Australia’s sun tax is as ridiculous as it sounds

There is a global movement away from the reliance on non-renewable energy sources. In response to global warming, people and governments are trying to switch to cleaner energy. This is evidenced by the Paris climate accords where as many as 196 parties in 2015 agreed to the goal of limiting global warming to below 2 degrees Celcius compared to pre-industrial levels (United Nations Climate Change, n.d). An increasing number of countries are generating a large portion of their electricity with solar PhotoVoltaic (solar PV) and wind and solar PV are the fastest growing renewable energy technology in the world since 2000 ( Rucinski & Kaye, 2014; IRENA, 2021)

In Australia, up to 30% of households use solar PV to generate electricity an increase of more than 90% from the early 2000’s when only 0.2% of households used solar PV for electricity generation according to data by the Australian PV Institute (2021). The portion of households using solar PV’s is estimated to keep rising.

As the use of solar energy for electricity generation grows, the structure and engineering of the energy industry will need to be restructured to accommodate the shift from traditional energy sources to solar energy. This is because the structure that currently exists was made for the traditional process of electricity generation and transmission.

In an attempt to make the electricity market fairer and more efficient as the use of solar energy continues to increase in Australia, the Australian Energy Market Commission (AEMC) has proposed a two-way pricing system that charges solar owners for exporting electricity to the grid. This article will analyse the case for and against this proposal and make some policy recommendations.

What is the sun tax issue?

Since its proposal, the sun tax has been largely criticised (Macdonald-Smith, 2021). The issue is that there is a need for a united legal and economic policy structure for the generation and distribution of electricity that includes solar energy generation. The policy structure that currently exists in the energy industry was made for the traditional energy production and distribution mechanism which uses the electricity grid to provide electricity to households from coal and other non-renewable energy sources. Households then pay for this electricity based on the market rate for electricity. The grid refers to the main actors or players involved in the supply of electricity; generators, distributors, and retailers.

This figure shows a breakdown of electricity generation in Australia since the year 2010. As you can observe, renewables only account for 20% of electricity generation in Australia. As the blue part of the chart gets smaller there is increasingly a need to restructure the energy market to account for electricity supply from these renewable sources of energy.

In addition, electricity supply must closely match electricity demand. This is because when supply is lower than demand, situations like blackouts occur and when supply exceeds demand, the electricity already generated goes to waste. To ensure that supply and demand match, energy suppliers use advanced computer models to forecast energy demand and use sophisticated systems to send signals to energy generators, about how much energy to produce every few minutes (AEMO, 2020).

To reiterate, the rise in the use of Solar energy for generating electricity poses complications to the systems that currently exist. To use solar energy, solar PV is used to convert the heat and the light of the sun into electricity using a technology known as solar PV cell. This means that electricity is no longer only generated by traditional energy generators who burn coal and other non-renewables to generate electricity at a plant, households and businesses can also harness the power of the sun to generate electricity for themselves. However, people often generate more electricity than they need and so they export their excess electricity to the grid for a feed-in tariff that varies from state to state, depending on the electricity provider. To illustrate this, here is a graph from a website that sells solar PV’s to households which shows the electricity use of an Adelaide household in Autumn which has a solar panel installed. Purple on the chart represents the total electricity consumed at that time of day and yellow represents the total electricity produced. When electricity is being consumed, this home will use up the electricity from the solar panels before drawing on energy from the grid. The excess electricity produced will then be exported for a fee.

This image is from : https://www.solarquotes.com.au/do-i-get-paid-for-my-solar-energy.html

As more and more people harness solar energy for electricity generation, it is becoming increasingly complicated to accurately predict the amount of electricity generated for supply from the grid. In addition to this, the AEMC is worried about “traffic jams” on the grid where the increasing supply or export of electricity from households leads to unanticipated rising of voltage levels of local networks and eventually to a situation where future solar exports are limited or not allowed. There needs to be new infrastructure in place but these will be costly and there is the policy question of who should pay for it.

The movement towards the use of solar and other renewable energy for electricity generation in Australia is inevitable as Australia is estimated to be on track to have 100% electricity generation from renewable energy by 2050 and 10 million households are forecast to use solar PV’s by then (Parkinson, 2016).

This is good not only because of how it helps with reaching sustainability goals but also because of the inefficiencies with how the grid currently works

  1. in the process of transmission and distribution of electricity, up to 90% of the energy produced is lost or wasted under the current system.
  2. The current system is also inefficient. Ausgrid, a major electricity distributor, has estimated that $11 billion worth of network infrastructure in the NEM is used for just 100 hours per year to meet periods of peak demand. 50 % of infrastructural upgrades have been used to solve 1% of the problem.

With the issue in mind, let us now explore what the sun tax is and the rationale behind it.

The sun tax is what a reform recommended by the AEMC to deal with these issues has been labelled as. The AEMC in march of this year released the reform package that included the proposal for a “two-way” pricing system to reduce “traffic jams” on the grid and allow networks to tailor their pricing mechanisms so that they can invest in parts of the grid where needed.

This means that Networks will be allowed to charge Solar PV owners to export their excess electricity to the grid. This would mean fewer gains from Feed-in-taxes (FIT’s) for solar PV owners.

However, as part of the reform Networks will be required to invest in making the grid solar and battery-friendly and must offer a basic free service to owners of solar PV’s up to a determined threshold beyond which they will have to pay for the export of solar energy at the network rates.

