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Power from the People

Inquiry into distributed generation

A draft report for further consultation and input

May 2012

State of Victoria 2012

This draft report is copyright. No part may be reproduced by any process except in accordance with the provisions of the Copyright Act 1968 (Cth), without prior written permission from the Victorian Competition and Efficiency Commission.

ISBN 978-1-922045-76-8 (paperback) ISBN 978-1-922045-77-5 (PDF)

Disclaimer The views expressed herein are those of the Victorian Competition and Efficiency Commission and do not purport to represent the position of the Victorian Government. The content of this draft report is provided for information purposes only. Neither the Victorian Competition and Efficiency Commission nor the Victorian Government accepts any liability to any person for the information (or the use of such information) which is provided in this draft report or incorporated into it by reference. The information in this draft report is provided on the basis that all persons having access to this draft report undertake responsibility for assessing the relevance and accuracy of its content.

Victorian Competition and Efficiency Commission GPO Box 4379 MELBOURNE VICTORIA 3001 AUSTRALIA Telephone: Facsimile: Website: (03) 9092 5800 (03) 9092 5845 www.vcec.vic.gov.au

An appropriate citation for this publication is: Victorian Competition and Efficiency Commission 2012, Power from the People: Inquiry into Distributed Generation, draft report, May.

About the Victorian Competition and Efficiency Commission


The Victorian Competition and Efficiency Commission (VCEC), which is supported by a secretariat, provides the Victorian Government with independent advice on business regulation reform and opportunities for improving Victorias competitive position. VCEC has three core functions: reviewing regulatory impact statements, measuring the administrative burden of regulation and business impact assessments of significant new legislation undertaking inquiries referred to it by the Treasurer, and operating Victorias Competitive Neutrality Unit. For more information on the Victorian Competition and Efficiency Commission, visit our website at: www.vcec.vic.gov.au

Disclosure of interest
The Commissioners have declared to the Victorian Government all personal interests that could have a bearing on current and future work. The Commissioners confirm their belief that they have no personal conflicts of interest in regard to this inquiry.

Opportunity for further comment


You are invited to examine this draft report and provide comment on it within the Commissions public inquiry process. The Commission will be accepting submissions commenting on this report and will be undertaking further consultation before delivering a final report to the Government. The Commission should receive all submissions by Friday 15 June 2012. Submissions may be sent by mail, fax, or email; in electronic, paper or audio format. By mail: Inquiry into Feed-in Tariffs & Barriers to Distributed Generation Victorian Competition and Efficiency Commission GPO Box 4379 MELBOURNE VICTORIA 3001 AUSTRALIA (03) 9092 5845 feedintariff@vcec.vic.gov.au

By facsimile: By email:

Terms of reference
Inquiry into Feed-in Tariff Arrangements and Barriers to Distributed Generation
I, Kim Wells MP, Treasurer, pursuant to section 4 of the State Owned Enterprises (State Body Victorian Competition and Efficiency Commission) Order (the Order), in conjunction with Michael OBrien MP, the Minister for Energy and Resources, hereby direct the Victorian Competition and Efficiency Commission (the Commission) to conduct an inquiry into feed-in tariff arrangements and barriers to distributed generation.

Background
Victoria currently has in place a number of programs that are designed to reduce greenhouse gas emissions and facilitate an adjustment towards a low emissions economy. These programs include feed-in tariff schemes such as the standard feed-in tariff scheme for customers with installations up to 100kW capacity and the premium and transitional feed-in tariff schemes applying to eligible customers with solar inverter systems up to 5kW capacity. In the context of the implementation of a national carbon price, it is appropriate that the Commission undertakes a review of Victorias feed-in tariff schemes. Addressing any state and local regulatory or other barriers to the uptake of low emissions generation, including co-generation and tri-generation, is also important to ensure that any transition to low emissions generation occurs as smoothly and as costeffectively as possible.

Scope of the inquiry


In this inquiry, the Commission is required to: (1) Assess the design, efficiency and effectiveness of feed-in tariff schemes, including market-based gross feed-in tariff schemes, in the context of a national carbon price. (2) Prove a recommendation as to whether existing feed-in tariff arrangements should be continued, phased-out or amended. Where phase-out of existing arrangements is proposed, the appraisal should give consideration to whether any transitional arrangements may be necessary. Any changes to existing arrangements would not be applied retrospectively. (3) Identify and State and/or local regulatory and other barriers to the development of a network of distributed renewable and low emission generation in Victoria, including co-generation and tri-generation. In conducting this inquiry, the Commission should have regard to: recent reports by the Australian Energy Market Commission on planning and connection arrangements for distributed energy generation; reviews currently being undertaken by the Victorian Government; and relevant reports by Commonwealth forums and bodies such as the Productivity Commission. TERMS OF REFERENCE
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Inquiry Process
In undertaking this inquiry, the Commission is to have regard to the objectives and operating principles of the Commission, as set out in section 3 of the Order. The Commission must also conduct the inquiry in accordance with section 4 of the Order. The Commission is to consult with key interest groups and affected parties, including representatives of end-use electricity consumers, and may hold public hearings. The Commission should also draw on the knowledge and expertise of relevant Victorian Government departments and agencies. The Commission is required to produce a draft report for public consultation, ahead of a final report to the Government within 6 months of receipt of this reference.

KIM WELLS MP Treasurer Received: 13 January 2012

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POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Preface
The release of this draft report gives interested parties the opportunity to comment on the Commissions analysis in relation to its inquiry into feed-in tariff arrangements and barriers to distributed generation. The Commission will consider comments received prior to developing and presenting the final report to government. In preparing this draft report, the Commission invited public submissions and consulted widely with a range of individuals, businesses, organisations, government departments and local councils. The Commission invites written submissions on the draft report. These submissions may address any of the issues covered by the terms of reference. In light of the submissions received, the Commission will hold further consultations as necessary. At the conclusion of consultation on the draft report, the Commission will prepare a final report to be presented to the Victorian Government by 13 July 2012. The Order in Council establishing the Commission says that the Treasurer should publicly release the final report and that the Victorian Government should publicly release a response to the final report within six months of the Treasurer receiving the report. The Commission looks forward to receiving feedback on the draft report.

Deborah Cope Presiding Commissioner

Dr Matthew Butlin Chair

PREFACE

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Contents
Terms of reference Preface Contents Abbreviations Glossary Key Messages Summary report Draft recommendations and information requests 1. Introduction 1.1 Background to the inquiry 1.1.1 What is distributed generation? 1.1.2 What are feed-in tariffs? 1.2 Context and why this inquiry is important 1.3 The Commissions approach 1.4 Inquiry process 1.5 Structure of the report Distributed generation in Victoria 2.1 The Victorian electricity industry 2.1.1 Market for distributed energy 2.2 Regulation of distributed generation in Victoria 2.2.1 Regulation of the NEM 2.2.2 Connecting to the distribution network 2.2.3 Selling excess electricity generated 2.2.4 What does this all mean for the inquiry? 2.3 Policies for distributed generation and renewable energy 2.3.1 Commonwealth policies 2.3.2 State policies 2.4 Future trends 2.4.1 Cost trends 2.4.2 Improved metering technology 2.5 Conclusions The Commissions approach 3.1 3.2 Introduction Issues raised by participants 3.2.1 Connecting to the network 3.2.2 Selling electricity 3.3 A framework for analysis 3.3.1 What are the policy objectives? 3.3.2 Barriers to distributed generation 3.3.3 How might markets fail to achieve efficient outcomes? 3.3.4 Equity considerations 3.4 Conclusion Connecting generators to the distribution network 4.1 4.2 4.3 Context Overview of barriers to efficient distributed generation connection Barriers to medium-scale distributed generation 4.3.1 Information and planning 4.3.2 Right to connect
V VII IX XI XIII XVII XIX XXXV

1 1 1 2 3 4 4 5 7 7 8 13 13 15 18 21 27 27 29 30 30 33 34 35 35 35 36 41 43 44 46 48 52 53 55 55 57 58 60 63
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2.

3.

4.

CONTENTS

5.

4.3.3 Costs: process, timelines and uncertainty 4.3.4 Costs: sharing network costs, benefits and risks 4.4 Barriers to efficient connection of household-scale distributed generation 4.5 Impact of removing barriers to connection of distributed generators Victorian feed-in tariffs: selling electricity 5.1 5.2 Introduction Victorian feed-in tariffs 5.2.1 Overview 5.2.2 Objectives of the three feed-in tariff schemes 5.2.3 Objective of reducing greenhouse gas emissions 5.3 Industry support 5.4 Providing a fair and reasonable price 5.4.1 Is there competition within the Victorian electricity retail market? 5.5 Are there barriers preventing the establishment of fair and reasonable feed-in tariff prices? 5.5.1 Structural issues 5.5.2 Information and transaction costs 5.5.3 Market power issues: vertical integration of retail energy businesses 5.5.4 Limitations on time of use and locational pricing 5.5.5 Conclusion on fair and reasonable prices 5.6 Conclusion Future Victorian feed-in tariff arrangements 6.1

65 72 77 82 85 85 85 85 86 88 91 92 94 98 98 102 104 105 106 106 109 111 111 116 117 120 123 123 124 125 126 127 128 130 134 137 137 137 139 140 143 143 144 144 156 169

Design, efficiency and effectiveness of feed-in tariff schemes 6.1.1 The value of distributed generation 6.1.2 Market-based feed-in tariffs 6.1.3 Eligibility 6.1.4 Metering arrangements 6.1.5 Information provision 6.1.6 Billing arrangements 6.1.7 The Commissions view 6.1.8 Terms of Reference 1: The Commissions summary view 6.2 Network value of distributed generation 6.2.1 Incentives for investment in distributed generation 6.2.2 The Commissions view 6.3 Implications for existing Victorian feed-in tariff schemes 6.4 Transitional arrangements Appendix A: Consultation A.1 Introduction A.2 Submissions A.3 Roundtables A.4 Stakeholder consultations Appendix B: Regulation of the electricity sector B.1 Victorian regulation B.2 Regulatory framework after 1 July 2012 B.3 Connecting to the distribution network B.4 Selling electricity generated References

POWER FROM THE PEOPLE: AN INQUIRY INTO DISTRIBUTED GENERATION

Abbreviations
AEMC AEMO AER AMI ASP CA CEC CES COAG DG DMIS DNSP DSP ESAA ESC ESV EWOV EWR FiT IPART JEN kW kWh LGC LRET MCE MEFL MEI MW MWh NECF NEL NEM NEO NER NERL Australian Energy Market Commission Australian Energy Market Operator Australian Energy Regulator Advanced Metering Infrastructure Accredited service provider Connectional applicant Clean Energy Council Certificate of electrical safety Council of Australian Governments Distributed generation Demand Management Incentive Scheme Distribution network service providers Demand-side participation Energy Supply Association of Australia Essential Services Commission Energy Safe Victoria Energy and Water Ombudsman Victoria Electrical works request Feed-in tariff Independent Pricing and Regulatory Tribunal Jemena Kilowatt Kilowatt hour Large-scale generation certificate Large-scale Renewable Energy Target Ministerial Council on Energy Moreland Energy Foundation Ltd. Melbourne Energy Institute Megawatt Megawatt hour National Energy Customer Framework National Electricity Law National Electricity Market National Electricity Objective National Electricity Rules National Energy Retail Law

ABBREVIATIONS

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NERR PC PCA PFiT PV REBS REC RET SCER SCF SFiT SRES STC TFiT TNSP UE VEEC VEET VRET

National Energy Retail Rules Productivity Commission Property Council of Australia Premium feed-in tariff Photovoltaic Renewable Energy Bonus Scheme Renewable energy certificate Renewable Energy Target Standing Council on Energy and Resources Solar connection form Standard feed-in tariff Small-scale Renewable Energy Scheme Small-scale technology certificate Transitional feed-in tariff Transmission network service providers United Energy Victorian energy efficiency certificate Victorian Energy Efficiency Target Victorian Renewable Energy Target

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Glossary
Australian Energy Market Operator Australian Energy Markets Commission Australian Energy Regulator Manager and operator of the National Electricity Market, and coordinator of market planning Rule maker and adviser to Ministers on development of energy markets Enforcer and monitor of compliance with the National Electricity Rules; responsible for economic regulation of electricity transmission and distribution networks in the National Electricity Market The full-load sustained output of a generator under ideal conditions. Capacity often exceeds output as output is limited by weather conditions, equipment failure and maintenance The power limit (in megawatts) a network can support Commonwealth tax on carbon production (initially fixed at $23 per tonne before shifting to a market-determined price) The simultaneous production of electricity and heat from the same fuel source Two or more independent parties attempting to attract business by offering the most favourable terms From 1 July 2012, distributed generators can connect to the distribution network through a process under chapter 5 or 5A of the National Electricity Rules. Each process sets the rights and obligations of those connecting and certain sizes/types of generators may be excluded from, or find it more difficult to access, specific connection processes. Distributors apply fees and charges associated with connection, which vary with the size/type of generator and type of connection Electricity purchaser and user Small- to medium-scale electricity production by households, business and community groups, predominantly for on-site use or to supply people and organisation close by. Generators may be stand-alone or connected to the distribution network and may export excess electricity into the grid Links the transmission system to electricity consumers through distribution lines that carry low voltage electricity Operator and manager of the distribution network A generator connected to a distribution network with no direct access to the transmission network Fair distribution of assets and resources throughout society

Capacity Generator capacity

Network capacity Carbon price

Co-generation Competitive market Connection

Consumer Distributed generation

Distribution network Distributor (distribution network service provider) Embedded generator Equity

GLOSSARY

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Fault level limit

The maximum current that can flow through a network in the event of a short circuit. Exceeding the fault level limit increases the risk to the reliability and safety of the distribution system Price paid (by retailers) per unit of energy exported to the grid by small to medium distributed generators (from renewable or low-emissions sources) Price paid for total electricity produced, regardless of whether it is used on-site or exported into the grid Price paid for electricity exported into the grid Net feed-in tariff (of at least 60 cents per kWh) available to customers with solar photovoltaic systems of five kilowatts or less. The scheme began in late 2009 and closed in late 2011, although payments to subscribers will continue to 2024 Net feed-in tariff available to customers with specified renewable energy generators up to 100 kilowatts capacity. Tariff level must be fair and reasonable and the scheme has no prescribed end date Net feed-in tariff (of at least 25 cents per kWh) available to customers with solar photovoltaic systems of five kilowatts or less. The scheme began in 2012 and will run until 2016, but can be ended early at the Ministers discretion A unit that generates electricity. Definitions of generators by size vary, and the Commission uses the following capacity limits as a guide only: 100 kilowatts or less. Household-scale includes distributed generators owned by small business and community groups. Greater than 100 kilowatts and less than five megawatts Greater than five megawatts Atmospheric gas that traps radiation emitted by the Earth. Increasing levels of greenhouse gases (such as carbon dioxide) have caused the atmosphere and Earths surface to heat up Government support to encourage the innovation and development of an industry, achieved by stimulating the demand for products of that industry or reducing its costs Measure of real electrical power, or energy rate of production or demand (one megawatt equals 1000 kilowatts) Measure of energy consumption or use (one megawatt hour equals 1000 kilowatt hours) Energy produced from hydrocarbon based fuels (such as coal, gas and oil) that uses lower carbon fuel sources or advanced technologies to significantly reduce greenhouse gas emission levels

Feed-in tariff

Gross feed-in tariff Net feed-in tariff Premium feed-in tariff

Standard feed-in tariff

Transitional feed-in tariff

Generator

Small-scale or household-scale generator Medium-scale generator Large-scale generator Greenhouse gas

Industry assistance

Kilowatt or megawatt

Kilowatt hour or megawatt hour Low-emissions generation

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POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Market-based pricing

Unregulated pricing determined by supply and demand. In an efficient and competitive market, market price will equal market value The inefficient allocation of goods and services by a free market The ability of a business to raise prices without losing customers to its competitors The market for the supply of electricity to retailers and endusers in all states and territories except Western Australia and the Northern Territory National consumer protection framework for the retail sale of electricity and gas A historically high point in electricity price resulting from strong consumer demand. It is estimated that 10 per cent of distribution network capacity is built to meet peak demand which occurs 1 per cent of the time Power generated by converting solar radiation into electricity using semiconductors. Photovoltaic generation uses solar panels composed of solar cells containing a photovoltaic material (commonly crystalline silicon) Energy produced from naturally replenished sources including solar, wind, marine, geothermal, hydro-electricity and bioenergy Interface between the electricity wholesale market and customers that sells electricity to the customer and manages customer transfers, connections, billing, complaint handling, and service information. Victorian retailers with 5000 or more customers are required to offer feed-in tariffs Device that measures two-way electricity flow and communicates this information to electricity distributors. By the end of 2013 each Victorian house and business will have one installed The demand in megawatts or megawatt hours placed on the total network generation system equal to the demand created by network-connected consumers plus distribution and transmission losses The more power sent through a line or transformer, the higher the temperature of the equipment. The equipment is designed for temperature tolerances based on power levels Transports electricity from generators to the distribution network service providers and large end users through high voltage transmission lines The simultaneous production of heat, cooling and electricity

Market failure Market power National Electricity Market

National Energy Customer Framework Peak demand

Photovoltaic

Renewable energy

Retailer

Smart meter

System load

Thermal capacity

Transmission network

Tri-generation

GLOSSARY

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Voltage level

The amount of electrical pressure necessary to transfer electricity. Transmission lines carry high voltage electricity long distances, before the voltage level is decreased for compatibility with the distribution network, and decreased again for customer use Exchange between electricity producers and retailers whereby the output of all generators is aggregated and instantaneously scheduled to meet demand in the most cost-effective way

Wholesale electricity market

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Key messages
In the right locations, small-scale consumer and commercial electricity generation can deliver low cost energy that avoids transmission losses and benefits the network. This improves the efficiency of the electricity industry, consistent with the National Electricity Market objectives. To play this role, distributed generators need to connect to the network without compromising its reliability. Such generators should also receive a fair return for the value of the energy they produce and for their value to the network. The introduction of a price on carbon will change low-emissions energy market signals. In this context, it is timely to reconsider the amount, structure and regulation of feed-in tariffs (FiTs) and distributed generation in Victoria. Similar reviews have already taken place in New South Wales and South Australia. FiTs are paid to small-scale domestic and commercial distributed generators for the electricity they produce. Three FiT schemes operate in Victoria Standard feed-in tariff (SFit), the Premium feed-in tariff (PFit) and the Transitional feed-in tariff (TFiT). Only SFiT and TFiT, are open to new entrants. A FiT can effectively pay distributed generators for the value of the energy they produce. This value can be delivered through a competitive market and, therefore, the Victorian Government should phase out its involvement in regulating FiTs. From 1 July 2012 when the carbon tax is introduced this price will also automatically incorporate a value for greenhouse gas reduction. The Commission proposes: moving to a fully competitively determined FiT by December 2015, provided adequate consumer protection, transparency and information are in place this transition be gradual to smooth the move to deregulation TFiT be closed to new entrants once 75 MW of generating capacity is reached (as previously announced) or by 31 December 2013, whichever is sooner SFiT be broadened to include all low-emissions and renewable technologies, with a requirement that until 31 December 2015 large retailers must offer a wholesale price based FiT for distributed generation of 100 kW or less. The Victorian Government should focus its efforts on barriers to distributed generation where there is market failure and current regulation is flawed. One such barrier is proponents limited ability to realise the network value of their generators. This value is highly location specific and depends on the type of generator and when and how reliably it produces electricity. Because it is not directly related to actual output, this value cannot be efficiently captured through a feed-in price. Other mechanisms are needed to capture this network value. Medium-scale generators, due to their size, have most potential to reduce network costs and greenhouse gas emissions. But the process for connecting such generators is often difficult and costly. The rules for sharing costs, such as the cost of augmenting the network to accommodate multiple distributed generators, are also unclear. These rules and processes are regulated nationally and there are processes in train to address these barriers. By advocating for change the Victorian Government could reduce a major burden on medium-scale generators. The Victorian regulations for connecting household-scale generation result in more complex connection processes than in other states. It imposes considerable regulatory burden on the installers of solar PV units and creates confusion for consumers. The Victorian regulation should be changed to simplify this process.

KEY MESSAGES

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Summary report
In this inquiry, the Commission has been directed to look at the policies that relate to distributed electricity generation using low-emissions and renewable technologies. More specifically, the terms of reference require the Commission to: assess the design, efficiency, and effectiveness of feed-in tariff (FiT) schemes recommend any changes to current FiT arrangements identify state and/or local regulatory and other barriers to the development of a network of distributed renewable and low emissions generation.

What is distributed generation?


There is no definitive definition of distributed renewable or low-emissions generation. For the purposes of this inquiry, the Commission is focussing on generation with the following characteristics: the energy is generated by households, businesses or community groups who predominantly intend to use the energy on-site or to supply people or organisations close by, and includes co-generation and tri-generation systems1 the generator is connected into the electricity grid through the distribution network, not the transmission network. In some cases the system may be stand alone energy in excess of the needs of the generator owner may be sold (exported) into the grid the energy could be from renewable sources such as solar, wind, biogas or waste, but may also be low-emission fossil fuels, using technologies that produce with up to half the average emissions intensity of electricity generation in Australia the total amount of energy generated is often small- to medium-scale, up to around 5MW. While a few larger-scale generators, such as some wind farms, can be connected to the distribution network and classified as distributed generation, any barriers to such activities appear to be common across centralised and distributed generation. The Commission has therefore not focussed on larger-scale generation in this inquiry.

What are feed-in tariffs?


Feed-in tariffs (FiTs) are: payments to distributed generators for electricity generated at their premises usually the subject of contracts between generators and electricity retailers traditionally intended to encourage the installation of photovoltaic (PV) cells and other renewable energy generation technology. Victoria currently has three regulated FiTs and all retailers with more than 5000 customers are required to provide them.

Co-generation is the simultaneous production of electricity and heat. Tri-generation is the simultaneous production of electricity, heat and cooling.
1

SUMMARY REPORT

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Premium FiT (PFiT) introduced in 2009 and closed in December 2011, the PFiT is paid to customers generating electricity using solar PV systems of 5kW or less. Customers are paid 60 cents a kWh for surplus electricity fed into the electricity network. The level of the PFiT was set according to the amount needed to pay back the cost of the solar PV system over 10 years. At that time solar panels were considerably more expensive. Transitional FiT (TFiT) the TFiT commenced in January 2012 following the closure of PFiT. It has similar eligibility criteria to PFiT but sets the tariff at 25 cents per kWh. Again the tariff was set at the level needed to pay back the cost of an average solar PV system. It is open to new applicants until 2016 but may be closed earlier if a cap of 75MW of installed capacity is reached, the cost the scheme on other energy users exceeds $5 per year per customer or the Minister thinks earlier closure is appropriate. Standard FiT (SFiT) introduced in 2004 for energy from wind generators, the SFiT was extended in 2007 to cover all renewable energy generators up to 100kW in capacity. The scheme has no specified end date and requires eligible retailers to pay a fair and reasonable price for the surplus electricity fed into the grid. Although not mandated in legislation, the Essential Services Commissions (ESC) guidelines indicate fair and reasonable is interpreted to mean that the price paid to customers supplying electricity from distributed generation under SFiT should not be less than the price they pay the retailer for electricity bought from the network.

Why this inquiry is important


Importance of efficient distributed generation
Renewable and low-emission generation has a role to play in reducing greenhouse gas emissions, offsetting rising power costs and contributing, on a competitive basis, to a diverse and efficient electricity sector. Often the business case for individual households or businesses to install distributed generation is compelling. And the attractiveness of distributed generation is increasing as technology costs fall and the cost of electricity bought from the network increases. Distributed generation enables businesses and households to offset their electricity costs by using their own power (in place of purchasing it from a supplier). They may also earn additional income by selling unused power into the network. Interest in installing distributed generation in Victoria has been growing, but there are concerns about unnecessary barriers to its use and how electricity fed into the network will be priced. Historically, Victorias electricity system was developed to transport electricity from large coal powered generators in the La Trobe Valley to consumers throughout the state. However, increasing electricity prices, the introduction of a carbon price and growing community concerns about greenhouse gas emissions mean that the electricity sector is changing. The electricity sector needs to be flexible and respond quickly and efficiently to this changing environment to prevent unnecessary increases in electricity prices.

Developments in Commonwealth policy


The Commonwealth Government has policies either in place or about to be implemented that will reduce carbon emissions and make installing distributed generation more attractive, including:

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POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

a fixed carbon price of $23 a tonne from 1 July 2012, moving to a market determined price after three years the Clean Energy Finance Corporation, with a mandate to encourage and leverage private investment in renewable energy and clean technology projects a target that 20 per cent of Australias electricity supply will come from renewable energy by 2020 (supported by assistance that includes subsidises for small-scale renewable energy). Since January 2011 households, small businesses and community groups installing smallscale renewable energy technologies have been eligible for financial credits in the form of small-scale technology certificates. Additional credits are available for installing small-scale renewable generators, such as solar PV, wind generators or small-scale hydroelectricity.

A climate of reform
These Commonwealth measures have led to suggestions that other policies for reducing carbon emissions are no longer relevant. For example, the Council of Australian Governments (COAG), argued that subsidies mandated through FiTs should be discontinued. Both New South Wales and South Australia have already responded by reducing FiTs: In 2012 New South Wales Independent Pricing and Regulation Tribunal (IPART) reviewed New South Wales FiTs for small-scale solar PV systems, recommended removing the obligation for retailers to offer a FiT and suggested that a fair and reasonable tariff would be in the range of 5.2 to 10.3 cents per kWh. South Australias price regulator, ESCOSA, also made a price determination in 2011 for FiTs applying to small-scale solar PV and concluded that retailers must pay a minimum FiT of 7.1 cents per kWh in 2011-12, increasing slightly in subsequent years. Distributors will pay an additional 16 cents per kWh until 30 September 2013. In May 2011 Western Australia halved its FiT from 40 cents to 20 cents per kWh and has subsequently closed the scheme. The recommendations in other states contrast with Victorias TFit and SFiT which respectively set FiTs of at least 25 cents per kWh and the retail price. The terms of reference for this inquiry note it is appropriate to review Victorias FiTs in light of a national carbon price. Queensland has decided to continue its FiT at 44 cents per kWh.

Distributed generation in Victoria


The Victorian electricity network reflects centralised system design decisions made in the 1920s and a legacy structure that has been adapted somewhat over the ensuing years. Since privatisation, smaller gas-fired generators have increasingly played a part in the energy market and, more recently, large-scale wind and small-scale solar capacity have grown. This growth reflects the falling cost of renewable technologies, increasing climate change awareness and responses to government policies designed to increase generation from renewable energy sources. Distributed generation is a diverse sector with a wide range of energy sources and producers, ranging from small-size household-scale solar PV systems to medium-size commercial-scale systems. The distributed generation market is made more complex SUMMARY REPORT

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by a slew of standards, regulations, policy and legislation imposed by various levels of government.

The extent of distributed generation


Widespread distributed generation is relatively new to the electricity industry and, as such, does not always fit neatly into Victorias traditional electricity market. While the data on generation capacity depend on the definitions used, ESAA figures suggest embedded and non-grid generation2 account for 7.2 per cent of Victorias installed capacity. Most of this installed capacity is medium-scale (chapter 2).3

Table 1

Capacity of embedded and non-grid generation in Victoria June 2010


MW 133 45 0.6 103 619 Non-hydro renewable embedded/non-grid Black liquor Landfill gas Sewage gas Solar Wave Wind Solar hot water MW 55 40 22 75 0.2 428 131 000 units 619

All embedded/non-grid Natural gas Waste gas LPG Hydro Non- hydro renewable

Total
Note:

900

Total

Solar hot water not included in total, renewable embedded/non-grid does not include hydro.

Sources: (ESAA 2011, pp. 20-21; CEC 2011a).

Distributed generation is growing, but it is still a small portion of Victorias energy generation capacity and is falling as a percentage of total generation. However, changes to government policy, consumer choices and cheaper technology are expected to encourage the installation of decentralised generators. Figure 1 shows the capacity of solar PV installed annually, and highlights the impact of the PFiT. The TFiT commenced on 1 January 2012 but there is not yet a full year of data to make a meaningful comparison. Clean Energy Australia predicted that Victoria would have over 80 000 solar PV systems installed by the end of 2011 (CEA 2011, p. 35).

Embedded generation is generation embedded in the distribution network and non-grid generation is not connected to the electricity network. Both are included in the Commissions definition of distributed generation.
2

Wind power is classed as embedded generation even though the majority of wind power connects to the transmission network.
3

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Figure 1

Additional annual capacity of solar PV installed in Victoria (MW)

Source: (CEC 2011a, p.p 34).

Objectives of distributed generation policies


The terms of reference direct the Commission to assess the effectiveness and efficiency of FiTs and identify barriers to distributed generation. To do so, the Commission needs a clear view on what distributed generation and FiT policies should try to achieve. But the policy objectives around distributed generation are not clear and have changed over time. This lack of clarity is illustrated in the diversity of views presented to this inquiry on the role of distributed generation and FiTs. As noted above, Commonwealth policies affecting low emissions and renewable distributed generation are changing, which affects the role of state policies such as FiTs. The objectives of these state policies also need to recognise the future role of distributed generation. Therefore as distributed generation takes a more active role in supplying electricity nationally, state policy objectives will need to be consistent with the objective of the National Electricity Market (NEM). Regulation of the NEM seeks to promote efficient investment in, and efficient operation and use of electricity services for the long term interests of consumers of electricity. In the past, three broad objectives have been assigned to distributed generation and FiT policies in Victoria: reducing greenhouse gas emissions, including assisting households to make a personal contribution to environmental outcomes and reducing greenhouse gas emissions supporting innovation and development of a new industry and stimulating investment in distributed generation by overtly allocating risks, including reducing the energy market risks for small investors installing solar panels

SUMMARY REPORT

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ensuring fair and reasonable payments for electricity from household-scale investment in renewable generation. In the Commissions view the first two of these objectives are based on previously identified policy gaps that are no longer relevant. reducing greenhouse gas emissions this objective has been overtaken by the Commonwealths carbon pricing policy and other Commonwealth greenhouse gas reduction initiatives. The carbon tax will raise the cost of carbon-intensive generators, lifting the wholesale price of electricity and increasing the price paid for distributed generation. In addition, Commonwealth subsidies for renewable energy further support investment in some types of distributed generation. Therefore, while the objective of reducing greenhouse gas emissions is now most appropriately addressed through the price on carbon (not state FiTs), distributed generation is still likely to contribute to the transition to a low carbon economy. industry support this is likely to be a highly distorting policy objective. While additional assistance to solar PV (through the PFiT or TFiT) may benefit the solar industry, this is likely to be at the expense of other distributed generation technologies or other industries supplying innovative energy efficiency solutions. Such policies have also proven uncertain and disruptive to industry, as they often change significantly at short notice, with adverse implications for business planning. The third objective, ensuring fair and reasonable payments for electricity from household-scale investment in renewable generation is, in the Commissions view, the most relevant objective for Victorian FiTs and consistent with national FiT principles and the objectives of the NEM. The Commission considers that a fair and reasonable return involves taking account of the full value of distributed generation and reflecting this value in the prices and other incentives facing market participants. It also involves providing efficient processes to connect distributed generators to the network, so this value can be realised. Such an approach would be fair and reasonable because: the owners of distributed generation are rewarded for the value they contribute to the energy market and are not disadvantaged by unnecessarily complex processes that prevent them from realising that value network owners and retailers are not required to incorporate or pay for distributed generation that does not contribute to the efficiency of the electricity market other users of the electricity network are not required to pay more for electricity to subsidise those who have installed distributed generation. Such cross-subsidies are a feature of all of Victorias current FiTs and are regressive because they disadvantage the poorest energy users, such as renters and those who cannot afford solar panels investment in distributed generation would be encouraged when it is an efficient way of developing and using electricity services, and it would not favour the development of one industry over another distributed generation policies would be more sustainable and predictable. The Commission notes that fair and reasonable payments for electricity could be achieved without government intervention if the electricity market was competitive and well informed. Competing service providers would voluntarily offer efficient prices and services that meet the above objectives without the costs and distortions created by government regulation. A summary of the Commissions view on the relevant objectives for distributed generation policy is outlined in box 1.

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Box 1

Objectives of distributed generation policy in Victoria

The Commission has concluded that the appropriate objective for Victorias policy on distributed generation is to ensure distributed generators have access to a fair and reasonable return for the value of their generation. In achieving this objective government policies should: rely on the market when it is capable of achieving this objective if markets fail, ensure the right policy tool is used to solve the identified problem be as administratively simple as possible be equitable so that one group does not subsidise benefits that go to others fit well with existing institutional arrangements and national policy directions. Much of the regulation affecting the electricity industry is, however, nationally agreed and hence while Victoria can advocate for change it cannot directly determine the regulatory regime in most instances.

Providing a fair and reasonable return to distributed generation


If Victorian policies for distributed generation are to ensure distributed generators have access to a fair and reasonable return for the value of their generation, it is important to understand the components that make up this value (chapters 4, 6). This value includes: Energy value which is the value of the energy output delivered by the distributed generator. This value is captured through the competitively determined price per unit of energy and based on the wholesale price of electricity at the time the energy is delivered. Network value which is the capital value of the difference between upgrading the network sooner, and upgrading it later because of distributed generation. This value takes into account the capacity for distributed generation to meet rising local demand without the need to augment the network as well as any additional network investment needed to accommodate the distributed generator. The network value is time and location specific and would be zero (or negative) in parts of the network where the system is below capacity. Externality value this mainly reflects the costs of unpriced pollution and greenhouse gas emissions. However, with the advent of the carbon tax from 1 July 2012 the value of greenhouse gas reductions will be reflected in the wholesale price of electricity and therefore incorporated in the energy value as defined above. Ensuring the different elements of the value of distributed generation are recognised and captured is critical to ensuring market participants face appropriate and efficient incentives to invest in distributed generation. However, none of the methods used previously to set Victorian FiTs (the amount needed to pay back investment in a solar PV system or the retail price of electricity) are an accurate measure of any of the above values. Also, policies that focus solely on the price paid for exported electricity fail to address issues around the ability to connect distributed generators to the network efficiently and effectively. Without efficient connection distributed generators cannot realise the full value of their investments.

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Recovering the energy value


As noted above, the energy value is the value of the energy delivered by the distributed generator. With the introduction of the carbon price it will also embody the greenhouse gas reduction value. In addition, distributed generation will have more value in locations further from the centralised power stations, where the system losses from transporting electricity are high, and at times when demand is at its peak so the cost of purchasing electricity on the wholesale market is high. Because the energy value is related directly to the amount of electricity delivered it is well suited to recovery through a FiT (chapters 5 and 6). The Commission retained ACIL Tasman (2012) to provide indicative estimates of the potential size of the energy value of distributed generation for various generation profiles. ACIL Tasman estimated the average energy value for a flat generation profile (generating constantly throughout the year), a solar generator, battery storage system (that stores energy off-peak and exports it back into the grid when the wholesale price is highest) and a peaking plant that generates and sells energy when the wholesale price exceeds $100 a MW (table 2). These estimates illustrate that the energy value of distributed generation varies with time and location, according to the type of generation technology and over time as factors such as the wholesale price of electricity change (chapter 6).

Table 2

Estimated average energy value of distributed generation at Keilor, for various generation profiles (nominal)
2013 cents per kWh 6.1 7.0 12.0 62.1 2014 cents per kWh 6.9 10.2 15.0 80.1 2015 cents per kWh 7.3 12.4 16.9 63.3

Generation Profile Flat Solar Battery Peak $100

A fair and reasonable FiT


In a competitive and well informed energy market it is reasonable to assume that competing energy retailers would offer efficient prices and services consistent with the characteristics of a fair and reasonable return described above. In an ideal scenario price would reflect the energy value of the electricity supplied taking account of when and where the electricity is produced. In contrast, an approach where the government sets the FiT involves a lot of regulatory costs and risks setting prices too low or too high (regulatory error), leading to inefficient investment in distributed generation. If prices are too high regulation may also impose costs on other electricity consumers or reduce competition by encouraging retailers to try to avoid certain customers or classes of customers (section 6.1.7). Regulation should not be used unless there is a clear case that the market will not deliver a fair and reasonable price and outcomes could be improved significantly by government intervention. The Commission has therefore assessed whether there is effective competition within the Victorian retail electricity market. The fundamentals for competition in Victorias retail market are strong. Victoria has had retail competition since 2002 and electricity consumers can choose among an
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increasing pool of energy retail businesses. The numbers of consumers switching between retailers is higher in Victoria than any other state and an Australian Energy Market Commission (AEMC) review in 2007 concluded that the retail market was competitive. The regulation of retail electricity prices in Victoria was discontinued in 2009. In addition some retailers already offer some FiTs that are above the regulated minimum (section 5.4.1). But most of this evidence is based on competition in the part of the retail market that supplies electricity, rather than distributed generation. Currently, retailers appear far less responsive to customers with distributed generation. The processes for connecting and transferring customers with distributed generation tend to be much slower and more complex than those applying to retail customers. Also a common criticism from distributed generators who are not eligible for a regulated FiT was that they are unable to find a retailer willing to purchase their electricity (sections 5.4.1 and 6.1.2). These experiences raise questions about whether behaviour in the part of the retail market dealing with distributed generation is currently sufficiently competitive to be confident that fair and reasonable FiTs will be offered.

Barriers to a market determined FiT


Setting aside the appropriateness of existing FiT schemes, there are several potential barriers to retailers offering an efficient, market determined FiT (chapters 5, 6). Many of these barriers are short term and in time will reduce as other reforms bed down or the market matures: Information and transactions costs there are concerns that, especially for proponents of small-scale distributed generation, information is difficult and costly to obtain and is not always clear and accessible to the customer. These costs are compounded by the newness of some technologies and uncertainty caused by changing national regulation. But with a benchmark that initially provides guidance on the level of a fair and reasonable FiT and ensuring FiT information is published on the Australian Energy Regulator price comparison website Energy Made Easy, these information and transactions costs should reduce over time. Market power issues (vertical integration of retail energy businesses) there are significant ownership links between the energy retail market and upstream energy production that may impact on the incentives for retailers to engage and negotiate a FiT with distributed generators. But over time new retailers could enter the market, or the proposed rule change allowing aggregators to act on behalf of distributed generators could be accepted, giving distributed generators options to sell to businesses other than current retailers. Limitations on time of use and locational pricing not all Victorians have meters which collect time of use and location aspects of their power use and production (such as smart meters). This limits the ability to develop FiTs that better reflect the value of distributed generation. Smart meters are now being rolled out across the state, although there is a ban on time of use pricing until at least 2013. The Commission therefore concludes that while the Victorian retail market is competitive there are some concerns about whether currently this competition is fully reflected in retailers negotiations with distributed generators. On its own none of the above barriers would prevent competitive outcomes from emerging (provided adequate consumer protection, transparency and information are available). However, combined they are likely to present significant short term constraints until key reforms are in place, including through the Commissions draft recommendations and national reforms to the national electricity consumer framework (NECF).

