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Feed-in tariff law: poorly designed and unclear

Hansard: 18 July 2007 ASSEMBLY

ENERGY LEGISLATION AMENDMENT BILL

Second reading
Debate resumed from 20 June; motion of Mr BATCHELOR (Minister for Energy and Resources).

Mr CLARK (Box Hill) — The Energy Legislation Amendment Bill has two main purposes. The first is to amend the Electricity Industry Act 2000 to require medium and large electricity retailers to purchase electricity generated by small renewable energy generators at prices that are fair and reasonable in accordance with the specifications of the bill. The second purpose is to redraft the powers under the Gas Industry Act 2001 to make gas market and system operation rules.

The first of these measures is what I might describe as a ‘typical Labor measure’. The government has thought, ‘Gee, this is a you-beaut idea. We are going to amend the rules to make sure that the people who set up small, micro, renewable generation arrangements get a better price out of the retailers. That is going to be really popular and will stimulate small-scale renewable energy devices, and it is going to go down very well with the electorate and earn us a lot of kudos’. But in typical Labor fashion, having had that rush of enthusiasm, Labor members have failed to think through the details and the consequences of that policy decision, and the bill that they have brought before the house raises a large number of questions that have not been answered and to which the opposition will be seeking answers during the course of the debate.

Certainly on this side of the house we support the sensible deployment of small-scale solar and other generation facilities.

At the commonwealth level the Howard government is providing an $8000 incentive for people to deploy solar roof systems. That is an incentive to generate that sort of facility and to focus the public’s mind on the benefits and attractions of investing in renewable energy. We can certainly appreciate the motivation for this measure, but, as I said, the problem is that it is one thing to have this bright idea, it is another thing to effectively implement it. What has become pretty apparent to us is that this has not been properly thought through by the government. There are a lot of issues that remain to be resolved.

That is consistent with the state Labor Party’s overall approach to energy and greenhouse issues. It is big on talk and short on effective action. I suppose there is no lesser demonstration of that than the way the Bracks government and other state and territory Labor governments have handled the issue of emissions trading policies.

The government is certainly big on the talk, and it is certainly very easy to call for other people to do something about it, but when it comes to the government taking action itself it has comprehensively failed.

In January 2004 the state and territory governments issued a declaration saying that in the absence of national leadership on greenhouse policy they had agreed to establish a working group to develop a multijurisdictional emissions trading scheme driven by the state and territory governments. In January 2004 it was going to be a state and territory government-driven multijurisdictional emissions trading scheme — in other words, the state and territory governments were going to take on the task. So they set up this working group, which was required by its terms of reference to report to ministers by December 2004. But come December 2004 all the working group had done was produce a progress report.

In March 2005 the state and territory first ministers declared that further work was to be done, which was to be reported to the first ministers in the second half of 2005 and that a discussion paper would be issued later in 2005. In fact we did not get a discussion paper issued until August 2006, and that paper outlined a possible national emissions trading scheme (NETS), which is the state and territory governments model insofar as it has been able to be developed. However, the day that discussion paper was issued we had the premiers of Queensland and Western Australia refusing to commit their states to the implementation of an emissions trading scheme. Premier Beattie said at the time that he refused to support projects which sounded good but deliver — if members will pardon the expression he used — bugger all.

The Premier of Western Australia, Mr Carpenter, said that he would not commit Western Australia to any form of national greenhouse gas emissions trading until there was more evidence that Western Australian interests would not be adversely affected. So for all of the carry-on by the states and territories about how dynamic they were and how they were going to act to fix the greenhouse problem, they were stymied by two of their own ranks. Ever since then they have resorted to the subterfuge of threatening that they would at some time in the future before 2010 introduce an emissions trading scheme if the commonwealth refused to act. As is so often the case, we get the huff and puff from the Labor Party, but when it comes to actually doing something effective to solve a problem you need the other side of politics to attend to that. That is what the Howard government is now proceeding to do, given the failure of the states and territories to be able to get their act together.
Now we come to this bill, which, again, has the sorts of attractions in principle that I have outlined. We now need to assess how well it is being implemented in practice.

I want to express the opposition’s appreciation to the many parties that have provided feedback to it on this bill from varying perspectives. I will refer to some of the points that have been put to us by various parties, but only with attribution where attribution has been authorised.

It became clear to us, based on the feedback that we have received, that there have been a considerable number of major participants in the energy industry whose first knowledge of this bill was the approach that was made to them by the opposition. We certainly got that feedback from one of the gas distributors in Victoria, which told us that it had not been made aware of the proposed changes to the Gas Industry Act and that it was difficult for it to comment when no consultation had taken place and when it did not know the reasons behind the changes in relation to VENCorp that were most relevant to it. It indicated it could not support a change to the legislation without further information.

