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Jan, 2014

Government incentives for solar power

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What have we had? What’s left? What might change?

There have been a variety of  schemes for solar incentives over the last four to five years, and as these have been changed or dropped, there is often a spike in buying behaviour from people to get in before “it all finishes”.

What we have seen though, is that most major incentives for solar have been stripped away, yet solar still remains a strong financial proposition.

Let’s cover what we have  had as incentives, then what is still left. And more importantly, why the removal of some incentives has had no impact.

First of all, let’s break down the incentives  into two categories:

Upfront incentives – rebates and grants. 

These help to reduce the initial cost of the system. There have been a few variations in this including a means tested residential rebate which ended  in 2009. This was replaced with a system called RECs (Renewable Energy Centificates) which gave a non-means tested incentive for installing a power generating system.  The RECs issued had a commercial value, just like a share certificate, and the number of RECs was dependent on the system size, including a nice ‘bonus’ number for the first 1.5kW. Initially the multiplier was 5X for the first 1.5kW, which meant that smaller systems received a more than proportional incentive. This made them an easier decision, and many people jumped in and  bought this  size system. On somewhat of a schedule, the multiplier was reduced and  is now gone  – so it is  strictly proportional to the system size.  RECs where renamed (and changed in subtle ways that don’t affect customers) to STCs – Small-scale Technology Certificates. These are allocated on systems up to 100kW.  Over 100kW, an alternative system of LGCs is in place, and the benefit is not upfront, but claimed year after year for 20 years (this ongoing nature of the LGCs means many people install a 100kW system even when a larger system would be useful, simply because the economics are better).

STCs currently assist the system buyer by about 1/3 of the overall cost, and in most cases are taken as a “point of sale” discount. They are generated when a system is  installed and capable of producing power, and meets certain other criteria such as being installed by a Clean Energy Council certified installer and using components approved  by the Clean Energy Council (CEC).  The STCs are the property of the system owner and can be traded, or surrendered to the installer and their value taken off the system cost.

STCs and  LGCs are the last remaining assistance for solar buyers. They are a Federal initiative, so the scheme doesn’t  vary from state to state, although there are ‘zones’ within Australia and  the calcultion for how many certificates are generated varies by location. As they are, in essence’  a prepayment of a reward for producing a clean form of energy, those areas in which more energy would be produced benefit more. Victoria for example generates about 10% fewer certificates for any given system size compared to NSW for example. You can check out the exact numbers on this site.

(There has also been industry specific assistance – such as CTIP for  primary industries – which has ended)

Ongoing incentives – feed in tariffs.

Every state has had their own incentive for the value of the power created. I won’t go into what every state  has had, however the short version is that there have been generous schemes to pay for the production and  export of power in many states and most of those have been stripped away. Those that signed up under their deals still get their deals, so the changes only affect new customers. For example, in NSW from 1st Jan 2010 through to 27th Oct 2010, you were offered 60c per kWh under the Solar Bonus Scheme on the export of power under what is a called a ‘Gross Feed in Tariff’ (meaning all your power was exported and  paid for, and that amount given as a credit off  your bill). Those people who signed  up will continue to receive that rate until Dec 31  2016.  In other states, there were different amounts offered and in many cases for longer periods of time – ACT offered 54c initially, and that was offered  until 2020. Here’s a summary of some states and their offers…

This is where it gets confusing. As these feed in tariffs have been taken away for new customers, many people have felt that solar is  “all over”.  While incorrect, this misconception is even encouraged by solar power  companies who want to drum up new business before the change. This had lead to amazing spikes in buying, which is both good for the industry, and also terrible. Good because it encourages  people to invest in solar. Terrible  because it misinforms, creates a boom and  bust cycle, and has generally lead to companies not being able to install and fulfill orders in a professional manner.

So, in most states now, no feed in tariff is offered. People then think “why bother with solar?”

Here’s the real incentive. Rather than exporting power and being paid for it, you are making  power, USING it, and  therefore  reducing  your purchases from the grid.

Another change – specifically the massive fall in  the  price of solar power – has meant that the return on investment for solar is as good, or better, than it was when there were  feed in tariffs paid. (System prices have approximately halved).

The rationale for solar has changed from “money making” to “money saving”, which seems less exciting, but as the  price of power keeps rising, the value proposition for solar is as good as ever.  In some states you might be paid a small amount for power (ranging from nothing, to 8c to 16c per kWh)  – but this is the wrong number to look at.  In fact, it is the focus on feed in tariffs that cause many people to see solar as non viable, when the fact is that the rate they pay for power is what matters.

In fact, for businesses, as opposed to home owners, the feed in tariff is often zero. If the power is not used it is exported and wasted. Individual contracts vary, but in most cases this is correct (talk to us about your bill, and we can help you ascertain this).  So, the power you produce and consume reduces your demand on the grid, and therefore  spells out your economic benefit. It is this that we analyse  in the Solar Business Case.

The goods news is that with no meaningful feed in tariffs, solar power systems  still make  economic sense. You are not dependent on the charity of any government scheme to make solar viable. It is viable because of the rate you pay for power.

The removal of feed in tariffs shows that the industry is maturing and can stand on its own legs – the training wheels have been removed.

What might change? 

With only the STC / LGC amount being valuable to system owners, the change in that system is  the last ‘threat’ to would-be purchasers.

There is discussion about lowering the threshold for STCs down from 100kW. Keep in mind that STCs are worth approx 1/3 of  the system cost. If it was lowered from 100kW to 10kW, then the majority of system buyers would not get an upfront benefit, but an ongoing (annual) benefit in the form of LGCs.

The long term benefit of this is the same (or even greater) than STCs, but the immediate impact changes things. It might add a year or more to the payback period of a system (making a system a 7 year payback instead of a 5 year payback, for example) but it won’t change the underlying value of a system.  And of  course, if you have a system already, you’re not affected.

In summary, the most important thing is to seek clarity about the actual, predictable financial benefit that solar will offer you, and that clarity is what we offer in obligation-free consultations, or through our Solar Business Case, which is tailor made for you.