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Weighing up these considerations, the Commission suggests a managed transition to a fully competitively determined price for energy from distributed generation that incorporates a relatively rapid adjustment to market-based FiTs.

Future Victorian FiT arrangements


The Commission has assessed the design, efficiency and effectiveness of feed-in tariff schemes, including market-based gross FiT schemes, in the context of a national carbon price. The Commissions conclusion on the best objective and role of FiTs is summarised in box 2.

Box 2

The design, efficiency and effectiveness of feedin tariff schemes

The Commissions response to the terms of reference on the design, efficiency and effectiveness of feed-in tariff (FiT) schemes (including gross FiT schemes) may be summarised as follows: With the advent of the carbon tax, and given the retail market for electricity is competitive, the energy value for distributed generation output is best captured through a wholesale-based price set by the competitive market. The role of a FiT is to recover this value. FiT schemes should: be based on such market prices, and be part of a transition to a fully market-based approach for pricing energy from distributed generation provide an indicative benchmark range with periodic updates until market FiTs are reasonably established not exceed such a market-based price, because this would mean cross-subsidies from customers without distributed generators to customers with distributed generators, and this would be regressive be technology neutral so that the most efficient choices among generation technologies can be made be confined to household scale distributed generation of 100 kW or less, as larger-scale producers are better placed to compete in the market.

Adopting time based pricing is desirable where feasible, because it provides a stronger economic signal to distributed generators of the value of production when overall electricity demand is high. While there are arguments in favour of gross FiT schemes, there would be significant costs in replacing recently installed smart meters and changing retailers supporting infrastructure and computer systems to adopt such schemes. Therefore, while not ruling out gross FiTs if they arose in the marketplace as a result of competition, the Commission sees no clear value in mandating them. Turning to the terms of reference on recommending changes to existing Victorian FiTs, the Commission proposes that the current Victorian regulated FiTs be phased out and that future prices of distributed generation be determined by retail market competition. Market determined FiTs would not discriminate against particular technologies or customers, rather they would be based on the value of the electricity supplied by distributed generators (which would include the impact of the carbon tax) The Commission has concluded that efficient FiTs should be technology neutral, but its draft
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recommendations focus on low emission and renewable technologies consistent with reference to these technologies in the terms of reference. The Commissions proposed approach would be supported by consumer protection and information measures and be phased in to maintain certainty that the market would continue to offer a competitive FiT. The approach would also support time of use pricing for distributed generation. In summary, the Commissions draft recommendation is: That, to improve the efficiency and effectiveness of the operation of FiTs in Victoria, the Victorian Government: close the TFiT, either by 31 December 2013 or once the 75 MW capacity is reached (as currently provided in legislation), whichever occurs first amend the SFiT to require that Victorian electricity retailers with 5000 or more customers offer fair and reasonable prices for electricity exported to the grid by all small low-emissions or renewable distributed generators (100 kW or less) until 31 December 2015 establish a fair and reasonable price for energy supplied by distributed generators through the retail electricity market define low-emissions technology as generators that produce 50 per cent or less of the emissions intensity of electricity generation in Australia allow market-determined arrangements based on gross payments by mutual agreement ensure that FiT prices are published by the Australian Energy Regulator under the requirements of the National Electricity Customer Framework. That the Essential Services Commission: publish information on the likely range of wholesale market-based net FiT payments which would be consistent with a fair and reasonable offer updated at regular intervals consider the extent to which FiT market offers are consistent with fair and reasonable criteria, redefined to be based on the wholesale price of electricity (the energy value). The terms of reference state that any changes to existing arrangements would not be applied retrospectively. The Commission understands this to mean that customers currently on PFiT would remain on this tariff until its contracted expiry date on 1 November 2024. Similarly, customers currently on the TFiT, and new customers entering the scheme prior to its proposed closure on 31 December 2013 would remain on the TFiT until its contracted expiry date 31 December 2016. This non-retrospectivity approach would also apply to SFiT customers. Customers on the SFiT would remain on any contracted terms of this tariff until the expiry of such contracts, and there would be no new entrants to the amended SFiT scheme after 31 December 2015. The Commission will look further at the transition issues for existing SFiT customers in the final report.

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Recovering the network value


The Commissions draft recommendation for the future of Victorian FiTs would ensure that distributed generators receive a fair and reasonable price reflecting the energy value of the power they produce. However, distributed generators can also create a network value which arises if the generator enables planned network augmentation to be deferred. Measuring the network value is difficult because it depends on the location of the generation, whether it is large enough to delay investment in the network and whether it can be relied on when needed. While ACIL Tasman (2012) discussed previous estimates that quantify network value, it acknowledges that if distributed generation does not delay network upgrades the network value may be zero or even negative. Because the network value arises from delaying planned network investment, it is by nature a time and location specific capital value that is unrelated to the actual quantity of electricity generated. Such a value is not readily reflected in a FiT and in the Commissions view it should be dealt with outside the FiT payment. There are however, barriers to a market determined network value flowing to distributed generators: monopoly network owners have an incentive to retain any network value and not pass it back to distributed generators there are information asymmetries as proponents of distributed generation may not know where there are network constraints and hence where the network value of distributed generation is highest the current regulatory regime guarantees network owners a regulated rate of return on their assets. It therefore rewards distribution network owners for investing their network rather than deferring network augmentation by encouraging distributed generation (section 6.2.1). There is a number of possible options for addressing this network value issue: Doing nothing and assuming the network value is zero, given the difficulty and costs of trying to calculate it. Improving the way distribution businesses are regulated so they have more incentive to reveal the network value, distributed generators have more bargaining power to recover that value, and distribution businesses seek out distributed generation where it is an efficient alternative to augmenting the network. The value could be estimated and spread across all distributed generators and reflected in FiT payments, but as noted above this is not an accurate reflection of the network value and is therefore not the Commissions preferred approach. In the short term enhancing the awareness and bargaining position of distributed generators would improve their capacity to negotiate with distribution businesses. The Commission is aware of several initiatives and trends that will help address market power concerns and improve distributed generators capacity to access and use information. They include: the information available on where network investment is needed is increasing. Sustainability Victoria has published maps that will help identify areas where distributed generation could help defer network investment

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the proposal (currently being considered by the AEMC) to allow aggregators to act on behalf of groups of smaller generators would enhance their bargaining power and introduce a party into the negotiation with the capacity and expertise to negotiate with distribution businesses about distributed generation based network solutions improved connection processes for distributed generation (consistent with the Commissions draft recommendations) would make it easier to incorporate other issues, such as network benefits, into those negotiations. While these initiatives are likely to strengthen the negotiating position of distributed generators, they are unlikely to change the underlying regulatory incentives that discourage distribution businesses from looking proactively at distributed generation as an alternative to expanding capacity through network investment. The Commission is seeking feedback on where the Victorian Government can advocate for further reform in the national electricity market across these and other approaches to capturing network value and removing barriers to efficient market incentives for investment in distributed generation.

Connection issues
The terms of reference require the Commission to identify State and/or local regulatory and other barriers to the development of a network of distributed renewable and low emission generation in Victoria, including co-generation and tri-generation. Apart from pricing issues, barriers to connection were the most common barriers to distributed generation identified by participants in this inquiry. The issues generally varied according to the scale of generator. medium-sized distributed generators (greater than 100 kW and generally less than 5 MW). This includes co-generation and tri-generation plants in factories, shopping centres, office blocks and hospitals. Capacity is often between 1 and 5 MW. household-sized distributed generators (100 kW or less). Largely comprised of solar PV systems owned by households, small businesses and community organisations with an average capacity of 2 kW.

Medium-scale connection
The complexity of the connection process was raised by medium-scale distributed generators as the largest barrier to efficient investment in distributed generation. Distributed generators require access to the networks for a range of reasons including to buy electricity, balance system loads and selling surplus power (ClimateWorks et al. 2011, p. 9). The processes for connecting distributed generators are, from 1 July 2012 regulated nationally, through chapters 5 and 5A of the national electricity rules. The Australian Energy Regulator is responsible for administering these rules and has released guidelines on connection charges. The process for connecting medium-scale distributed generation is illustrated in figure 2.

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Figure 2

Connection process for medium-scale distributed generation


Preliminary inquiry from potential applicant wishing to connect DNSP has 5 days to provide information Applicant lodges application on form determined by DNSP

Additional information required DNSP informs applicant of additional information needed

Application incomplete

DNSP informs applicant of deficiency

Application complete DNSP has 10 days to advise whether the service is covered by an approved connection process and, if so, make a connection offer offer open for 45 days expedited connection may be available

Completed application submitted

Site visit, if needed

Not approved service. DNSP notifies applicant of the negotiation process & possible changes & expenses DNSP uses best endeavours to make offer within 65 days of receiving completed application* Offer open for 20 days Agree d Offer terms form connection contract * This applies to negotiation, not dispute resolution
Source: Commission analysis.

Basic connection service or standard connection service

Use agreement approved by AER Negotiated connection offer Not agreed Option of dispute resolution reduction through AER Legend Australian Energy Regulator DNSP Distributed Network Service Provider AER

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A number of elements of this process make it complex, uncertain and costly, including the need for expensive network upgrades in some areas before distributed generation can be connected. This complexity is, however, unlikely to be resolved by the market. The AEMC conducted a review in 2009 which concluded that there are regulatory barriers that prevent the efficient connection of distributed generators (AEMC 2009b, p.76). While it is difficult to estimate the loss to Victoria from poor connection processes, the delays can be large. A report by ClimateWorks, Seed Advisory and the Property Council of Australia (PCA) noted that distribution businesses claim it takes up to 12 months for a simple connection and up to two years for a more complex one (ClimateWorks et al. 2011, p.23). Participants in a distributed generators roundtable held by the Commission claimed it can take longer than four years for some to get connected, while others received an answer in two weeks. The main barriers to connection identified by participants were: information and planning right to connect costs of connection: process, timelines and uncertainty costs of connection: sharing network costs, benefits and risks. While the Victorian Government does not directly control these processes, the Commission considers they are likely to be significant issues for medium-scale distributed generators in Victoria. The Commission is therefore seeking to identify those areas where the Victorian Government might focus in advocating for change in national arrangements.

Information and planning


Participants indicated that information on network capacity by location could help inform better siting of distributed generation, assist negotiation and reduce connection costs. Information on network capacity includes where distributed generation can be tolerated and where network constraints restrict further expanding distributed generation. Such information would reduce problems where the costs of connection are unknown until distributed generators have spent significant time and money on the application process (ClimateWorks et al. 2011, p.24). The Commission agrees that improved spatial information on network constraints and fault levels would improve negotiation and siting of investment, and reduce connection costs. This information would allow distributed generators to make judgements about likely connection costs and manage the risks of pursuing projects that are less likely to proceed. The Commission is seeking feedback on its conclusion that the AEMCs proposed Distribution Annual Planning Report will include sufficient information on network constraints and planning by location to inform decision making and negotiation by distributed generation proponents.

Right to connect
Medium-scale distributed generators claim they will be treated less favourably than larger and smaller generators under new national regulations because they do not have an automatic right to connect once predetermined standards are met. In negotiating with medium-scale distributed generators individual distribution businesses have discretion in SUMMARY REPORT
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setting minimum technical standards and distributed generators must pay for network studies and the network reinforcement required to meet those standards. In contrast household-scale distributed generation has an automatic right to connect for units that meet Australian Standard AS4777. Large generators that meet predetermined standards also have an automatic right to connect under chapter 5 of the NER. The Commission sees merit in devising practical and efficient arrangements for automatically connecting distributed generators that meet predetermined standards and pay for legitimate network costs (the allocation of such costs is discussed below). Distributed generators may then make commercial decisions to connect or not based on predetermined standards. Those who do not meet the standards could choose not to connect or negotiate a tailored connection service. ClimateWorks, Seed Advisory and the PCA have made a rule change request to the AEMC that could result in common standards and an automatic right for connection for medium-scale distributed generators. An automatic right to connection for standard embedded generators should be available to plants that meet an automatic access standard. This automatic access standard would be established to ensure that only plants that will not compromise the integrity of the grid are granted automatic access. (ClimateWorks et al. 2012, p.14)

Costs of connection: process, timelines and uncertainty


The connection process itself was raised by many participants as a source of uncertainty and delay and therefore a key barrier to distributed generation. As noted above, participants were concerned about the time it takes to connect but also uncertainty about the process, which can be different for each distribution business. Regulation of the connection process is being transferred to the AER, and the specificity around this process and its timeframes is again less for medium-scale generation than for either large or small generators. The Clean Energy Council (CEC), for example, claimed that the new chapter 5A covering these connection processes overlooked the needs of medium-scale distributed generation. The CECs primary concern with Chapter 5A is that the industry has learned some of the most significant lessons since the consultation process closed in early 2010. The NECF [National Energy Customer Framework] consultation process was flawed as a result and has completely failed to meet the needs of the small scale embedded generation market or indeed take account of this stakeholder group. (CEC sub. 76, p. 7) Participants identified causes of delay and uncertainty at each stage of the connection process (box 3).

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Box 3

Concerns about the connection process for distributed generation

Participants argued that distribution businesses can: delay the process by avoiding the triggers that start formal negotiations and require them to respond within regulated timeframes manipulate timeframes by, for example, requesting more information on the 19th day of a 20 day decision-making period and therefore restarting the 20 day period. Others suggested that dispute resolution processes would be ineffective because concerns about the ramifications for their other dealings with network businesses would stop distributed generators from taking a dispute to the Australian Energy Regulator (MEFL sub. 75, pp. 9-10). There were also concerns about distribution businesses not having the capacity and skills to deal effectively with connection inquiries from distributed generators (ClimateWorks et al. 2012, p.22). Participants in the Commissions environmental inquiry claimed planning application and approvals processes add further complexity, cost and time risk (VCEC 2009, pp.382383). From a distribution business perspective, distributed generators often do not understand the connection process, network implications or what is required for them to connect (ACIL Tasman 2011a, pp.2930). The ClimateWorks, Seed Advisory and the PCA rule change request for connecting embedded generators has, in the Commissions view, the potential to address many of the above concerns, including a standardised process with specific timeframes and information provision, and a right to connect for distributed generators that meet predetermined standards. The Commission has made a draft recommendation that to facilitate efficient connection of medium-scale distributed generators up to 5 MW, the Victorian Government support the Proposal to amend the National Electricity Rules for connecting embedded generators submitted to the AEMC, with specific support for: improved information on connection processes an automatic right of connection based on meeting standard technical criteria a standard connection process improved engagement by Distribution Network Service Providers (DNSP) specific timelines, including limits on how information requests can impact on overall timelines. The Commission has further suggested in its draft recommendation that should these issues not be resolved through the national rule change process within 12 months, the Victorian Government add a licence condition requiring DNSPs in Victoria to establish such standards and rights by incorporating them into standard connection services that are submitted to and approved by the AER.

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Costs of connection: sharing network costs, benefits and risks


Barriers to connecting distributed generation are not confined to the connection process but also extend to the cost of connection. The largest connection cost is reinforcing the network or installing specialised equipment when augmentation is needed to accommodate the distributed generator. These costs can be substantial, running into millions of dollars (CEC sub. 76, p.7). But the problem is complex and as noted by distribution businesses there is no easy way to remove fault level barriers (UE sub. 77, p. 5). Maintaining the quality and safety of the network is a key performance requirement. Participants claimed that lack of transparency makes it difficult for distributed generators to evaluate cost estimates and the generators share of the costs of network augmentation. They must also negotiate connection with a monopolist whose incentives for efficient augmentation through distributed generation, as noted above, are further dampened by the approach to regulation. Access to information will however improve with the AEMCs proposed Distribution Annual Planning Report which will identify where network constraints are greatest. The proposal by ClimateWorks and others to change to the NER for connecting embedded generation will also support these negotiations. That said, the Commission considers information and process improvements alone will not fully address barriers to efficient sharing of costs, benefits and risks. A particularly vexed issue is who should pay for network augmentation. While a single distributed generator may trigger the need to augment the network the subsequent investment is likely to accommodate a range of users. As noted by the AEMC it is difficult to distinguish the causes of the increased need of augmentation in a meshed network (AEMC 2012c, p.173). Additional investment could be needed to accommodate new distributed generation from several sources or changes in the use of electricity, such as increased population density. These barriers are material. For example, Melbournes CBD has high demand for distributed generation and the network is constrained. When CitiPower proposed to address this issue by levying distributed generators and charging on other users the AER was of a different view and CitiPower withdrew the proposal (ACIL Tasman 2011a, pp.1920). This process illustrates that there is no agreed framework on how these costs should be allocated and shared. The main channel open to the Victorian Government on this matter is advocating reforms to the NEM. The Commission has therefore made a draft recommendation that to clarify the circumstances and conditions in which network reinforcement costs can be spread across new distributed generators and other users and that the Victorian Government: in addition to the draft recommendation to improve the connection process for medium-scale distributed generation, make a submission seeking reform in cost sharing arrangements to the AEMCs consideration of the Proposal to amend the National Electricity Rules for connecting embedded generators. The Department of Primary Industries in consultation with the AER, distribution network service providers and distributed generation proponents would prepare this submission advocate to the AER to prepare and provide guidelines on cost sharing arrangements for the connection of distributed generators before the next round of network distribution pricing determinations expected in 2015.

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The Commission is seeking further information on whether the Proposal to amend the National Electricity Rules for connecting embedded generators is the best vehicle for addressing cost sharing issues and invites feedback on this or other options, for example, that the Victorian Government submit a separate rule change request to the AEMC.

Connecting household distributed generation


While the technical issues in connecting household-size distributed generation to the network are much simpler than for medium-sized systems there was still widespread agreement among retailers, installers and consumer representatives that the processes are overly complex and costly.

Box 4

Complicated connection process

There was consensus across stakeholders on the complexity of the connection process for household-size distributed generation: Retailers Customers are required to sign a feed-in tariff (FiT) contract with their retailer before the metering can be configured for solar and again each time the customer changes retailers or moves into a property with solar. This process often delays the customer receiving the FiT. In other states the processes are simpler. (AGL, sub. 72, p. 4) Installers Installing small-scale PV is an involved process which can include a solar company, electrical retailer, electrical distribution company, solar design and installer and solar inspector. This does not take into account government departments and agencies, the Clean Energy Council and green certificate traders. With so many participants customers are often confused about who is responsible for which part of the installation process. (NECA, sub. 37, p. 5) Customer representatives: The application of FiTs is sometimes delayed because customers do not know that several forms need to be completed. Delays and errors were frequent, with some customers missing out on PFiT because the electricity retailer or distributor: lost paperwork delayed raising service orders or raised incorrect service orders delayed completing service orders to upgrade or re-configure the meter provided incorrect or untimely advice about eligibility, timeframes and requirements. (OWOV, sub. 48, p. 2)
Source: Submissions

The connection process involves three separate but related processes physical connection, signing up for a FiT including having a smart meter installed and obtaining small-scale technology certificates. It also involves two levels of government and multiple government bodies. This complexity imposes considerable cost on the consumers and businesses involved, particularly installers who often mediate the process on behalf of the owners of PV systems. Other states have far simpler processes. To address these barriers and remove unnecessary administrative costs imposed on people wishing to install distributed generation, the Commission has made a draft SUMMARY REPORT
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recommendation that the Victorian Government amend the Electricity Industry Act 2000 (Vic) and associated regulations, codes and guidelines to: clarify roles and responsibilities of the parties involved reduce duplication, such as the installer providing the Electrical Work Request and Certificate of Electrical safety to the retailer who provides it to the DSPN remove or reduce the impact of unnecessary or burdensome steps establish contestability for meter installation. The Commission intends to consult further on the specific changes that could be made to simplify the connection process.

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Draft Recommendations and information requests


The four recommendations and 10 information requests are listed in the order they appear in the report, and need to be understood in the context of the discussion in respective chapters.

Connecting generators to the distribution network


Information request
The Commission seeks feedback on its conclusion that recently implemented and proposed changes to national electricity regulation will address many of the barriers to connection of distributed generation. These changes include the new chapter 5A connection process in the National Electricity Rules, the Australian Energy Market Commissions (AEMC) Power of Choice review and the following AEMC rule change requests: Proposal to amend the National Electricity Rules for connecting embedded generators Distribution Network Planning and Expansion Framework Small Generator Aggregator Framework. The Commission seeks feedback on its conclusion that the proposed Distribution Annual Planning Report includes sufficient information on network constraints and planning by location to address the barriers to informed decision-making and effective negotiation by distributed generator proponents. The proposed report is included in the AEMCs proposed rule on Distribution Network Planning and Expansion Framework.

Draft Recommendation 4.1


That, to facilitate efficient connection of medium-scale distributed generators up to 5MW, the Victorian Government support the Proposal to amend the National Electricity Rules for connecting embedded generators submitted to the AEMC, with specific support for: improved information on connection processes an automatic right of connection based on meeting standard technical criteria a standard connection process improved engagement by Distribution Network Service Providers specific timelines, including limits on how information requests can impact on overall timelines. Should these issues not be resolved through the national rule change process within 12 months, the Victorian Government add a licence condition requiring distribution network service providers in Victoria to establish such standards and rights by incorporating them into standard connection services that are submitted to and approved by the AER.

DRAFT RECOMMENDATIONS AND INFORMATION REQUESTS

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Draft Recommendation 4.2


That to clarify the circumstances and conditions in which network reinforcement costs can be spread across new distributed generators and other users, the Victorian Government: in addition to Draft Recommendation 4.1, make a submission seeking reform in cost sharing arrangements to the Australian Energy Market Commissions consideration of the Proposal to amend the National Electricity Rules for connecting embedded generators. This submission be prepared by the Department of Primary Industries in consultation with the Australian Energy Regulator (AER), distribution network service providers and distributed generator proponents advocate to the AER to prepare and provide guidance on cost sharing arrangements for the connection of distributed generators before the next round of network distribution pricing determinations expected in 2015.

Information request
The Commission is considering whether the Proposal to amend the National Electricity Rules for connecting embedded generators is the best vehicle to address the sharing of the costs of network reinforcement and invites feedback on this or other options, for example, that the Victorian Government submit a separate rule change request to the AEMC.

Draft recommendation 4.3


That to facilitate the connection of household distributed generation to the network the Victorian Government amend, where relevant, the Electricity Industry Act 2000 (Victoria) and associated regulations, industry codes and guidelines to: clarify roles and responsibilities of the parties involved reduce duplication, such as the installer providing the Electrical Work Request and Certificate of Electrical safety to the retailer who provides it to the distribution network service provider remove or reduce the impact of unnecessary or burdensome steps establish contestability for meter installation.

Information request
The Commission seeks views on how the connection process for household-scale distributed generation can be improved, and what is required to give effect to such improvements. The Commission plans to conduct further consultation on specific changes to this process.

Victorian feed-in tariffs: selling electricity


Information request
Does the process for applying for an individual retail exemption under the Australian Energy Regulators Exempt Selling Guideline (2011) address the regulatory constraints on distributed generators who on-sell electricity? If not, what changes might be made to reduce those constraints without compromising competition and contestability in the retail electricity industry?

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Future Victorian feed-in tariff arrangements


Information requests
The Commission proposes that the eligibility for low-emissions technology be defined as technologies that produce 50 per cent, or less, of the emissions intensity of electricity generation in Australia, as recommended by the Clean Energy Finance Corporation Expert Review. Is this an appropriate definition to apply to distributed generation? In adopting this definition, are there any practical issues that will need to be addressed? To what extent do current billing and payment practices by Victorian retailers impact on customers ability to access fair and reasonable value for the electricity supplied by their distributed generator? Several current and proposed incentive schemes and regulatory changes aim to improve incentives for distribution network service providers to engage with distributed generators to reduce network costs. Which initiatives should the Victorian Government initiate or make submissions to in order to most effectively reduce the barriers to distributed generation?

Draft recommendation 6.1


That, to improve the efficiency and effectiveness of the operation of feed-in tariffs (FiTs) in Victoria, the Victorian Government: close the Transitional FiT, either by 31 December 2013 or once the 75 MW capacity is reached (as currently provided in legislation), whichever occurs first amend the Standard FiT to require that Victorian electricity retailers with 5 000 or more customers offer fair and reasonable prices for electricity exported to the grid by all small low-emissions or renewable distributed generators (100 kW or less) until 31 December 2015 establish a fair and reasonable price for energy supplied by distributed generators through the retail electricity market. define low-emissions technology as generators that produce 50 per cent or less of the emissions intensity of electricity generation in Australia allow market-determined arrangements based on gross payments by mutual agreement ensure that FiT prices are published by the Australian Energy Regulator under the requirements of the National Electricity Customer Framework. That the Essential Services Commission: publish information on the likely range of wholesale market-based net FiT payments which would be consistent with a fair and reasonable offer updated at regular intervals consider the extent to which FiT market offers are consistent with fair and reasonable criteria, redefined to be based on the wholesale price of electricity (the energy value).

DRAFT RECOMMENDATIONS AND INFORMATION REQUESTS

XLI

Information requests
Given that there is effective competition in the electricity retail market, is it necessary to retain an obligation to offer a price for the purchase of electricity supplied by distributed generators within the transitionary period? Why? Are there any significant costs of retaining the obligation to offer? If so, what are they? Is the three year transition to market determined feed-in tariffs appropriate? If not, what might be a more appropriate transition period? A preliminary view is that the TFiT cut-off should be based on the lodgement of relevant paperwork with the retailer by a specific date. Are there other options that the Commission could consider to ensure an orderly and fair phase-out of the TFiT? What information should be provided by DPI about transitional arrangements, when should it be provided, and how should the information be disseminated? Are there any SFiT, TFiT or PFiT contractual issues that the Commission should be aware of in its consideration of transitional matters? What are they?

XLII

POWER FROM THE PEOPLE: AN INQUIRY INTO DISTRIBUTED GENERATION

1
1.1

Introduction
Background to the inquiry

Along with many other jurisdictions, Victoria has in place policies and programs to reduce greenhouse gas emissions and facilitate adjustment towards a low-emissions economy. Renewable and low emission generation has a role to play in reducing greenhouse gas emission and ensuring a diverse and competitive electricity sector. In many cases installing distributed generation capacity makes commercial sense to the household or business installing the capacity. Distributed generation enables them to offset their electricity costs by using their own power (in place of purchasing it from a supplier) and they may earn additional income by selling unused power back into the grid. Interest in installing distributed generation in Victoria has been growing, but there are concerns that there are unnecessary barriers to its use and about how electricity fed into the gird will be priced. A key consideration for households is the price paid for the electricity they produce. For larger distributed generation projects, the timeliness and cost of the connection process is the key concern, in addition to the price received for electricity to the network. The prices paid per unit of energy for the electricity sold by distributed generators are referred to as feed-in tariffs (FiTs). In the past, these FiTs were closely related to the objective of reducing greenhouse gas emissions and were intended to encourage the installation of renewable energy or low-emission generators, including photovoltaic (PV) cells, on homes and other buildings. Businesses may also install renewable energy or low emissions generation that is not covered by FiT schemes, but the price paid for their electricity is determined by negotiation with the electricity company. However, with the introduction of a national carbon tax, the justification and design of State Government greenhouse gas policies may need to be reconsidered. The terms of reference for this inquiry look at the policies that relate to distributed energy generation and have two main elements: assessing the design, efficiency, effectiveness and future of FiT schemes and to recommend any changes to current FiT arrangements identifying barriers to connecting distributed renewable and low emission technologies into the distribution system.

1.1.1

What is distributed generation?

The terms of reference direct the Commission to look into regulatory and other barriers to the development of a network of distributed renewable and low emission generation in Victoria. There does not appear to be a standard definition of distributed generation, however, and reports that analyse distributed generation (or embedded generation) use varying definitions. While the Commission does not need to settle on an authoritative definition of distributed renewable or low-emissions generation, it does need to define the scope of its inquiry. This inquiry will focus on generation with the following characteristics:

INTRODUCTION

the energy is generated by households, businesses or community groups who primarily intend to use the energy on-site or to supply people or organisations close by, and includes co-generation and tri-generation systems the generator is connected into the electricity grid through the distribution network, not the transmission network. In some cases the system may be stand alone energy in excess of the needs of the generation owner may or may not be sold (exported) into the grid the energy could be from renewable sources such as solar, wind, bio gas or waste, but may also be low emission fossil fuels such as natural gas the total amount of energy generated is small to medium scale. The Commissions definition was generally supported by many inquiry participants. The Clean Energy Council (CEC) noted that: The CEC is generally comfortable with the characteristics of distributed energy systems and low emissions generation proposed by the Commission. However, the combined definitions of both distributed and embedded generation require consideration in this case. While used broadly to define generation which is not centralised, distributed generation has no clear definition. Conversely, embedded generation is defined in the National Electricity Rules (rules) as being a generator connected within a distribution network and not having direct access to the transmission network. (sub. 76, p. 1) Similarly, Ceramic Fuel Cells Limited noted that it agrees with the Commissions qualitative criteria for defining distributed and low-emission generation and: particularly that the energy is generated by households, businesses or community groups who primarily intend to use the energy on-site or to supply people or organisations close by, and includes cogeneration systems; and that the total amount of energy generated is small to medium scale. (sub. 41, p. 9)

1.1.2

What are feed-in tariffs?

FiT is a price paid per unit of energy fed in to the grid (distribution network) by small to medium distributed generators. FiT arrangements provide for customers to enter into a contract with their electricity retailer to receive payments for the electricity generated by small-scale renewable generators at their premises. FiTs may be either net or gross. Under a net FiT, a price is paid for any solar energy that goes back into the grid from the premises, and so the customer is paid only for the surplus energy generated. Under a gross FiT the customer is paid for every unit of electricity generated, regardless of whether it goes into the grid or is used at the premises, and they then pay separately for all the energy they use including that supplied to them from the grid. All Victorian FiTs are net. In Victoria, there are three arrangements that regulate FiTs under the Electricity Industry Act 2000 (Vic): the general feed-in tariff scheme, also known as the standard feed-in tariff (SFiT) scheme established in 2004 the premium solar feed-in tariff scheme (PFiT) introduced in 2009 and now closed to new customers

POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

the transitional solar feed-in tariff (TFiT) scheme to replace the premium solar feed-in tariff scheme. All electricity retailers with 5000 customers or more are required to make offers to eligible customers under these three schemes. Electricity retailers with less than 5000 customers can choose to make offers under these schemes, in which case the relevant statutory requirements apply. The details of these schemes are discussed further in chapter 2 and appendix B.

1.2

Context and why this inquiry is important

Previously, PFiT and TFiT were regulated to encourage the installation of PV cells and thereby increase the amount of energy generated through PV renewable technologies. SFiT was available to a wider range of low emission and renewable technologies. More recently, however, the Commonwealth has legislated to tax carbon emissions. The Commonwealths Clean Energy Future legislation will, among other things, impose a fixed carbon price of $23 a tonne from 1 July 2012, moving to a flexible price after three years. The Commonwealth also has a target that 20 per cent of Australias electricity supply will come from renewable energy by 2020. This target is supported by other assistance, some of which is targeted specifically at small-scale renewable energy. Since January 2011 households, small businesses and community groups installing small-scale renewable energy technologies have been eligible to receive financial credits in the form of small-scale technology certificates. Additional credits are available to encourage further the installation of small-scale renewable generators, such as roof-top PV or wind generators (DCCEE 2011). The introduction of a price on carbon has led to some, including the Council of Australian Governments (COAG), to argue that subsidies through policies such as FiTs should be discontinued. South Australia and New South Wales recently held inquiries to establish the future framework for setting fair and reasonable FiTs in their jurisdictions. The terms of reference for this inquiry note that: In the context of the implementation of a national carbon price, it is appropriate that the Commission undertakes a review of Victorias feed-in tariff schemes. More generally, the introduction of a price on carbon will encourage more energy generation from renewable and low emissions sources. However, there may be regulatory or other barriers that prevent or hinder the move to low emission sources of energy. As noted in the terms of reference: Addressing any state and local regulatory or other barriers to the uptake of low emissions generation, including co-generation and tri-generation, is also important to ensure that any transition to low emissions generation occurs as smoothly and as cost-effectively as possible. This inquiry investigates the barriers that apply to renewable and low emissions distributed energy.

INTRODUCTION

1.3

The Commissions approach

The Commissions task is to answer its terms of reference. In answering its terms of reference the Commission has considered a number of matters to help structure its analysis and guide the type of evidence it needed to collect through the public inquiry process. The first is to consider the objectives of policies impacting on distributed generation and how these may have changed overtime. The Commission notes that these objectives also need to be consistent with the overall objectives of the National Electricity Market. The Commission then considers the barriers to distributed generation achieving its potential within the National Electricity Market and what role FiTs should play in the policy framework. Central to the Commissions analysis is a consideration of where there may be market failures or other barriers that prevent the market signals faced by participants from resulting in an efficient structure for the supply of electricity. In the Commissions view, removing these barriers in a way that reinforces choice and competitive incentives could help deal with many of the complexities identified and increase the efficiency of decisions for investment in and use of network and generation infrastructure. Efficient FiTs play an important role in providing market signals to drive investment and the use of different forms of distributed generation. An important question considered by the Commission is what is the role of FiTs in reducing greenhouse gas emissions in the context of other state and national climate change policies. In the absence of a role for FiTs in dealing with greenhouse gas emissions, the Commission considers that FiTs should create the correct incentives for the installation of distributed generation in Victorias electricity system where the benefits of this form of generation outweigh the costs.

1.4

Inquiry process

The Commission advertised the inquiry in the press and by circular to those who, according to a preliminary analysis, were likely to be interested. The terms of reference and inquiry particulars were listed on the Commissions website (www.vcec.vic.gov.au). In February 2012, the Commission released an issues paper and invited submissions to the inquiry. During the inquiry, the Commission met with a number of individuals and organisations including community groups, consumer representative groups, industry experts, government departments, and State and Commonwealth regulatory bodies to identify and assess the issues relevant to this inquiry. The Commission also conducted a short Victorian Energy Retail Business Survey to assist its analysis of current and future Victorian feed-in tariff arrangements. In addition, the Commission held three roundtables, and received 85 individual submissions from interested parties, including businesses, unions and private individuals. The Commission also received 718 proforma submissions supporting the retention of FiTs sent via the Environment Victoria website and a further 126 additional proforma submissions where the submitters had added additional comments. Detailed information about the consultation process is available in appendix A. The Commission also engaged ACIL Tasman to advise on the advantages and disadvantages of different methodologies for valuing electricity from distributed 4 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

generation and model one of these methodologies. The ACIL Tasman report is available on the Commissions website (www.vcec.vic.gov.au). The Commission also surveyed electricity retailers to gather information to inform its analysis of FiTs. The Commission would like to thank those who have participated in its consultation process and made a submission to the inquiry. The Commission has been pleased by the quality of many of the submissions, reflecting the thought and effort which has been put into their preparation. The Commission took account of the Charter of Human Rights and Responsibilities Act 2006 (Vic) and considers that this report is consistent with the human rights set out in the Charter.

1.5

Structure of the report

The report is structured as follows: Introduction (chapter 1) Distributed generation in Victoria (chapter 2) The Commissions approach (chapter 3) Connecting distributed generators to the distribution network (chapter 4) Victorian feed-in tariffs: selling electricity to the grid (chapter 5) Future Victorian feed-in tariff arrangements (chapter 6). Appendix A provides information on parties consulted during the course of the inquiry through meetings, roundtable discussions and submissions. Appendix B provides more information on the regulatory structure.

INTRODUCTION

2
2.1

Distributed generation in Victoria


The Victorian electricity industry

The market structure for electricity in Victoria can be defined by interactions through physical energy flows and financial transactions between market participants (figure 2.1). The key participants in the Victorian electricity industry are summarised in box 2.1.

Figure 2.1

Market structure
physical electricity flows

transmission network

distribution network

physical electricity flows

dispatch orders

generators
supply offers

AEMO schedules wholesale market

retailers

consumers

electricity settlement payments feed-in tariff

electricity settlement payments financial contracts Source: Commission analysis.

electricity payments

Box 2.1

Electricity industry key participants

The key participants in the Victorian electricity industry are: Generators supply electricity to the transmission or distribution system. Most of the generation capacity in Victoria is privately owned. The major companies are AGL Energy, International Power, TRUenergy, and Alinta Energy. Transmission network service providers (TNSPs) transport electricity from generators to distribution network service providers and large end users through high voltage transmission lines to substation transformers that lower the voltage for distribution. The Victorian TNSP in the National Electricity Market (NEM) is owned and operated by SP AusNet. Distribution Network Service Providers (DNSPs) link the transmission systems to end users (including households) through distribution lines that carry low voltage electricity. In Victoria DNSPs are CitiPower, Powercor, Jemena, SP AusNet and United Energy. Each DNSP is responsible for a defined region.

DISTRIBUTED GENERATION IN VICTORIA

Box 2.1

Electricity industry key participants (cont.)

Retailers act as an interface between the electricity wholesale market and customers. They manage customer transfers, connections, billing, complaint handling, and service information. They also deliver a range of Commonwealth and state programs, including community service obligations, energy efficiency schemes, hardship schemes and renewable and other energy generation schemes. Retailers operating in Victoria include: AGL, Australian Power and Gas, Click Energy, Dodo Power and Gas, Energy Australia, Lumo Energy, Momentum Energy, Neighbourhood Energy, Origin Energy, Powerdirect, Red Energy, Simply Energy and TRUenergy. Retailers are not constrained to operate in a particular region and are free to compete for customers. Consumers purchase and use electricity. These assets and businesses physically operate in Victoria and are governed by the rules of the NEM which is a wholesale market for the supply of electricity to retailers and end-users. The NEM consists of five interconnected regions (essentially Queensland, New South Wales, Victoria, South Australia and Tasmania). The NEM is operated by the Australian Energy Market Operator (AEMO) under the National Electricity Law and Rules.
Source: Commission analysis.

2.1.1

Market for distributed energy

The Victorian energy market has historically been shaped by large brown coal energy generation in the La Trobe Valley, with large transmission lines to distribution networks. This network reflects system design decisions made in the 1920s and a legacy structure that has been adapted somewhat over the ensuing years. Since privatisation, smaller gas fired generators have increasingly played a part in the energy market and, more recently, large-scale wind and small-scale solar capacity have grown. The growth of renewable technology reflects a number of factors including increased climate change awareness and a response to a number of government policies. Distributed generation occupies a specific niche in the broader electricity market. The market for distributed generation sees the crossroad of energy retailers, technology producers and installers, small- and medium-scale generators, and energy distributors. Distributed generation is a diverse sector of the electricity market, with a wide range of energy sources and producers, ranging from micro size (households) to medium size. The distributed generation market is made more complex by a slew of standards, regulations, policy and legislation imposed by various levels of government. While exact figures on market characteristics depend on definitions of distributed generation, such generation already appears to play a role in the energy market. Energy Supply Association of Australia (ESAA) figures suggest embedded and non-grid generation account for 7.2 per cent of Victorias installed capacity (ESAA 2011, pp. 18, 20). The Institute for Sustainable Futures (ISF), however, suggests that while Australian distributed generation is growing in absolute terms, it has shrunk as a proportion of installed capacity (Dunstan et al. 2011, p. 42).