Why does the AEMC think this is a good idea?

These are some of the reasons the AEMC has given as a rationale for the sun tax. Firstly, it forces electricity distributors to upgrade the energy infrastructure in place to allow small scale rooftop solar systems and batteries to connect to the grid in a way that does not cause traffic jams. Network companies would be actively required to actively accommodate rooftop solar in future network planning and upgrade the infrastructure that is needed to make it happen. This will mean that more rooftop solar systems and batteries can connect to the grid in the future.

It may also allow an equitable move towards solar energy use. As more people buy and use solar PV, new uptakers of solar PV will also be able to connect to the grid and gain from their supply of solar energy. This means that it will continue to be attractive to move towards solar energy use which is good. The more people use it the closer we are to all being powered by renewable energy. Therefore, Solar pioneers still gain from solar energy use but they are not the only ones that gain. Some solar owners may even receive greater returns than they do now by being able to export solar and benefit from higher fit’s when they export at beneficial times to the grid.

Another reason the AEMC proposed this policy as a solution is that it also encourages self-consumption of energy through batteries. Not only can adding a battery to a residential solar system increase the amount of self-generated electricity consumption, but the more batteries also become adopted as a part of the energy generation process, they could become more affordable which will only accelerate solar energy use.

However, that being said, not only are the reasons given by the AEMC unconvincing and underwhelming, the sun tax will very likely make solar energy uptake less attractive and therefore limit solar use.

In addition, there is evidence that traffic jams are not caused (at least not solely) by solar PV’s. A report prepared by the University of NSW in May 2020 showed that the so-called traffic jams on the system are not caused by the uptake of solar energy but their findings indicate that voltage readings around the six states and territories in the jurisdiction of the National Energy Market were higher than the standard in the absence of solar PV.

Spain also implemented a reform referred to as the sun tax similar to what has just been approved in Australia. Spanish consumers have faced the highest electricity prices in a decade since having a sun tax in place that drastically reduced the uptake of solar PV for electricity generation.

Instead of the sun tax, state governments could increase support for community-owned energy schemes like Country Wide energy, which recently completed the construction of a new solar farm. These community-owned energy schemes provide electricity generated from solar energy to multiple households and businesses. This may help reduce the variability of household electricity export to the grid and more people will have access to consume solar energy for electricity.

Also, since matching electricity supply to demand can be more difficult with solar energy because of its variable and intermittent nature, the right machine learning techniques can provide the ability to make more accurate forecasts. This combined with the right electricity storage infrastructure may reduce traffic jams on the grid during times of high solar electricity supply. There needs to be more research in this area for the different energy jurisdictions in Australia.

The networks and the government should bear the cost of new infrastructure and prioritise investing in large scale batteries to balance the high electricity supply during the day. Network fees should be used for maintaining current infrastructure and providing new and necessary infrastructure that reduces inefficiencies and benefits everyone. Upgrades to the grid to efficiently allow solar energy supply from households and businesses benefits not only owners of solar PV but the economy as a whole with lower prices of electricity for all, less reliance on non-renewables for energy production and progress on meeting sustainability goals.

The sun tax has been introduced as a solution to the challenges of integrating small scale solar energy generation by households and businesses into the current electricity grid. However, this is not the appropriate solution to restructuring the energy industry. It shifts the cost of important infrastructure that benefits all to the portion of households and businesses who use solar PV for electricity generation. Therefore, I suggest investing in models of electricity forecasting which account for the variability of solar energy supply to better match electricity supply to demand as the use of solar energy increases as well as investment in better electricity storage infrastructure that is paid for not by solar PV owners but by the networks and government.

References

United Nations Climate Change n.d, The Paris Agreement, United Nations Climate Change, viewed 1 October 2021, < https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement>.

Rucinski T & Kaye B 2014, Taxes, fees: the worldwide battle between utilities and solar, Reuters, viewed 1 October 1, 2021, < https://www.reuters.com/article/us-solar-battlelines-insight-idINKCN0HN07P20140929&gt;.

IRENA 2021, World Adds Record New Renewable Energy Capacity in 2020, IRENA, viewed 1 October 2021, < irena.org/newsroom/pressreleases/2021/Apr/World-Adds-Record-New-Renewable-Energy-Capacity-in-2020>.

Australian PV Institute 2021, Australian PV market since April 2001, Australian PV Institute, viewed 1 October 2021, < https://pv-map.apvi.org.au/analyses>.

Macdonald-Smith 2021, ‘Sun tax’ riles solar users, Financial Review, viewed 1 October 1, 2021, < https://www.afr.com/companies/energy/sun-tax-riles-solar-users-20210325-p57dv7>.

Australian Energy Market Operator 2020, Electricity Demand Forecasting Methodology Information Paper, AEMO, viewed 2 November 2021, <https://www.aemo.com.au/-/media/files/electricity/nem/planning_and_forecasting/inputs-assumptions-methodologies/2020/2020-electricity-demand-forecasting-methodology-information-paper.pdf&gt;.

Parkinson G 2016, CSIRO sees $100bn savings in zero carbon grid by 2050, Renew Economy, viewed 2 November 2021, <https://reneweconomy.wpengine.com/csiro-sees-100bn-savings-in-zero-carbon-grid-by-2050-2050/&gt;.

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