Another respondent to us made the point that there are no criteria or objectives proposed which would guide the Essential Services Commission in making a determination under the legislation. It argued that that should be a policy matter and not at the discretion of the regulator. It made the point that a conflict arises in that the small generator may believe that a fair and reasonable price must be determined with respect to its cost of investment, which may be very high, while an end customer considers the benefit of objectives, such as the national energy market objective, which would suggest that a fair and reasonable price should be determined based on the economically efficient cost of supplying power in the national electricity market and having regard to achieving jurisdictional policy obligations such as renewable energy targets. In relation to the gas industry amendments the same respondent questioned the logic and appropriateness of the market system operation rules including the power to confer functions on VENCorp when it was the principal driver of those rules.

Another respondent said to us that, as another small-scale addition to the complex web of state-based greenhouse initiatives, the benefits and efficiency of the policy compared to a comprehensive national emissions trading scheme or other national greenhouse policy measures were questionable. The respondent also pointed out that the bill appeared to involve the Essential Services Commission (ESC), which was designed to wind up its main energy-related activities under the new national energy reforms, being given a new lease of life, and that it has been placed in the role of market intervention and of setting a range of fair and reasonable prices between buyers and sellers of energy in the national market.

On the other hand we received a response supporting the direction of the bill and arguing that the bill is a good first step but that it needs to be followed up with either a regulated tariff above the consumption tariff or a pricing principle defining a fair and reasonable feed-in tariff as being higher than the typical consumption tariff. That respondent argued that such a tariff would apply at least to households, perhaps to microgeneration of less than 5 kilowatts. A parallel was drawn with the price of accredited green energy, and it was suggested that perhaps that justified a higher price as being fair and reasonable. That respondent also raised with us the question of the grounds on which the ESC could determine whether a tariff was fair and reasonable, and suggested that having a specific mandate to consider environmental impacts in its facilitating objectives, if they are retained post the impending review, would assist it to consider the wider benefits of incentivising small-scale microgeneration in such a determination.

Last, but certainly not least, we received a comprehensive response from the Energy Users Association of Australia, which was happy to have its views attributed to it. It put to us that the EUAA has been concerned that over the past few years there has been a plethora of greenhouse, renewable and energy efficiency schemes emerging, many being state specific, inconsistent and imposing layers of costs and regulatory burden on business. It cited, for example, that in renewable energy there is the mandatory renewable energy target, the Victorian renewable energy target and the recently announced New South Wales renewable target, and that South Australia and Western Australia have also announced renewable energy targets.

The EUAA argued that renewable energy sources are high cost and that it has significant reservations as to their value, particularly the value of wind generation. It said that the small-scale generation encouraged by this legislation, particularly photovoltaic generation, may help reduce the severity of the peaks, but that it is imperative that the prices paid be economically efficient and not another form of hidden subsidy to renewables that is passed through to end users. It made the point that the means of deriving a fair and reasonable price is not an easy question.

The EUAA argued that perhaps the most correct way would be the half-hour bidding price less the costs incurred by the retailer, taking into account the hedged position of that retailer.

Again, the EUAA said that the issue of identifying the appropriate costs is not an easy issue — for example, do you short-run or long-run marginal costs, and what are the costs associated with catering for such a variable input? Overall the EUAA said that it was concerned this would be seen to be too complicated and that a price would be selected that ignored the cost side.

It is clear that the respondents who have contacted the opposition have raised a range of very serious concerns and diverse points of view on the legislation. We have distilled out of the points they and others have raised with us a number of issues which need to be addressed during the course of the debate and which I hope will be addressed by other government speakers and in particular by the minister in closing the debate.

I suppose at the head of the list is the question of how the regime created by this bill is seen to be fitting with a national emissions trading scheme, because there is in fact a broad degree of agreement between the NETS model produced on behalf of the state and territory governments on the one hand and the proposals produced by the Prime Minister’s emissions trading task group on the other hand. Their agreement is on the fact that there should be technology-neutral and broad-based measures.

I refer to page 41 of the report of the prime ministerial task group on emissions trading, which states:

Given the magnitude of the abatement task facing Australia, it will be critical to rely on broader based measures that are driven by the market. They should be neutral in terms of technology and fuel. This will allow Australia to achieve abatement at the least cost.

There would also be considerable benefit from rationalising the current mix of policies.
In similar terms, at page 11 of the state and territory government’s national emissions trading task force discussion paper, the following point was made:

One of the great strengths of an emissions trading scheme is that it is technology neutral — that is, it does not select preferred technologies. It allows the market to seek out the lowest cost ways of achieving any particular emissions cap. It does not rely on omniscient governments directing investments and abatement activities through more traditional ‘command and control’ regulation or through industry or technology-specific subsidies.
I should make the point that the Prime Minister’s task group made the following additional observation:

Well-designed and targeted technology policies, which complement the market signal, will also be necessary to bring on the technologies necessary to make significant reductions in greenhouse gases over the longer term.
The Prime Minister’s task group was very specific here in talking about technology policies rather than policies that affect the market structure and operation.