Small-scale distributed generation


Victorian small-scale distributed generators include homes, business and community groups that produce energy primarily for their own use. The overwhelming majority of small-scale generators use solar photovoltaic (PV) technology. Many Victorian electricity retailers are active in the small-scale solar market, having published offers 8 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

under the standard, premium and transitional feed-in tariff schemes (SFiT, PFiT and TFiT). Indeed, electricity retailers with more than 5000 customers are required to offer feed-in tariffs (FITs), and have to do so using a variety of packages and terms and conditions (DPI 2012c). The number of PFiT customers and installed capacity (kW) in the various Victorian electricity distribution networks is shown in table 2.1.

Table 2.1

Premium solar feed-in tariff scheme uptake (at 31 October 2010)


SP Ausnet Jemena 2 467 3 969 Powercor 7 259 10 648 CitiPower 1 451 1 654 UED 5 236 7 977 Total 25 565 37 201 9 152 12 953

Number of PFiT Customers Installed capacity (kW)


Source: (DPI 2011b, p. 153).

As well as retailers, the small-scale solar market also comprises producers and installers of solar panels. There are a significant number of solar PV cell and panel producers worldwide, many of which sell their products in Australia. A number of energy retailers also supply and install solar systems, including to customers who purchase their electricity from other retailers. This includes selling a range of system configurations with different panels and inverters, arranging for finance, arranging installation by licensed accredited installers, organising applications for appropriate government rebates, and providing advice and assistance for the installation of appropriate meters by the relevant distributers (Origin 2011; TRUenergy 2011). In Australia, all installed solar PV cells and panels must be certified and approved to AS/NZS5033 standards. These guidelines are set by Standards Australia. The Clean Energy Council (CEC) also runs an industry accreditation program,1 and there are now more than 3000 accredited installers of PV systems who are certified and trained. To be eligible for the Commonwealth rebates and Renewable Energy Certificates (RECs), solar PV systems must be designed and installed by accredited CEC installers. Each installation must have a completed report before the system has been commissioned and RECs can be applied for up to 12 months after the date of installation. The market for non-solar, small-scale distributed generation operates in a similar fashion. While the premium and transitional FiTs are limited to solar, the SFiT applies to other renewable energy sources provided the system size is less than 100kW (table 2.5). Again, Commonwealth rebates and RECs are issued where an accredited system is installed.

Medium-scale distributed generation


Medium-scale distributed generation encompasses customers such as hospitals, office blocks and manufacturers. Many medium-scale generators produce electricity primarily for private use, although some export their excess electricity into the grid, and, for others, selling electricity is their primary focus. Medium-scale distributed generation includes a wide variety of energy sources including renewable and non-renewable energy and encompasses co-generation and tri-generation facilities.

See http://www.solaraccreditation.com.au for more details.

DISTRIBUTED GENERATION IN VICTORIA

Larger distributed generators can be expensive and the connection process can be long and costly. Most businesses interested in installing distributed generation will therefore engage an electrical contractor to oversee the process. The contractor will assess the businesses energy requirements and capacity to generate electricity, and determine the feasibility of a generator through consultation with a number of parties. These include local and international technology manufacturers and accredited installers. Once the project is approved the contractor engages the relevant energy distributor to establish a connection to the energy grid.

Take up of distributed generation


While exact figures on market characteristics depend on definitions of distributed generation, ESAA figures suggest embedded and non-grid generation account for 7.2 per cent of Victorias installed capacity (approximately 5.7 per cent from renewable distributed energy generation and 1.6 per cent from non-renewable distributed energy generation) (table 2.2; (ESAA 2011, pp. 18, 20)). The majority of embedded generation, by volume, is medium-scale.

Table 2.2

Capacity of embedded and non-grid generation in Victoria June 2010


MW 133 45 0.6 103 619 Non-hydro renewable embedded/ non-grid Black liquor Landfill gas Sewage gas Solar Wave Wind Solar hot water MW 55 40 22 75 0.2 428 131,000 units 619

All embedded/non-grid Natural gas Waste gas LPG Hydro Non- hydro renewable

Total
Note:

900

Total

Embedded generators are those connected directly to the distribution network, with no direct connection to the transmission network; solar hot water is not included in total.

Source: (ESAA 2011, pp. 20-21; CEC 2011a).

Importantly, the ISF notes that: In absolute terms, installed DG [distributed generation] capacity has increased in Australia by about 20% between 2006 and 2010 however this has not kept pace with the national average increase in installed capacity. (Dunstan et al. 2011, p. 42) Unfortunately, a lack of data makes it difficult to assess the uptake and system impact of small-scale distributed generation. While solar PV installations are well documented it would useful to understand what proportion of small-scale distributed generation they account for. Furthermore it would be useful to track the impact of various FiT schemes on the uptake and impact of non-solar distributed generation. This would help assess the extent to which FiTs detract from the uptake and impact of other distributed generation technologies in favour of solar PV. Figure 2.2 shows the capacity of solar PV installed annually, and highlights the impact of the PFiT. 10 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Figure 2.2

Annual capacity of solar PV installed in Victoria (MW)


SFiT introduced PFiT introduced TFiT introduced a

a Forecast based on first 8 months Source: (CEC 2011a, p. 34).

Although there are only around 30 co-generation facilities in Victoria they produce a significant amount of energy (DPI 2012a). While data depend on definitions and sources, non-renewable co-generation contributed around 478MW of Victorias electricity generation in 2010 (table 2.3).

Table 2.3

Co-generation in Victoria 2010


MW Brown coal Natural gas Waste gas LPG Bioenergy Total 195 124 45 0.6 113 478

Note:

the 195MW Morwell brown coal co-generation power station is classed as a principal power station and does not appear in Table 2.2.

Sources: (ESAA 2011, p. 21; CEC 2012a).

DISTRIBUTED GENERATION IN VICTORIA

11

Pricing electricity
The retail price of electricity reflects four elements the wholesale cost of electricity, network service, retail service, and capital change and investment in the network. According to the Australian Energy Regulator (AER), the average electricity bill reflects a cost breakdown of 42 per cent wholesale costs, 47 per cent network costs and 11 per cent retail costs (AER 2011b, p. 2)2.

Wholesale electricity price


Within the National Electricity Market (NEM), exchange between electricity producers and consumers occurs within a pool in which output from all generators is aggregated and scheduled to meet demand. Wholesale electricity trading is conducted in a spot market in which supply and demand are matched instantaneously. At five-minute intervals, generators bid to supply the market a specific amount of electricity at a specific price. AEMO determines the most cost-effective generators to meet demand and dispatches them into production. The cost to supply the last megawatt of electricity to meet demand (within the five minute period) is deemed the dispatch price and applies to all generators in production, regardless of their original bid. The spot price of Victorian electricity for a 30 minute trading interval is the average of the previous six dispatch prices. The Rules set a maximum spot price (market price cap) at $12 500 per MWh. This is the maximum price generators can bid into the system, and automatically triggers AEMO to request customer electricity supply be interrupted to maintain supply and demand balance. The Rules also limit the minimum spot price (market floor price) at $1 000 per MWh. Market non-scheduled small generators are said to be price takers in the NEM. That is, while they cannot set the spot price, they receive it for any electricity exported into the grid. AEMO determines the liabilities of all market participants daily and settles trade transactions in the NEM weekly. NEM financial settlement operates on a four week delay. The settlement price for generators and market customers equals the amount of energy consumed or supplied multiplied by the spot price and any loss factors (AEMO 2010a).

Network tariffs
Network tariffs recover the cost of transporting electricity from generator to customer. This takes places through the transmission network (high voltage power lines which transport energy long distances) and the distribution network (lower voltage power lines which deliver electricity to homes and businesses). Network tariffs are regulated by the AER and include the cost of: maintaining, replacing and extending infrastructure metering operating the network business (including labour, material and compliance with reliability and safety standards) financing the installation of new equipment complying with government legislation (AER 2011b, p. 3).

Based on the average customer bill in the Australian states where network prices are set by government.

12

POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Retail services
Electricity retailers purchase wholesale electricity in the NEM, pay the owners of distribution and transmission networks to transport electricity, and bill customers for their electricity use. Retail services include customer information and billing. Retail service costs include: running customer service centres, advertising and selling electricity contracts complying with government legislation (AER 2011b, p. 3). Unlike other states, the price of Victorian retail services is unregulated. Instead electricity prices are directly determined by retailers. All customers must install equipment which monitors their consumption and measures electricity use. This equipment is provided by local network service providers and is registered and audited by AEMO. Currently, under the National Electricity Rules (NER) there is no obligation for decentralised generators to install remotely-read interval meters. Where these are not used, generators may not receive accurate settlement statements as actual output may not be incorporated into the settlement cycle until revision (up to 30 weeks after billing).

2.2

Regulation of distributed generation in Victoria

Regulation of the electricity sector in Victoria is complex, comprising a combination of national and State-based regulation. The trend in recent years has been towards an increasingly national regulatory framework with the economic package of national reforms completed in 2008. The non-economic package of national reforms will commence from 1 July 2012, by creating a single national framework for energy distribution networks and retail markets. This reform process is known as the National Energy Customer Framework (NECF). These reforms have significant implications for distributed generators wishing to connect to the distribution network. This section provides an overview of: the regulatory framework governing the NEM (section 2.2.1) connecting to the distribution network (section 2.2.2) selling surplus electricity generated (section 2.2.3) how regulation of the electricity sector impacts distributed generation and the implications this has for the inquiry (section 2.2.4). A more detailed discussion of the framework regulating distributed generation in Victoria can be found in appendix B: Regulation of the electricity sector.

2.2.1

Regulation of the NEM

Current regulatory framework


The NEM is the wholesale market for the supply of electricity to retailers and end-users in all states and territories except Western Australia and the Northern Territory. The NEMs high level regulatory structure is outlined in figure 2.3. The regulatory framework for the electricity market in Australia is governed by the Council of Australian Governments (COAG) and is developed under the guidance of the Standing Council on Energy and Resources (SCER). The AER regulates the NEM. The DISTRIBUTED GENERATION IN VICTORIA 13

AEMC makes rules in response to requests for rule changes, usually from NEM participants. The AEMO manages and operates the NEM and coordinates planning of the market. Appeals are considered by the Australian Competition Tribunal. The NER are made under the National Electricity Law (NEL). The NER are maintained and developed by the AEMC and enforced by the AER. The lead legislation for the NEL is the National Electricity (South Australia) Act 1996 (SA). This legislation is applied in Victoria by the National Electricity (Victoria) Act 2005 (Vic). The current national regulatory framework for distribution and transmission is supplemented by Victorian legislation. The Electricity Industry Act 2000 (Vic) (EI Act) includes a licensing regime for those generating electricity for supply or sale, and the Victorian FiT arrangements for the PFiT, TFiT and SFiT schemes. The Victorian Essential Services Commission (ESC) administers the licensing and price and service standard provisions of the EI Act.

Figure 2.3

Electricity regulatory structure


Council of Australian Governments (COAG)

Standing Council on Energy & Resources

Australian Energy Market Operator (AEMO)


System operator and planning

Australian Energy Market Commission (AEMC)


Rule maker and adviser

Australian Energy Regulator (AER)


Economic regulator of transmission and distribution networks Australian Competition & Consumer Commission (ACCC)

Participants & Consumers

Essential Services Commission (ESC)


Licensing and service standards

Source: Commission analysis.

14

POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Regulatory framework after 1 July 2012


The NEL and NER are complemented by the NECF which will commence nationally on 1 July 2012. The NECF regulates the sale of energy to retail customers through the National Energy Retail Law (NERL) and National Energy Retail Rules (NERR). It also amends existing national regulation, including introducing chapter 5A into the NER, which regulates electricity connections for retail customers (including embedded generators). The lead legislation to implement the NERL has been passed in South Australia. The NECF will be applied in Victoria by the National Energy Retail Law (Victoria) Bill 2012, which is currently being debated by the Victorian Parliament. Although the agreed commencement date of the NECF is 1 July 2012, cl 2 of the National Energy Retail Law (Victoria) Bill 2012 provides that it will commence on a day to be proclaimed. This ensures that if another jurisdictions application Act is delayed, a later commencement date can be coordinated between participating jurisdictions and the NECF will not become operational in Victoria before other jurisdictions (Explanatory Memorandum 2012, p.1; OBrien 2012, p.1447).

2.2.2

Connecting to the distribution network

The process for connecting connection applicants (CAs) to the distribution network will change with the commencement of the NECF. As of 1 July 2012, there will be two separate processes under the NER for connecting distributed generation to the distribution network: a process for registered generators or generators exempt from registration by AEMO under chapter 5 a process for retail customers (including generators who do not intend to participate directly in the NEM and instead intend to sell electricity through a direct contract with a retailer) under chapter 5A. Each connection process sets the rights and obligations for those seeking connection to the distribution network and specific sizes/types of generators may be excluded from, or find it more difficult to access, one or other of these connection processes. There are various fees and charges associated with connecting distributed generators to the distribution network applied by DNSPs. These costs vary depending on the size/type of generator being connected and type of connection. With the commencement of the NECF, fees and charges will be regulated nationally by the AER through the NER.

Connecting distributed generation under chapter 5


To be connected under chapter 5, registration as a generator is required unless AEMO grants an exemption from registration (NEL, s 11; NER, cl 2.2.1). A Standing Exemption exists for generating systems with a nameplate rating of less than 5 MW (AEMO 2010b, p.36). In certain circumstances, AEMO may also exempt generators less than 30 MW from registration on a case-by-case basis. Generator classification has significant implications for participation in the NEM. Registration as a market generator is required to sell electricity in the NEM through the spot market. The consequences of generator classification for distributed generators wishing to sell excess electricity generated are discussed in section 2.2.3. Connection under chapter 5 is a negotiated process. However, there is an automatic right of connection if automatic access standards outlined in sch 5.2 are met. These automatic access standards apply to larger registered generators. Generators of less than 5 MW capacity must negotiate the terms of a connection agreement, including technical standards, with their DNSP on a case-by-case basis. DISTRIBUTED GENERATION IN VICTORIA 15

Connecting distributed generation under chapter 5A


The chapter 5A connection process is designed primarily for retail customers seeking to buy electricity, but it also applies to distributed generators wishing to connect to the distribution network and sell electricity directly to a retailer. Chapter 5A provides for three types of connection service for retail customers. (1) A basic connection service which will cover retail customers, including those who are micro-embedded generators (but not larger embedded generators). DNSPs must have a model standing offer for basic connection services that has been approved by the AER. Micro-embedded generators are not defined in chapter 5A according to generator size. The NER merely state that a micro EG (micro-embedded generator) connection is of the kind contemplated by Australian Standard AS 4777 (Grid connection of energy systems via inverters) (cl 5A.A.1). (2) A standard connection service which can cover the terms and conditions for different classes of connection services or different classes of retail customers (including non-registered embedded and micro-embedded generators). DNSPs can choose to prepare a model standing offer for such services and have it approved by the AER. (3) A negotiated connection contract which covers services that are not subject to a basic or standard connection standard offer, or where a basic or standard connection service is sought but the CA elects to negotiate the terms and conditions of the connection agreement. The terms and conditions for such services are negotiated and if agreement cannot be reached the dispute can be arbitrated by the AER. The DNSP must use its 'best endeavours' to make a negotiated connection offer within 65 business days. A CA is an applicant for a connection service that is a retail customer (including an embedded generator), a retailer or other person acting on behalf of a retail customer, or a real estate developer. Table 2.4 compares the connection processes under chapters 5 and 5A of the NER. See appendix B for a detailed discussion on the connection processes under chapters 5 and 5A of the NER for distributed generators.

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POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Table 2.4
NER Chapter 5

Connection process for distributed generators from 1 July 2012


Applies to Registered generators Generators exempt from registration: generators <5 MW (must meet Standing Exemption criteria) other generators <30 MW on a case-by-case basis (includes generators >5 MW and <30 MW capacity which export <20 GWh in any 12 month period) Generator type Various combinations of: scheduled, semi-scheduled and non-scheduled market and non-market Generator size not specified but must meet Australian standard AS4777 Not specified Connection Negotiated cl 5.5 outlines access arrangements for embedded generators wanting to connect to the distribution network Right to connect? Yes if automatic access standards are met (sch 5.2) No if CA wishes to negotiate any access standards or if the generator is exempt or eligible for exemption from registration, automatic access standards do not apply and there is no automatic right to connect Yes DNSP must provide model standing offer

Chapter 5A (excludes registered generators)

Retail customers who are micro-embedded generators

Basic connection service

Retail customers (includes non-registered embedded generators and micro-embedded generators) Connection is neither basic nor standard connection service, or Basic or standard connection service is sought but CA elects to negotiate terms and conditions
Source: Commission analysis of chapters 5 and 5A NER.

Standard connection service

Yes but only if the DNSP provides a relevant model standing offer (DNSPs may, but are not required to, provide model standing offers) Unclear DSNP must use its best endeavours to make a negotiated connection offer within 65 business days. The AER will arbitrate where agreement cannot be reached

Not specified

Negotiated connection contract

DISTRIBUTED GENERATION IN VICTORIA

17

2.2.3

Selling excess electricity generated

National regulation
Under the NER, distributed generators wishing to sell surplus electricity into the distribution grid currently have two options. (1) Sell through the NEM at spot prices: each generating unit that receives payment from AEMO for sent out electricity must be registered as a market generator, regardless of generating unit size. This would include generators of less than 5MW capacity that would otherwise be eligible for an exemption from registration under the Standing Exemption (although the Commission understands it is rare for this to occur in practice). Substantial registration and participant fees apply. (2) Sell through a private bilateral agreement outside of the NEM, generally for an agreed fixed price: applies to registered non-market generating units and generating systems exempt from registration. All sent out generation must be purchased in its entirety by a local retailer or customer located at the same connection point. A connection point is the agreed point of supply established between a DNSP and distributed generator. In the future, there may be a third option for distributed generators wishing to sell surplus electricity generated. AEMO recently submitted a rule change to the AEMC to introduce a new category of market participant into the NER called a 'small generation aggregator'. This will allow a small generation aggregator to have market responsibility for the participation of multiple generating units in the NEM and will only require a single registration. Separate registration of each of the generating units will not be required, significantly reducing costs and improving access to the market. This will allow aggregated generators to more easily enter and sell in the NEM (AEMC 2012a, pp.15). However, registered small generation aggregators would not be eligible for the simpler chapter 5A connection process and would instead have to connect through chapter 5.

Victorian regulation Licensing


The EI Act prohibits the generation of electricity for supply or sale unless the generator is licensed or has been exempted from the requirement to hold a license for the generation of electricity for supply and sale (s 16(1)). Under s 17 of the EI Act, the Governor in Council can make an Order in Council exempting a person from the requirement to obtain a licence. An Exemption Order exists for distributed generators with a capacity of less than 30MW (ESC nd, p.1; Order in Council 2002).

Victorian feed-in tariff schemes


In Victoria, certain types of distributed generators connected to the distribution network are able to sell surplus electricity generated back into the distribution grid through FiT schemes under Division 5A of the EI Act. The PFiT and TFiT are paid as a credit against the amount owing under the FiT customers electricity bill. The SFiT is usually paid by way of a credit to the customers electricity bill (NERA & AAR 2011, pp.62, 70, 79). Victorian distributed generators receiving a FiT are exempt from the requirement to obtain a licence by the Exemption Order. Under the NECF, the State-based retail licensing regime will be replaced by a national retailer authorisation framework. The retail licensing provisions under the EI Act will therefore be repealed, and current licence

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POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

conditions that regulate FiTs will become direct statutory obligations under an amended EI Act. There are three FiT schemes operating in Victoria and each has specific eligibility criteria restricting the size of generator, type of technology and type of customer that can participate. Licensed electricity retailers are required to publish the terms and conditions of their FiT offers. The EI Act provides that the Minister for Energy and Resources may refer a matter to the ESC for assessment if not satisfied that the terms and conditions of a licensed retailers FiT offer are fair and reasonable (s 40I). Table 2.5 summarises the FiT schemes that operate in Victoria. See appendix B for a more detailed discussion of the Victorian FiT arrangements.

DISTRIBUTED GENERATION IN VICTORIA

19

Table 2.5
Feed-in tariff Premium FiT (closed to new applicants) Transitional FiT

Victorian feed-in tariffs schemes


Applies to householders claiming one solar PV at principal place of residence, or persons (such as small businesses and community organisations) occupying one or more properties (other than as a place of residence) that claim one solar PV at each property and consume 100MW hours or less per year. generation companies, or persons generating electricity for supply or sale. Small renewables, including: wind solar hydro biomass other (specified). Less than 100 kW (excludes solar PV of 5 kW or less) Technology Solar PV Generator size 5 kW or less Tariff 60c/kWh statutory minimum Other terms and conditions consistent with statutory minimum conditions fair and reasonable where terms and conditions are not statutory minimum conditions average cost per customer of electricity per year arising from the TFiT scheme cannot exceed $5. A fair and reasonable price: ESC guidance states that this means the rate offered to the customer must be not less than the rate the customer pays to buy electricity from the retailer range of offers from 18.99 to 29.03c/kWh available as of 30 March 2012. Terms and conditions must be fair and reasonable.

25c/kWh statutory minimum

Standard FiT

Source: Commission analysis of Division 5A of the Electricity Industry Act 2000 (Vic).

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POWER FROM THE PEOPLE: AN INQUIRY INTO DISTRIBUTED GENERATION

2.2.4

What does this all mean for the inquiry?

The regulatory framework governing the Victorian electricity sector, and distributed generation in particular, has significant implications for the growth of distributed renewable and low emission generation in Victoria. Although the electricity sector is increasingly nationally regulated, some areas of Victorian-specific regulation such as the FiT schemes will remain after the commencement of the NECF on 1 July 2012. In reviewing how the framework applies to distributed generation, the Commission has found that the regulation is complex, and has identified aspects that are inconsistent and where the rationale for regulating similar activities differently is unclear.

The regulatory framework is complicated


Regulation of the Victorian electricity sector comprises national and Victorian-based regulation. The present regulatory framework is changing, with transfer of current state and territory responsibilities to a new national regulatory regime governing the supply and sale of energy to retail customers, to commence on 1 July 2012. This means that a significant amount of State-based electricity regulation in Victoria will become redundant. However, Victoria regulation will continue to govern distribution, transmission and generation licensing, and FiTs. Under the NECF, a distributed generator can potentially be required to enter into four separate contractual arrangements, each of which is subject to separate terms and conditions: a contact for retail services with a retailer governed by the NERL Pt 2 a contract with a DNSP for initial connection services governed by the NER chapter 5 or 5A a (deemed) contract with a DNSP for ongoing energisation services governed by the NERL Pt 3 a Victorian FiT contract with a retailer who is retailing to Victorian customers, governed by the EI Act Div 5A. The regulation that governs these contractual arrangements distinguishes between specific categories of customer and/or types of generator. These categories are not consistent.

The regulatory framework is, in some respects, inconsistent and discriminatory


Processes for connecting distributed generation to the distribution network and for receiving a regulated FiT for selling surplus electricity generated, contain detailed and inconsistent generator eligibility criteria. Only certain types/sizes of generators and/or types of technology can connect under chapter 5, access the new chapter 5A simplified connection process, and participate in a Victorian FiT scheme to sell electricity. In addition, individual DNSPs have their own requirements and procedures. To connect under chapter 5, a generator must be registered or exempt from registration by AEMO under the NER chapter 2. A Standing Exemption exists for generators of less than 5MW capacity. Connection services under chapter 5A are restricted to specific types of retail customers that are not registered with AEMO. Micro-embedded generators are guaranteed connection through a basic connection service. Other embedded generators are only guaranteed connection through a standard connection DISTRIBUTED GENERATION IN VICTORIA 21

service if a DNSP chooses to provide a model standing offer for that particular class of connection service or retail customer. The PFiT and TFiT schemes are reserved for solar PV systems of up to 5 kW capacity. The SFiT scheme applies to specified small renewable energy generating facilities of less than 100 kW capacity (greater than 5 KW and less than 100 kW for solar PV systems). As a result of the various size thresholds and eligibility criteria that have emerged over time, the rationale for why some generators and not others have access to certain regulated rights is unclear and can conflict across the different areas of regulation.

Registration is a high entry barrier to participation in the NEM


Any distributed generator wishing to sell through the NEM at spot prices must be registered as a market generator with AEMO, regardless of the size of the generator. Registered generators are unable to connect through the new simpler processes in chapter 5A and must therefore connect under the chapter 5 process. Similarly, the proposed introduction of a new category of registered market participant a small generation aggregator will also be restricted to connecting under the more complicated chapter 5 process. The registration process is designed for larger generators and, therefore, can be complex and time consuming. AEMO has advised that it may take a proponent up to three months to prepare the documentation necessary for registration (AEMO 2011, p.4). The chapter 5 connection process is generally lengthier, more costly and uncertain than the process under chapter 5A because there is no mandated statutory timeframe within which a DNSP must make an offer to connect. In addition, registered generators are subject to significant registration and participant fees. Electricity sold outside the NEM must be purchased in its entirety by a local retailer or customer located at the same connection point. Distributed generators can therefore only sell their sent out generation to market participants through a retailer (AEMC 2012c, p.174). Although distributed generators may enter into a private agreement with their local retailer, retailers are not obliged to purchase electricity in this way. Micro to small distributed generators in Victoria therefore often rely on the State-based FiT scheme arrangements to sell surplus electricity generated.

Connection and selling regulation does not cater for all distributed generators
Certain customers, generator types/sizes and forms of technology are restricted, excluded from or find it more difficult to access current connecting and selling arrangements. An automatic right to connect exists for larger generators (with a capacity of 5 MW or greater) that meet the automatic access standards under chapter 5. Similarly, micro-embedded generators have an automatic right of connection through a basic connection service under chapter 5A. However, other small to medium generators will only be guaranteed an automatic right of connection if DNSPs choose to provide a relevant model standing offer for standard connection services under chapter 5A. Generators unable to connect through a basic or standard connection service under chapter 5A need to negotiate their connection arrangements with a DNSP under chapter 5 or 5A. Connecting through a negotiated connection contract 22 POWER FROM THE PEOPLE: AN INQUIRY INTO DISTRIBUTED GENERATION

under chapter 5A is more a complex process than simply accepting a basic or standard connection service model standing offer. Negotiating access under chapter 5 is even more time consuming, costly and difficult for a CA. Table 2.6 summarises the connecting options available to distributed generators from 1 July 2012. Non-renewable and low-emission generation, and renewable generators with a capacity of 100 KW or greater, are excluded from participating in the Victorian FiT arrangements. These forms of distributed generation/larger sized generators are restricted to selling through the NEM at spot prices, or through a private bilateral agreement outside of the NEM with a local retailer or customer located at the same connection point. Table 2.7 summarises the selling options available to various distributed generator types/sizes and forms of technology. Solar PV systems of 5 kW or less are only eligible for the PFiT (closed to new applicants) or TFiT if they meet specific customer eligibility criteria. Householders must be claiming only one solar PV system on a property that is their principal place of residence. The PFiT and TFiT are also available to people that occupy one or more properties (other than as a place of residence), claim only one solar PV system at each of those properties, and their annual consumption rate of electricity is 100 MWh or less. If these criteria are not satisfied, customers with solar PV systems of 5 kW or less are unable to access a regulated FiT. This, however, does not preclude retailers from offering an unregulated FiT if they choose to do so.

DISTRIBUTED GENERATION IN VICTORIA

23

Table 2.6

Connecting options for distributed generation from 1 July 2012


Micro to small generators <100 kW Small to medium generators 100 kW to 5 MW Chapters 5 and 5A Under chapter 5A: no Under chapter 5: yes registration or exemption from registration is required. A Standing Exemption applies for generators <5MW Basic connection service, standard connection service or negotiated connection contract Yes for basic connection services a DNSP must provide a model standing offer. Yes for standard connection services if a DNSP provides a model standing offer for a relevant standard connection service. Unclear for negotiated connection contracts a DNSP must use its best endeavours to make a negotiated connection offer, AER has the power to arbitrate where agreement cannot be reached Under chapter 5: negotiated Under chapter 5A: Yes if a DNSP provides a model standing offer for a relevant standard connection service. Unclear for negotiated connection contracts a DNSP must use its best endeavours to make a negotiated connection offer, AER has the power to arbitrate where agreement cannot be reached Under chapter 5: No there are no automatic access standards for generators of <5MW. Access standards must be negotiated on a case-by-case basis Under chapter 5: Yes if automatic access standards are met No if connection applicant wants to negotiate any of the access standards Under chapter 5: yes registration or exemption from registration is required Medium generators >5 MW to <30 MW Chapters 5 and 5A

Chapter of the NER Registration required?

Chapter 5Aa No

Type of connection Automatic right to connect?

Under chapter 5A: standard connection service or negotiated connection contract

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POWER FROM THE PEOPLE: AN INQUIRY INTO DISTRIBUTED GENERATION

Table 2.6

Connecting options for distributed generation from 1 July 2012 (cont.)


Micro to small generators <100 kW Small to medium generators 100 kW to 5 MW Medium generators >5 MW to <30 MW

Statutory timeframe mandated?

Yes for basic and standard connection services a DNSP has 10 days to make a model standing offer. Expedited connection is available. No for negotiated connection contracts a DNSP must use its best endeavours to make a negotiated connection offer within 65 days Subject to AER connection charge guidelines

Under chapter 5A: Yes for standard connection services a DNSP has 10 days to make a model standing offer. Expedited connection is available. No for negotiated connection contracts a DNSP must use its best endeavours to make negotiated connection offer within 65 days Under chapter 5: No preliminary program of milestones agreed between parties

Cost of connecting

Under chapter 5A: subject to AER connection charge guidelines Under chapter 5: fees and charges specified in chapter 5 registration and participant fees apply to registered generators exempt generators (excludes generators <5MW subject to the Standing Exemption) must pay a registration fee Under chapter 5: fees and charges specified in chapter 5 registration and participant fees apply to registered generators exempt generators must pay a registration fee

Notes:

a Although it is unlikely to occur in practice, micro-embedded generators will also be technically able to apply for connection under chapter 5 of the NER.

Source: Commission analysis.

DISTRIBUTED GENERATION IN VICTORIA

25

Table 2.7
Technology Solar

Selling options for distributed generation in Victoria


Micro to small generators 5 kW or less Solar PV: Premium FiT (closed to new customers) Transitional FiT for new customers <100 kW Standard FiT Small to medium generators 100 kW to 5 MW Registered generators can sell through the NEM at spot prices Non-market and exempt generators can sell through a private agreement outside the NEM to a local retailer or customer located at the same connection point Medium generators >5 MW to <30 MW Registered generators can sell through the NEM at spot prices Non-market and exempt generators can sell through a private agreement outside the NEM to a local retailer or customer located at the same connection point

Wind Hydro Biomass Other forms of renewable energy specified in an Order in Council Low emission Non-renewable

Standard FiT

Standard FiT

No FiT schemes exist for these forms of technology Registered generators can sell through the NEM at spot prices Non-market and exempt generators can sell through a private agreement outside the NEM to a local retailer or customer located at the same connection point

Note:

Distributed generators eligible to participate in a Victorian FiT scheme also have the option of purchasing electricity under national regulation (as registered generators through the NEM, or as non-market or exempt generators through a private agreement outside the NEM to a local retailer or customer located at the same connection point). However, it is unlikely that eligible distributed generators would choose this option in practice.

Source: Commission analysis.

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POWER FROM THE PEOPLE: AN INQUIRY INTO DISTRIBUTED GENERATION

2.3

Policies for distributed generation and renewable energy

Policies regarding distributed generation form part of a broader policy framework designed to reduce greenhouse gas emissions and facilitate an adjustment towards a low emissions economy. This framework comprises state and national policies, programs and legislation. Contributing to the complexity, a number of programs overlap, and there is little sense of overarching policy rationale. The Commonwealth emissions trading scheme, renewable energy target (RET) and Clean Energy Finance Corporation (CEFC) are Australias main policy measures for reducing carbon emissions. The fundamental purpose of these policies is to increase the cost of carbon-intensive energy, thus making low-carbon energy a more attractive alternative. The renewable energy target encourages distributed generation by providing payments to households and other small producers of renewable energy. The emissions trading scheme will apply to larger co-generation plants: in general, a threshold of 25,000 tonnes of CO2-e will apply for determining whether a facility will be covered by the carbon pricing mechanism (Commonwealth Government 2011, p. 105).

2.3.1

Commonwealth policies

Recently, the Commonwealth Government attempted to clarify its climate change agenda with the publication of the Clean Energy Plan. The plan details the Commonwealths climate change strategy as well as households transition to clean energy, and investment in low-emissions technology. The Commonwealth proposed four key drivers of a transition to clean energy: (1) introducing a carbon price (2) promoting innovation and investment in renewable energy (3) encouraging energy efficiency (4) creating opportunities in the land sector to cut pollution (Commonwealth Government 2011, p. 17).

Carbon price
The cornerstone of the Clean Energy Plan, the carbon tax will be introduced from 1 July 2012. As legislated, the carbon price will initially be fixed at $23 per tonne, to increase by 2.5 per cent per year in real terms (from 1 July 2012). Following this, the price will be determined by the market through an emissions trading scheme with the government capping the number of permits issued each year. In its Clean Energy Plan the Commonwealth Government stated a carbon price would create incentives for business to find the cheapest and most effective way of reducing carbon pollution, rather than relying on more costly approaches such as government regulation. (Commonwealth Government 2012a)

Renewable Energy Target


The RET scheme is a market-based measure to increase the share of electricity consumption derived from renewable energy resources. The current RET supersedes the Victorian RET and mandatory RET with a commitment that 20 per cent of Australias energy will come from renewable sources by 2020. The Government predicts the DISTRIBUTED GENERATION IN VICTORIA 27

scheme will generate approximately $20 billion of investment in renewable energy by 2020 (Commonwealth Government 2011, p. 64). Under the RET scheme, tradeable Renewable Energy Certificates (RECs) are created by eligible renewable energy sources, based on the amount of electricity they produce or displace. RECs are then traded (sellers and purchasers directly negotiate the price), with electricity retailers and electricity wholesale purchasers mandated to surrender their RECs into their holding account each year in proportion to their acquisitions of electricity. From 2011 the RET has been separated into two components: the Large-scale Renewable Energy Target (LRET), and the Small-scale Renewable Energy Scheme (SRES) (Clean Energy Regulator 2012a, p. 6).

Large-scale Renewable Energy Target


The LRET supports the deployment of renewable energy projects. The most common examples of these are wind farms, commercial solar, and geothermal power stations. The target also extends to energy produced by ocean waves and tides, geothermalaquifers, wood waste, gas waste, bagasse, black liquor and landfill gas. In accord with the target, accredited renewable energy power stations generate renewable large-scale generation certificates (LGCs). One LGC is equivalent to 1 MWh of renewable energy generated above the power stations baseline. LGCs are traded in the LGC market with prices determined by supply and demand. Liable entities are legally required to surrender a prescribed number of LGCs to the Office of the Renewable Energy Regulator annually (Clean Energy Regulator 2012a, pp. 710).

Small-scale renewable energy scheme


The SRES was designed to support the installation of small renewable energy systems. These are most often rooftop PV panels or solar water heaters, but can include wind turbines, micro-hydroelectric systems and heat pump water heaters. The scheme assists households, small businesses and community groups by reducing the upfront cost of installing these systems. Under the SRES, small-scale technology certificates (STCs) are generated for eligible installations. Installers can claim a set number of STCs based on electricity generated or displaced over the systems lifetime (where one STC is equivalent to 1 MWh of electricity). These certificates are tradeable commodities and the government legislates their demand by mandating liable entities surrender a prescribed number of STCs quarterly (Clean Energy Regulator 2012a, pp. 1114).

Solar credits
Solar credits work in conjunction with STCs. Solar credits provide additional support for the installation of small-scale renewable energy units by increasing the number of STCs created for eligible installations. Solar credits apply to the first 1.5kW of installed capacity for systems connected to the main electricity grid, and up to the first 20kW of installed capacity for off-grid systems (Clean Energy Regulator 2012a, p. 12).

Renewable energy bonus scheme


The renewable energy bonus scheme (REBS) is a rebate designed to decrease carbon emissions and electricity costs associated with household water heaters. Under the REBS, eligible households can claim $600 for a heat pump hot water system or $1 000 for a solar hot water system (that replaces an electric hot water system). The 28 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Commonwealth Government recently announced the REBS will cease on 30 June 2012 (Rheem Australia 2012).

Clean Energy Finance Corporation


As part of its Clean Energy Plan, the Commonwealth announced the creation of, and $10 billion investment in, the CEFC. The Government predicts transforming the Australian energy sector will require $100 billion in renewable energy, and additional investment in new manufacturing technologies and improving energy efficiency. The Commonwealth Government believes it plays an important role in facilitating and coordinating investment in technologies that financial institutions may not be familiar with(Commonwealth Government 2012b, p. 4). The CEFC therefore, aims to leverage private funding for renewable energy and clean technology, as well as remove barriers to funding large-scale renewable energy projects. The Report of the Export Review Panel clarified the CEFCs focus. The CEFC will allocate its funding into two streams at least 50 per cent to renewable energy, and the remainder to low-emissions and energy efficiency. The term renewable energy is not prescriptive and will adapt in response to technological evolution. The funds direct investment in energy efficiency will focus on large-scale projects, while small-scale projects may be funded indirectly if aggregated through a third party. Co-generation units are eligible for funding as either energy efficiency projects or low-emissions technology. Although it acknowledges demand managements is distinct from energy efficiency, the report argues demand management lowers the cost of transitioning to clean energy by reducing network upgrade costs and deferring investment in new generation. Technologies associated with demand management will therefore be funded from the energy efficiency stream. (Commonwealth Government 2012c, pp. 1316).

2.3.2

State policies

Under the Climate Change Act 2010 (Vic) s5(i), Victoria set an emissions reduction target of 20 per cent by 2020 (based on 2000 levels). In light of the Commonwealths Clean Energy Act 2011 (Cth) and the introduction of a carbon price, a recent review found that separate state-based targets were unnecessary (DPC 2011, p. 14). A number of state-based renewable energy policies initiated under the Victorian Act have been aligned with national schemes and emissions reductions targets.

