usage charge. . .
I was interested to see that Western Australia was not included as an art in your report.
Are you not part of Australia? 😜🖕
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EbeneMagazine – AU – Why your solar feed-in tariff is lower than your electricity consumption tariff