There is a question that arises as to how the scheme created by this bill will fit with the national emissions trading regime and what the government’s intention is. Is it intended to phase out the mechanisms in this bill as an emissions trading scheme is introduced, or is it intended by the government to continue this and its other specific state-based schemes notwithstanding the introduction of a national emissions trading scheme?

Mr Batchelor — Have you got a view? What would you do?

Mr CLARK — Our view is similar to that expressed by the prime ministerial task group and by the national emissions trading task force: that the ideal way of achieving an outcome is to have a technology-neutral policy. I will be very interested to hear what the minister has to say on that subject.

Mr Batchelor interjected.

The ACTING SPEAKER (Mr Jasper) — Order! The Leader of the House will get his opportunity.

Mr Batchelor — I am interested in his views.

The ACTING SPEAKER (Mr Jasper) — Order!

The member will give those views if the Leader of the House allows him to give them without interjection.

Mr CLARK — In similar vein the government needs to explain what its intentions are in relation to the move to national regulation. Does it intend that the ESC will continue to determine fair and reasonable prices under the legislation, notwithstanding the moves to national regulation? As I understand it — again, I look forward to the minister’s remarks — the Bracks government supports the move to national regulation.
There is also the issue as to whether or not this is going to involve a cross-subsidy from other consumers to those who have small-scale renewable generation facilities — in other words, will the price of electricity for consumers rise in order to drive the mechanisms established under this bill? It hardly needs me to say that the general principle should be that direct government incentives, such as the commonwealth government’s incentive, are to be preferred to cross-subsidies. Again, I look forward to the minister declaring whether or not it is intended that this bill will involve a cross-subsidy between other consumers and the operators of small-generation facilities.

That in turn leads on to the issue of pricing.

The bill is very open-ended in that respect. It talks about fair and reasonable pricing, but the bill sets no criteria as to what constitutes fair and reasonable pricing. As has been pointed out by many who have contacted the opposition, this is a policy question that should be determined by the Parliament under the guidance of the policy views of this place rather than of the ESC.

Mr Helper interjected.

Mr CLARK — The Minister for Agriculture interjects and suggests this is a price-setting bill.

Mr Helper — That is what you want.

Mr CLARK — And he suggests that we want a price-setting bill.

What we want is some explanation of how the bill is intended to operate. It is a price-setting bill by either means. Let the Minister for Agriculture not protest about that. The very essence of this bill is to create a mechanism whereby if the industry does not set prices, then the ESC — or the minister on the recommendation of the ESC, to be more specific — will set those prices.

The bill will apply to retailers with more than 5000 customers, which we understand is 7 of the 15 licensed retailers in Victoria. The bill will require them to publish terms and conditions on which they are willing to buy power from small-scale renewable generators, which are generators with a capacity of less than 100 kilowatts, and the bill is extending the current feed-in provisions which apply to wind generators to also cover hydro, biomass and solar generators, such as rooftop photovoltaic generators. Then, as I said, if the minister considers that the retailer’s terms and conditions are not fair and reasonable, the minister can send them off to the Essential Services Commission.

If the ESC agrees that the prices are not fair and reasonable, it can recommend to the minister other terms and conditions that are fair and reasonable, and the minister can declare that those recommended terms and conditions will apply to the retailer.

So this is certainly a price-setting piece of legislation, which is exactly why the opposition is concerned that there is a full understanding of what it is all about in the marketplace and in this chamber. And there are a wide range of views as to what is a fair and reasonable price. It is not just a technical issue of assessment and measurement of issues of fact against known criteria. The question is: what are the criteria going to be?

My understanding from the briefing provided to the opposition by the department is that the departmental view is that by and large a fair and reasonable price to be paid by retailers for the purchase of small-scale generation by them is a price that is more or less equal to the price that they charge for the supply of electricity to the facility concerned, so that if you were a householder with photovoltaic cells on your roof, you would be credited for the power you feed into the grid for a price approximately equal to the price you are charged when you are supplied power by the retailer. On the face of it that sounds a reasonable proposition, but the retailers argue — it seems to me with some merit — that that view does not take into account the fact that the retail price includes not just the price of energy but also the cost of transmission and the cost of distribution.

Mr Batchelor interjected.

Mr CLARK — The minister says it includes the cost of generation investment as well. So there is a whole range of criteria. Are the retailers going to be expected to pay more to buy power from a small-scale generation facility than to buy power from other sources — what is the marginal cost to a retailer of sourcing power from another source? — so that it is on a cost-neutral basis? You might look at it from the point of view of the person with the generation facility and say a fair and reasonable price is based on what it has cost them to put in their generation facility. Given that solar panels are quite expensive, that could be a very high price that is well above the prevailing market price for electricity.