Victorian Energy Efficiency Target


The most powerful State policy is the Victorian Energy Efficiency Target (VEET). Promoted as the energy saver initiative, the VEET commenced in 2009 and is legislated to continue in three-year phases until 2030. The purpose of the scheme is to: reduce greenhouse gas emissions encourage the efficient use of electricity and gas encourage investment, employment and technology development in industries supplying goods and services which reduce the use of electricity and gas. Under the scheme, large energy retailers are liable to surrender a specific number of energy efficiency certificates annually. These Victorian energy efficiency certificates (VEECs) each represent one tonne of abated greenhouse gas. The VEECs are created when accredited entities help consumers make energy efficiency improvements to their homes. The energy generated through the sale of VEECs allows entities to make special offers to consumers, thus reducing the cost of undertaking energy efficiency improvements. DISTRIBUTED GENERATION IN VICTORIA 29

Currently, VEECs are created for around 30 prescribed energy efficiency enhancements. These range from the installation of high efficiency hot water systems, to draught proofing and the purchase of high efficiency appliances (ESC 2012).

Victorian Renewable Energy Target


Established under the Victorian Renewable Energy Act 2006 (Vic), the Victorian Renewable Energy Target (VRET) aimed to encourage generation of electricity from renewable resources. This was to be achieved through a mechanism of tradeable renewable energy certificates, created by eligible sources of renewable energy. These certificates were traded at market prices and surrendered by liable entities annually (ESC 2009b). In January 2010 Victoria transitioned VRET into the expanded Commonwealth RET (DPI 2012e).

Large-scale solar feed-in tariff


In 2010, the then Victorian Government announced an extension of the solar feed-in tariffs to include large-scale solar generation (DPC 2010, p.15). This announcement was never implemented.

2.4
2.4.1

Future trends
Cost trends

Cost estimates for renewable energy are based on a number of factors. Fundamentally, they rely on learning curves (experience curves) which map the relationship between knowledge and experience in production, and technology costs. While these curves provide useful trendlines, a number of other factors influence costs. These include government policy, supply and demand, and broader market dynamics. As the bulk of renewable energy technology components are produced overseas, international trends have the greatest impact on technology price. The following describes some cost trend forecasts for renewable energy. The past decade has seen a substantial increase in the installed capacity of solar PV cells. As the industry has grown, cost has decreased along a common learning curve with cost reductions of approximately 22 per cent for every doubling of cumulative capacity. Cost strayed from this curve from 2003 to 2008 due to a supply bottleneck and market dynamics (MEI 2011, p. 2). The Melbourne Energy Institute (MEI) argued that increased production capability, improved supply chains and economies of scale will lead to further cost reductions. It contended that Chinas massive increase in production capability will continue to reduce prices, while an increase in silicone production capacity will alleviate supply constraints (MEI 2011, p. 2)(figure 2.4).

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POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Figure 2.4

Solar PV cost projections

Note:

direct normal irradiation = 2445 kWh/m2/yr

Source: (MEI 2011, p. 2).

Wind energy capacity has also doubled every three years over the past decade. Capital costs have generally followed the expected learning curve (MEI 2011, p. 3). However, supply chain bottlenecks and commodity constraints slowed price reductions. A shift to more large-scale (and automated) production has alleviated this slow down recently. MEI contends economies of scale and continuing industry expansion internationally will continue to deliver modest cost reductions for wind technology. It suggests incremental technological improvements represent a significant potential for cost reductions (figure 2.5).

DISTRIBUTED GENERATION IN VICTORIA

31

Figure 2.5

Wind power cost projections

Source: (MEI 2011, p. 3).

As concentrating solar thermal power is still a relatively new technology, sources suggest it has a significant cost reduction potential. This cost reduction should be driven by known technical improvements, economies of scale and industry learning (MEI 2011, p. 4). It is expected that concentrating solar thermal power cost will follow a similar learning rate to those observed for solar PV and wind power (figure 2.6).

Figure 2.6

Concentrating solar thermal power cost projections

Note:

direct normal irradiation = 2445 kWh/m2/yr

Source: (MEI 2011, p. 4).

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POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

The CSIRO modelled the price of key technologies under various carbon price paths. Figure 2.7 demonstrates the long run marginal cost of these technologies under the highest and lowest carbon prices. The first carbon price path would lead to a 5 per cent reduction in Australian emissions below 2000 in 2020. The second would lead to a 25 per cent reduction in Australian emissions below 2000 in 2020. Both assume Australia meets its commitment to 20 per cent energy from renewable sources by 2020.

Figure 2.7

Long run marginal cost ($/MWh 2009) of technologies in 2050

Notes:

a pulverised fuel; b carbon capture and storage

Source: (Hayward et al. 2011, pp. 29, 32).

The most significant difference between these two scenarios is the price of black coal pulverised fuel. Under the higher carbon price, black coal is projected to become over 50 per cent more expensive than it would be under the lowest carbon price. The CSIRO hypothesises that the increased price of black coal would lead to a far greater distribution of renewables than under any other carbon price (Hayward et al. 2011, p. 52).

2.4.2

Improved metering technology

By the end of 2013, the Victorian Government plans to roll-out smart meters to all Victorian homes and businesses. Smart meters will measure and record electricity usage throughout the day and communicate this information to electricity distributors. The intent is to provide customers with more accurate and detailed information about their electricity use. This increased awareness is expected to lead to reductions in electricity use. Furthermore, the increased information smart meters provide should make it easier for consumers to compare pricing offers from competing providers. The introduction of smart meters is expected to lead to a number of customers switching from fixed to flexible pricing. Making consumers aware of the large fluctuations in electricity price is expected to produce a shift in electricity consumption as consumers seek low cost, low demand periods. DISTRIBUTED GENERATION IN VICTORIA 33

Smart meters are also capable of measuring two-way electricity flow. Thus, households or businesses that generate electricity will be credited for the electricity they export back into the grid. (DPI nd)

2.5

Conclusions

Distributed generation is a relatively new part of Victorias electricity industry and, as such, does not always fit neatly into Victorias traditional electricity market. Although it currently accounts for only a small portion of Victorias energy generation, decentralised energy capacity is increasing. Furthermore, changes to government policy and consumer choices, together with a reduction in technology prices are expected to encourage further installation of decentralised generators. Some government policies encouraging distributed generation have increased its uptake. But without substantial analysis, it is difficult to determine how successful and cost effective these have been. Many of these policies favour specific technologies and an observed increase in the uptake of one technology may mask a shift from other renewable energy sources. If the market for decentralised energy is to continue growing, it is important to consider the current state of the market and, where possible, simplify entry to and participation in it. Complex regulatory arrangements governing the generation and sale of electricity are tolerable by large electricity companies; however they may not be to independent generators. Distributed energy is diverse and many generators are managed by households or small businesses with little knowledge of electricity regulations.

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3
3.1

The Commissions approach


Introduction

To address its terms of reference, the Commission has developed an analytical approach to help structure its analysis of distributed generation and feed-in tariffs (FiTs) and provide guidance on the relevant issues. This chapter therefore: summarises the high level issues and problems raised by participants in submissions and consultations, as well as those identified by the Commission through desk-based research categorises the issues raised according to whether they relate to connection to the distribution network (section 3.2.1) or selling power (section 3.2.2) develops a framework for analysing the issues further in subsequent chapters of the draft report (section 3.3).

3.2

Issues raised by participants

Many potential issues were identified by participants and by the Commissions research. They range from very specific technical issues to wider concerns about the operation and regulation of the electricity industry in Victoria and nationally. Past work by the Commission also highlighted issues relevant to this inquiry. For example, participants in the Commissions 2009 inquiry into Victorias environmental regulations claimed examples of barriers to investment in distributed energy generation systems included: complex network connection and access requirements (for example, requirements for detailed network connection studies) that add substantially to overall project costs existing market rules of electricity distribution that do not adequately set price signals that reflect the security and competition benefits that come from clean energy generation technical performance standards that must be met for renewable generators to be registered existing structure of the electricity market that discourages energy efficiency more generally, for example, retailers have an incentive to sell more electricity, while distributors have little incentive to encourage energy efficiency electricity distribution businesses have been set up on the basis of centralised electricity generation and so resist connection by small-scale generation which is typically located away from current power stations planning application and approvals processes that adds complexity, cost and time risk (VCEC 2009, pp.375 376). This section summarises the issues raised across the sector in the context of this inquiry (substantive issues and possible recommendations to deal with them are explored in subsequent chapters). The Commissions previous work suggested that the issues would be wide ranging and therefore, to focus the analysis, and help structure the discussion, the Commission has categorised the issues raised by participant into two groups: connecting to the network selling power from distributed generators into the grid. THE COMMISSIONS APPROACH 35

Whilst the classification is intended to aid the discussion of issues, the Commission notes that there may be some overlap between the issues and a particular issue may not fit only into one category, for example, FiT issues may also incorporate elements of the connection process. That said, the two group classification is consistent with the views of many inquiry participants. For example, Exigency argued that: The key barriers to establishing distributed generation could be simply summarised as revenue certainty and grid connection on reasonable terms. (sub. 4, p. 3) In summarising issues raised by participants, the Commission has also identified, where possible and relevant, where issues differ according to size of the market participant and location.

3.2.1

Connecting to the network

The most commonly raised immediate barrier to greater adoption of medium-scale distributed energy is the process for connecting these systems into the electricity network. There are various technical standards to be met and contractual arrangements that must be in place before distributed generation, such as a cogeneration or tri-generation system, can be connected to a Distribution Network Service Providers (DNSP) network. These are required to ensure the DNSPs meet their safety and reliability of supply obligations. Connection costs, performance standards for distributed generators, conditions and the negotiation timeframes can have a major impact on the financial viability of embedded generation projects. These costs are project specific, depending on various characteristics and location of the proposed distributed generation. In addition, local land planning rules may play a part in limiting embedded generation projects. The Commission has structured the discussion by identifying the critical issues raised by participants at each stage of considering whether, and how, to connect distributed generation. This involves consideration of: information on where distributed generation is needed the right to connect costs of connection regulatory issues technical issues.

Information and network plans


Participants argued that there was a lack of public and accessible information on where distributed generation was needed in the network and where there were network constraints on adding further distributed generation. The benefit of distributed generation in deferring network costs increases if it is installed in areas where the network is constrained or close to capacity. However, some participants argued that there was insufficient information about the location of network constraints. In addition, there are some parts of the network where increasing distributed generation is impractical without additional investment because it would contribute to already high fault levels.

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Making this information more widely available may encourage more targeted proposals for the installation of distributed generation. Proponents of distributed generation projects can more readily identify those locations where connecting further distributed generation is likely to be difficult. Proposals may also be more likely to proceed as market participants are more aware of and, therefore, able to share the benefits of the savings from deferred network augmentation. Retailers and network owners would therefore face positive incentives to encourage and accept distributed generation connection.

Right to connect
Some participants argued that there are no incentives for distributors to connect distributed generation to the network. In the Clean Energy Councils (CEC) view: There is presently no incentive for a DNSP to process a connection application; rather it is an obligation of the DNSPs Distribution Licence. In conjunction the introduction of a generator has the effect of reducing the DNSPs revenue from energy delivered, whilst increasing complexity (and hence cost) of their network assets. (sub. 76, p. 6) This apparent lack of incentive to connect distributed generation to the network has lead a number of participants to suggest that there should be an automatic right to connect to the network. For example, WattSource argued that: It [the right to connect] should be automatic for every person, household and business (no negotiations, no approvals, no special contracts) so power companies have access to renewable energy at competitive wholesale prices from small, medium and large contributors around the nation. (sub. 2, p. 1) The Property Council of Australia (PCA) also argued for automatic connection rights for distributed generation (ClimateWorks et al. 2011). The issue is complicated because some types of distributed generation already have an automatic right of connection. For example, smaller PV solar systems have an automatic right to connect through both the standard and transitional feed-in tariff schemes. However, while there is a right to connect a number of participants noted that the process can be cumbersome and time consuming because of the paper work and number of agents involved in the transaction. The Energy and Water Ombudsman Victoria noted, for example, that: Delays in the application of FiTs sometimes occurred because customers did not know that several forms needed to be completed. (sub. 48, p. 2) Others participants, such as Jemena (sub. 79), suggested that connection should be subject to consideration of any technical and commercial issues and may therefore not necessarily be automatic. In some cases it may be appropriate to refuse connection of distributed generation. Technical issues are discussed further later in this chapter.

Costs of connection
The costs incurred in connecting to the distribution network were cited by many participants as a barrier to further distributed generation. These costs include the direct financial cost involved in connecting to the network and the time taken to complete the process but most of the participant comments focused on the process and on the time taken from requesting connection to it being done.

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Participants suggested that the time taken to negotiate and affect a connection for a distributed generation unit varied from a few months to several years. In addition, in some cases the negotiations were not completed and connection did not occur. The problem is compounded by different distributors having different requirements and processes to connect distributed generation. It was argued that the different processes did not reflect technical or locational issues for example, Ironbark Sustainability (sub. 50, p. 9). Groups such as the PCA have claimed that, despite the national regulatory changes, barriers to connecting small- to medium-scale distributed energy will persist (ClimateWorks et al. 2011, p. 11). In particular, while the proposed national changes establish automatic access standards for micro generators, other small to medium generators do not have similar rights (ClimateWorks et al. 2011, p. 36). These considerations have led the PCA and some other bodies to propose a rule change to the AEMC to address these barriers. In response to these issues a number of participants, for example, the Moreland Energy Foundation (sub. 75), have argued in favour of standardised and predetermined processes to ensure the timely and cost effective connection of distributed generation to the network. The PCA advocated a national, standardised connection process with automatic connection rights and practical district level licensing frameworks (ClimateWorks et al. 2011), and has made a proposal for a draft rule change to address this issue (chapter 4). In terms of the direct financial and administrative costs, there were fewer participant comments. However, Erwin Boermans of Comfortid.com (sub. 1, p. 1) suggested that a major barrier to connecting renewable power sources to the grid was the extreme connection fees charged by grid monopolist owners and the very high priced generator-permits for medium or large scale solar. The cost of meeting technical requirements as a condition of connection are discussed in the later section on technical issues.

Regulatory issues
The industry is subject to extensive regulation, and many participants suggested that the existing regulatory framework can act as a barrier to connecting distributed generation. Many of the regulatory issues relate to the requirement to meet technical standards (discussed in the following section) but some have claimed that additional requirements have been added by retailers and distributors. For example, Ironbark Sustainability argued that: In this context, incentives for efficient DG [distributed generation] may be viewed as a secondary objective of regulation, with the localised nature of DG posing challenges for the regulations. The regulations are often not conducive to ease of installation of DG and provide substantial market impediments through metering, connection and pricing requirements. DBs are obliged to meet minimum technical standards for connection, detailed in the Victorian Electricity Distribution Code, however they can also add additional requirements effectively resulting in no standard process for gaining approval to connect cogeneration systems to the electrical network across the network providers. (sub. 50, p. 9) The regulation of network investment has also been raised as an issue. It has been argued that there is a lack of incentive for networks to connect distributed generation. 38 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

In particular, it is claimed that the current regulatory environment rewards investment in network assets rather than in distributed generation which reduces the need for such investment (CEC, sub. 76). This is consistent with the Australian Energy Regulators (AER) more general views that there is a systemic bias towards inflated expenditure estimates, disincentives for efficient investment and process biases in favour of the service provider that can lead to excessive payment by users (AER 2011e). Without efficient incentives for investment generally, DNSPs will have weak incentives for efficient investment in distributed generation. Improving the incentives for DNSPs more broadly would have implications for electricity prices and the broader economy beyond distributed generation. Other regulatory issues including planning concerns, especially around the construction of new distributed generation in particular areas, were also raised in submissions. The construction of new wind farms has been one such issue in Victoria. Union Fenosa Wind Australia (UFWA) observed that: The Victorian government and councils should remove or reduce planning laws that are particularly onerous, and are not based on economic, scientific or environmental criteria. The recent changes to the Victorian planning laws for utility scale wind farms that apply noise, setback and right of veto powers that are significantly above criteria for all other developments are not in the interests of the Victorian community. UFWA respects the right of the Victorian government to apply rigid objective criteria for development but the same criteria should be consistently applied to all developments i.e. the criteria for noise, visual amenity and setback should apply to all developments including small and large scale generation, and others such as coal mines, gas wells, sewerage facilities, piggeries, and farming facilities that have far more relaxed planning requirements. (sub. 71, p. 4) Other local government regulations can also be a barrier to the installation of distributed generation. For example the National Electrical and Communications Association noted that: In some cases, such as those residents who live in a heritage overlay area, they are required to seek planning approval from their local Council to install a solar PV system on their premises. This has created another barrier to the installation of distributed energy. (sub. 37, p. 5) Regulatory issues also arise when distributed generators are required to be licenced as generators. In Victoria the Electricity Industry Act 2000 (Vic) (EI Act) regulates the Victorian electricity supply industry. The EI Act supplements the national electricity regulatory framework regulating various matters, including providing for, among other things, a licensing regime for people who generate electricity for supply or sale, or the transmission, distribution, supply or sale of electricity. The Essential Services Commission administers the provisions of the EI Act and licensing of generators. The legal framework and process is described in more detail in appendix B.

Technical issues
Technical issues need to be addressed when considering whether to connect additional distributed generation to the network. These arise because the connection of distributed generation can impact on the reliability and performance of the electricity network. Jemena (JEN) stated that:

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connection of medium and large scale rotating equipment to the distribution network generally contributes to the fault level energy that flows into the network when a localised network fault occurs. Distribution networks are designed with a maximum fault level limit. Exceeding the networks designed fault level limit will increase the risk to the reliability and safety of the distribution system. The Electricity Distribution Code issued by the Essential Services Commission of Victoria requires that embedded generators (DG) design and operate their plant so as not to cause fault levels on the distribution network to increase above specified levels. Additionally, the NER [National Electricity Rules] advises fault levels which should not be exceeded for sub-transmission systems. While supportive of renewable energy initiatives, JEN by necessity has a stronger commitment to safety and reliability of electricity supply. Accordingly, JEN must have regard for maintaining fault levels within safe limits that are consistent with the provision of a reliable and secure supply of electricity to their customers. (sub. 79, p. 7) Similarly, the Energy Supply Association of Australia argued that: the process to connect to a Distribution Network Service Providers (DNSP) network is to ensure the safety and reliability of supply. This should remain the primary concern of a regulatory process. Rather than being a barrier to distributed generation, this process is essential to maintain the integrity of the system. (sub. 74, p. 3) An alternative view expressed by some is that technical issues are overstated and used as a barrier to connect distributed generation. For example, Ironbark Sustainability observed that: In some cases DBs [distribution businesses] require the installation of prohibitively expensive equipment in the distribution network to accommodate increased fault levels. (sub. 50, p. 9) It may not always be clear to the proponent of the distributed generation whether these requirements are justified. Professor Alan Pears noted the asymmetrical treatment of electricity consumers and those generating electricity, and argued that: any small consumer is free to install energy consuming equipment that causes significant impacts on local power quality (such as low Power Factor equipment), increases pressure on local network capacity, creates harmonics or causes power surges. Dealing with these kinds of problems is seen as the normal business of the electricity supply industry, and the costs of doing so are smeared across all customers. Yet, if similar impacts are caused by a small distributed generator, the electricity supply industry can insist on expensive remedies. (sub. 44, p. 2) The issue that the Commission must address is the extent to which the technical requirements are justified on the grounds of safety and network stability or are being used as an unnecessary barrier to the introduction of distributed generation. In addition, the Commission must consider how the necessary technical (safety and network stability) requirements can be addressed at least cost to proponents of distributed generation projects.

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3.2.2

Selling electricity

Issues around selling electricity raised by participants often focused on the price paid and the way it was calculated. However, participants also raised other issues, which are discussed below and expanded on in chapters 5 and 6.

Right to sell
A number of participants, especially households with solar PV installations, argued that there should be an automatic right to sell their excess power and that retailers should be obliged to accept such power. In effect this is related to the right to connect issue raised in the previous section.

Prices
The price paid for generated and/or exported electricity is a key concern for many participants in this inquiry. The prices paid per unit of energy for the electricity sold by distributed generators are referred to as FiTs. Those wanting to encourage distributed generation, often solar, argued for higher FiTs, while others argued for unregulated or market-based tariffs. Still others argue in favour of a fair and reasonable tariff that is sustainable, but definitions of fair and reasonable differed. The principal original objectives for premium FiTs were to encourage the uptake of zero emission generation to help reduce greenhouse gas emissions and to encourage industry development. For example, Ceramic Fuel Cells Limited argued that: Where feed-in tariffs have become clouded is that the design and rate of the tariff have been set to achieve other objectives, notably to support the solar PV industry as a form of industry development (and as a subsidiary goal, to reduce greenhouse gas emissions). (sub. 41, p. 10) Others, for example Jill Dumsday (sub. 3), argued that a premium FiT was necessary to ensure that the capital cost of installing solar panels incurred by households was paid back within a reasonable period. A shorter payback period was regarded as a major incentive to install solar panels. In contrast to the view of many participants that FiTs are meant to encourage the uptake of low emissions generation technology, the Alternative Technology Association (sub. 73, p. 1) argued that it is a misconception that the objective of FiT policy is primarily one associated with the delivery of emissions reduction, contending: the primary objective of a well designed and structured FiT mechanism is to correct market failure and to capture costs benefits and other potential benefits (e.g. carbon) of a particular policy choice, where the market alone cannot realise those benefits, or indeed is actively preventing them from occurring. (sub. 73, p. 2) Similarly, Exigency argued that: Any change to feed-in tariff structures should address free-rider issues, including the use of the distribution network as a back-up supply. (sub. 4, p.2) If there are market failures then some participants considered that the case for government intervention and the setting of regulated FiTs is strengthened. Jemena argued that:

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regulated feed-in tariffs are not an efficient way of achieving the FiT objectives. However, JEN would support a level of regulation if it can be demonstrated that competitive prices are not being offered or are below the value of energy in the market (sub. 79, pp.5-6) Regardless of the justification used, if FiTs are to be regulated, submissions have suggested a number of different methodologies that could be used to calculate the FiT. Some of the more commonly suggested approaches include: economic/market-based price payment of a fair and reasonable price paying a one for one price based on the retail price of electricity payment based on the estimated return needed to payback investment in distributed generation technology payment of a premium tariff. Other issues raised in submissions in relation to regulated FiTs include: Should they be calculated on a gross or net basis? Should FiTs be calculated in such a way as to treat generators of a different size or type differently? Over what time frame should regulated FiTs be held constant to provide certainty for investment decision-making? On the other hand other participants have argued for market-based FiTs, for example AGL argued that: It is critical that the tariff paid by retailers to embedded and distributed generators be determined by the market. Regulating such a tariff would be a significant retrograde step in relation to microeconomic reform of Australias energy markets. (sub. 72, p. 1) Market determined FiTs may still need to be assessed to ensure that they are fair and reasonable and there may need to be regulation to ensure that, especially smaller generators, are covered by adequate consumer protection.

Billing and administrative arrangements


Billing and administrative arrangements are of particular concern to smaller distributed generators, such as households with solar PV panels. Concerns were raised regarding the amount of paper work required to enter into an agreement with an electricity retailer and problems with delays and lost paperwork. How distributed generators were paid for the power they exported was also a concern for some households. In relation to the paper work burden imposed on those wanting to set up distributed generation, AGL noted that: The current Victorian feed-in tariff schemes place an unnecessary level of administrative burden on retailers and customers. (sub. 72, p. 4) The Energy and Water Ombudsman Victoria noted that on the basis of complaints received one of the main consumer concerns related to:

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Incorrect or confusing information about the solar process, or about the billing of FiTs [which] had often been provided to customers by their electricity retailer, distributor or solar installer. (sub. 48, p. 2) In relation to a larger co-generation project, BRT Consulting stated that: The administration charges are greater than the off peak feed in tariff and therefore costs to sell energy. (sub. 8, p. 2) Another issue is how those producing distributed generation are paid for their power exported into the grid. This is an issue of particular concern to smaller household producers who may be concerned about whether they are paid directly for their power or offered a credit on their account. Depending on their personal circumstances, some consumer may prefer payments, while others may prefer an amount to be credited to their electricity account.

Other conditions or constraints


Other issues related to selling electricity produced by distributed generation include: scope to aggregate smaller generators to enhance seller bargaining power and to provide more scope to argue for compensation for delaying network enhancement the complexities around to whom the distributed generator can sell its power. For example, a distributed generator cannot sell directly to a neighbour without obtaining a retail licence or meeting the associated consumer protection regulations (and incurring the associated costs of that application) (ClimateWorks et al. 2011, p.30) the regulation that guarantees retail contestability for tenants has been an issue for larger distributed generation projects, including co-generation and tri-generation.

3.3

A framework for analysis

The terms of reference direct the Commission to: assess the design, efficiency, effectiveness and future of FiT schemes and recommend whether existing FiTs should be continued, amended or discontinued identify barriers to connecting distributed renewable and low-emission technologies into the distribution system. To analyse the issues raised by participants and respond to its terms of reference, the Commission has developed an analytical framework and a set of principles to help guide policy selection. The Commissions framework is built around a set of questions and issues which guide its analysis: What are the objectives of policies impacting on distributed generation, how have they changed over time and how do they relate to the overall objectives of the national electricity market? What are the barriers to distributed generation and efficient and effective FiTs? In the Commissions view well-functioning markets offer the most efficient outcomes but markets can fail and this may provide scope for government policy interventions. The terms of reference also specify that the Commission is to examine barriers to renewable and low-emission technologies. The terms of reference does not define THE COMMISSIONS APPROACH 43

low-emission technologies. The Commission notes that the recently completed Clean Energy Finance Corporation Expert Review has recommended that the eligibility for low emissions technology be defined as technologies which produce 50 per cent, or less, of the emissions intensity of electricity generation in Australia (Commonwealth Government 2012c, p.15). The Commission is considering adopting this definition of low emission. This issue is discussed further in chapter 6, and the Commission is seeking more information on whether this is an appropriate definition. In the following section this framework is distilled into a set of criteria that is used to analyse the barriers to distributed generation and FiTs in subsequent chapters.

3.3.1

What are the policy objectives?

Currently, the policy objectives around distributed generation are not clear and appear to have changed over time. The diversity of views on the role of FiTs discussed in section 3.2.2 illustrates the lack of clarity around objectives. It is therefore not clear whether distributed generation policies have achieved their current objectives effectively or whether those objectives are appropriate going forward. The Commission also notes that distributed generation is part of the National Electricity Market. Many consider (CSIRO 2009) that the importance of distributed generation in that market will, and should, grow. The objectives of distributed generation policy therefore also need to be consistent with the overall objectives of the National Electricity Market. There is a number of objectives assigned to encouraging distributed generation and the use of FiTs. In chapter 5 the historical objectives of FiTs are discussed and their continued validity analysed. This analysis shows that the main claimed objectives of FiTs are to: reduce greenhouse gas emissions, including assisting households to make a personal contribution to environmental outcomes and reducing greenhouse gas emissions support innovation and the development of a new industry by stimulating the demand for investing in distributed generation by more efficiently allocating risks, including risks to customers and energy market risks to small-scale solar PV investors ensure fair payments for electricity from small-scale solar PV investments. These objectives have also historically applied to distributed generation more generally. In the Commissions view a number of these objectives appear to be based on previously identified issues or problems that are no longer relevant to FiT policy (chapter 5). In particular: reducing greenhouse gas emissions this objective has been overtaken by the Commonwealths carbon pricing policy and other greenhouse gas reduction initiatives industry support where FiTs do not cover all technologies, the outcome is likely to be a highly distortionary policy and stifle innovation in low-emission and other renewable distributed generation technologies. The objective of ensuring fair payments for electricity which reflect the value of distributed generation is an important objective for future FiT arrangements and is considered further in later chapters. The Commission considers that an efficient electricity system should take account of the full value of distributed generation and this value should be reflected in price signals 44 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

and other incentives faced by market participants. There are three elements of value from distributed generation (chapter 6): the energy value which is the value of the energy delivered by the distributed generator. This is a price per unit of energy delivered and would be time and location specific the network value which is the value of (net) avoided capital spending to augment the network (this value is time and location specific) externalities the value of greenhouse gas reductions (which with the carbon tax will be reflected in the market determined energy value). The Commission considers that the objective of ensuring fair, market determined payments for electricity would encourage efficiency in the development and use of the electricity system. This means that distributed generation polices should focus on ensuring that there is investment in distributed generation when it is the most efficient option to enhance the electricity system. Such an objective does not preclude the growth of distribution generation technologies or those technologies playing an important part in the adjustment to a low carbon economy. Rather it would mean that distributed generation polices would be more sustainable and predictable. The incentives to use distributed generation to reduce greenhouse gas emissions would be strongest when distributed generation is the most cost-effective way of reducing emissions. The CSIRO concludes that distributed generation: has a bridging role in transitioning from the current coal dominated centralised system while large-scale renewable and near zero emission CCS [carbon capture and storage] technologies are either too expensive or unproven. (CSIRO 2009, p.353) The resulting policies would be fairer, as they would also not impose higher electricity prices on those who do not, or cannot afford to, install distributed generation. The Commission considers that distributed generation polices should be designed and implemented in such a way as to achieve this efficiency objective: efficiently effectively in an equitable manner as administratively simple as possible in a manner which fits well with existing institutional arrangements and national policy directions. Subsequent chapters of this draft report analyse distributed generation polices and FiTs and make recommendations to achieve this outcome. The Commission considers its approach in this draft report is fully consistent with the objectives of the national electricity market, which are to: To promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to a) price, quality, safety, reliability, and security of supply of electricity; and

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b) the reliability, safety and security of the national electricity system. (National Electricity Law s 7) In the context of this market efficiency objective, the Commissions approach is then to consider what are the barriers and market failures that may distort choices and investment in the most efficient distributed generation technology. This consideration also includes the equity implications of distributed generation polices.

3.3.2

Barriers to distributed generation

The following analysis examines the barriers to distributed generation achieving its potential within the national electricity market and the role FiTs should play in the policy framework. This analysis explicitly addresses the terms of reference relating to the identification of barriers to distributed generation and the design, efficiency and effectiveness of FiT schemes. In some cases the perceived barriers to distributed generation are driven by the cost of distributed generation, and reflect the fact that distributed generation may not be best option in all circumstances. In other cases, the barriers to distributed generation may relate to the industrys: regulation and market structure market conditions.

Regulation and market structure


The structure of Victorias electricity market has been determined, at least in part, by the current regulatory structure and reflects long standing investments in infrastructure. The industry is structurally separated (retailers, distributors and network service providers) and some parts are highly regulated while others are more competitive. The resulting arrangements were designed to facilitate competition in the broader electricity industry, but they may have led to misalignments of incentives between distributed energy proponents, distribution businesses and retail businesses. There are also significant disparities in market power. This structure, and resulting incentives, may make responding to new entry of distributed generation difficult. Uncertainty caused by frequently changing regulation has also created barriers to distributed generation. Individuals and businesses wanting to install distributed generation want a degree of certainty so that they can make an informed investment decision. For example, Ceramic Fuel Cells Limited noted that to be effective, distributed generation policies, and in particular FiTs need: to give certainty over the long term, rather than be susceptible to boom and bust cycles. (sub. 41, p. 11)

Market conditions
The Commissions starting point is that well-functioning competitive markets are the best means of achieving efficient outcomes that ultimately protect the long-term interests of consumers (and society more generally) (box 3.1).

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Box 3.1

Market-based prices

Market-based price signals and the actions of market participants will result in an efficient take up of distributed generation and development of the electricity network. In such circumstances the case for government intervention is weak. In competitive markets potential sellers of electricity will negotiate the conditions and price under which their exported electricity will be purchased. Those considering installing distributed generation will be able to assess the benefits (energy costs saved and returns from selling excess electricity) and make an informed decision as to the desirability of installing generation capacity. The buyers will offer a price which reflects the value of the electricity to them. If the market is well-functioning the price offered will be economically efficient. Price signals will guide investment in generation and the development of network assets.
Source: Commission analysis.

A number of participants argued that the electricity market is sufficiently well-functioning for such an efficient price to be the outcome. For example, AGL argued that: It is critical that the tariff paid by retailers to embedded and distributed generators be determined by the market. Regulating such a tariff would be a significant retrograde step in relation to microeconomic reform of Australias energy markets. (sub. 72, p. 1) In addition, AGL suggest that one of the reasons for concluding that the rate should be market-determined is because: AGL believes that no market failure has been identified which justifies additional mandated feed-in tariff policies being introduced or maintained. (sub. 72, p. 2) However, there is evidence of disparities in market power among market participants, including local monopoly in distribution businesses and the limited capacity to pass through from distribution businesses to the retail markets any price signals reflecting scarcity of localised network capacity. It is argued by some participants, that the evidence that markets are functioning effectively in Victoria includes that some retailers currently offer FiTs higher than the regulated rates. Others, however, contest this view (chapter 5). In a competitive market it would be expected that different technologies would be treated neutrally. Technology neutrality with differences in policy or approach (only justified on technical or other appropriate grounds) would help support efficient market outcomes by ensuring that the relative merits of all technologies are considered and no single approach is advantaged over another. A number of participants supported this view, for example, the Energy Supply Association of Australia (ESAA) argued that as a: technology neutral association, esaa considers that it would be preferable not to specify eligible technologies. This will allow for innovation and new technologies to enter the marketplace. (sub. 74, p. 2)

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3.3.3

How might markets fail to achieve efficient outcomes?

Central to the Commissions analysis of why distributed generation may not be appropriately incorporated into Victorias electricity sectors is the identification of market failures or other barriers that prevent the market signals faced by participants from resulting in an efficient structure. Efficient outcomes are predicated on the market functioning effectively. If there are any market failures, market outcomes may not be efficient and there may be scope for government intervention. That said, even in the presence of market failures it is necessary to consider whether the cost of intervention outweighs the benefits. The existence of market failure is not in itself sufficient to justify government intervention and regulation. Participants have suggested there are market failures that justify policies to encourage distributed generation and the regulation of FiTs. For example, the Dandenong Ranges Renewable Energy Association argued that: we believe this inquiry should not recommend amending current feed-in tariffs in a way which requires retailers to offer a feed in tariff but does not regulate the actual price paid. Instead we think that the system should be regulated to avoid market failures and ensure a set premium is paid for green power. (sub. 10, p. 2) Similarly, Moreland Energy Foundation Limited argued that regulated FiTs were necessary to: Address market failures that prevent distributed generators from receiving the full benefits of the electricity they produce, and from having certainty about receiving these full benefits over the life of the system. (sub. 75, p. 5) Participants have cited apparent failures in the current electricity market which may justify regulating FiTs. For example Ceramic Fuel Cells Limited argued that: In our view the problem that feed-in tariffs should address, in simple terms, is that ordinary homes and businesses who have excess electricity to sell cannot efficiently participate in the energy market. There are many reasons for this, which are well known from other markets high transaction costs, imperfect and asymmetric market information, imbalance of market position etc. This is the core market reality that a feed-in tariff is designed to address and a well designed feed in tariff is a very effective tool to address this problem. (sub. 41, p. 10) The Commission considers that the market failures relevant to this inquiry include: existence and opportunities, and incentives to exploit market power; when a party to a transaction has incomplete information (information asymmetries or deficiencies); or when the parties to a transaction do not account for the full effects of their actions on others (spillovers or externalities) high transactions costs where it is difficult for dispersed parties to combine to negotiate joint benefits.

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Market power concerns


Market outcomes will not be efficient if one or more of the participants has market power which he or she is able to exercise during price negotiations. An electricity service provider (such as a network operator) with market power is able to charge a higher price for the services it sells (compared with the price which would have been offered in a competitive market) to the detriment of the buyer of those services. It also leads to an inefficient use of resources between generators, distributed generation, and transmission and distribution infrastructure. Several participants expressed concern that some market participants did have market power and that regulation of FiTs and connection was therefore warranted. For example, the Australian Solar Round Table noted that one of the problems that FiTs are intended to address is that: The market for power from distributed and embedded generation is distorted by an imbalance of market power. A small number of players dominate the market. (sub. 56, p. 9) Similarly, Professor Alan Pears also noted that the network operators have market power and that this can distort the role of distributed generation (sub. 44, p. 2). The degree of potential market power available to monopoly distribution businesses is likely to be much higher than that available to retailers who operate in a more competitive market and where entry by new businesses is possible. However, it is also the case that some retailers (although not all) also own generation assets. This may affect their incentives to encourage more distributed generation as it may represent increasing the number of competitors to their own generation businesses. To address market power concerns some submissions have argued in favour of mandated FiTs, not just general guidance on what might be a fair and reasonable FiT.

Incomplete information
Markets work best when those participating in the market have sufficient information to make decisions that maximise their welfare and best reflect their individual circumstances. Information is important in helping to make decisions that may have long-term implications for those considering whether to invest in a distributed generation unit. Moreland Energy Foundation Limited argued that there is a need for certainty and that: Without a feed-in tariff, a person or business considering investment in a distributed energy system cannot be certain that they will receive the true value of the electricity produced by their system over the life of the system. A feed-in tariff can provide this certainty, with appropriate mechanisms for adjustment of the feed-in tariff rate. (sub. 75, p. 3) There are also concerns that the availability of information and ability to understand and use it may vary according to the size and sophistication of the entity installing the distributed generation unit. For example, Moreland Energy Foundation Limited argued that: Nor is there any guarantee without regulation that the characteristics of feed-in tariffs provided voluntarily by market participants will be useable by

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the significantly smaller, less sophisticated, less knowledgeable and less wellresourced distributed generation owners. (sub. 75, p. 8) Information is also required to ensure an efficient connection process for distributed generation. Distributed generation proponents argue they need access to information on where the distributed generation is most highly valued and the nature of any network constraints that may impact on the cost and viability of the project. Lack of information does not necessarily justify government intervention in the operation of the market. In some cases, information concerns can be overcome by private intermediaries, for example, in the case of financial services, loan and insurance comparison services provide information to consumers to help them make informed decisions.

