What do we think of the Essential Services Commission’s decision to increase the minimum feed-in tariff?

On 28 Feb, the Essential Services Commission released its decision to increase the minimum feed-in tariff (FiT) rate in Victoria from 5c/kWh to 11.3c/kWh. This decision improves the viability of small scale generators selling energy to the grid — a welcomed change — but it also clearly shows the real challenge of pricing the true benefit of solar energy for society at large.

Why did this happen?

Amendments to the Electricity Industry Act 2000 (Vic) (the Act), effective from 15 Feb 2017, require the Commission to have regard to ‘the avoided social cost of carbon and avoided human health costs attributable to a reduction in air pollution’ in addition to ‘the price of electricity in the whole sale market’. For this reason, the Commission decided to increase the price of solar, acknowledging the avoided social cost to society and the impact on the wholesale electricity market.

Of the 6.3c price increase, 2.5 cents is attributed to the avoided social costs of carbon and 3.8 cents to the increase in wholesale market price of electricity.

Who is affected?

The change will affect customers who were generating under the transitional feed-in tariff scheme, receiving a rate of 25c/kWh, and the standard feed-in-tariff scheme receiving a ‘one-for-one’ rate (both expired on 31 Dec 2016). The new feed-in-tariff applies only to small scale generators, which is defined as generators with a capacity less than 100kW, such as wind, solar and hydro.

The change does not affect customers who are generating electricity under the premium solar feed-in tariff scheme, for which the rate remains at 60c/kWh until 2024.

The Commission will re-evaluate the minimum FiT in 12 months, leaving open the possibility of introducing multi-rate FiTs in future years.

While the amended Act authorises multiple rates, the Commission elected to set a flat rate in the first year after the legislation was amended, stating in its press release “This will allow sufficient time for consultation with energy retailers on the implementation of multi-rate feed-in-tariffs in future years.”

Our analysis

This amendment is a step in the right direction towards harmonizing emissions reduction (climate mitigation) and energy policy, but the Commission’s decision demonstrates the real challenge to the Government in incorporating the true wider costs of air pollution.

While the Commission incorporated the avoided social cost of carbon into the FiT determination, it did not incorporate “the avoided human health costs attributable to a reduction in air pollution,” also a mandatory consideration in the Act.

Because the Governor in Council’s did not give a methodology for calculating the avoided human health costs, the Commission had less guidance as to how to price the health costs of avoided air pollution. The Commission’s decision concludes that the “necessary data to quantify those benefits with sufficient reliability to include them in a FiT are not available at present.

It is not clear what the Commission requires as sufficient reliability but the fact is there is mounting research linking air pollution and health costs. For example, the Climate Council report titled Climate Council Briefing Paper: Health Effects of Coal estimates that in Australia the adverse impacts from pollutants produced from coal-fired electricity generation costs A$2.6 billion annually.

In any case, because calculating the social, health and environmental costs of air pollution from climate change impacts — such as from sea level rise or early death — is challenging, does not mean we should not try. If these costs are not factored in to prices, the costs are simply reallocated — the public wears the costs directly (i.e., health costs) or indirectly (i.e., taxes or insurance liabilities).

The more we price air pollution appropriately, the most equity and justice our energy system will deliver for society and future generations.

Source: Essential Services Commission 2017, Minimum electricity feed-in tariff to apply from

1 July 2017, Decision (Final), February 2017