As I have mentioned, some people believe that is exactly what should be happening — that the buy-in price should be equated not with the marginal cost of energy but with the price of green energy, or higher, in order to provide incentives for people to have rooftop solar facilities and other facilities.

So there are these fundamental policy criteria that need to be thrashed out here and not just shoved off to the Essential Services Commission, and we certainly hope the minister will shed some light on these matters during the course of this debate.
The point should also be made that a large part of the difficulty in determining pricing is a consequence of the government’s tardiness in authorising the deployment of smart meters, or interval meters, because, as many honourable members will know, a smart meter can measure the consumption, or generation, of electricity, at different times of the day, and if properly designed can therefore facilitate the charging for electricity, or the purchase of electricity, at different prices at different times of day, possibly even prices that are linked to the market price. So that if you had smart meters deployed, it would in principle be possible to pay a householder who was feeding power into the grid at the peak on a hot summer’s afternoon a price related to the market price of electricity, which could be up to 10 000 — —

Mr Batchelor — The spot price.

Mr CLARK — Which could be related to the spot price, as the minister says, which could be many thousands of dollars.

Mr Batchelor interjected.

Mr CLARK — Exactly. It could be up to $10 000, and that would be an enormous incentive to people to be feeding power into the grid at that time of day. It could be a fair price if that was the prevailing spot price in the market. But in the absence of interval meters, that sort of pricing is not possible, and the expectation is that whatever price is set by the Essential Services Commission is going to be based on some sort of average price which cannot give those incentive effects that would be so desirable.

We have had the Bracks government boasting about the deployment of interval meters for a long time. Indeed, I can recall at the time of the change of government that interval meters were something that were well advanced and due to be deployed in the not-too-distant future, yet it went into a black hole upon the change of government from which it did not emerge until around 2004.

I refer in particular to a media release of the previous minister, dated 16 July 2004 and entitled ‘More power to consumers with interval meter rollout’:

Victorians will soon have access to new interval smart meter technology that will allow them to save money on their electricity bills and help protect the environment, the Minister for Energy Industries and Resources, Theo Theophanous, announced today.
That was 16 July 2004.

We are now at 18 July 2007 — three years and two days later — and we still have consumers in Victoria not having access to interval meters. If those interval meters had been available, we could have had a lot better pricing for small scale generators than is possible at present.

It seems to us that the strongest justification for a measure such as is included in this bill is if there is a lack of competition for the purchase of power from small-scale generating facilities. We understand that about 80 per cent of the market in Victoria involves two retailers, but any of the 15 are entitled to enter the market if they wish. In other contexts the minister has been boasting that we have a highly competitive electricity industry in Victoria, so I will be interested in the minister’s views. Is he saying the government’s view is that there is a lack of competition in the purchase of power from small-scale generation?

Mr Batchelor interjected.

Mr CLARK — The minister says ‘market power’. We may be using different language to describe the same concept. I will be very interested to hear whether the minister is saying we need to intervene in this particular segment of the market because the market is not operating effectively.

Finally, concerns have been raised with us about this legislation on the issue of red tape and bureaucratic regulation; that was obvious from some of the references I made earlier to comments the opposition had received. One party to whom we spoke said that as far as the electricity industry was concerned, Victoria is the red tape capital of Australia, and they drew very unfavourable comparisons between the Queensland code, which has been newly introduced, and the Victorian code, which is roughly four times thicker.

They made the point that layer upon layer of regulation is impeding the effectiveness of competition, impeding the competitiveness of the prices that are available to consumers, and deterring new entrants to the market.

Quite apart from the additional regulation being introduced by this bill, the government needs to address the overall level of red tape. Of course the electricity industry is just a microcosm of the red tape of the Bracks government across the board, which the Treasurer’s much-vaunted red tape reduction policy is making no inroads into whatsoever.

I conclude by referring to the second major aspect of the bill — namely, redrafting the powers to make gas market and system operation rules. Those provisions, we are told, are intended to clarify the items that can be included in the rules and anticipate problems that may emerge rather than be reacting to problems that have already emerged.

I think that the experience overnight and this morning shows that regulation of the gas industry is a very important issue indeed. VENCorp, the Essential Services Commission and the state government have important roles in ensuring that there is security of supply and that the increasingly heavy-handed regulation of the industry and the move by the ESC away from the CPI-minus-type regulation, which was the original policy objective, to far more of a cost-plus, very inquisitorial-type regulation as exists at present is not undermining the security of supply and proper investment in the network.

The opposition is not opposing this bill, but it believes there are many questions that need to be resolved during the course of the debate.