Spillovers and externalities


Spillovers and externalities occur when the activities of one agent in the market affect another in ways that are not taken into account by the market. For example, in the absence of any tax on pollution a producer will not take into account the cost of pollution in production decisions. Ironbark Sustainability identify one of the market failures resulting in a barrier to distributed generation is that: Savings related to avoiding upgrades to the grid (ie, DG systems may not require investment in poles and wires) are not captured in the current regulatory environments, meaning DG providers accrue the risks but none of the savings. (sub. 50, p. 12) It has also been argued that more distributed generation benefits electricity users by reducing reliance on a small number of larger generators. It is argued that continuity of electricity supply can be vulnerable to the failure of a large generator. Ironbark Sustainability argued that a benefit of distributed generation is that: DG provides the opportunity to reduce the negative consequences from potential outages of escalations in energy costs. A large number of smaller units using varied energy sources represents a lower output at risk per installation, as opposed to outages at centralised plants that have massive output at risk, for example, through accident, terrorism, maintenance. (sub. 50, p. 10) Reduced network losses is another benefit of distributed generation. Energy is lost from the system as electricity is transported over long distance in the transmission network and these losses are averaged over customers in a particular area. It is argued that by locating generation capacity closer to the electricity user these losses are reduced. For example, the CSIRO also argued that distributed energy generation improves system efficiency due to: the reduction of network losses by generating energy close to the point of consumption, or improving the utilisation of a fuel by capturing more of the energy available as occurs through co-generation and tri-generation. (CSIRO 2009, p. 18) Overall, the existence of spillovers and externalities and resulting market failures may justify additional support for distributed generation. For example, United Energy stated that:

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Incentive schemes are required to encourage distributed generation because in general distributed generators dont receive a financial reward that reflects the full benefits they provide to the network and wider community. (sub. 77, p. 1)

High transactions costs


The costs of negotiating individual contracts and arrangements can be a problem for households and owners of smaller distributed generation units. Transaction costs can also affect the willingness of retailers and distributors to connect small-scale distributed generation if they have to deal with a large number of potentially diverse and geographically spread suppliers. These costs may mean that transactions which would have been mutually beneficial to all parties, including the community as a whole do not take place representing a market failure. Regulating FiTs and the terms and conditions of connection and supply can reduce the transactions costs faced by both the seller and buyer of electricity. This point was recognised by the Australian Solar Round Table who argued that FiTs address a number of problems including transaction costs of the individual transactions (sub. 56, p. 9). During consultations, John Daly of the Grattan Institute noted another form of transactions costs relating to the acceptance of new technologies. He argued that there is a first mover disadvantage for those trying to introduce new generation technologies. The transactions costs involved in getting new technologies accepted within the system are high but are not ongoing. The first mover incurs these costs but later entrants using the same technology do not.

The impact of addressing market failures


In the Commissions view, to the extent that these market failures are valid, addressing them, when the benefits of intervention outweigh the costs, and encouraging a more competitive market, make decisions on connection of distributed generation and network development more efficient. Dealing with market failures would involve: embedding efficient price signals this is complex and involves sending efficient signals to all participants in the market and ensuring that the value of distributed generation is reflected in the actions of market players. The value of distributed generation differs among industry participants: to retailers the value of distributed generation is their savings from buying less electricity on the wholesale market. This value should be reflected in the price of electricity per unit exported. Competitive prices should reflect the opportunity cost of electricity generated by different types of generation and not subsidise or favour any particular technology to distributors the value of distributed generation results from the value of any capital expenditure to augment the network which is avoided as a result of distributed generation. But, must also include the cost of any capital enhancement necessary for the connection of distributed generation. An issue with current arrangements is that the value to the distributor is not passed back to retailers and therefore customers and not reflected in their decision to install distributed generation freeing market entry informing business and consumer decisions

enhancing contestability and competition through

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improving the efficiency of administration and decision making processes allowing the most efficient technologies and scale to emerge

increasing predictability for business and consumers in the long run. It is achieving this outcome that is the focus of the Commissions analysis and draft recommendations in the following chapters. However, the Commission is cognisant that it may not be possible to recommend a perfectly efficient and equitable FiT methodology even if these market failures are addressed. ACIL Tasman, in its assessment of different methodologies for calculating FiTs concluded that: In summary, none of the methodologies for calculating FiTs satisfy the efficiency or effectiveness criteria and all have adverse equity implications. (ACIL Tasman 2012, p. 71) The Commissions task is therefore to develop recommendations that achieve the best possible outcome given Victorias circumstances. The draft recommendations in chapters 4 and 6 reflect the Commissions current views, and it seeks views and information from interested parties on them.

3.3.4

Equity considerations

There are conflicting views about the impact of FiTs on public welfare, which is a matter the Commission is required to consider under its Order in Council. A number of submissions to the inquiry and some academic papers suggest that schemes such as the Premium FiT (PFiT), which set a FiT price above competitive market levels, result in regressive outcomes. For example Nelson, Simshauser and Kelley (2011) argue the extra costs associated with premium FiT schemes result in above market costs that are passed on to all electricity customers in the form of higher electricity prices. In effect, distributed generators are cross subsidised by other electricity consumers. Furthermore, the authors argue that this is regressive because it is primarily higher income households that are able to afford distributed energy systems and therefore capture the benefits, while lower income consumers, who cannot afford these systems, face higher costs. This is also facilitated by the restriction to only allow the various distributed generator rebates to apply to those consumers who hold the title deed to property and therefore less affluent consumers (such as renters) are unable to access the benefits. Nelson, Simshauser and Kelley (2011) also present some quantitative evidence, based on the NSW FiT schemes and AGL data, to support the theory. However, Grosche and Schroders (2011) evaluation of the German FiT schemes conclude that while FiTs are regressive, the redistributive effects are quantitatively small. The Alternative Technologies Association (sub. 73) also supports the view that provided the overall cost of the FiT scheme is low, and that the broadest base of electricity consumers are levied, the final cost to average consumers should remain insignificant. In contrast to these views, others have argued that FiT schemes can have a positive impact on welfare. The contrary view is that as embedded generators increase in the market the two fold effect of increased supply of energy and reduced demand (as generator owners consume energy they generate) could lower electricity prices for all electricity consumers (the merit order effect). In addition, the potential for embedded generators to improve the cost-effectiveness of the electricity network (for example through reduced transmission losses or need to augment the network) can also facilitate lower electricity prices.

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The Merit Order Effect1, it is argued offsets any form of cross-subsidisation. The submission from Beyond Zero Emissions (sub. 64, p. 5) asserts that increasing the amount of renewable energy on sale lowers the average price per unit of electricity because it counteracts the effects of peak demand. However, others have observed that as renewable energy sources tend to be more expensive than the non-renewable alternatives the effect is to increase the total cost of producing power. They argue that the merit order effect represents a shifting of costs among market participants but does not lower the overall cost of electricity. For example in a paper by Nelson, Simshauser, and Kelley (2012) quoted in the submission by AGL the authors conclude that: the result is nothing more than a short term wealth transfer from existing electricity producers to consumers and a long run increase in overall costs leading to a loss of consumer (or taxpayer) welfare. (sub. 72, p. 4) Another equity consideration is that under current regulatory arrangements, distributed generators pay less for their ongoing access to the network. As the amount of distributed generation increases over time the cost of network access will be spread across a smaller number of customers. These customers will therefore be disadvantaged relative to those with distributed generation. It is not clear from the literature or submissions alone which argument is more pertinent. It is possible the differing views can be reconciled due to intertemporal differences. In the short run, where embedded generation isnt common, the costs associated with FiT schemes result in increased electricity prices and the associated welfare transfers. However, in the longer run, where the benefits of distributed generation (including improved network effectiveness and the merit order effect) are realised, this may result in lower electricity prices and improved consumer welfare. This assumes that the broader benefits of distributed generation are passed on to all consumers and that distributed generators still contributes to the costs of continued access to the network. In the Commissions view, the equity impact of FiTs will depend on pricing policies and the nature and extent of any resulting subsides to particular groups. An efficient distributed generation model that is free of cross-subsidies will have positive long-term benefits for all energy users.

3.4

Conclusion

Participants and the Commissions research identified many issues relevant to the terms of reference during the course of this inquiry. Therefore, to focus the analysis, and help structure the discussion, the Commission has categorised the issues raised by participant into two groups: connecting to the network selling power from distributed generators into the grid The Commissions approach was then to examine the barriers to distributed generation achieving its potential within the National Electricity Market to achieve its objectives and the role FiTs should play in the policy framework. In some cases the perceived
The merit order is a way of ranking available sources of energy in ascending order of their short-run marginal costs of production, so that those with the lowest marginal costs are the first ones to be brought online to meet demand, and the plants with the highest marginal costs are the last to be brought on line.
1

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barriers to distributed generation are driven by its cost, and reflect the fact that distributed generation is not be best option in all circumstances. In other cases, the barriers to distributed generation may relate to the industrys: regulation and market structure market conditions. Removing or addressing these barriers would reinforce market signals and help ensure that decisions on investment in and location of distributed generation are consistent with the objective of having an efficient electricity sector in Victoria. The Commissions analysis and recommendations in the following chapters are intended to achieve this outcome.

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Connecting generators to the distribution network

Although distributed generation can have many advantages, it does not always easily fit into todays centralised power systems. While it is often argued that distributed generation can reduce network costs, in many cases networks need to adapt, incurring additional costs. Thus the net benefits, or net costs, of distributed generation vary from case to case depending on network constraints, size, technology and operation. Even if the overall benefits are positive, additional network costs can represent a disincentive for network operators to connect a distributed generator. It is therefore not surprising that the most commonly raised immediate barrier to greater adoption of medium-scale distributed generation appears to be the process for connecting these systems into the electricity network. The terms of reference of the inquiry ask the Commission to identify barriers to distributed generation and this chapter examines whether there are barriers to efficient connection. First, the chapter sets out the regulatory context along with work currently underway to address connection barriers. Section 4.2 outlines the barriers to efficient connection, sections 4.3 and 4.4 examine the evidence of barriers presented to the inquiry and section 4.5 makes conclusions and considers the materiality of these barriers.

4.1

Context

Connection of distributed generation is predominantly governed by national arrangements. The national connection arrangements outlined in appendix B include the connection elements of the COAG principles for Feed-in-Tariffs and from 1 July 2012 chapter 5 and 5A of the National Electricity Rules (NER) and the National Customer Energy Framework (NECF). Chapter 5A of the NER will provide for three types of connection service: (1) A basic connection service, which will cover retail customers including those with generally household-scale distributed generation. Distribution Network Service Providers (DNSP) must have a model standard offer for basic connection services that has been approved by the Australian Energy Regulator (AER). (2) A standard connection service, which can cover the terms and conditions for different classes of connection services or customers. DNSPs can choose to prepare a model standing offer for such services and have it approved by the AER. (3) A negotiated connection contract, which covers services that are not subject to a basic or standard connection standard offer. The terms and conditions for such services are negotiated and if agreement cannot be reached the dispute can be arbitrated by the AER. In the 2009 Australian Energy Market Commission (AEMC) conducted a Review of Energy Market Frameworks in Light of Climate Change Policies. The AEMC concluded that regulatory barriers prevent the efficient connection of distributed generators and that addressing these barriers is likely to further the National Electricity Objective (NEO) (AEMC 2009b, p.76). Many actions have been implemented or initiated to address these barriers (table 4.1).

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Table 4.1
Date Jul 2010

Actions to address barriers to distributed generator connection


Action AEMO Small Generator Framework Design Details Sets out principles that aim to minimise barriers to cost-effective small generator participation in the NEM. Aims to improve the incentives for DNSPs to invest more efficiently in general. AEMC concluded the TFP approach has merit but that practical implementation issues exist. The AEMC completed a rule change process to include distributed generation in the DMIS Proposal by ClimateWorks, Seed and the PCA to streamline connection processes and improve DNSP incentives for engagement Main components are an annual planning and reporting process; a Demand Side Engagement Strategy; and a Regulatory Investment Test for Distribution (RIT-D). Expands the NER for connection of household and medium-scale distributed generation. Aims to improve opportunities for DSP Aims to simplify registration of distributed generators

Jul 2011

Proposal by Minister for Energy and Resources (Victoria) Total Factor Productivity (TFP) approach to network pricing regulation Inclusion of distributed generators in the Demand Management Incentive Scheme (DMIS) Proposal to the AEMC to amend the NER for connecting embedded generators

Dec 2011

Apr 2012

Jun 2012

Publication by AEMC of draft rule change determination from MCE on Distribution Network Planning and Expansion Framework Commencement of Chapter 5A of the NER

1 Jul 2012

Sep 2012

Finalisation of AEMC Demand Side Participation (DSP) Stage 3 Review: The Power of Choice Outcome of AEMO Small Generator Aggregator Framework rule change request to AEMC Final Report of Productivity Commission inquiry into electricity network regulation National feed-in tariff (FiT)

Sep 2012

Apr 2013

Seeks to, among other things, address barriers to distributed generation A consistent national approach to FiT

Proposed, no definite timeframe


Note:

Australian Energy Market Operator (AEMO), Australian Energy Market Commission (AEMC), Ministerial Council on Energy (MCE), National Electricity Market (NEM), Property Council of Australia (PCA)

Source: Commission analysis

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4.2

Overview of barriers to efficient distributed generation connection

Investment in distributed generation is efficient and effective when the private and system benefits are greater than the costs, including all relevant charges and connection costs. In an efficient system distributed generation is likely to form part of a suite of solutions that includes traditional investments in poles and wires and demand side participation (DSP) such as contracts to reduce demand and time of use pricing. Connection of distributed generation is of particular interest to this inquiry because the connection processes and costs can have significant impacts on the efficiency and viability of medium-scale distributed generation projects. A particular challenge exists because of barriers to transparent and market based capture of the potential network value of all sizes of distributed generation. Distributed generators require access to distribution networks for a range of reasons including selling electricity and balancing system loads (ClimateWorks et al. 2011, p.9). Distributed generation can have the following effects on the network and the network operator: causing additional costs, both operational and capital expenditure entailing network benefits, such as increased reliability, smaller incremental cost than centralised energy supply solutions and relieving network constraints reducing the volume of electricity sold over the network replacing or deferring network investments. (Bauknecht & Brunekreeft 2008, p.480) Given the cost of connecting distributed generators to the network varies significantly, recovering connection costs can help inform efficient choices between locations where new investment will not exacerbate transmission constraints and locations where they will. This is consistent with the AERs view: The AER maintains its initial views that non-registered embedded generators should pay for the cost of removing specific output constraints, unless there is a demonstrable net benefit to other network users. (AER 2011a, p.64) From an economic perspective, connection may be associated with a number of complex markets failures and other problems: Asymmetric information and market power: monopoly DNSPs hold information, have market power and as monopolies have an incentive to exploit information asymmetry in negotiation, especially if there are weaknesses in the regulatory framework. Administrative burden: overly prescriptive and complicated processes can add significant costs. Risk and cost sharing for incremental infrastructure investment: if a new distributed generator will use 10 per cent of the upgraded fault level headroom should they pay 100 per cent of the upgrade? If the DNSP pays, what happens if the other expected distributed generation projects do not arrive? Simultaneous optimisation problem: efficient investment in distributed generation is a function of network capacity, including highly localised capacity bottlenecks, and efficient investment in network capacity is a function of the demand for distributed generation. This is exacerbated by the fact that using distributed generation to defer network investment can create a coordination problem, i.e.

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distributed generation has higher value to the DNSP if its operation alleviates network stress and the DNSP may have limited or indirect control over operation. Regulatory incentives: as natural monopolies, electricity distribution networks are highly regulated and the challenge for regulators is to design incentives for efficient connection of distributed generators. The regulatory system was designed when energy supply was dominated by centralised generation and the incentives built into this regulation do not readily reward consideration of distributed generation as an alternative supply source. The Victorian Government can influence these arrangements through its role in the development and evolution of national electricity regulation. These barriers indicate a probable underinvestment in distributed generation in Victoria, primarily at the medium-scale where these connection barriers are more significant (section 4.5 discusses the materiality of these barriers). Efficient connection would mean DNSPs have incentives to ensure no artificial barriers to entry, with efficient costs, timing and risk allocation. The Commission supports the position of the AER and the AEMC (AER 2010b, p.293; AEMC 2011e, p.26) that the incentives should be neutral, rather than providing positive incentives or unnecessary barriers. While there are material barriers to connection, these can be addressed at two levels: (1) The process for connection: the Commission considers there are clear barriers in the connection process which could be addressed now. These changes are necessary, would move the industry towards more neutral choices between distributed generation and other options for achieving the NEO, and hence more efficient use of distributed generation. The Commission considers these important barriers should be the primary focus for this chapter. (2) Clarity and efficiency of incentives for DNSPs to plan and manage the system to accommodate distributed generation and for distributed generators to invest in locations where network benefits are highest: many argue that addressing the connection process alone will not be sufficient to guarantee efficient use of distributed generation. The Commission considers that some of these issues are longer term but that they have a strong impact on the barriers to distributed generation. The Commission is examining these barriers, makes draft recommendations on some of the more immediate actions and identifies areas where longer term action may be needed. Sections 4.3 and 4.4 examine medium-scale and household-scale1 distributed generation respectively, given each have different connection processes, the proponents have different capacity to deal with DNSPs and scale creates different kinds of connection issues. The Commission defines medium-scale as greater than 100kW and generally less than 5MW and household-scale is 100kW or less.

4.3

Barriers to medium-scale distributed generation

The process for seeking medium-scale connection is illustrated in figure 4.1. There is some evidence of challenges in connection negotiations with a survey of completed distributed generation connections by Senergy finding a range of issues, although the

Household-scale includes small-scale distributed generators owned by small business and community groups.
1

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survey did not seek the views of the DNSPs (box 4.1). A survey conducted by Entura for Sustainability Victoria also found that: The majority of survey respondents and interviewees found their working relationship with the DNSP to be average or below normal expectations and believed that this resulted in longer project implementation times and increased costs. There is a clear relationship between the perceived working relationship with the DNSPs, and the number of grid connection problems faced, the technical requirements needed and the cost of grid connection. (SV 2010, p.i)

Box 4.1

Senergy report on distributed generation connection experiences

Senergy conducted a survey of distributed generator proponents after the connection process was completed. Distribution network service providers (DNSP) were not involved in the survey. The main concerns highlighted by respondents in the interface between the DNSP and the customer included: access to the appropriate DNSP representatives for connection related issues (e.g. legal or technical staff) excessive response times from DNSPs for relatively straight forward queries lack of transparency in and understanding of connection process fear that accessing dispute resolution services would have a negative impact on a distributed generation project or even the proponents distributed generation project portfolio. In addition, even though the regulatory instruments define some aspects of the connection process, respondents said that DNSPs often fail to meet their obligations, including: inadequate and/or delayed connection enquiry responses insufficient detail provided on the DNSPs management of the process or scheduling of connection related activities lack of commitment to firm delivery dates for connection offers, or to meet such milestones if they are committed to, and a lack of understanding of the importance of such milestones inadequate provision of data (both in detail and timing) required to fully assess the commercial significance of a connection offer, despite the Rules requiring this data to be provided not paying avoided use of system charges as required by the current legislation issues respondents raised about the negotiation process included: DNSPs using their information to advantage during the connection process unwillingness to negotiate terms in the offer and significant delays in responding to requests to reconsider terms, often leading to non-preferred agreement terms being signed due to external commercial pressures. These terms included open ended liability on the distributed generator not providing access to DNSP legal representation insufficient information on cost estimates and work scopes for applicants to assess their fairness or reasonableness.

Source: (senergy 2011, pp.34)

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As discussed in chapter 3, key issues and material barriers to distributed generation identified by the Commissions analysis and through submissions are: information and planning on network capacity right to connect costs of connection: process, timelines and uncertainty costs of connection: sharing network costs, benefits and risks regulatory incentives for efficient connection. As mentioned in table 4.1, several processes are in progress or will soon be implemented to address the barriers to distributed generation connection. The AEMC considers it is likely that the combination of the new chapter 5A arrangements and the proposed Distribution Network Planning and Expansion Framework rule change can reduce the barriers to demand side participation, especially for distributed generation (AEMC 2012b, p.39). The Commission seeks feedback on its conclusion that recently implemented and proposed changes to national electricity regulation will address many of the barriers to connection of distributed generation. These changes include the new chapter 5A connection process in the National Electricity Rules, the Australian Energy Market Commissions (AEMC) Power of Choice review and the following AEMC rule change requests: Proposal to amend the National Electricity Rules for connecting embedded generators Distribution Network Planning and Expansion Framework Small Generator Aggregator Framework.

Information request

4.3.1

Information and planning

Many participants indicated that information on network capacity by location could help inform better siting of investment in distributed generation, assist with negotiation and reduce connection costs. Distributed generators can benefit from information on where their projects are needed or can be tolerated in the network and where there are network constraints to their further addition. The lack of such information could constitute a significant barrier to efficient distributed generation investment. Where distribution networks have capacity to accommodate distributed generation the costs are restricted to the shallow costs of physical connection and are both relatively low and straight forward to calculate. Connecting distributed generation to a constrained network, can require costly augmentation of fault level, voltage or thermal capacity and the cost sharing arrangements become both more important and more complicated. These are the so-called deep costs. In parts of Melbournes CBD, for example, connection of a distributed generation project can impose millions of dollars in network reinforcement costs and there is high demand for connection from backup generators and green building rating incentives (ACIL Tasman 2011a, p.7). Currently, there is limited information on network capacity for distributed generation, the information is costly and time consuming to obtain and the impact of network constraints on connection costs is substantial: For both cogeneration project owners and distributors, the cost of connecting cogeneration systems often remains unknown until significant 60 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

time and money has been invested in the application process itself. (ClimateWorks et al. 2012, p.24) Distributed generation can impose costs on networks but can also defer network investment and as discussed in section 4.3.4 a lack of information on where these opportunities exist will impact on proponents siting decisions and negotiation capacity.

Figure 4.1

Connection process for medium-scale distributed generation


Preliminary inquiry from potential applicant wishing to connect DNSP has 5 days to provide information Applicant lodges application on form determined by DNSP

Additional information required DNSP informs applicant of additional information needed

Application incomplete

DNSP informs applicant of deficiency

Application complete DNSP has 10 days to advise whether the service is covered by an approved connection process and, if so, make a connection offer offer open for 45 days expedited connection may be available

Completed application submitted

Site visit, if needed

Not approved service. DNSP notifies applicant of the negotiation process & possible changes & expenses DNSP uses best endeavours to make offer within 65 days of receiving completed application* Offer open for 20 days Agree d Offer terms form connection contract * This applies to negotiation, not dispute resolution

Basic connection service or standard connection service

Use agreement approved by AER Negotiated connection offer Not agreed Option of dispute resolution reduction through AER Legend Australian Energy Regulator DNSP Distributed Network Service Provider AER

Source: Commission analysis

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In the longer term, the distribution network could be planned better to accommodate distributed generation. Jemena noted: Smart networks of the future are designed with DG [distributed generation] in mind. However the transition of the existing distribution networks to smart networks would have to occur, by necessity, over a relatively long period of time due to the significant investment required. The pace of transition can vary depending on government policy. (JEN, sub. 79, p. 8) The longer terms incentives for efficient investment to accommodate distributed generation also relate to the regulatory incentives for DNSPs more broadly. These are briefly considered in section 4.3.4. The related issues of incentives for DNSPs to reward distributed generators for deferred network investment are addressed in chapter 6.

Opportunities for improvement


Many participants suggested that regulators should require the publication of better information about network constraints and other issues that may render certain locations unsuitable for new connections (Ironbark Sustainability, sub. 50, CEC, sub. 76). In the UK, DNSPs submit information strategies for regulatory approval (ACIL Tasman 2011a, p.30). Ironbark Sustainability suggested maps of network constraints could reduce barriers to distributed generation (sub. 50, p. 14) and the Institute for Sustainable Futures prepared maps that identify network constraints that can help inform where distributed generation could result in savings from deferred network investment (SV 2012). However, the Commission notes that the SV report does not contain information on fault levels, the main driver of distributed generation connection costs in Melbourne. Exigencys submission claimed that: Publication of network performance data (capacity constraints, quality of supply) would simultaneously support regulatory oversight of prudent network expenditure and enable the market to proactively devise non-network solutions. The process of consideration of non-network solutions by DNSPs could be made more transparent, for the benefit of energy market efficiency overall. (sub. 4, p. 3) Consistent with these calls, the AEMC is considering a rule change request from the Ministerial Council on Energy on the Distribution Network Planning and Expansion Framework (AEMC 2011a). The proposed rule change includes a requirement for DNSPs to publish a Distribution Annual Planning Report that would detail peak demand, forecast augmentation of the network and, of particular relevance to distributed generation: forecasts of any factors that may have a material impact on the network, including factors affecting: (A) fault levels; (B) voltage levels; (C) other power system security requirements; and (D) ageing and potentially unreliable assets. (AEMC 2011a S5.8(2)(v))

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The Commissions view


The Commission considers improved spatial information on network constraints and fault levels would improve contestability through fairer negotiation, and better siting of investment leading to reduced connection costs. The information would allow distributed generator proponents to make judgements about likely connection costs and manage the risks of pursuing projects that are less likely to proceed. The Commission considers the AEMCs proposed Distribution Annual Planning Report is the most appropriate mechanism to deal with this issue if data required by S5.8(2)(v) is reported by location. The Commission notes that while fault levels and voltage levels are currently an issue, thermal capacity is a potential issue in other countries (Bauknecht & Brunekreeft 2008) and could be monitored to determine whether it should be incorporated into the reporting requirements in the future. The Commission also expects better information would lead to better planning. The AEMCs consideration of the rule change request on the Distribution Network Planning and Expansion Framework requires review of a greater number of issues with improved transparency, and may lead to better long-term planning. The Commission considers competition can be enhanced in Victoria if the AEMCs proposed Distribution Annual Planning Report contains sufficient detail on network constraints and planning by location. Information can support proponents to make informed decisions and to negotiate more effectively with DNSPs where reporting exemptions do not compromise the usefulness of information available. The Commission considers this AEMC process appears to have the capacity to address information barriers but is interested in participants views. The Commission seeks feedback on its conclusion that the proposed Distribution Annual Planning Report includes sufficient information on network constraints and planning by location to address the barriers to informed decision-making and effective negotiation by distributed generator proponents. The proposed report is included in the AEMCs proposed rule on Distribution Network Planning and Expansion Framework.

Information request

4.3.2

Right to connect

There is currently no automatic right of connection for medium-scale distributed generation. Rather, DNSPs have discretion in setting minimum technical standards and distributed generators must pay for network studies and for network reinforcement. The AEMC concluded this arrangement is a key barrier to connection of distributed generation (AEMC 2009a, p.28) and inquiry participants supported this view. As a priority, enabling automatic access for cogeneration systems up to 5MW should be immediately implemented because, relative to the size of their installation, the costs of connection and the current connection process are very high. (ClimateWorks et al. 2011, p. 36). This contrasts with household-scale distributed generation, where there is an automatic right to connect. Large generators that meet predetermined standards also have an automatic right to connect under chapter 5 of the NER.

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Opportunities for improvement


An automatic right of connection for medium-scale distributed generation based on a specific process or technical standards, as advocated by some participants, is one way to establish an equivalent connection process across all sizes of generation. The soon to be implemented chapter 5A of the NER provides for a standard connection service which would allow for DNSPs to offer a standardised process and automatic connection. United Energy (UE) stated they will not establish standard contracts given the vast differences between connections. UE note that NECF is expected to commence on 1 July 2012 in Victoria and that there may be a perception that automatic access may be provided via the NECF standard connection offer contracts. UE has considered this approach and has not progressed contracts in this area due to the need to standardise the technical and cost arrangements in these contracts, nor do we believe that there is a high volume requirement in the UE distribution area. (sub. 77, p. 5) The AEMC identified technical standards as a key barrier to distributed generation projects: The AEMC's Stage 2 Review of Demand Side Participation found that the flexibility given to DNSPs to determine minimum technical standards is causing delays and increasing costs for DG [distributed generation] projects. In that review, we recommended that the Reliability Panel be asked to consider the minimum technical standards that apply to DG projects less than 5 MW. The SCER supported this recommendation in its response to our Stage 2 Review of Demand Side Participation. (AEMC 2012c, p.160) CSIRO previously identified options for access standards and outlined four options: continue to grant exemptions from the registration and access standard requirements for small generators (current practice) develop new access standards tailored for small generators change the exemption process so that smaller generators are required to register and meet the current access standards pool the small generators in a specified geographical area and require that the pooled generation satisfy the access standard requirements. (CSIRO 2009, p.461) As noted, ClimateWorks, Seed and the PCA recently submitted a rule change to the AEMC which addresses minimum technical standards for medium-scale distributed generation, which may be the mechanism the AEMC uses to address minimum technical standards (ClimateWorks et al. 2012).

The Commissions view


The Commission considers that if automatic connection based on minimum technical standards is possible for large-scale and small-scale generators then such a process should be possible for medium-scale. Minimum technical standards could reduce the costs and delays involved in connecting distributed generation and the developers of equipment also need to know DNSP requirements to improve system integration (Bauknecht & Brunekreeft 2008, p.485). The key question is the efficiency of establishing 64 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

such an arrangement. Large scale power stations must undertake significant amounts of preparatory work to meet minimum standards which guarantee a right of connection. Household-scale connection, particularly through an inverter, imposes smaller impacts on the network. Medium-scale distributed generation can have costly impacts on the network that can vary greatly from place to place. The Commission considers that while there are currently barriers to distributed generation, a prudent approach would recognise the high costs of inadvertently stimulating investment in places where it has a large adverse impact on the safety and reliability of the network. Investment in distribution networks is a major driver of rising electricity costs and significant network investment may be required to accommodate large penetration of distributed generation in some locations. The Commission considers there is merit in exploring arrangements for automatic connection where the distributed generator meets specified standards and is required to meet all appropriate costs. Distributed generator proponents may then make commercial decisions to connect or not connect based on predetermined standards. Those who do not meet the standards could choose not to connect or negotiate a tailored connection service. The ClimateWorks, Seed and PCA rule change request to the AEMC could result in common standards and an automatic right for connection. An automatic right to connection for standard embedded generators should be available to plants that meet an automatic access standard. This automatic access standard would be established to ensure that only plants that will not compromise the integrity of the grid are granted automatic access. (ClimateWorks et al. 2012, p.14) If the ClimateWorks, Seed and PCA rule change request is unsuccessful, the Victorian Government could effect an automatic right of connection based on technical standards through lighter or heavier interventions: voluntary Victorian standards rule change request to the AEMC requiring, as a licence condition, that DNSPs submit to the AER and have approved a standard connection service offer. In the absence of a national approach, Victoria could pilot, monitor and review arrangements for an automatic right of connection with a view to incorporating this process into national arrangements after consultation with other jurisdictions (see draft recommendation 4.1).

4.3.3

Costs: process, timelines and uncertainty

The connection process itself was raised by many participants as a key source of uncertainty and delay and therefore as a key barrier to distributed generation. In one extreme case the owner received approval of its connection application, only to have it subsequently withdrawn, without explanation for the change of approach (ClimateWorks et al. 2011, p.24). In the Commissions distributed generators roundtable, participants identified poor information exchange as a key driver of uncertainty. DNSPs can ask for more information partway through the process, so distributed generator proponents do not know where they stand. The connection process is inconsistent across DNSPs which adds further uncertainty (ClimateWorks et al. 2011, p.11).

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Distributed generator proponent participants noted that long delays impact on the viability of proposals and can impose high costs on other aspects of an investment. For example, CBD high-rise commercial property developers require timeframes of around 12 weeks to avoid high cost impacts on other aspects of their development (ClimateWorks et al. 2011, p.23). DNSPs claim it can take up to 12 months for a simple connection and up to two years for a more complex one (ClimateWorks et al. 2011, p.23). Distributed generator roundtable participants, however, mentioned that while it can take longer than four years to get a connection, there are examples of DNSPs providing an answer within two weeks. Participants identified key causes of delay and uncertainty at each stage of the process: Initial inquiry stage: which has no overall timeframes and the DNSPs can delay connection in the step prior to the regulated time period. Information requests: a key source of delay in the initial inquiry stage is the ability to restart the clock on decision-making timeframes. If the DNSP requests more information on the 19th day of a 20 day decision making period this can restart the timeframes. Negotiation/arbitration costs and processes: many participants identified that distributed generator proponents are concerned about the potential adverse ramifications of using dispute resolution systems through the AER. For all distributed generators, a lack of an effective consumer protection framework and complaints resolution process is an additional barrier, in light of the power and information asymmetries between distributed generators and electricity market participants such as retailers and distribution network service providers. (MEFL, sub. 75, pp. 910) No standard process: each DNSP has its own process and medium-scale projects are assessed on a case-by-case basis. Rules are not designed for medium-scale generators: the rules view co-generation systems as equivalent to major power stations (AEMO 2010c, p.10). DNSP skills/capacity: once a connection enquiry has been made, DNSPs are not adequately equipped nor given enough incentive to respond to connection enquiries in a manner that reduces the potential for surprises. (ClimateWorks et al. 2011, p.22) Complexity: distributed generator proponents often do not understand the connection process (ACIL Tasman 2011a, pp.2930). DNSP participants recognised the potential benefits of distributed generation but raised concerns about the impact on their networks. CitiPower/Powercor support the connection of distributed generation to their distribution systems, including windfarms, provided that these connections promote the National Electricity Objective and the Businesses safety obligations (sub. 80, attachment 1, p. 5). United Energy (UE) had similar views, and while recognising the benefits of distributed generation, stated: UE understand that customers perceive these legitimate technical issues as a barrier to connection and we will be seeking to improve in this area. (UE,-sub. 77, p.5) As mentioned in section 4.3.1, the impact of a proposed distributed generation project on the network is unknown until both the DNSP and project proponent commit significant time and resources to assess these impacts.

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Opportunities for improvement


The impact of the connection process on distributed generation is well recognised and some stakeholders suggested the introduction of chapter 5A in the NER may address some of these issues. The most common barrier identified by various bodies to the incorporation of distributed generation is the connection process. It is noted that the new Chapter 5A of the NER is designed to provide some relief in this area. (UE, sub. 77, p. 5) Groups such as the PCA, however, claim that despite the introduction of chapter 5A and other changes, barriers to connecting small- to medium-scale distributed energy will persist (ClimateWorks et al. 2011, p. 11). The Clean Energy Council (CEC) identified that one of the key issues is the timing of the rule change: The CECs primary concern with Chapter 5A is that in conjunction the industry has learned some of the most significant lessons since the consultation process closed early in 2010. The NECF consultation process was flawed as a result and has completely failed to meet the needs of the small scale embedded generation market or indeed take account of this stakeholder group. It will result in the formulation of a new chapter in the rules which strongly supports the position of DNSPs and fails to resolve any issues which were already present in the relevant jurisdictional legislative instruments. (CEC sub. 76, p. 7) The evidence before the Commission highlights a number of remaining opportunities for improvement after the introduction of chapter 5A, such as information provision, including standard processes and timeframes. Participants also raised issues with dispute resolution.

Information on connection processes


The Commission notes several bodies have developed connection guidelines to support distributed generator proponents and DNSPs to navigate the complex connection process, including: CitiPower/Powercor: Customer Guidelines for Sub-transmission Embedded Generation (CitiPower & Powercor Australia 2010) Connected

Electricity Networks Association: ENA Guideline for the Preparation of Documentation for Connection of Embedded Generation within Distribution Networks The report, Unlocking the Barriers to Cogeneration states that in other states, it is almost standard for DNSPs to provide online information, an information line and a form outlining the connection process (ClimateWorks et al. 2011, p.22).

Standard process
In some other countries there is a standard connection process and participants suggested this approach could work in Victoria: International jurisdictions, such as New Zealand and the United Kingdom, have implemented and benefited from a requirement by networks to publish standard connection contracts, standard connection processes and published connection charges and tariffs. (Exigency sub. 4, p. 3) CONNECTING GENERATORS TO THE DISTRIBUTION NETWORK 67

The rule change request by ClimateWorks, Seed and the PCA (box 4.2) and many submissions to this inquiry advocate for a national, standardised connection process and practical district level licensing frameworks (ClimateWorks et al. 2011). In addition to the calls in this inquiry, the AEMC in its Power of Choice Review received a number of submissions calling for a standardised connection process (AEMC 2012c, p.166).

Timeframes
Distributed generator proponents participating in the inquiry suggested the connection timeframes could be substantially shortened. The case study proponents consider that a timeframe of between one and three months for completing the connection application process would be consistent with the wider commercial building development process, with an outer limit of six months in extreme cases. (ClimateWorks et al. 2011, p.23) The PCA rule change request outlines a 20 day connection decision for standard connections and a 65 day connection decisions for non-standard connection (ClimateWorks et al. 2012, p.11).

Dispute resolution
Many participants indicated distributed generator proponents are unwilling to use dispute resolution through AER arbitration, as it may negatively impact on the DNSPs willingness to work with them and on their chance of connecting future distributed generation projects. The DNSP may not like the outcome which could in turn have a negative impact on the project due to adverse retaliation from the DNSP. This could impact the project or even the developers project portfolio. While difficult to prove there is suspicion amongst the industry that this is a real threat. (CEC sub. 76 attachment 3, p. 9) The Moreland Energy Foundation Ltd (MEFL) recommended that the government should establish a connection ombudsman or other dispute resolution process to resolve disputes arising out of connection processes (MEFL sub. 75 attachment 1, p. 2). The ClimateWorks, Seed and PCA rule change request submitted to the AEMC aims to address many of the connection process barriers raised in this inquiry. The rule change request does not, however, address dispute resolution processes (box 4.2).

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Box 4.2

Proposal to amend the National Electricity Rules for connection of embedded generators

On 18 April 2012, the AEMC received a rule change request from ClimateWorks Australia, Seed Advisory and the Property Council of Australia. The applicants argue that the National Electricity Rules (NER) deter distributed generators from connecting to the electricity grid, as the connection process is uncertain, complex, burdensome, time consuming, inefficient and costly. The application proposed that the NER be amended to:

(1) Provide an automatic right of connection to the grid and standard access
terms. This would apply to generators that meet Automatic Access Standards.

(2) Enable embedded generators a right to export electricity to the grid. (3) Provide an improved connection process for embedded generators that are
ineligible for automatic access and a right to export electricity to the grid. collaboration with proponents during the connection process. limited. The chart below summarises the proposed new connection process with rule changes. Connection Enquiry Connection Application Connection Agreement Offer
Received within 20 day maximum time, as entitled to automatic connection for standard fee, amended in Ch 5 Standard connection agreement Offer required to be made no more than 65 days after full application Opt-in boilerplate contract terms common across DNSPs

(4) Allow DNSPs to charge an optional fee-for-service. This is to promote (5) Oblige DNSPs to publish annual network reports identifying where capacity is

Automatic Access

Submit Connection Enquiry May invite DNSP to advise on connection issues in design phase on a fee-forservice basis

Site satisfies automatic access standards in amended Ch 5

Automatic Access

Submit Connection Enquiry May invite DNSP to advise on connection issues in design phase on a fee-forservice basis

Connection Application proceeds under specified timeframe in amended Ch 5

The proposed changes aim to replace case-by-case negotiations with a standardised process that is clearer, more certain and efficient. The declared intention of the proposal is to encourage distributed generation without compromising the integrity of the national electricity grid.
Source: (ClimateWorks et al. 2012)

The Commissions view


Efficient and clear processes can reduce time and uncertainty and thereby support the efficient entry of distributed generation, resulting in effective competition in related markets. The outcomes of efficient connection processes include early withdrawal of unsound proposals and improvements to sound proposals (such as redesign to reduce, mitigate or avoid costly network reinforcement). An efficient process would also enable a progressively sharper focus on the key issues and collection of data.

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As illustrated in figure 4.2, an improved process would permit a progressive reduction in the number and scope of issues about which there is genuine uncertainty, rather than lingering uncertainty as is currently the case. Distributed generator proponents would normally prefer to delay outlays on the project until such uncertainty is reduced, to avoid the risk of wasting money if, for example, the assessment indicates the project needs redesigning or cannot proceed. DNSPs would also benefit as relevant information would be provided more quickly on higher quality more viable proposals. The Commission has identified changes that would improve the current process, and reduce uncertainty, timeframes and costs to business: Improved information on the connection process: information on minimum technical standards (section 4.3.2), network condition (section 4.3.1), clarity around the process and information required from distributed generator proponents would help to streamline connection and reduce uncertainty. Improved engagement: DNSPs currently have limited incentive to engage with distributed generator proponents to help improve their applications and identify information needs during the preliminary inquiry stage and during negotiation. A lack of engagement during the preliminary inquiry stage could be easily resolved, as UBC [Unlocking the Barriers to Co-generation] project owners have indicated they would be prepared to pay on a fee for service basis to ensure this engagement process occurred (ClimateWorks et al. 2011, p.23). The rule change request by ClimateWorks, Seed and PCA includes such a proposal (ClimateWorks et al. 2012). Clarity around timeframes: establishing negotiated, project-specific time limits to each stage of the connection process, and reporting performance against these time limits. Also establishing processes that allow the clock to stop while the distributed generator proponent responds to information requests, but not to be reset would encourage early identification and communication of information requirements so DNSPs retain sufficient time to subsequently reach a decision. Improved integration: integrating, at an operational level, the processes of the connection approval with the broader project approvals, for example, that distributed generator connection can progress at the same rate as a broader commercial building approval process. Several participants argued for improvements to dispute resolution, including an ombudsman or similar (for example, MEFL, sub. 75 attachment 1, p.2). The Commission, however, considers that as conflict resolution arrangements are transitioning from the Essential Services Commission (ESC) to the AER, they are untested and there is not a clear case of a problem in this area. The Commission accepts that DNSPs, as monopoly businesses, may have an incentive to exploit asymmetric information and market power but considers improved information, better engagement and the proposed arbitration processes could address these problems. If there is evidence of a problem in dispute resolution, the use of commercial mediation in advance of arbitration may help remove barriers to distributed generation. The Commission considers that the Proposal to amend the NERs for connecting embedded generators by ClimateWorks, Seed and the PCA has the potential to address many of the opportunities for improvement, including information on processes, standardised processes and specific timeframes (ClimateWorks et al. 2012, pp.7, 15 & 26). As noted this proposed amendment also has the potential to establish an automatic right to connect for distributed generation projects that conform to specified standards (section 4.3.2).

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Figure 4.2

Framing the connection process from a business perspective


Unlimited x 10 days Clock stop/reset with information request/network study
Agree

Current process under Ch5A


Unlimited x 5 days

Preliminary inquiry

Information Application request/site visit

DNSP advises standard or negotd process, expected costs

Negotiation

Offer
Dispute resolution

Possible improvement to the process


One timeframe with no resets, clock stop permitted
Information Preliminary inquiry w/better Application request/ site visit engagement DNSP advises standard or negotd process, expected costs
Agree

Negotiation Offer
Dispute resolution

Note: Negotiated (negotd); preliminary inquiry (Prelim. Inq); expected cost (exp. Cost). Source: Commission Analysis

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Draft Recommendation 4.1


That, to facilitate efficient connection of medium-scale distributed generators up to 5MW, the Victorian Government support the Proposal to amend the National Electricity Rules for connecting embedded generators submitted to the AEMC, with specific support for: improved information on connection processes an automatic right of connection based on meeting standard technical criteria a standard connection process improved engagement by Distribution Network Service Providers specific timelines, including limits on how information requests can impact on overall timelines. Should these issues not be resolved through the national rule change process within 12 months, the Victorian Government add a licence condition requiring distribution network service providers in Victoria to establish such standards and rights by incorporating them into standard connection services that are submitted to and approved by the AER.

4.3.4

Costs: sharing network costs, benefits and risks

Participants identified key cost and risk sharing issues involving incremental network costs and transparency.

Incremental network cost


Where a network is constrained, the distributed generators may have to pay the full cost of network reinforcement to accommodate several distributed generation projects and other demand growth: Requiring non-registered DG [distributed generator] proponents to possibly pay for costs of augmenting the shared network will affect the incentives for DG projects, especially in Victoria. Currently DG projects in that state are only liable for shallow connection costs (i.e., direct connection assets and extensions) The incremental DG project application that leads to the available fault level headroom/capacity being breached will be asked to meet the full costs of the required shared network augmentation. (AEMC 2012c, p.270) The DNSPs themselves consider this a complex problem: There are no easy ways to remove the fault level barrier problem although long term planning should aim to reduce fault levels to make allowance for future distribution generation. (UE sub 77, p. 5) Network augmentation costs can have a significant impact on distributed generation projects: if it is established that there is not enough network capacity, the costs of network augmentation are not transparent and are often prohibitively expensive costing more than the cogeneration system itself. (ClimateWorks et al. 2011, pp.2425)

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Where network reinforcement does occur, there is no mechanism to charge subsequent distributed generation projects for their share of that reinforcement. Another aspect of the incremental network reinforcement cost is identifying who benefits. Growth in demand, for example, also naturally leads to the need for increased fault level capacity. As growth in energy demand increases due to population growth, more energy-intensive appliances and changing land use (such as higher density housing), new substations are required to accommodate increased energy from the transmission network and this increases the fault levels on the distribution network. The AER considers that, in general the beneficiary of network augmentation to accommodate a distributed generation project is the distributed generator and that these increased costs should not be recovered from customers through network charges (AER 2011a, p.64). The AEMC considers treatment of this issue will have a significant impact on distributed generation: the effectiveness of [the AERs proposed connection] arrangements will depend upon how they are applied in practice, including the net benefit test and whether DNSPs offer constraint reduction services, and the transparency of connection cost estimates. (AEMC 2012c, p.174) As noted in section 4.2, while distributed generation can impose costs on the network there are potential network benefits including increased reliability, smaller incremental cost and deferred network investment. These benefits depend on highly localised characteristics and timing of distribution network investment. While the AER does recognise where there are demonstrable benefits to other users and the negotiation process offers an opportunity to share these benefits, the onus of proof is on the distributed generator proponent (AER 2011a, p.64). Various methods of recognising the network benefits of distributed generation are discussed in chapter 6.

Transparency
A lack of transparency makes it difficult for distributed generators to evaluate the appropriateness or competitiveness of the cost estimates and distributed generators share of the costs of network augmentation. Bauknecht and Brunekreeft (2008, p.489) argued that in theory the form of regulation used for distributed generation, 100 per cent cost pass through, gives DNSPs incentives to shift costs of system augmentation, which would happen regardless, onto distributed generation customers. The MCE in 2006 and the AEMC in 2012 identified that this is a problem in practice. Augmentation of existing network assets may provide benefits to other network users, creating difficulties in assigning these costs. Furthermore, distributed generation may provide other benefits to network users, for example, through improved system security. Quantifying and assigning these benefits is difficult. (Ministerial Council on Energy Standing Committee of Officials 2006, p.26) in relation to augmentations, it is difficult to distinguish the causes of the increased need of augmentation in a meshed network. (AEMC 2012c, p.173) In terms of regulatory incentives for distributed generation specifically, even if the overall benefits of a project are positive, additional network costs can represent a disincentive for network operators to connect the distributed generator. The incentives depend on the form of regulation and the current full cost pass through (so called zfactor) does not necessarily provide efficient incentives for connection:

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The DNSP does not carry any risk and would lack the incentive for efficient DG [distributed generation] connections and will be tempted to game. They will try and label costs that are not to do with DG as DG-related costs and shift costs from the general expenditure to the special DG regime. (Bauknecht & Brunekreeft 2008, p.490) Consistent with this view, the AEMC concluded that the incentives for DNSPs to engage in demand side participation, which includes distributed generation, may not be optimal: the current arrangements may fail to provide the right incentives even if it is efficient to do so (AEMC 2012c, p.135). The AEMC also concluded DNSPs have strong incentives to concentrate on security concerns, and weak incentives to connect distributed generation (AEMC 2009a, p.28).

Opportunities for improvement


There are three main apparent opportunities for improvement. (1) Improved information on the opportunities and constraints in the network There are some moves to improve access to information and this is an important step. Ironbark Sustainability proposed that transparency could be improved by establishing regulations that compel the DNSPs to provide information in sufficient detail to inform negotiation (sub. 50, p. 14, sub. 76, p. 6), and any new arrangements should take account of the fact that DNSPs are monopoly businesses (CEC, sub. 76, p. 6). As noted in section 4.3.1, the AEMC is proposing that DNSPs should publish a Distribution Annual Planning Report which would help address these issues (AEMC 2011a). (2) Providing greater clarity on when and how costs can be shared The current system for dealing with network costs is also problematic. CitiPower proposed a levy on distributed generators for the 2010-15 price determination. Part of the cost was to be recovered partly through a charge on embedded generators and partly from all customers (standard control service). In rejecting the proposal the AER argued the service should fully recover fees from distributed generators (alternative control service) and requested CitiPower to provide further information to support the fee (ACIL Tasman 2011a, p.20). AER was of the view that this service should be an alternative control service rather than a standard control service on the basis that the works to maintain fault levels were attributed to specific connections rather than recognising that an efficient solution requires works to be undertaken in the shared network. (ACIL Tasman 2011a, p.20) This process illustrates that there is no agreed framework on how these costs should be allocated and shared. (3) Regulatory framework for DNSPs to recover system reinforcement costs from distributed generation Addressing barriers in regulatory incentives involves changing the regulatory incentives themselves and there are several means of achieving improved incentive compatibility for connection cost recovery. One is to implement a dedicated distributed generation connection incentive scheme and the AEMC proposes to consider these types of schemes in the Power of Choice review (AEMC 2012c). A number of proposals for distributed generation incentive schemes have been identified by the Commission in the course of this inquiry:

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Unlimited Demand Management Incentive Scheme (DMIS): In response to consultation on the DMIS SP AusNet submitted that DNSPs do not have incentives to adopt innovative solutions because of a lack of competitive pressures to do so (as it is a regulated business). It further stated that capping a broad-based demand management scheme to the level proposed by the AER wont encourage significant innovation as the development (and testing) of new, technologically advanced equipment is costly. Hence, SP AusNet considers that the DMIA2 should be uncapped, as the current capped arrangement will not encourage spending in this area. (AER 2009, pp.1617) Modified CitiPower/Powercor levy: the AER rejected a distributed generation connection cost recovery proposal by CitiPower/Powercor in the most recent price determination (ACIL Tasman 2011a, p.20). ACIL Tasman has suggested a modified form of this: Only charge the levy to new distributed generation locating in areas where fault levels are at or above fault ratings Estimating the levy based on the costs of bringing forward works to increase the fault ratings Providing a discount on the levy if the embedded generator agrees to be disconnected from or provide support to the network on days of peak demand Applying a cap and floor on the rate of return from the levy to ensure no over or under recovery of costs associated with increasing fault levels. (ACIL Tasman 2011a, p.36)

Menu of sliding scales: combining the elements of a number of different schemes can achieve a self-selection scheme. If the regulator does not know the costs of distributed generator connection faced by the DNSP, the regulator can design an incentive compatible mechanism which triggers the DNSP to reveal the costs truthfully. The impact of hidden information is very substantial as the cost of distributed generation on the DNSP is strongly case sensitive. The regulator sets a price cap and the DNSP chooses a sliding scale which determines the cost passthrough (the price cap should be an increasing function of the cost pass-through). A DNSP with high connection costs would choose a low price cap and high-cost pass-through and vice versa. (Bauknecht & Brunekreeft 2008, pp.492493) Another option is to modify network regulation to create a more fundamental change in incentives: Total factor productivity and distributed generation included in price determinations with benchmarking: the main objective of incentive regulation is to increase the efficiency of the network, so the analysis of a DNSPs efficiency and its potential to increase efficiency should incorporate the costs of distributed generation (Bauknecht & Brunekreeft 2008, pp.491492).

Demand Management Incentive Allowance.

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The Commissions view


The Commission considers asymmetric information, lack of clarity around sharing network reinforcement costs and the regulatory framework pose barriers to distributed generators negotiating efficient connection agreements. Improving information is a necessary but not sufficient step to removing barriers to connection of distributed generation. Distributed generators need to negotiate connection with a monopolist whose incentives for efficient augmentation through distributed generation are further dampened by the regulatory environment (see also chapter 6). Therefore, information alone will not fully address barriers to efficient sharing of costs, benefits and risks. As noted, the Distribution Annual Planning Report will provide information that would assist negotiation, and the proposed amendments to the NERs for connecting embedded generation would support negotiations by improving DNSP engagement. The lack of guidance and clarity around regulatory mechanisms to recover network reinforcement costs presents a significant barrier to connecting distributed generation to the electricity network in Victoria. It also means DNSPs are less likely to plan distribution networks to accommodate distributed generation. These barriers are material as the Melbourne CBD has high demand for distributed generation, the network is constrained and the process for sharing network costs has significant impact. The sharing of costs could be improved by developing guidance on the conditions and circumstances for allocating the network reinforcement costs across new distributed generation projects and across customers and results in system wide benefits. These guidelines could inform future price determinations and connection charges. Addressing these barriers through improved guidance and cost recovery mechanisms is a longer term issue and could potentially benefit network efficiency more broadly, not just for distributed generation. Options to address sharing network reinforcement costs include guidance, a distributed generation cost recovery scheme for DNSPs or more efficient incentives for DNSPs to invest overall. While this is a national issue the Victorian Government could engage with the AER, AEMC, DNSPs and distributed generator proponents to develop a solution for incorporation into Victorias next round of DNSP pricing determinations. The pricing determinations are expected in October 2015 providing sufficient time to work on a possible solution or solutions. The AEMCs consideration of the Proposal to amend the NERs for connecting embedded generators provides an avenue for the Victorian Government to engage the relevant stakeholders.

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Draft Recommendation 4.2


That to clarify the circumstances and conditions in which network reinforcement costs can be spread across new distributed generators and other users, the Victorian Government: in addition to Draft Recommendation 4.1, make a submission seeking reform in cost sharing arrangements to the Australian Energy Market Commissions consideration of the Proposal to amend the National Electricity Rules for connecting embedded generators. This submission be prepared by the Department of Primary Industries in consultation with the Australian Energy Regulator (AER), distribution network service providers and distributed generator proponents advocate to the AER to prepare and provide guidance on cost sharing arrangements for the connection of distributed generators before the next round of network distribution pricing determinations expected in 2015.

Information request

The Commission is considering whether the Proposal to amend the National Electricity Rules for connecting embedded generators is the best vehicle to address the sharing of the costs of network reinforcement and invites feedback on this or other options, for example, that the Victorian Government submit a separate rule change request to the AEMC.

4.4

Barriers to efficient connection of householdscale distributed generation

One of the major drivers of connection costs for medium-scale distributed generation is the impact on the network, which some participants did not consider a barrier for household-scale distributed generation. Medium-scale distributed generation often involves greater size, greater network impacts and constrained networks, whereas household-scale distributed generation units usually have less impact on the distribution network: From JENs perspective, there are no barriers to connecting micro DG [distributed generation] units to the grid. (JEN sub. 79, p. 7) Small systems are also not likely to require any upgrade or changes to the distribution network, meaning the requirements for the network company to dedicate resources should be minimal. (CFCL sub. 41, p. 9) The Electricity and Water Ombudsman of Victoria (EWOV) identified that there is currently good information provided on the Department of Primary Industries (DPI) website which includes information on the connection process: The DPI website remains the hub of solar information. It is a centralised and trusted source of information for EWOV, customers, electricity retailers and distributors. (OWOV sub. 48, p. 3) Participants identified barriers that exist for household-scale distributed generation generally relate to the connection process which involves three separate but related processes:

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Physical connection: wiring a household-scale distributed generator into the distribution network is governed under chapter 5 of the NER and soon under the basic connection offer in chapter 5A requiring an Electrical Work Request (EWR) and Certificate of Electrical Safety (CES). Signing up for the feed-in tariff contract: while arguably an aspect of selling electricity (chapter 5), the connection process as currently arranged includes connection steps which involve the installer, and requirements such as to have a smart meter installed to secure a feed-in tariff contract. Small-scale technology certificates (STC): to be eligible for STCs, the installer must have CEC accreditation and the homeowner must sign the Commonwealth Solar PV STV Assignment and Written Compliance Statement (Clean Energy Regulator 2012b). These processes are described in more detail in box 4.3.

Box 4.3

What is the process for installing solar power?

The overall process for installing solar power includes the following steps: First decide whether solar power is financially suitable for you. Check with your electricity retailer about whether you are eligible for a feed in tariff for the excess electricity you export back to the grid. If you are satisfied with the retailers feed in tariff offer and the associated terms and conditions, ask them about signing up for it. You will not automatically start receiving a feed in tariff simply because you have installed a system. Check with your retailer whether you are likely to need a new meter and about any changes to your electricity consumption tariff structure and rate. You can shop around for a better deal from another electricity retailer at any time. Choose a reputable solar supplier - the company that will sell you a solar PV [photovoltaic] system and install it for you. Check whether the company uses accredited designers and installers. You have to use an accredited installer to get a benefit from the Federal Governments Small-scale Renewable Energy Scheme (SRES). You can use this to reduce the upfront cost of your system. The solar power system is then installed by the solar power supplier. Check with the supplier about all the paperwork that goes to your distributor (the company that owns all the electricity poles and wires). The paperwork includes a solar connection form (SCF), an electrical works request (EWR), and a certificate of electrical safety (CES). A Certificate of Electrical Safety is provided by your solar power supplier. A copy should go to your distributor (the company that owns the poles and wires that supplies your power) Your electricity meter might need to be changed by your distributor to be able to measure the excess solar power you sell to your retailer. Advise your retailer that you have solar power and apply for a feed in tariff.
Source: (ESC undated, p.7)

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Participants identified several barriers in the current arrangements: Incorrect or confusing information: about the solar process, or about the billing of FiTs, had been provided to customers by their electricity retailer, distributor or solar installer (OWOV sub. 48, p. 2). Complicated processes: there is a relatively high administrative burden, many parties are involved and roles and responsibilities are not clear (box 4.4). Planning barriers: those who live in heritage areas are required to seek local government approval to install solar PV. It is absurd that for such a small investment that all three level of government should be involved (NECA sub. 37, p. 5). It is not clear, however, whether such problems are isolated or widespread. CEC accreditation: some participants consider CEC accreditation a costly and unnecessary step in the connection process. Licensed electricians in Victoria are already qualified to install solar PV but the federal government has created another level of bureaucracy by insisting electricians obtain CEC accreditation to be able to install solar PV systems and claim solar credits for their customers. The CEC are a barrier because the accreditation fees far outstrip those that licensed electricians pa Energy Safe Victoria (ESV). Not only are the fees a barrier but the process of obtaining accreditation is complicated and protracted. (NECA sub. 37, pp. 5-6) Victoria is obliged to address barriers to the streamlining and simplification of connection process as the COAG FiT principles state: connection arrangements for small renewables customers should be standardised and simplified to recognise the market power imbalance between small renewable customers and networks. (COAG 2008, p.2)

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Box 4.4

Complicated connection process

One aspect of the submissions was the consensus across stakeholder groups on the complexity of the connection process: Retailers Customers are required to sign a feed-in tariff contract with their retailer before the metering can be configured for solar and again each time the customer changes retailers or moves into a property with solar. This process often delays the process for a customer to have the feed-in tariff applied. In other states the feed-in tariff payments are regulated through legislation and the electricity retail contract, with scheme payments applied as a pass through of distribution tariffs, plus any retailer premium payments. (AGL, sub. 72, p. 4) Installers The installation of small-scale PV is an involved process which can include a solar company, electrical retailer, electrical distribution company, solar design and installer and solar inspector. This does not take into account government departments and agencies, the Clean Energy Council (CEC) and green certificate traders. With so many participants a customer can be forgiven for being confused about who is responsible for what in the whole installation process. (NECA, sub. 37, p. 5) Customer representatives: Delays in the application of FiTs sometimes occurred because customers did not know that several forms needed to be completed. Delays and errors were frequent, with some customers missing out on PFiT because the electricity retailer or distributor: lost paperwork - which caused delays in the completion of the solar process delayed raising service orders or raised incorrect service orders delayed completing service orders to upgrade or re-configure the meter provided incorrect or untimely advice about eligibility, timeframes and requirements. (OWOV, sub. 48, p. 2)
Source: Submissions.

Opportunities for improvement


Many participants highlighted connection processes in other states which are simpler, quicker, more predictable and less costly. The CECs flow charts for connecting small-scale renewable energy generators to the electricity grid (CEC 2012b) show that the South Australian and New South Wales connection processes offer examples of how the Victorian process could be streamlined: one connection process for all Victorian DNSPs no requirement for a connection agreement with the DNSP no retail contract installer deals directly with the DNSP for the Electrical Work Request (EWR), rather than the electrical contractor engaging with the retailer and then the retailer contacting the DNSP

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In NSW Accredited Service Providers (ASP) can act on behalf of the DNSP to obtain and install a meter as well as installing the PV system. The Ceramic Fuel Cells Limited (CFCL)(sub. 41, p. 17) supported the adoption of a similar process in Victoria. In South Australia the DNSP collects the CES onsite, while in Victoria the installer gives a copy to the retailer, who gives it to the DNSP. More generally, participants argued that in the Victorian process for connecting household distributed generation there was a need to: clarify roles and responsibilities (NECA, sub. 37, p. 5) reduce duplication (CFCL, sub.41, p. 17) remove or reduce unnecessary steps (Origin, sub. 81).

The Commissions view


In section 4.3.3 the Commission outlined the rationale for improving the connection process for medium-scale distributed generation and the same rationale applies to household-scale connection. The Commission concurs with the submissions that the household-scale connection process is unnecessarily complicated and contains unnecessary steps. This imposes considerable cost on the consumers and businesses involved, particularly installers who often mediate the process on behalf of the owners of PV systems. Lack of clarity around roles and responsibilities is a key driver of errors and delays in the connection process. There are steps which pose barriers to communication between key parties, such as the installer not being able to deal with the distributer and the roles and responsibilities need to be clarified. The Commission considers duplication could be removed, such as the installer providing the EWR and the CES to the retailer who then provide them to the DNSP. Double handling of paperwork is an ineffective way to ensure all parties are informed. The Commission is attracted to the CFCLs proposal for an online system to automate and streamline the process, allowing the customer, retailer and distributor to share information and provide sign-off (CFCL sub. 41, p. 17). As well as removing duplication, some steps could be truncated or removed. The retail FiT contract, for example, offers certainty to consumers and retailers: customers cannot have their FiT changed without their written consent facilitates referral to the ESC establishes a specific start date greater certainty over terms and conditions than is contained in the supply contract (DPI 2012b). But other states have achieved adequate consumer protection in other ways, and these could be reinforced such as through greater detail in the NECF. In NSW the market contract (supply contract) is also the FiT contract, they are not separate. IPART made recommendations to strengthen consumer protection by: improving information provided by retailers under the NSW Marketing Code of Conduct improving disclosure through the Retail Pricing Information Guidelines made under the National Energy Retail Law and AER publication of comparison information

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encouraging the NSW Government and the solar industry to provide clear information on small-scale solar PV including potential financial implications(IPART 2012, p.11). Victoria could take a similar approach. Not only would this allow the removal of a burdensome step in the connection process, but would allow for greater national consistency of consumer protection for FiT customers. In Victoria a PV installer must coordinate with the DNSP to arrange meter installation and connection of the system to the distribution network (CEC nd). In New South Wales, ASPs can perform some of the functions of the DNSP and can also install PV systems (for example, Trinity electrical services 2012). The Commission considers there is merit in increasing contestability and reducing barriers to innovative business models in network services and PV installation.

Draft Recommendation 4.3


That to facilitate the connection of household distributed generation to the network the Victorian Government amend, where relevant, the Electricity Industry Act 2000 (Victoria) and associated regulations, industry codes and guidelines to: clarify roles and responsibilities of the parties involved reduce duplication, such as the installer providing the Electrical Work Request and Certificate of Electrical safety to the retailer who provides it to the distribution network service provider remove or reduce the impact of unnecessary or burdensome steps establish contestability for meter installation.

Information request

The Commission seeks views on how the connection process for household-scale distributed generation can be improved, and what is required to give effect to such improvements. The Commission plans to conduct further consultation on specific changes to this process.

4.5

Impact of removing barriers to connection of distributed generators

As noted, the Commissions terms of reference require it to identify any state and/or regulatory and other barriers to the development of a network of distributed renewable and low emissions generation. This chapter has identified connection processes as a key source of such barriers. Another key barrier, the difficulty in realising the network value of distributed generation, is discussed in chapter 6. Connection related barriers are greatest for medium-scale generators. The connection process for these generators is lengthy, complex and uncertain. Medium-scale generators also have problems: accessing information on network constraints and the connection process and timeframes getting clarity on the technical standards required for them to connect to the network.

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The system for meeting network augmentation costs to accommodate distributed generation is also an important barrier. Recovery of these costs is regulated by the AER but there is no agreed framework on how these costs should be shared when augmentation is needed to accommodate several future distributed generation projects or other load users on the network. For household-scale generation the process is also complex, involving three interrelated processes, numerous parties and requirements from at least two levels of government. This complexity is exacerbated by: lack of clarity in the roles and responsibilities of the parties involved duplication and unnecessary steps I the process lack of contestability in the provision of services such as meter installation. The impact of removing barriers to connection of distributed generation also differs between medium-scale and household-scale. Barriers to efficient connection of medium-scale distributed generation can have a major impact on the financial viability of projects. These costs are project-specific and depend on location, technology and size. Over half the total DG [distributed generation] project costs are associated with the grid connection process, including power systems studies, application and network augmentation costs. Therefore the average grid cost for small installation in Victoria was approximately 50 per cent of overall cost. (SV 2010, p.i) Any unnecessary increase to these connection costs is likely to be a major barrier to investment. There is significant opportunity for cost-effective distributed energy in Victoria. Distributed generation already makes up seven per cent of Victorias installed capacity (chapter 2) and this likely to increase in response to climate change policies (AEMC 2012c). Distributed generation appears to offer a number of key advantages as part of a portfolio of greenhouse gas emissions reduction options: numerous low-emission distributed generation technology options are available and commercially viable the short lead times and scale of distributed generation can better match incremental demand than large additions to centralised power some distributed generation technologies use fuel that is not economic for large centralised power generation(e.g. landfill gas, waste streams, some forms of biomass) distributed generation has reduced transmission losses and potential distribution network benefits (CSIRO 2009, p.353). The realisation of many of these opportunities will require connection of distributed generation systems to the network. Under some scenarios, the nation could cumulatively invest between $68 and $74 billion to build between 39 000 and 42 000 MW of lower emissions installed capacity by 2030 (Garnaut 2011, p.30). Reducing the barriers to different kinds of low-emissions technology can increase competition and reduce the adjustment costs of moving to a lower-emissions generation mix. The Institute for Sustainable Futures (ISF) found that in Victoria strategically planned and implemented decentralised energy projects could CONNECTING GENERATORS TO THE DISTRIBUTION NETWORK 83

reduce electricity sector emissions by 6.2 per cent and save consumers about $437 million per annum by 2020 (ISF 2012). The Commission advises caution on these the ISF figures because while distributed generation has grown at less than the rate of growth of all energy generation in the last decade the effect of removing barriers is difficult to quantify. The Commission considers that while it is difficult to quantify precisely the impact of connection barriers the current capacity of installed distributed generation, potential future growth and the significant nature of the barriers all support a conclusion that barriers to medium-scale distributed generation are material. While the barriers to connection of small-scale distributed generation are less severe, removing administrative burden in the connection process, is likely to provide significant relief to industry and consumers. During industry consultation participants stressed that household-scale distributed generation installers currently bear significant levels of red tape as a result of the current connection processes.

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5
5.1

Victorian feed-in tariffs: selling electricity


Introduction

This chapter provides an overview of the current Victorian feed-in tariffs (FiTs) and, to the extent possible, identifies and assesses the key objectives of the FiT schemes. In particular, it seeks to establish whether the objectives are appropriate in light of the planned introduction of a price on carbon, and the extent to which the FiTs represent the best instrument to achieve other stated policy objectives. Given that the Victorian FiTs operate in the context of the National Electricity Market (NEM) it is important that they are consistent with, and support, the overarching National Electricity Objectives (NEO) set out in the National Electricity Law. Acknowledging the important role of competition in the Victorian electricity market, this chapter considers whether there are any barriers that may prevent the full benefits of competition being realised in relation to establishing fair and reasonable FiTs. It also discusses some of the potential issues within the broader energy regulatory framework, whilst acknowledging that many of these issues are currently subject to major reviews.

5.2
5.2.1

Victorian feed-in tariffs


Overview

As discussed in chapter 2 there are three Victorian FiT schemes. All electricity retailers with 5000 customers or more are required to make offers to eligible customers under these three schemes: (1) Standard feed-in tariff (SFiT): requires retailers to publish the prices, and terms and conditions under which they will purchase electricity supplied by generators. This FiT varies among retailers according to their business strategy and applies to renewable technologies (including solar). It is available to specified households, community organisations and small businesses with a solar generation capacity greater than 5 and less than 100 kW in size, and is also available to eligible customers generating other forms of renewable energy, such as wind, hydro or biomass, with a system size of less than 100 kW. (2) Premium feed-in tariff (PFiT): This scheme (now closed to new applicants) provided participating households, businesses and community organisations (all of whom operate solar photovoltaic (PV) systems of 5 kW or less) a credit of at least 60 cents per kWh for excess electricity fed back into the grid. This net tariff was calculated to provide a 10 year payback period for a small-scale solar system. When the PFiT was first introduced, solar system costs were significantly higher than current costs. (3) Transitional feed-in tariff (TFiT): Under the TFiT scheme, households receive a minimum of 25 cents for every kilowatt hour they feed back into the grid. It is only available to new solar PV customers with systems of 5 kW or less. The TFiT commenced 1 January 2012 and is available for five years or unless a capacity limit of 75 MW is reached or $5 per customer cost is reached.1 An explicit minimum feed-in net tariff is established within the PFIT and TFIT which only applies to solar PV technology. There is no minimum FiT for other technologies except to
1

This caps the extent to which the costs of the FiT scheme are borne by other electricity users at $5 per bill.

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the extent that the prices and terms and conditions must be fair and reasonable. However, the Commission notes that a guidance paper, released by the Essential Services Commission (ESC) outlines the methodology for the assessment of fair and reasonable FiTs and includes that an offer (by a retailer) must: Specify that the retailer will pay or credit the customer, for electricity supplied by the customer under a feed-in contract, at a rate not less than the rate the customer pays to buy electricity from the retailer. (DPI 2011f) In effect this sets a minimum FIT for renewable technologies and is considered further in section 5.4.

5.2.2

Objectives of the three feed-in tariff schemes

The importance of having clear public policy objectives is emphasised by AGL who commented that: There is a lack of overarching public policy objectives unpinning the development of feed-in tariff policies throughout Australia. AGL believes that the lack of underlying public policy objectives being determined before the implementation of FiT policy is the main driver of the poor outcomes experienced in most jurisdictions in relation to FiT policy. (sub. 72, p. 1) Ceramic Fuel Cells Limited (CFCL) also suggested that: Where feed-in tariffs have become clouded is that the design and rate of the tariff have been set to achieve other objectives, notably to support the solar PV industry as a form of industry development (and as a subsidiary goal, to reduce greenhouse gas emissions). (sub. 41, p. 10) Table 5.1 highlights that each of the FiTs has different objectives and would therefore appear to be seeking to address various problems that may have been identified at the time the FiTs were designed.

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Table 5.1
Type of FiT

Objectives of Victorian Feed-in tariffs


Established Original Objectives Develop Victorias substantial wind energy resource Ensure timely and efficient connection of wind energy generators

Standard FiT

2004

Address problems where the benefits and costs of connecting wind farms are not shared equally amongst market participants Remove market barriers that constrain the development of a small wind turbine industry in Victoria Reduce cost barriers to installing small-scale solar PV systems Encourage the continued uptake of solar PVs as part of a greenhouse gas abatement strategy for Victoria

Premium FiT

2009

Modernise the regulatory approach to crediting and qualifying customers Assist households to make a personal contribution to tackling climate change Ensure certainty for owners of solar PV systems Ensure certainty for retailers and distributors Support the solar industry Ensure that the level of subsidy is equitable, given the cost to electricity users, including those on concessions Support renewable energy in the transition to a lower emissions future Provide a fair and reasonable price to households feeding solar back into the grid Manage changing prices as PV costs have dropped by around 50 per cent Reduce the boom and bust cycle for the solar panel industry Provide an average payback period of less than 10 years.

Transitional FiT

2011

Source: (Brumby 2004; Batchelor 2009; OBrien 2011).

Overall the objectives cited for FiT schemes in the past appear to fall into three categories: reduce greenhouse gas emissions, including assisting households to make a personal contribution to environmental outcomes support innovation and the development of a new industry by stimulating the demand for investing in distributed generation by more efficiently allocating risks, including risks to customers and energy market risks to small-scale PV investors ensure fair payments for electricity from small-scale PV investments.

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The ongoing relevance of these objectives needs reconsideration in light of the introduction of a price on carbon and the maturing of distribution generation technologies.

5.2.3

Objective of reducing greenhouse gas emissions

Central to considering a FiT objective of reducing greenhouse gas emissions is the introduction of a national approach to the pricing of carbon. On 10 July 2011, the Commonwealth Government announced a price on carbon pollution as part of its climate change plan, which will come into effect from 1 July 2012. Under this pricing mechanism, around 500 of Australias largest carbon emitters will be required to pay for each tonne of carbon pollution they release into the atmosphere. Recent data (table 5.2) reported by corporations under the requirements of the National Greenhouse and Energy Reporting Act 2007 (Cth) indicate a number of largescale generators will be subject to the carbon pricing mechanism.

Table 5.2

Greenhouse gas emissions (by registered corporation) Top 10 by Total Scope 1 Gas emissions
Example of generators owned by the corporation Lidell power station Bayswater power station Mount Piper Power Station Munmorah Power Station Greenhouse gas emissions (t CO2-e) 20 330 773

Registered corporation Macquarie Generation

Delta Electricity

Vales Point Power Station Wallerawang Power Station

19 792 536

Great Energy Alliance Corporation Pty Ltd International Power (Australia) Holdings TRUenergy Holdings Pty Ltd

Loy Yang A Power Station Loy Yang B Power Station Yallourn Power Station Callide Power Station Kogan Creek Power Station Wivanhoe Power Station Eraring Power Station

19 378 906 16 764 353 16 143 406

CS Energy Limited

14 880 516

Eraring Energy BlueScope Steel Limited Loy Yang Holdings Pty Ltd Oz Gen Holdings Australia Pty Ltd
Source: (Clean Energy Regulator 2012c).

11 725 490 11 371 293 10 165 819 9 717 866

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From 1 July 2012 a price of $23 per tonne of carbon pollution will apply. It is also intended that by 2015 the price on carbon will be determined by market forces. The price on carbon is a mechanism that provides a market-based incentive to reduce carbon pollution. Explicitly pricing carbon ensures all companies and individuals either explicitly or implicitly factor into decisions the costs of greenhouse gas emissions. Companies and individuals do not need to make complex calculations about the emission intensity of particular goods, as the price of the goods will reflect that key information. Over time, as prices reflect the emission content of goods, producers and consumers will have an incentive to find ways to reduce emissions. For instance, electricity producers will look to reduce the use of emissionintensive fossil fuels to generate electricity and consumers will be encouraged to use less electricity. (Commonwealth Treasury 2011, p. 19) The Productivity Commission (PC) found that the costs of reducing emissions are lower when consumers and producers make the decision, rather than government (PC 2011). Looking at over 1000 carbon policy measures across nine countries the PC also found that: Emission trading schemes were found to be relatively cost effective, while policies encouraging small-scale renewable generation and biofuels have generated little abatement for substantially higher cost. (PC 2011, p. xiv) More importantly, stylised modelling by the PC for Australia suggests that relative to a price-based approach the abatement from existing policies for electricity could have been achieved at a fraction of the cost (PC 2011, p. xiv).

Implications for Victorian feed-in tariffs


One of the objectives of establishing the premium and transitional FiTs was to reduce greenhouse gas emissions at a time when there was great uncertainty regarding any national approach. From a regulatory design perspective it is important to ensure that the most appropriate regulatory instrument is assigned to a given problem provided that the case for government intervention is established. It is also important to ensure consistency with national electricity objectives as previously stated. The Commission notes that work by the Commonwealth Government and the PC indicates that the objective of reducing greenhouse gas emissions is most appropriately addressed through a price on carbon. If the objective of the FiT was to reduce greenhouse gas emissions then it would appear that this objective is no longer valid, on the grounds that a more appropriate regulatory (market-based) instrument will operate shortly. It is also the case that FiTs will not be necessary as a complementary policy. As noted by ACIL Tasman if distributed generation is not the lowest cost of abating greenhouse gas emissions, but a FiT is designed to include this objective, it will increase the cost of meeting greenhouse gas emissions reduction targets. More importantly, this would cause electricity prices to be higher than necessaryit would be contrary to the NEO and the long term interests of consumers (ACIL Tasman 2012b, p. 38). There are also other Commonwealth initiatives that seek to achieve environmental objectives similar to those of the Victorian FiTs.

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The Renewable Energy Target


The Renewable Energy Target (RET) is designed to deliver the Commonwealth Government's commitment to ensure that 20 per cent of Australia's electricity supply will come from renewable sources by 2020 and consists of the Large-scale RET (LRET) and the Small-scale Renewable Energy Scheme (SRES). These schemes create a financial incentive to invest in renewable energy sources through the creation and sale of certificates. The purposes of the schemes are to: encourage additional generation of electricity from renewable sources reduce emissions of greenhouse gases in the electricity sector ensure that renewable energy sources are ecologically sustainable. This is achieved by the creation of online certificates by eligible renewable energy sources based on the amount of electricity either generated (by a renewable energy power station, or small-scale solar panel, wind or hydro system) or displaced by a solar water heater or heat pump. A legal obligation is placed on electricity retailers to purchase and surrender a certain amount of these certificates each year. The LRET creates a financial incentive to establish and expand renewable energy power stations, such as wind and solar farms, or hydro-electric power stations. It does this by legislating demand for Large-scale Generation Certificates (LGCs). These LGCs are created based on the amount of eligible renewable electricity produced by the power stations. LGCs can be sold or traded to liable entities (usually electricity retailers2), in addition to the power stations sale of electricity to the grid. RET liable entities have a legal obligation to buy LGCs and surrender them to the Clean Energy Regulator annually (Clean Energy Regulator 2012a). SRES provides a financial incentive to install small-scale renewable energy systems including solar panel systems, small-scale wind systems, and small-scale hydro systems. Under this scheme Small-scale Technology Certificates (STCs) are created (with the number of certificates relating to the amount of electricity produced or displaced), which are bought by RET liable entities who are legally bound to do so. Further to this, Solar Credits increase the number of STCs able to be created for eligible installations of small-scale solar panel, wind or hydro systems by multiplying the number of certificates for which the system would normally be eligible. Solar Credits apply to the first 1.5 kW of on-grid capacity installed in an eligible location or to the first 20 kW of capacity for off-grid systems. Some inquiry participants argued that the Clean Energy Act 2011 (Cth) and the Renewable Energy Target are more efficient than mandated FiT schemes in terms of their likely impact on changes to greenhouse gas emissions. For example, Simply Energy noted: the Clean Energy Act and the LRET scheme will drive change in the mix of generation capacity and achieve that change in a more efficient manner than mandated FiT schemes. The advantages that the carbon price and LRET scheme have are that they are generally broad-based and not technology specific and are thus more likely to produce efficient outcomes without the perverse social outcomes generated by mandated FiT schemes ...

For more detailed information refer to ss 25 and 31 of the Renewable Energy (Electricity) Act 2000 (Cth).

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The Clean Energy Act removes the case for FiT schemes as an instrument to reduce greenhouse gas emissions. A price on carbon will force business and consumers to factor the cost of climate change into their investment and purchasing decisions and will likely transition the economy to make more energy efficient or cleaner energy choices. (sub. 58, p. 1-2) However some participants questioned whether the price on carbon reduces the need for a Victorian FiT. We do not believe the emissions trading scheme, or the introduction of a carbon price generally is sufficient or adequate to remove the need for a FiTs, or to encourage distributed renewable energy generation. It is our understanding that the emissions trading system will simply penalise carbonintensive forms of wholesale generation. Whilst this will have a small impact on retail prices, we do not believe the connection is sufficiently strong to overcome the needs of small to medium generators ... (Warburton Community Hydro Project, sub. 69, p. 3) While there are mixed views from participants regarding whether Commonwealth policies adequately deal with greenhouse gas emission issues, the Commission considers that the combined effect of these policies is likely to be substantial and provide additional assistance for households to make a personal contribution to reducing greenhouse gas emissions (an objective of the PFiT). Given current Commonwealth policies in this area the Commission is of the view that the Victorian FiT(s) are no longer an appropriate regulatory instrument to assign to the objective of reducing greenhouse gas emissions, particularly noting the cross-subsidies and potential inequities inherent in the current FiT. (chapter 3). This does not preclude distributed generation from helping in the adjustment to a low carbon economy. The Commission envisages that the current and imminent Commonwealth programs, combined with improvements proposed in this draft report will result in incentives to invest in distributed generation when it is a cost-effective way of reducing greenhouse gas emissions.

5.3

Industry support

A further objective often cited in support of regulated FiTs is the development of, or support for, a particular industry. Current Victorian FiTs are skewed towards very small solar PV technology, and to other forms of distributed renewable generation technology. This is achieved through the tariff and eligibility criteria. Several options are available to assist customers to minimise their expenditure on energy, including: purchasing and using energy efficient appliances (lighting, heating, cooling) or production processes reducing demand for energy at times where energy from the grid is more costly investing in technologies to generate electricity, which may also include on-site storage and /or export to the grid substituting between different fuel sources. In a competitive market, customers would optimise between the various options available to minimise their spend on energy.

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The PFiT and TFiT are higher than a market determined price, and therefore assist the solar PV industry. This assistance can change the way customers decide between the energy saving options highlighted previously. For example, a higher FiT for solar PV makes this option more attractive than would otherwise be the case, and potentially crowds out alternatives. This reduces the demand for other industries such as those supplying energy saving technologies and those building and operating large-scale renewable generators. More generally the current SFiT arrangements are specifically targeted towards renewable generation technologies. This may implicitly disadvantage other possible technologies that have low-emission characteristics. Electricity generated from fuel cells, for instance, is not considered a renewable form of distributed generation as it relies on gas (a non-renewable energy source) to produce electricity and heat. However, it is considered to be low-emission and highly efficient. CFCL argued that: In terms of choice for consumers who want to provide their own electricity or who want to reduce greenhouse gas emissions, under the current feed-in tariff regime the only effective choice is to install solar PV panels or not. CFCL believes that small business, householders and community groups should be given a wider choice the choice to generate their own electricity using a high efficiency fuel cell. By giving consumers this choice, the government would allow business and householders the ability to rationally decide between installing a renewable energy generator (solar PV) or a low emissions generator (fuel cells) - or of course installing neither and continuing to buy power from the grid. (sub. 41, p. 4) While additional assistance to solar PV (through the PFiT and TFit) may benefit the solar PV industry, it is likely to be at the expense of other distributed generation technologies (or more generally to other industries supplying innovative energy efficiency related products or services). As outlined in the Commissions inquiry into the Victorian manufacturing industry, selective assistance that lowers the costs of a particular firm or industry may improve its competitiveness, but at the expense of other sectors (VCEC 2011, p. 90). Industry assistance, through regulated tariffs and discriminatory eligibility criteria, may not be the most appropriate way to support the establishment of a sustainable industry, particularly when (in the case of the solar PV industry) the industry is already reasonably well established. The industry support argument is also undermined by uncertainty created by previous FiTs, which have been subject to significant change at short notice.

5.4

Providing a fair and reasonable price

One of the objectives cited in support of FiT schemes is to ensure that households and small businesses have access to a fair and reasonable price for the electricity that they export into the grid. The Commission is of the view that this is the most relevant objective for Victorian FiTs and is consistent with COAG national FiT principles. However, the mechanism for achieving this objective may not require a FiT to be specified and regulated. The following discussion relates to current Victorian FiT arrangements which cover generation capacity of up to 100 kW. Under these arrangements the owner of a distributed generator has a relationship with (and is a customer of) an energy retail business. The Commission understands that the policy intent of Victorian FiTs (particularly 92 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENEATION

the SFiT) was to encourage system installations where generating capacity is proportionate to the electricity consumption at the site for instance it was not intended to capture installations that are primarily solar generators. Consistent with COAG national principles for FiT schemes, the Commission considers that micro and small generators of electricity exported to the grid (or distribution system) should receive a fair and reasonable price. The key question is how fair and reasonable is defined, especially in view of the proposed appropriate objective for a FiT. From submissions it appears that views on what constitutes fair and reasonable fell into one of two basic groups: (1) providing consumers with a rate of return on their investment in solar PV and therefore providing an incentive to invest (2) providing a price that reflects the full value of the energy exported to the grid, noting that there were some significant differences in views on what constitutes full value. The Commissions view, as noted in chapter 3, is that the main remaining appropriate objective for a FiT is to provide a price signal to investors in micro/small distributed generators, that will help achieve efficient use of distributed generation in a competitive energy market. The Commission sees little value in providing additional State-based incentives for development of renewable generation technology. Accordingly, the Commission accepts the second approach, namely that the term fair and reasonable refers to a price that reflects the value of the energy exported to the grid and that would encourage efficient use of resources in the electricity industry, including the economic use of distributed energy. In the past, fair and reasonable has been accepted as at least a one-for-one tariff.3 This arrangement resulted in a tariff that is greater than a market-determined price, and is likely to overstate the energy value of distributed generation, particularly if it is based on a retail price that incorporates network components. In some cases, retailers may vary their retail prices based on customer characteristics (residential or small business for example) which is independent of the network value of the distributed generation. There are also other potential issues with a one-for-one FiT, especially that it can lead to inequitable outcomes. Under a scenario where the FiT is greater than its value to the network, the gap between the FiT and the market value of the electricity needs to be funded by someone, which in general will be other electricity customers. ACIL Tasman also noted that: Even if the FiT payment is equal to the sum of the network and energy value of distributed generation, an X for one FiT causes equity issues. These arise because customers who generate electricity and use it on site reduce the amount of network charges they pay (because these are charged on a per kWh basis). However, there is no particular reason to expect that the network value provided by a distributed generator will increase in
Section 40I of the Electricity Industry Act 2000 (Vic) enables the Minister for Energy and Resources to refer retailer FiT offers to the ESC for assessment when not satisfied that a term or condition is fair and reasonable. A guidance paper which outlines the methodology for the assessment of fair and reasonable FiTs and terms and conditions was released by the ESC in March 2008 which refers to a one-for-one tariff.
3

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proportion to the reduction in that customers electricity use regardless of whether X for one FiTs are efficient, they are inequitable. (ACIL Tasman 2012b, pp. 6162) As discussed in chapter 3, efficient FiTs have equity benefits whereas crosssubsidised FiTs risk creating inequitable outcomes. In the Commissions view, the equity impact of FiTs will depend on pricing policies and the nature and extent of any resulting subsides to particular groups. An efficient distributed generation model will have positive long-term benefits for all energy users.

5.4.1

Is there competition within the Victorian electricity retail market?

In a competitive and well informed energy market it is reasonable to assume that competition between the various energy retailers would lead to efficient price and service outcomes. In an ideal scenario price would reflect the true value of the electricity supplied taking into account factors such as the time and location the electricity is produced, and the demand at that time and location. If the price is determined within a competitive retail market, it is reasonable to assume that this would be consistent with a fair and reasonable price. It is relevant therefore to consider whether there is effective competition within the Victorian electricity retail market. Since 2002, when full retail competition commenced, Victorian electricity customers have had the opportunity to choose their preferred electricity retailer from an increasingly larger pool of energy retail businesses. The objective of this move toward retail competition was to deliver efficient prices and services to energy customers and the opportunity for customers to exercise choice among competing retailers and their price and service offerings. The extent to which consumers are exercising choice is partly reflected in the volume of transfers occurring between the various retail businesses. Recent data showing small consumer transfers each month is shown in the figure 5.1 below.

Table 5.3

Transfer statistics February 2012


NSW Qld 19 808 SA 16 350 Vic 51 983

Small consumer transfers completed in February 2012 Total number of consumers transferred in the NEM to date 1 month annualised transfer rate
Source: (AEMO 2012).

44 220

3 038 602 16%

1 391 268 12%

1 189 291 23%

5 085 079 23%

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Figure 5.1
75000 70000 65000 60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 May-10

Monthly small customer transfers between retailers: February 2010 to February 2012

May-11

Apr-10

Mar-10

Mar-11

Apr-11

Aug-10

Aug-11

Nov-10

Dec-10

Nov-11

Dec-11

VIC Source: (AEMO 2012)

NSW

QLD

SA

Recent reviews of the effectiveness of retail energy market competition in Victoria


Following reviews of the effectiveness of energy retail competition in Victoria by the ESC in 2002 and 2004, the Australian Energy Market Commission (AEMC) released its final report of a Review of the Effectiveness of Competition in Electricity and Gas Retail Markets in Victoria in 2007. The AEMC found that competition in the Victorian electricity retail sector was effective. In particular it found that: The majority of energy customers are participating actively in the competitive market by exercising choice among available retailers as well as price and service offerings. There is strong rivalry between energy retailers, facilitated by the current market structures and entry conditions. Customers are demonstrating a clear willingness to participate in the competitive retail market if approached directly by a retailer ... retailers have a strong incentive to be pro-active in seeking and retaining customers in competition with other rivals. [With] evidence of vigorous marketing rivalry between retailers who are contacting customers directly. Retailers are offering customers discounted tariffs together with a range of non-price incentives in an effort to differentiate their energy services from those of their rivals The current market conditions encourage efficient entry, thereby creating a credible threat of competition from actual or potential new retailers and constraining the pricing and output decisions of existing retailers. (AEMC 2007, p.vii, ixx) VICTORIAN FEED-IN TARIFFS: SELLING ELECTRICITY 95

Mar-12

Oct-10

Oct-11

Sep-10

Sep-11

Jul-10

Feb-11

Jul-11

Feb-12

Jan-11

Jan-12

Jun-10

Jun-11

The Commission notes that the review undertaken by the AEMC was in the context of the market for the retail supply of electricity and not in the Victorian FiT market. While it may be useful to rely on the AEMC finding as a proxy to infer that there is effective competition in Victorian FiT market, the Commission notes that, in practice, retailer processes and responsiveness to attracting new customers appear to be more active in the retail electricity supply market than for distributed generation. Some reasons why this may be the case include: The complexity of the decisions involved in assessing the case for installing distributed generation and selling the excess electricity is greater than for purchasing electricity alone There is currently a lot of change in the broader regulatory environment for retail customers, including distributed generators. This is likely to add to the uncertainty and confusion in the market in the near term Many retailers and most, if not all, major retailers own centralised generation assets which may affect their incentives to offer competitive tariffs to distributed generation that potentially competes with their own generation businesses Some sectors of the market have only emerged recently. Consumers and retailers have not had the opportunity to develop systems and expertise and gain the experience needed to operate in a competitive market.

Removal of electricity retail price regulation in Victoria in 2009


The findings of the review undertaken by the AEMC formed the basis for the removal of electricity (and gas) retail price regulation in Victoria in January 2009. The Commission notes that s 13 of the Electricity Industry Act 2000 (Vic) (EI Act) allows for the reintroduction of price regulation in the event that the AEMC concludes that competition in the retail market for electricity is not effective and recommends price controls be reintroduced. (This would be based on the findings of a, MCE directed, review by the AEMC). In a submission to the Independent Pricing and Regulatory Tribunal (IPART) review of solar FiTs, Origin Energy noted that the nature of the feed-in tariff market is very different from energy supply to a small customer as a result of retailers being the consumers of the energy exported by PV customers. However, IPART did not accept this view given that customers purchase both services the services being the retail supply of electricity and the provision of feed-in tariffs for electricity exported to the grid (IPART 2011, p. 129). IPART also noted: If the NSW Government determines that the [NSW retail electricity] market is sufficiently competitive to remove retail price regulation, then arguably, there would be no need to provide a regulatory framework for feed-in tariffs. (IPART 2011, p. 16)

Current feed-in tariff offers


Current FiT legislation requires electricity retailers to publish their FiT offer terms and conditions relating to each of the FiT schemes in the Government Gazette and on their website. AGL made the point that most energy retailers are voluntarily offering a FiT for renewable embedded generation. AGL stated that it believes that no market failure has been identified which justifies additional mandated feed-in tariff policies being introduced or maintained (sub. 72, p. 2).

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The information provided on Victorian electricity retailer websites and in the Government Gazette is summarised below (table 5.4). The Commission notes that some retailers are offering FiTs that are greater than the TFit and PFiT statutory minimum tariff price. The additional or top up amount ranges between 2 and 8 cents per kWh this may reflect the additional value of the solar PV generated electricity to the retailer.

Table 5.4
Retailer AGL

Example of retailer feed-in tariffs


Distribution zone All Jemena Domestic General Jemena Small Business United Energy Domestic General United Energy Small Business CitiPower Domestic General CitiPower Small Business Powercor Domestic General Powercor Small Business SP Ausnet Domestic General SP Ausnet Small Business 21.38 24.79 20.61 26.32 18.99 23.19 22.01 23.63 22.47 29.03 25 25 31 33 25 25 25 25 25 All SP Ausnet CitiPower United 23.5 22.5 19.4 20.5 27.5 27.28 23.32 25.96 26.51 23.1 19.91 31 66 62 31 31 25 60 60 60 68 60 60 60 60 60 66 68 Standard FiT c/kWh Transitional FiT c/kWh 33 Premium FiT c/kWh 68

Australian Power and Gas Click Energy Country Energy Diamond Energy Dodo Energy Australia Lumo Momentum Neighbourhood Energy Origin Powerdirect TRUenergy

Red Energy

All Jemena CitiPower Powercor Zone 1 Powercor Zone 2 SP Ausnet United Energy

Simply Energy
Note: As at 30 March 2012 Source: (DPI 2012d) and Commission analysis.

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In contrast to the point made by AGL, some participants argued that from their experience retailers are reluctant to offer a FiT if there is no requirement to do so. For example, CFCL commented that with the exception of Origin Energy in the context of a particular demonstration project: based on our discussions with many retailers over several years we do not believe that retailers would offer a fair and reasonable rate without being required to. (sub. 41, p. 16) Warbuton Community Hydro Project also referred to some difficulties in reaching agreement with retailers: our project has had some difficulty in identifying retailers willing to enter into an agreement with us under the SFiT. This is in large part due to the lack of similar projects as ourselves, and the overwhelming number of households seeking connection under the PFiT. In large retailing organisations it has been difficult to find the person or team responsible for SFiTs, even when they publicly publish documents on websites stating they do offer such arrangements in line with the legislation. Those that do offer them often limit them in terms of MWHrs annually, which seems to us not to be in the intent or legislation of the SFiT. (sub. 69, p. 3) In the presence of a competitive market for electricity from distributed generation, there is no rationale for government intervention, unless it can be demonstrated that there are significant impediments (market failures) that would lead to inefficient outcomes. While there is sufficient evidence to suggest that the retail electricity market is competitive, participants were concerned that retailers are not as responsive to distributed generation. For example, unlike the process for changing retailers to supply electricity, signing up to a FiT is complex and lengthy. These experiences raise questions about whether the behaviour in the market for electricity from distributed generation reflects that which would be expected in a competitive market that would set fair and reasonable FiTs. The potential barriers are discussed further below.

5.5
5.5.1

Are there barriers preventing the establishment of fair and reasonable feed-in tariff prices?
Structural issues

The current regulated structure of the electricity industry contains impediments to the establishment of fair and reasonable FiTs. The current structure separates retail, distribution and generation businesses. Furthermore, while distributors and transmission businesses operate under a price or revenue cap, the retail sector operates in a competitive market. These structures can impact the incentives faced by retailers, particularly when they may not be able to access the full benefits of electricity exported by distributed generators. It is important to note that due to the disaggregated centralised energy supply chain in Australia, no one business in this supply chain can capture the full value of the distributed energy. This acts to dilute the incentive to invest, and has the potential to result in significant investments that do not achieve socially efficient energy supply. (CSIRO 2009, p. 40)

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Given these structural realities, there is potential that retail businesses will not be in a position to offer of FiT that is truly reflective of the value of the electricity to the network. For instance, retailers may not be able to access monetary rewards for the broader system benefits (such as reduced augmentation of the network) attributable to the installation of distributed generators. This results in a FiT that will be less than the true value of the electricity generated in those locations where distributed generation has network benefits. However, the potential solution(s) to this issue are likely to be resolved through amendments to the broader network regulatory arrangements which will ensure that appropriate incentives exist to efficiently accommodate distributed generation. In relation to this issue, ACIL Tasman noted: Our view is that it would be more appropriate to address any shortcoming in the economic regulatory regime by changing those arrangements than by adding to the complexity of regulated FiTs. (ACIL Tasman 2012b, p. 43) For the reasons outlined in chapter 6, the Commissions view tis hat a FiT is not the appropriate regulatory instrument to resolve these, more fundamental issues, which may be improved by various reform processes currently being pursued at a national level (for example, by the AEMC). Processes for providing value to distributed generators for network benefits are discussed in chapter 6.

Impacts of other policy settings


In relation to medium-scale distributed generation, there may be some concern from distributed generation proponents regarding: the ability to attract a retail FiT barriers to selling (exporting) electricity a need to obtain a retail licence to on-sell electricity through the grid, and regulations that support retail contestability (which constrain distributed generation proponents ability to require local users to take up locally generated electricity). These constraints increase the commercial risk associated with distributed generation projects. Not being able to require local users (such as building tenants or users in a defined precinct) to take distributed generation as a condition of locating in the area makes it difficult to estimate and guarantee base-load demand. Combined with the potential difficulty in establishing a FiT for surplus electricity, this makes demand uncertain and can lead to the scale of projects being smaller than technically efficient (particularly in the case of co-generation). In the case of distributed generation for an office or commercial building, for example, distributed generation units may be scaled so they do not generate the full building load to avoid the risk of underutilisation of capital and sub-optimal financial returns, which may occur if tenants choose a network-based retailer. While retail contestability rules are designed to increase competition, the Commission is considering whether the Victorian Government should consider mechanisms that allow building owners to sign new tenants to an agreed electricity contract for distributed generation as a condition of their tenancy.

On-selling of distributed generation from 1 July 2012


When the National Energy Customer Framework (NECF) commences on 1 July 2012, electricity retailers will be regulated by a retailer authorisation and exemption regime, administered by the AER. Under this framework, sellers of electricity are required to have VICTORIAN FEED-IN TARIFFS: SELLING ELECTRICITY 99

a retailer authorisation or be exempt from the requirement to have an authorisation. The AER has published an Exempt Selling Guideline (2011c), which sets out its approach to retail exemptions and the types of available exemptions: deemed, registrable and individual exemptions. The AER may grant a retail exemption subject to specific conditions. Retail exemptions commonly apply where electricity is being on-sold within an embedded network. For example, shopping complexes, caravan parks, retirement villages and bodies corporate (AER 2011c, pp.23). Under the National Energy Retail Law (NERL), the AER must consider a number of policy principles (including choice of retailer) and may consider exempt seller characteristics and customer-related factors, in determining retail exemptions (s 114). The AER considers that exempt selling is often not in the long term interests of customers. We have seen particular growth in on selling within high density residential developments such as apartment buildings. We do not want on selling to be a motivating factor for developers in deciding how these developments are structured The most effective way of affording customers the right to a choice of retailer is to ensure that network configuration and metering arrangements for new developments and redevelopments facilitate customer choice of retailer going forward. (AER 2011c, pp.3, 8) The Exempt Selling Guideline advises that decentralised energy (including on-site co-generation and tri-generation) will be treated as an exempt seller characteristic and on-site distributed generators will need to apply for an individual retail exemption on a case-by-case basis. The Guideline states that the AER will grant exemptions in these situations where the initiative is in the long term interests of energy consumers having regard to all of the criteria and factors we are required to assess (AER 2011c, p.17). The regulatory constrains to on-selling of distributed generation appear to have been, or are in the process of being, addressed in the United Kingdom and Sydney (box 5.1).

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Box 5.1

On-selling of distributed generation in the United Kingdom and Sydney

As part of the consultation process to develop the Exempt Selling Guideline, the Australian Energy Regulator published an issues paper on retail exemptions in June 2010 and invited submissions from interested parties. A submission from the City of Sydney discussed the Woking and London models in the United Kingdom (UK) and the proposed Sydney model, part of the municipalitys Decentralised Energy Master Plan 2010-2030. In the UK, decentralised energy was stimulated by the Electricity (Exemption from the Requirements for a Licence) Order 2001 which led to the Woking private wire and other decentralised energy systems. These were class exemptions, so permission was not required from any of the vested interest energy players, including the distribution network operator, or the regulator the Office of Gas and Electricity Markets (Ofgem). Compliance with the order was sufficient to implement decentralised energy projects. The exemption supply limits were 50 megawatts (without Secretary of State approval) or 100 megawatts (with Secretary of State approval) for each generation site over private wires. This enabled significant growth in non-residential supply. However, the exempt limit for home use was only one megawatt (about 1,000 homes) for each generation site with limited exempt aggregated supply over public wires. This enabled the growth of decentralised energy in towns and cities such as Woking and London and led to the enactment of the Electricity Supply Licence Modification 2009 or local electricity supplier licenses to retail electricity over the local public wires distribution network based on the virtual private wire over public wires principle The City of Sydney model will utilise and take advantage of the knowledge and features of both the Woking and London models but adapted for the City of Sydney environment. The barriers to decentralised energy and the solutions to those barriers are very similar to those encountered in the Woking and London models. Therefore, the strategic direction for the Citys own trigeneration and renewable energy projects for its own property portfolio will need to follow the foregoing principles by establishing decentralised energy projects specifically designed to trade electricity with each other across the local distribution networks using the virtual private wire concept and to utilise and incorporate other related monitoring and control systems, such as Building Energy Management Systems, monitoring and targeting software and metering, to provide a smart grid approach to delivering the Sustainable Sydney 2030 targets.
Source: (City of Sydney 2010, pp.34, appendix 1: 1011; AER nd).

Information request

Does the process for applying for an individual retail exemption under the Australian Energy Regulators Exempt Selling Guideline (2011c) address the regulatory constraints on distributed generators who on-sell electricity? If not, what changes might be made to reduce those constraints without compromising competition and contestability in the retail electricity industry?

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5.5.2

Information and transaction costs

In a well-functioning market, both the sellers of electricity (the owner of the distributed generator) and the purchaser (the retail energy business) would have access to sufficient information to make informed decisions and complete transactions. While having access to information is critical, it is also important that the information is in a form that is clear and accessible to the customer. As noted by the AEMC: When consumers are unable to access necessary information, or the information which is available is perceived to be complex and costly to decipher, there is a risk that consumers (or specific groups of consumers) are not sufficiently well-informed. Consequently, consumers may make inefficient decisions. (AEMC 2011d, p. 29) Two potential problems may arise. First, information may be costly to obtain, particularly for individuals participating in the small-scale distributed generator market. Without adequate information, individuals may decide to not participate in the market, leading to less than optimal levels of distributed generation. Alternatively, they may make poor decisions where the products they purchase do not deliver the outcomes they expect. Second, there may be information asymmetries, where one side of the market (for example, the retailer) is more informed about the value of the benefits and costs of the electricity being fed into the distribution system. ACIL Tasman noted that: Distributed generators, particularly residential and small business customers, generally do not have perfect information as to the true value of the electricity they would export to the grid ... (ACIL Tasman 2012b, p. 40) This additional information could be used by the retailer to negotiate a price that is lower than what would have been achieved if all parties had access to the same information. The Energy and Water Ombudsman Victoria (EWOV) noted that: Between 1 January 2011 and 31 December 2011, EWOV received 8,524 solar cases and registered 17,993 solar case issues. During this period, 21% of these cases - 1,805 cases and 3,229 issues - were about issues with the application of the Premium Feed-in Tariff (PFiT) and Standard Feed-in Tariffs (SFiT). (sub. 48, p. 1) A case study provided by EWOV highlights some of the difficulties faced by consumers, particularly when incorrect information is provided. The customer owns two properties and decided to place solar panels on his holiday home after his electricity retailer confirmed in writing that he will be able to receive PFiT credits for this property. However, after the panels were installed he received a PFiT form that stated eligibility required the residence to be the primary residence of the customer. The electricity retailer subsequently confirmed that he will not be able to receive PFiT credits for this property. As a result of EWOV's investigation, the electricity retailer paid the customer $2,800 in recognition of providing incorrect information. (sub. 48, p. 3)

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The Commission notes cases come to EWOV only after customers have been unable to resolve their complaint directly with their electricity retailer or distributor and have subsequently chosen to take the complaint further. Ideally data would be publicly available to allow FiTs to be compared. In this regard, the Commission notes that the EI Act currently requires Victorian retailers to publish FIT information (including tariffs and terms and conditions) as part of their retail licence conditions. The Commission has undertaken desktop research to determine the extent of information on FiT offer terms and conditions available online. A number of non-governmental organisations and businesses publish price comparator information, including the Moreland Energy Foundation (Moreland Energy Foundation 2009) and Energy Matters (Energy Matters 2009). However, much of this information is out of date. The ESCs YourChoice website, allows comparison of retail electricity supply offers, but does not allow direct comparison of FiTs. The Commission has also visited electricity retailer websites to compare the information available on FiT offers. The Commission notes that individual retailers present the terms and conditions of their FiT offers in different formats and it is often hard to find information on specific terms and conditions, making it difficult to compare offers across retailers. In some cases electricity retailers have combined all offers into one set of terms and conditions; in others they have separated the offers into discrete terms and conditions. This is consistent with observations made by the IPART in relation to information disclosure by retailers operating in New South Wales: We are concerned that the current practices of retailers in disclosing the key features of their [FiT] offers are not assisting customers to assess these offers and make well informed decisions. (IPART 2012, p. 99) The Commission notes that IPART, in recommending a benchmark range for a fair and reasonable FiT, argued that: our recommended form of regulation needs to be supported by actions to improve the quality and accessibility of information available to customers about the financial consequences of installing PV generation and retailers voluntary feed-in tariff offers. (IPART 2012, p. 98) Information and transaction cost issues including those resulting from the complexity of the market, changing regulatory environment and the potential barriers to competition resulting from the industrys structure were discussed in section 5.5.1. In addition, consumer regulation in the retail electricity market is in a state of flux as responsibility shifts to the AER and new connection processes and charging regimes are introduced. These changes add further to uncertainty in the market.

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5.5.3

Market power issues: vertical integration of retail energy businesses

There are significant ownership links between the energy retail market and upstream energy production (including in renewable energy) (box 5.2).

Box 5.2
AGL Energy

Examples of ownership links between energy retailers and upstream energy production

owns a number of wind farms owns 10 hydro-electric generating schemes (comprising 16 power stations in Victoria and New South Wales) owns and operates two gas fired electricity generation plants in South Australia and Victoria has a 32.5 per cent equity investment in Loy Yang Power( one of Australias largest coal-fired power stations) owns and operates several renewable landfill gas and biogas (sewage) generation facilities owns and operates a 4.4 MW gas fired cogeneration plant at Symex Holdings in Port Melbourne owns one large scale solar electricity generator. Origin Energy Has a generation portfolio of 5,310 MW operates eight power stations (mainly gas fired) has a 50 per cent interest in three cogeneration plants owns a wind farm facility. TRUenergy owns and operates a portfolio of electricity generation facilities, including coal (Yallourn in Victoria), gas and wind assets Snowy Hydro owns Red Energy Hydro Tasmania owns Momentum Energy
Source: Commission analysis of retailer websites.

Some participants claimed vertical integration of retail energy businesses with upstream generation facilities may impact on the incentives retailers face when engaging and negotiating a FiT with small-scale (or aggregated groups of) generators. A view was expressed by the Australian Solar Roundtable that: The market for power from distributed and embedded generation is distorted by an imbalance of market power. A small number of players dominate the market. (sub. 56, p. 9)

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The Commission considers that following a transition period, this issue is not likely to represent a significant barrier to the establishment of fair and reasonable FiTs.

5.5.4

Limitations on time of use and locational pricing

Electricity use varies widely depending on the time of day and season. At times there are large peaks in demand which drive much of the cost of generating and supplying electricity. Large peaks in demand may cause network congestion in particular locations, and lead to increases in the wholesale price of electricity when this is supplied from more expensive peak supply sources (for example, gas-fired generators). Time of use and location have two elements that impact on the value of distributed generation: Network value at locations where the network is congested there is additional value to distributed generation that produces at times when the extra local supply delays network investment. The Commission has concluded that FiTs are not a good way to approximate or reward distributed generation for this capital value (chapter 6) Energy value output from distributed generation will have more value in locations where the system losses from transporting electricity from centralised generators are high and at times when demand is at its peak so the costs of purchasing electricity on the wholesale market are high. These values should be reflected in an efficient FiT and provide incentives for people to invest in distributed generation. Smart meters can allow consumers to monitor their electricity use more closely and make more informed decisions about when and how they use electricity. Having access to time of use and locational pricing information would also allow customers considering installing distributed generation technology access to better information to guide their decision-making process. As noted by ACIL Tasman: Peak demand, or a closer proxy such as the maximum electricity consumed in any half hour interval, will be able to be measured with the smart meters that are currently being installed in Victoria. However, there is currently a moratorium presenting the additional information collected by these meters being used in retail electricity pricing, although it has recently begun to be used in settling the wholesale market. Customers with smart meters are being billed as if they had the historic type of meters. This will continue for as long as the moratorium is in effect, until 2013. (ACIL Tasman 2012b, p. 26) Access to better information (price signals), within a competitive electricity market is likely to lead to FiTs that better reflect the value of distributed generation. The Commission notes that there is currently a ban on the rollout of time of use retail prices before 2013. Modelling undertaken by Deloitte Access Economics indicated that banning time of use tariffs until at least 2013 delays about 24 per cent ($490 million) of the estimated benefits of smart meters, the proportion of the benefits attributable to time of use tariffs and demand management (DAE 2011, p. 13).

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5.5.5

Conclusion on fair and reasonable prices

While there is sufficient evidence to suggest that the retail electricity market is competitive, participants were concerned that retailers are not as responsive to distributed generation. For example, unlike the process for changing retailers to supply electricity, the processes for signing up to a FiT is complex and lengthy. And DG proponents, particularly in area not subject to regulated FiTs, have found it difficult to negotiate a FiT for electricity fed into the network. These experiences raise questions about whether the behaviour in the market for electricity from distributed generation reflects that which would be expected in a competitive market that would set fair and reasonable FiTs. The Commission considers the underlying causes of these difficult, complex and lengthy processes are likely to include: structural issues relating to the separation of distributors and retailers information and transactions costs market power issues limitations on time of use and locational pricing uncertainty of the regulatory environment, coupled with the transition to a national regime. While on its own none of the above factors constitute a market barrier sufficient to prevent competitive outcomes from emerging (as long as adequate consumer protection, transparency and information is provided) combined they are likely to present significant short term barriers. A number of the changes in the NEM that are underway or have been foreshadowed are likely to reduce these barriers, as will the Commissions draft recommendations in chapter 4, if accepted. Other aspects can be addressed through consumer protection, reasonable access to information and maturing of the market. Accordingly, the Commission considers a market-based FiT is likely to provide the most efficient outcome in the long term. However, there are important transition issues and in the short term moving too rapidly to market determined FiTs may cause unnecessary disruption and hinder the transition to a fully competitive market. These issues are discussed further in chapter 6.

5.6

Conclusion

The objectives for feed-in tariffs going forward


Victorian FiTs have a number of objectives which appear to be based on previously identified issues or perceived problems. One of the main drivers appears to be related to reducing greenhouse gas emissions. However, given the introduction of a price on carbon pollution by the Commonwealth Government and other current Commonwealth initiatives (for example, RET, LRET and SRES), the Commission considers the Victorian FiT(s) are not the most appropriate regulatory instrument to assign to this objective. It should also be noted that given the carbon tax will affect the wholesale price of electricity, it will be automatically incorporated into the value of a marketbased FiT. Supporting the development of a particular industry (for example, solar PV) appears to be a further objective of the current FiTs. The Commissions view is that pursuing this objective is likely to be highly distortionary. From a solar industry perspective this may 106 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENEATION

create significant benefits. However pursuing the development of one industry (either through a higher regulated FiT for solar PV, or through eligibility criteria which favours solar PV) can be at the expense of other distribution generation technologies, or more broadly other industry sectors that supply innovative approaches to minimising electricity usage. Ensuring that households and small businesses have access to a fair and reasonable price for exported electricity is an important FiT objective, and is the most relevant objective underpinning any future FiT arrangements. This is consistent with COAG national FiT principles.

Tariff/price component
Victorian FiTs establish a minimum price for electricity exported to the grid whether it is 60 cents per kilowatt hour under the PFiT, 25 cents per kilowatt hour under the TFiT or a one-for-one price under the SFiT. The Commission considers these prices are probably above what would be expected in a well-informed competitive market. Given current eligibility criteria which favour solar PV and to a lesser extent other renewables it could be expected that this will artificially increase the take up of these technologies, and impose increases in electricity prices for non-users of solar PV. These cross-subsidies are regressive to a greater or lesser extent. The regulated PFiT and TFiT are based on an assumed payback period for solar PV systems. This is inconsistent with the Commissions view that the price for exported energy should be based broadly on the value of the electricity to the network, and that this price should be determined within a well-informed competitive retail electricity market. Market determined FiTs would be consistent with a fair and reasonable price.

Feed-in tariff eligibility


The main FiT eligibility criteria relate to both the capacity or size of the distributed generation system and the technology (table 5.5).

Table 5.5
Type of FiT PFiT TFiT SFiT

Feed-in tariff eligibility technology and capacity


Eligible technology Solar PV Solar PV Small renewable energy generation facilities (solar, wind, hydro and biomass) connected to the distribution network System capacity 5kW or less 5 kW or less Less than 100 kW (excludes solar PV with a capacity of 5kW or less)

Notes:

See Appendix B for greater detail on the various FiT schemes

Source: Commission analysis

As noted in chapter 3, the Commission considers that FiTs should not unnecessarily favour one technology over another. There should be technology neutrality, with differences in policy or approach only justified on technical or other appropriate grounds. This would help support efficient market outcomes by ensuring that the relative merits of all technologies are considered and no single approach is advantaged over another. The terms of reference for this inquiry refer to renewable and low-emission technologies, and it is these that the Commission has focused on that is that eligible technology embraces at least renewable and low-emission distributed generators.

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Future Victorian feed-in tariff arrangements

The terms of reference require the Commission to: (1) assess the design, efficiency and effectiveness of feed-in tariff (FiT) schemes, including market-based gross FiT schemes, in the context of a national carbon price (2) provide a recommendation as to whether existing FiT arrangements should be continued, phased out or amended. Where phase-out of existing arrangements is proposed, the appraisal should give consideration to whether any transitional arrangements may be necessary. Any changes to existing arrangements would not be applied retrospectively. This chapter addresses these two issues. In approaching these issues the Commission considers the key policy objective in relation to distributed generation (including renewable and low-emission technologies) is to contribute to achieving the National Electricity Objective (NEO), in a way that achieves efficiency and effectiveness without cross-subsidies. The key to this matter is to identify the sources of economic value from distributed generation and strengthen the competitive frameworks for achieving that value, having regard to the impending introduction of the carbon tax from 1 July 2012. The two key components of value from distributed generation are the energy value (which will shortly incorporate the carbon tax) and the network value. The energy value refers to the value of the electricity actually generated, for which price (or FiT in the case of household scale generators) is the right mechanism. The Commission considers determining this price in competitive markets, with appropriate safeguards, is most likely to result in prices that are efficient, do not result in regressive cross-subsidies from one class of consumer to another, and are technology-neutral. Previous and current FiTs do not meet these tests. In this context, well-designed market-based FiTs can play a useful role in a relatively quick transition to a competitively determined price for household scale distributed generation. While market-based gross FiT schemes have merit, Victoria is at a point where moving to such schemes would carry significant costs. However, such price schemes may ultimately emerge from a competitive process and should not be ruled out. These matters are addressed in detail in section 6.2. Moving to efficient, market-determined prices for distributed generation would best capture the energy value. A key policy challenge is how best to capture the network value, which the Commission considers may be significant in some locations, but not all. Network value is a capital value that is location specific and time dependant in that it arises from the value of deferring network investment. The value is not captured through a price of energy generated indeed attempting to do so would lead to regressive cross-subsidies from some groups of consumers. Proposed reforms to the National Electricity Market (NEM) will help to reduce the current barriers, and enable the network value to be better realised. However, this is likely to be a challenge in the absence of more fundamental changes to incentives for key market agents, especially distribution businesses. Network value is considered in further detail in section 6.2. The Commission, in chapter 5, noted that distributed generation can contribute to reducing greenhouse gas emissions. But, in the context of a price on carbon from 1 July

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2012, reducing emissions is no longer a valid objective of Victorian FiT schemes on the grounds that a more appropriate policy (market-based) instrument will operate shortly.1 Once the carbon tax is in place it will increase the wholesale price of electricity which would be used to determine a fair a reasonable FiT. Turning to the second term of reference, the Commission recommends that over time the current Victorian regulated FiTs should be phased out. Future FiTs more accurately reflect the energy value of electricity for household-scale distributed generation should be determined by retail market competition. Market determined FiTs would not discriminate against particular technologies or customers, rather they would be based on the value of the electricity supplied by distributed generators (which would include the impact of the carbon tax). This deregulation would be supported by consumer protection and information measures and be phased in to maintain certainty that the market will continue to offer a competitive FiT. Existing contractual arrangements would be maintained. Transitional arrangements should not unnecessarily impede the move to market-based FiT arrangements. In summary, the Commission recommends a transitional arrangement to improve the efficiency and effectiveness of the operation of FiTs in Victoria, comprising: That the Victorian Government: close the Transitional FiT (TFiT), either by 31 December 2013 or once the 75 MW capacity is reached (as currently provided in legislation), whichever occurs first amend the Standard FiT (SFiT) to require that Victorian electricity retailers with 5 000 or more customers offer fair and reasonable prices for electricity exported to the grid by all small low emissions or renewable distributed generators (100 kW or less) until 31 December 2015 establish a fair and reasonable price for energy supplied by distributed generators through the retail electricity market define low-emissions technology as generators that produce 50 per cent or less of the emissions intensity of electricity generation in Australia allow market-determined arrangements based on gross payments by mutual agreement ensure that FiT prices are published by the Australian Energy Regulator (AER) under the requirements of the National Electricity Customer Framework (NECF). That the Essential Services Commission (ESC): publish information on the likely range of wholesale market-based net FiT payments which would be consistent with a fair and reasonable offer updated at regular intervals. assess, as required, the extent to which FiT market offers are consistent with fair and reasonable criteria, redefined to reflect the wholesale value of electricity (the energy value).

The Commission notes that distributed generation would still assist in reducing greenhouse gas emissions.

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6.1

Design, efficiency and effectiveness of feed-in tariff schemes

This section addresses a range of design, efficiency and effectiveness issues including: the value of distributed generation market-based FiTs eligibility metering information provision billing arrangements.

6.1.1

The value of distributed generation

In chapter 5 the Commission concluded that the most appropriate objective of FiT schemes is to ensure that households and small business have access to fair and reasonable prices for electricity produced by distributed generators. This objective raises a question regarding the value of distributed generation. ACIL Tasman (2012) suggest that the value of distributed generation comprises: The energy value2 of distributed generation, which arises when actual output from a distributed generator reduces the amount of electricity that must be purchased on the wholesale electricity market. The energy value of distributed generation is based on the wholesale price of electricity adjusted for avoided network losses. The network value of distributed generation, which arises when capacity from a distributed generator enables a planned network augmentation to be deferred. The network value of distributed generation is the difference between upgrading the network sooner, and upgrading it later, taking into account the costs that a distributed generator may impose on the network. The network value of the distributed generator would be zero (or negative) in areas where the network is not constrained. (ACIL Tasman 2012b, p.vii) ACIL Tasman note that the FiT payment is better able to reflect the energy value of electricity exported to the grid by a distributed generator, while a separate payment (discussed in section 6.2) may be needed to reflect the network value of distributed generation. There are several FiT methodologies that have been used in Australian jurisdictions which have been evaluated by ACIL Tasman on behalf of the Commission. These include:

ACIL Tasman (2012b, p.14) note that the energy component of the cost of supplying electricity consists of: the cost of purchasing electricity in the wholesale electricity market; the cost associated with emitting greenhouse gases (from 1 July 2012); the cost associated with losses in transporting electricity from the generator to customers; the cost of hedging the risk associated with purchasing electricity in the wholesale market; and the cost associated with purchasing Renewable Energy Certificates.
2

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(1) An X for one FiT where the FiT payment is a multiple of the retail price of electricity (2) A payback FiT where the FiT payment is calculated to ensure that a distributed generator, pays for itself within a targeted period (3) A wholesale market based FiT where the FiT payment is based on the components of the wholesale price of electricity that are avoided by the distributed generation. Based on an assessment of these methodologies against efficiency, effectiveness, equity and administrative simplicity criteria, ACIL Tasman concluded that: None of the methodologies for calculating FiTs satisfy the efficiency or effectiveness criteria and all have adverse equity implications. The main issue is the inability of any of these FiTs to send appropriate signals regarding the network value of distributed generation. Depending on consumption and generation profiles, they exacerbate the inefficiency arising from network pricing and create cross subsidies. That said, the wholesale market based FiT is an efficient representation of the energy value (only) of distributed generation. (ACIL Tasman 2012b, p.viii) A summary of the assessment is shown in table 6.1.

Table 6.1
Methodology X for one Payback period Wholesale price

Assessment of feed-in tariff methodologies


Efficiency and effectiveness 1 2 3 Equity 1 1 3 Administrative simplicity 4 2 3

Note: Score out of five, where a higher number implies a higher ranking. Source: (ACIL Tasman 2012b, p.71).

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Table 6.2
Methodology X for one

Example of feed-in tariff methodology strengths and weaknesses


Strengths Administratively simple Weaknesses Overstates the energy value of distributed generation particularly if x is set at 1 inequitable if payment exceeds sum of energy value and network value of distributed generation. Determined without regard to the impact the distributed generator has on the electricity supply system inefficient they pay more for generators with higher costs and less for generators with lower costs inequitable if the payments are more than the value of the distributed generation and are funded by electricity customers, this amounts to a disproportionate burden on electricity customers that do not have distributed generation. Efficiency and effectiveness of the FiT is limited by the assumptions that are necessarily used in forecasting the value of the electricity generated the forecast may or may not be an accurate reflection of the actual costs avoided customers with distributed generation that are paid a wholesale market-based FiT avoid paying for electricity they generate and use on-site. In doing this, they avoid the network component of the retail price of electricity as well as the energy component more difficult to administer need to account for characteristics of different generation technologies.

Payback period

Degree of certainty for distributed generator investors

Wholesale price

Provides a more efficient payment for the energy exported to the grid

Source: (ACIL Tasman 2012b, pp.6066).

The Commission requested that ACIL Tasman (2012b) provide indicative estimates of the potential size of FiTs based on a wholesale price methodology. In moving to such a methodology it is important to note that the wholesale price can vary dramatically across different times of the day and year. The generation profile of different technologies also varies with some producing more electricity when demand, and hence the wholesale price, is highest. Therefore, if a FiT is set at a single rate, regardless of the time of day or the level of the wholesale price, that rate would need to be different for different technologies. To illustrate this point ACIL Tasman estimated FiTs for various generation technologies (which have different generation profiles)3:

See ACIL Tasman (2012b) for a more detailed discussion on methodology and underlying assumptions.

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Flat generation profile: represents a generator that generates constantly throughout the year. This profile is presented mainly to illustrate the difference in value between this generation profile and others, which target higher price periods. Therefore, it was not adjusted for on-site consumption. This profile could be used to represent a gas fired (or similar) generator in always on mode or a fuel cell. Solar generation profile: reflects a representative solar photovoltaic (PV) system installed by a representative residential customer. It is assumed that the PV system is 2.5 kW in capacity and, therefore generating 2.95 MWh each year based on the number of small-scale technology certificates a system of that size is deemed to produce. Storage device: which imports electricity from the grid at one time of day (when the electricity price is low) and exports it at another time (when the electricity price is high). This profile is based loosely on the possible capabilities of an electric car. Peak generator profile: represents a distributed generator that targets high price periods. This profile could represent a stand-alone gas fired co-generation unit (or similar) or a co-generation unit whose operator reduces demand during high price periods to maximise electricity exports when prices are high. Three thresholds were calculated so that the generator generated whenever the wholesale price exceeded, $50 per MWh, $100 per MWh and $150 per MWh. The results for a generator generating when the wholesale price is $100 per MWh are presented in table 6.3. From table 6.3 it can be seen that the estimated average energy value of distributed generation in 2013 (for flat rate and solar PV generators most commonly used by households) is the range of 5.7 7.8 cents per kWh depending on the distributed generation technology. This range reflects the locations of the distributed generator. For example, Yallourn represents a distributed generator (and relevant transmission and distribution loss factors) nearest to existing centralised brown coal generators. For Yallourn the transmission and distribution loss factors are therefore minimal compared with Red Cliffs which is furthest from the Latrobe Valley.

Table 6.3

Estimated average energy value of distributed generation for various generation profiles (nominal)
Location Yallourn Keilor Red Cliffs 2013 cents per kWh 5.7 6.1 6.8 6.6 7.0 7.8 11.4 12.0 13.4 58.8 62.1 69.4 2014 cents per kWh 6.5 6.9 7.7 9.7 10.2 11.4 14.2 15.0 16.8 75.8 80.1 89.5 2015 cents per kWh 6.9 7.3 8.2 11.7 12.4 13.8 16.0 16.9 18.9 49.9 63.3 70.8

Generation Flat

Solar PV

Yallourn Keilor Red Cliffs

Storage device (battery)

Yallourn Keilor Red Cliffs

Peak $100

Yallourn Keilor Red Cliffs

Source: (ACIL Tasman 2012b, p.81).

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High FiTs do not necessarily lead to large incomes from selling electricity from the distributed generator because the amount of electricity sold may be small. For example, based on the 2013 estimates for a 1 kW generator, ACIL Tasman estimated the average annual revenue for solar PV selling at a FiT of 7 cents per kWh, would be $145. This compares with $46 for a peaking plant that sells electricity at 62 cents per kWh when the wholesale price rises above $100 per MW see table ES 1 (ACIL Tasman 2012b, p.x). The Commission encourages inquiry participants to review the ACIL Tasman report, which is available on the Commissions website www.vcec.vic.gov.au, and welcomes feedback on the methodology and estimates provided above. The solar PV estimate provided above is within in a similar range to recent estimates for solar PV by IPART in New South Wales and ESCOSA in South Australia (IPART 2012; ACIL Tasman 2011b).4 These are shown in table 6.4. The Commission observes that while the value of energy estimates differ (and may represent variations in methodology) among the three jurisdictions, they are broadly of a similar magnitude. Moreover, it is clear that these estimates for 2012 are well below all three Victorian FiTs (60 cents per kWh, 25 cents per kWh and the current range of SFiT offers, see chapter 5).

Table 6.4

IPART final estimates of the value of PV exports to retailers (c/kWh, $2011/12)


2011/12 5.2 7.0 8.3 10.3 2012/13 7.5 9.8 TBC

Method used Wholesale market value Direct financial gain to retailers


Source: (IPART 2012, p.44).

The ACIL Tasman estimate is at the bottom end of the IPART estimate and below that of ESCOSA.

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Table 6.5

ESCOSA value of exported PV output (nominal cents per kWh)


2011 Both scenarios 2012-13 Carbon scenario 8.9 0.8 0.1 9.8 No carbon scenario 8.1 0.7 0.1 9.0 2013-14 Carbon scenario 10.2 0.9 0.1 11.2 No carbon scenario 9.0 0.8 0.1 9.9

Reduced wholesale electricity cost Avoided losses Market and ancillary service fees Total

6.4 0.6 0.1 7.1

Source: (ACIL Tasman 2011b, p. iv)

In South Australia, all electricity retailers are required to provide the ESCOSA determined FiT premium to solar customers. In addition to the FiT premium, the electricity distributor, ETSA Utilities, is also required to provide a FiT to solar customers for electricity fed into its network. The FiT amount provided by ETSA Utilities varies depending on the date at which a solar customer is connected to its network. This requirement for the electricity distributor to provide a FiT will cease for solar installations after 30 September 2013 with a retailer FiT payment (based on energy value) remaining.

Table 6.6

Summary of South Australia FiT scheme including electricity distribution FiT (nominal c/kWh, GST exclusive
2011-12 7.1 + 44 = 51.1 c/kWh 7.1 + 16 = 23.1 c/kWh N/A 2012-13 9.8 + 44 = 53.8 c/kWh 9.8 + 16 = 25.8 c/kWh N/A 2013-14 11.2 + 44 = 55.2 c/kWh 11.2 + 16 = 27.2 c/kWh 11.2 c/kWh

Solar PV Cell Installation/ Approval Date Class 1 Before 1 October 2011 Class 2 1 October 2011 30 September 2013 Class 3 From 1 October 2013
Source: ESCOSA 2011

6.1.2

Market-based feed-in tariffs

The Commission agrees that the energy value of distributed generation should be based with reference to the components of the wholesale price of electricity. A key question is the extent to which this value (or price) can be determined within the competitive retail electricity market. As discussed in chapter 5, the Commission is of the view that the competitive market should determine the FiT payment, provided that competition within the retail energy market is effective. Given that condition, it is reasonable to assume the market determined FiTs would be fair and reasonable and are likely to be at least consistent with the energy value of the electricity supplied by the distributed generator. 116 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Allowing the market to determine the FiT is a natural progression of the Victorian energy market. As highlighted in chapter 5, Victoria removed retail price regulation of electricity (an essential service) in 2009 leaving this to the market to decide (within a customer protection framework). This is consistent with IPART which recently recommended that the market set FiTs.

Participant views
Some participants were concerned that a unregulated feed-in tariff would lead to retailers choosing not to offer fair and reasonable rates for electricity exported to the grid (Environment Victoria, sub. 51, p. 6). Others (including Australian Photovoltaic Association, sub. 67, p. 4 and Alternative Technology Association, sub. 73, p. 2) argued that a regulated FiT created investment certainty for consumers and industry players: Properly designed and implemented, feed-in tariffs (FiTs) offer the best opportunity to capture the market failures that exist in the national electricity market (NEM) with respect to the cost effective utilisation of demand side activities such as distributed generation (DG). As a policy mechanism, FiTs also offer the greatest potential for investment certainty for consumers and industry players in the relevant technology space. (sub. 73, p. 2) From a retail perspective AGL argued that market determined FiTs were more appropriate in the current environment where jurisdictions were moving towards removing price controls where competition is effective: Regulating such a tariff would be a significant retrograde step in relation to microeconomic reform of Australias energy markets. The Australian Energy Market Agreement clearly articulates the agreement among all jurisdictions to remove existing price regulation where competition is demonstrated to be effective. Accordingly, adding a further regulatory pricing structure to existing markets would be in contrast to the intent of the Australian Energy Market Agreement. (sub. 72, p. 1) The possibility that regulated FiTs may undermine the effectiveness of retail competition was raised by the Energy Supply Association of Australia: Setting a regulated FIT raises many risks. Setting it too high could result in retailers paying far more than is justified for solar PV-generated electricity. This may disadvantage those retailers with a higher proportion of customers with solar PV. It would also discourage retailers from competing vigorously for customers who have PV installed. This could then undermine retail competition. Solar PV or other technologies may have a greater benefit in certain areas. The market should be free to offer higher FITs to customers whose generation offers greater benefit. Adopting a fixed FIT value removes this possibility. (sub 74, p. 2)

6.1.3

Eligibility

Distributed generator technology


The Commission considers that FiT regulation should not discriminate in favour of any particular technology. This is especially the case in the presence of a carbon price which will, through changing the relative prices of electricity from various generators, create incentives for efficient choices, and investment in generation technologies. Investment in small-scale renewable technologies is further encouraged by the Commonwealth Small-Scale Renewable Energy scheme (chapter 5). The following FUTURE VICTORIAN FEED-IN TARIFF ARRANGEMENTS 117

discussion, however, focuses on broadening eligibility criteria to include low-emission technologies as well as renewables consistent with reference to these technologies in the terms of reference. The current Victorian SFiT specifically applies to renewable technologies generating less than 100 kW, such as solar PV (between 5 kW and 100 kW), hydro, biomass and wind. The current arrangements, however, do not refer to generation technologies that may be considered low-emission. This point was raised by Ceramic Fuel Cells Limited (CFCL): Ceramic Fuel Cells believes the current Victorian standard feed in tariff regime should be extended to require electricity retailers to offer a fair and reasonable tariff to any distributed generator which is small scale (100kW or less) and less emissions intensive than the current power grid. Extending the feed in tariff to a broader range of low emissions technologies gives homes and businesses a wider choice of on-site energy generation products. (sub. 41, p. 1) Similarly Jemena (JEN) stated that: Currently, the SFiT is limited to renewable energy and the PFiT and TFiT schemes are limited to photovoltaic (PV) systems only. JEN believes the future FiT arrangements should be extended to include low emission generationthat is, technology neutrality should be a key feature of future FiT arrangements. (sub. 79, p. 3) The Commission previously noted that low emission technologies (renewable or not), which demonstrate a capacity to significantly reduce greenhouse gas emissions, should not be disadvantaged when seeking to enter the electricity market (VCEC 2009, p.381). This raises a question regarding what constitutes a low emission distributed generation technology. Moreland Energy Foundation suggested that: Low emissions generation should exclude systems with higher greenhouse gas emissions per kWh produced than a high efficiency combined heat and power or co-generation system. (sub. 75, p. 3) CFCL commented: We suggest the tariff apply to any product with lower emissions than the existing emissions intensity of the Victorian grid. The Victorian grid has an emissions intensity of 1.35 t CO2-e per MWh. This figure is already measured and used in Victorian Government energy regulations Translating this threshold into policy would require a product to meet certain minimum efficiency or emissions standards to be eligible: for instance, total efficiency of at least 70%. This is not overly difficult or costly: regulation already requires minimum performance or efficiency requirements for many products. This criteria could be administered by Government (e.g. Essential Services Commission) or approved industry groups (e.g. Clean Energy Council) or regulators (e.g. Australian Gas Association, Energy Safe Victoria etc). (sub. 41, p. 12) Table 6.7 shows average emission intensities for a number of generator fuels.

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Table 6.7

Emission intensity of selected generators by fuel type


Fuel Type Black coal Brown coal Hydro Liquid fuel Natural gas Wind Solar PV Average kg CO2-e/GJ of fuel over all power stations 91.1 92.6 0 68.8 51.3 0 0

Source: (ACIL Tasman 2012a).

As noted in chapter 3 the Clean Energy Finance Corporation Expert Review recommended that the eligibility for low-emissions technology be defined as technologies that produce 50 per cent, or less, of the emissions intensity of electricity generation in Australia (Commonwealth Government 2012c, p.15). The Commission is disposed to adopt this definition of low-emission. The Commission proposes that the eligibility for low-emissions technology be defined as technologies that produce 50 per cent, or less, of the emissions intensity of electricity generation in Australia, as recommended by the Clean Energy Finance Corporation Expert Review. Is this an appropriate definition to apply to distributed generation? In adopting this definition, are there any practical issues that will need to be addressed?

Information request

Distributed generator size


The current FiT arrangements (combined) apply to distributed generators less than 100 kW. According to CitiPower/Powercor: The Businesses consider that the scale of generation activity under a FiT scheme should be 100kW. This is consistent with the current scale criterion for Standard FiTs. A proponent generating above 100kW would be operating at capacity beyond that of a household or small business and would be in a position to negotiate their own contract for the exported energy, as opposed to relying on a FiT scheme. (sub. 80, p. 4) An alternative view was expressed by other participants. For instance it was suggested that all small-scale renewable generators should be included up to 30 MW (Reeves, sub. 27, p. 1). Similarly Christine Easdown suggested: While it is important that feed-in tariffs be regulated to ensure that the community receive a fair and reasonable price for green electricity fed back into the grid, it is important to maintain a feed in tariff that will encourage both domestic and community based renewable energy projects of all sizes. (sub. 32, p. 1) FUTURE VICTORIAN FEED-IN TARIFF ARRANGEMENTS 119

The Commissions preliminary view is that owners of generators greater than 100kW are likely to be larger businesses, or commercial entities that have access to sufficient resources to enable them to negotiate a FiT payment with a relevant retailer or establish alternative arrangements for selling surplus electricity. The Commission notes that the Australian Energy Market Operator (AEMO) recently submitted a rule change to the Australian Energy Market Commission (AEMC) to introduce a new category of market participant into the National Electricity Rules called a 'small generation aggregator'. AMEC has released a consultation paper on the rule change and is seeking public submissions by 12 April 2012. Under the proposed rule change, small generation aggregators will only have to register once with AEMO. A small generation aggregator will have market responsibility for the participation of multiple generating units in the NEM. Separate registration of each of the generating units would not be required, significantly reducing costs and improving access to the market. This would allow distributed generators to use an aggregator to more easily enter and sell in the NEM (AEMC 2012a, pp.15). In relation to the size criteria it has been suggested that it should be 100kW or less (rather than the current less than 100kW requirement). David Sparks noted that If a potential owner of an embedded generator sets out to purchase a generator it will be quickly realized that such machines in the range of 100 kW would be typically 75, 80, 100, 120, 150 kW etc. Therefore to utilize the full potential of the DPI criteria it would be necessary be a little deceptive and purchase a 100 kW generator and declare that it is 99 kW. This is a genuine problem which I have encountered with retailers. (sub. 43, p. 2) From a practical perspective, the Commission is disposed to propose a size eligibility criterion for the SFiT of 100 kW or less, which is a marginal adjustment to the current SFiT criterion.

6.1.4

Metering arrangements

Several submissions queried whether the FiT should be based on net or gross metering. Before turning to this question it is important to understand the difference between the two arrangements. Customers with small-scale distributed generators (solar PV for example) may generate electricity to meet their own demand, import electricity from the network in cases where demand is greater than that supplied by their generator and export electricity to the network in cases where their demand is less than that supplied by their generator. To facilitate payment between the retailer and customer (for electricity imported or exported from the grid) a meter is needed to record the units of electricity exported to and imported from the grid. The way in which this measurement occurs for billing purposes depends on whether the customer has net or gross metering arrangements.

Gross metering
Under gross metering all of the electricity generated by a customer (through a solar PV system for example) is measured as is all of the electricity consumed by that customer. A gross FiT is applied to all of the electricity that is generated (that is, including energy consumed on-site) and the relevant retail price is applied to all the electricity consumed, regardless of where it is generated. Therefore the gross meter measures the entire output of the distributed generator separately to electricity consumption.

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Net metering
Under net metering the electricity generated by a customer and that customers consumption of electricity is combined to arrive at a net outcome. Electricity generated and consumed at the time of generation is not metered the customer does not pay for this electricity, and is also not paid for the amount generated at this time. The internally generated electricity consumed by the customer is valued at the retail price of electricity, as this is the amount that the customer saves. If the amount generated is greater than the amount consumed at a particular point in time, this amount is exported and measured for which the customer receives the applicable feed-in tariff. If the amount generated is less that the amount consumed at a particular point in time, the required amount of electricity is imported and measured with the customer paying the applicable retail tariff.

Metering arrangements in other jurisdictions


Many FiTs worldwide are based on gross metering (and gross FiTs). In some cases renewable electricity generators are paid a base rate for all the electricity they generate, and a premium for any electricity exported into the grid. Germanys FIT scheme, considered to be the worlds most developed, operates under a gross tariff. Under this scheme, solar PV generators are paid for electricity generated and used on-site (approximately 9 euro cents per kWh for the first 30 per cent of their annual electricity generation, and approximately 13 euro cents per kWh thereafter). Any electricity exported into the grid attracts a tariff of approximately 25 euro cents per kWh. Similarly, in the United Kingdom, solar PV generators receive a gross tariff of 8.9 to 21.0 pence per kWh for all electricity produced. On top of this, any electricity exported into the grid receives an additional tariff of 3 pence per kWh. While its large-scale renewable energy generators receive gross FiTs, Japans residential solar PV generators are subject to a net FiT. Under this scheme, generators are paid a tariff of 42 yen per kWh for electricity exported into the grid.

Table 6.8
Jurisdiction Victoria Northern Territory Queensland Germany

Feed-in tariff schemes


Implementation January 2012 July 2011 July 2011 January 2012 Tariff rate per kWh 25 cents 19.77 44 cents 8.05 euro 12.43 euro centsb 24.42 euro cents 21 pence 24 pence 28.88 euro cents 42 yen centsa, Gross/ net Net Net Net Gross Net Gross Net Gross Net 25 years 10 years Residential solar Residential solar 25 years Solar <4kW 20 years 20 years Duration 5 years Systems included Solar <5kW Residential solar Solar <5kW Roof-top solar <30kW

UK Spain Japan
Notes:

April 2010 Suspended: January 2012 July 2012

a for first 30 per cent of total annual electricity generation; b for the remainder of electricity generated

Source: Commission analysis.

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Participants views
While ACIL Tasmans preferred gross metered FiT may be more effective in reflecting the energy value, Victorias current FiTs are paid on a net basis. This implies significant sunk costs in smart meters, billing systems and other administrative aspects. The potential benefits of a gross tariff need to be weighed up against the additional costs of change. Jemena highlights that it has installed (single element) smart meters under the Advanced Metering Infrastructure (AMI) program which can only support net metering. Furthermore Jemena asserted: To support gross metering, a dual element meter is required. While the cost difference of a single-element and dual-element meter may be small relative to the cost of a small-scaled DG [distributed generator], the modifications to JENs AMI IT systems to support gross metering would be prohibitive. (sub. 79, p. 6) Similarly United Energy (UE) believed that, while gross metering may offer improved load forecasting at times of high demand, there may be additional costs: The minimum standard of metering under the AMI program is single element metering which enables a net feed in tariff as opposed to measuring the full energy generated from the distributed generation which may occur with a two element interval meter. Two element interval meters have only been funded for UE in order to continue the metering configuration for dedicated off peak circuits hot water and slab heating customers. (sub. 77, p. 4) Continuing the theme of minimising costs to relevant parties, Origin Energy supported net metering arrangements for small distributed generation systems: as this provides incentives for customers to reduce their consumption and maximise output of electricity to the grid. Furthermore, most jurisdictions have implemented net metering schemes, the metering and wiring costs are lower (because a second meter is not required) and the contribution of DG to the grid can be measured accurately where interval meters are installed. (sub. 81. p. 1) In contrast, several submissions focused on the potential societal benefits of gross metering. For instance Moreland Energy Foundation argued that: Gross metering of distributed energy systems offers a number of benefits over net metering, from greater fairness and equity, to greater financial certainty when determining the return on investment for the distributed energy system, to providing accurate and useful energy consumption information and enabling simple energy auditing of a home or business. (sub. 75, p. 6) Environment Victoria also pointed to the broader benefits of gross FiTs that would be supported by gross metering arrangements: A gross feed-in tariff values the full contribution to the community, environment and to our energy security, and pays a fair price based on these factors to the generator for all of the electricity generated, regardless of where it is used. (sub. 51, p. 5)

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6.1.5

Information provision

As noted in chapter 5, it is important that electricity customers considering distributed generation options have access to relevant information to be able to evaluate FiT offers in a timely and cost-effective manner. Accessibility of information can be improved by standardising FiT offers to allow customers to compare retailer offerings ultimately choosing the best offer that meets their needs, taking into account personal preferences. The Commission found in its desk-top reviews of retailer and other comparison sites that it is often difficult to understand how FiT offers interact with other retail market offers, terms and conditions. To improve customers capacity to make well informed decisions (from their perspective) it is important that they understand the financial implications of the service packages they are being offered by retailers. The Commission notes the National Electricity Customer Framework (NECF) is expected to commence on 1 July 2012, and transfers the regulation of Victorian electricity retailers to a national regime. The NECF requires retailers to comply with AER Retail Pricing Information Guideline (2012a) published by the AER. In complying with this guideline, electricity retailers will be required to provide relevant pricing information to the AER which will be input into a price comparator website (maintained by the AER). The Commissions view is that FiTs should form part of the pricing information provided under the price disclosure guidelines, and be included on the AERs price comparison site Energy Made Easy. Furthermore, the Commission understands that the requirement to publish FiT terms and conditions on retailer websites will remain, under the requirements of the Electricity Industry Act 2000 (Vic). To assist the market to transition to the new arrangement the Commission sees merit in also establishing an indicative benchmark range for FiTs that provides customers a starting point when seeking alternative offers from retailers. As shown earlier (table 6.3), ACIL Tasman have provided indicative estimates of the value of distributed generation for various generation profiles and technologies. The benchmark range would provide customers with some basic cost information that they would have difficulty acquiring on their own. This benchmark rate could be updated as appropriate over the short term until market FiTs are reasonably established.

6.1.6

Billing arrangements

In looking at future Victorian FiT arrangements it was suggested that the Commission consider billing and payment arrangements. The Minister for Energy and Resources wrote to the Commission5 listing several issues including: the retailer be required to pay the customer at the end of each normal billing period any amount earned by the customer from the feed-in that customers be paid in cash, not just credits that are wiped out if not used. The Commission notes that the criteria applied by the ESC states that: An offer must state that the retailer will pay or credit the customer for electricity supplied under the feed-in contract with the same frequency as the customer is billed for electricity supplied to the customer. (DPI 2011f)
The letter from the Minister for Energy and Resources is available on the Commissions website, www.vcec.vic.gov.au.
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An issue for further consideration is that under the Commissions proposed approach, a FiT will be available to all distributed generators, including at locations other than the principal place of residence. This may have implications for the way that retailers structure their billing and payment arrangements with their customers. For instance, it is conceivable that the value of the energy exported by distributed generators will be greater than the value of the energy consumed (for example, holiday homes). The Commission seeks further information on the extent to which current billing and payment practices by Victorian retailers are causing significant problems, which impact on the ability of customers to access fair and reasonable value for the electricity supplied by their distributed generator. To what extent do current billing and payment practices by Victorian retailers impact on customers ability to access fair and reasonable value for the electricity supplied by their distributed generator?

Information request

6.1.7

The Commissions view

An approach that specifies a specific FiT risks setting a price that is either too low or too high (regulatory error), leading to inefficient investment in distributed generation. It may also impose costs on other electricity consumers or impact on the competitiveness of the retail energy market if retailers are obliged to offer FiTs that are higher than market determined FiTs (or above the value of the distributed generation). This could result if retailers attempt to avoid certain customers or classes of customers. This was noted by the Australian Solar Roundtable: retailers may either try to avoid entering into market contracts with these customers, or offer them higher retail electricity rates than other customers (Australian Solar Energy Roundtable 2011, p.7) The market determined FiT, in an effectively competitive environment, would reflect the value of the generated electricity to the retailers, and would therefore avoid any unintended cross subsidisation issues. How best to move Victoria to a more efficient market-based FiT is discussed in the rest of this chapter. As previously noted there are currently some impediments to an efficient market determined FiT which appropriately rewards small distributed generators for the energy value of the electricity that they produce, including: Information and transaction costs: there are concerns that, especially for smaller distributed generation proponents, information is difficult and costly to obtain and is not always in a form which is clear and accessible to the customer. These costs are compounded by the newness of some technologies and uncertainty caused by changing national regulation. Market power issues: vertical integration of retail energy businesses. There are significant ownership links between the energy retail market and centralised energy generation which may impact on the incentives retailers face when engaging with and negotiating a FiT with small-scale (or aggregated groups of) generators. Limitations on time of use and locational pricing: not all Victorians have access to meters which collect time of use and location aspects of their power use and production. This limits the ability to develop FiTs that better reflect the value of distributed generation at different times and locations.

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On their own none of the above factors constitute a market barrier sufficient to prevent competitive outcomes from emerging (provided adequate consumer protection, transparency and information is available). However, combined they are likely to present significant short-term barriers until key reforms are in place, including through the Commissions draft recommendations and the ongoing changes to the NEM and its regulation. In moving towards a market-based FiT it is important that customers (owners of smallscale distributed generators) are well informed about the variety of service offerings by electricity retailers. As noted in chapter 5, it is likely that current FiT information provided by retailers is inadequate, and confusing in the manner it is presented. These information shortcomings may reduce the likelihood of efficient participation in the FiT market. Given the interrelationship between FiT offerings and retail market contracts for the supply of electricity, more targeted and comparable information regarding FiT offerings can support, rather than hinder, the further development of competition in the retail electricity sector. The Commission considers that future Victorian FiT arrangements be administratively simple, and capable of being implemented at low cost. Having regard to this, the Commission notes that there has been significant investment in metering equipment and systems that support the measurement of net exports of electricity from smallscale distributed generators. Given this, the Commission considers it is likely that mandating gross metering, which supports gross FiTs, would increase costs and would therefore be inconsistent with the guiding principles. The Commission also notes the value of supporting a nationally consistent approach, provided that it is not detrimental to the welfare of Victorian electricity customers. In this context the Commission notes that recent regulatory changes in South Australia and New South Wales have implemented net FiTs. As the role of distributed generation in the electricity market develops, however, there may be broader benefits to the industry from adapting their systems to allow for gross metering. Under the Commissions proposed market-based regulatory framework, this would remain an option. The Commissions recommendations are not a barrier to gross metering, the introduction of gross FiTs or businesses adapting their systems to accommodate both.

6.1.8

Terms of Reference 1: The Commissions summary view

Drawing all these elements together, the Commissions view on the design, efficiency and effectiveness of FiT schemes (including gross feed-in schemes) may be summarised as follows: With the advent of the carbon tax, and given the retail market for electricity is competitive, the energy value for distributed generation output is best captured through a wholesale-based price set by the competitive market. The role of a FiT scheme is to recover this value. FiT schemes should:
be based on such market prices, and be part of a transition to a fully market-based approach for pricing energy from distributed generation provide an indicative benchmark range with periodic updates until market FiTs are reasonably established not exceed such a market-based price, because this would mean cross-subsidies from customers without distributed generators to customers with distributed generators, and this would be regressive to some degree

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be technology neutral so that the most efficient choices among generation technologies can be made be confined to household scale distributed generation of 100kW or less, as larger scale producers are better placed to compete in the market.

Adopting time based pricing is desirable where feasible, because it provides a stronger economic signal to distributed generators of the value of production when overall electricity demand is high. While there are arguments in favour of gross FiT schemes, there would be significant costs in replacing recently installed smart meters and changing retailers supporting infrastructure and computer systems to be able to adopt such schemes. Therefore, while not ruling out such schemes if they were to arise in the marketplace as a result of competition, the Commission sees no clear value in mandating them.

6.2

Network value of distributed generation

Ideally the payment made to distributed generators should reflect the two components which contribute to the total value (that is, the energy value and the network value) of electricity supplied by distributed generators. ACIL Tasman (2012, p. viii) recommends that this could be achieved through a hybrid FiT which is paid to distributed generators, with the energy value calculated using the wholesale market-based approach, and a separate payment made to reflect the network value (net of the costs of accommodating the distributed generator). The network value of distributed generation stems from electricity being generated close to the customer (or other customers) in areas where the network is constrained. It therefore does not need to be transported through all of the various parts of the network, and can defer the need for network augmentation. However, the value of the distributed generation is driven by its capacity to support the network at the time the network is constrained (which is at times of peak demand). ACIL Tasman notes: the network value of distributed generation is likely to vary significantly from place to place due to the local nature of network constraints. It is also likely to vary significantly for different generation technologies as the certainty with which they can be relied upon to generate electricity during times of peak demand varies. It is only efficient to use distributed generation for its network value if the cost of doing so is less that the (avoided) network solution. In determining this, the cost of accommodating the distributed generation in the network must be taken into account. (ACIL Tasman 2012b, p.25) A further issue is that, given electricity network business regulatory arrangements, the network value of distributed generation is: determined by the output that the DNSP [Distribution Network Service Provider] expects a distributed generator to provide when peak demand occurs. It is not affected by the actual output when peak demand occurs because networks are planned and built based on demand forecasts. (ACIL Tasman 2012b, p.82) Advice provided to the Commission by ACIL Tasman suggests that the network value of distributed generation is in the nature of a local specific capital value that is unrelated to the quantity of energy generated, and is not easily incorporated into the FiT payment. The Commissions view is that this part of the network value is appropriately dealt with outside of the FiT payment.

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Taking account of this network value is important to ensure there are effective incentives to invest in distributed generation. Possible options for addressing this network value, include: Recognising that there is a value but do nothing because of the difficulty and possible transactions costs involved in trying to calculate it. These costs arise because the network value will vary by location, time of day, type of generator and the extent to which the DNSP can rely on the generator producing electricity when it is needed. Improving regulatory structures to provide incentives to reveal the network value proposed changes to the regulations governing incentive structures for distribution businesses, simpler (and less costly) connection processes, and better information about local bottlenecks may make the value more accessible to distributed generators. The Commissions draft recommendations 4.1 to 4.3 are relevant to this point. The value could be estimated and spread across all distributed generators and reflected in FiT payments, but as noted earlier this is not the Commissions preferred approach because the network value is not based on output. The approach of assuming network value is effectively zero (for the purposes of calculating FiTs for solar PV) has been adopted by IPART in New South Wales.

6.2.1

Incentives for investment in distributed generation

Enabling the network value of distributed generation to be captured by distributed generators is an important driver of efficient investment and installation of distributed generation technologies of all sizes. Concerns have been raised about the extent to which there are sufficient incentives for distribution businesses to encourage investment in distributed generation even where there are network benefits. For example, the Grattan Institute suggested that: the current regulatory environment does not always recognise the economic value of such distributed generation Many of the current regulations do not create the incentives for network operators to recognise the value of distributed generation. Indeed, because many of them earn a guaranteed rate of return on necessary augmentation, they have an incentive to discourage distributed generation that would reduce peak demand. (sub. 86, p. 2) ACIL Tasman suggested distribution businesses have limited incentive to innovate except when the payback is short because there is no incentive across revenue periods. where capital expenditure deferral benefits accrue across regulatory periods the building blocks approach reduces the benefits to the distributors as the benefits may be returned to customers at the subsequent price review. This could reduce the viability of demand management initiatives to the distributors.6 (ACIL Tasman 2011a, p.6)

ACIL Tasman noted that this was recognised by the ESC who allowed specific provision for demand management initiatives of $0.6 million over five years for each distributor with demand side activities and
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ACIL Tasman also noted that a DNSPs revenue is based on a return on its regulatory asset base so there is an incentive for the DNSPs to invest in network solutions to increase the regulatory asset base (ACIL Tasman 2012b, p.48). Currently there is an incentive scheme, the Demand Management Incentive Scheme (DMIS), designed to encourage distributors to investigate demand management options, including distributed generation. The scheme, as it applies to distributed generation, has a number of shortcomings: the amount provided to distribution businesses is too small to be effective uncertainty associated with the ex-post assessment of the DMIS payment because distributors have no certainty of recouping their costs narrow focus of expenditure (ACIL Tasman 2011a, pp.17, 39) The AER identifies that the DMIS is not the sole or only incentive and included $221 million for Demand Side Participation (DSP) in the Queensland DNSPs price determinations. While DSP includes distributed generation, most of the $221m in Queensland was allocated to funding demand side participation (DSP) technologies such as air-conditioning and pool filtration direct load control and some pilots of pricing options (AER 2010a).

6.2.2

The Commissions view

The Commission considers that misalignment between incentives for distribution businesses and efficient distributed generator connection present a major barrier to both efficient distributed generator connection and planning of networks to accommodate distributed generation. It is difficult to estimate the size of the network value because it depends on the location of the generation, whether it is of sufficient capacity to delay the need to invest in the network and whether it can be relied on at the time it is needed. Based on a range of estimates on the network value of distributed generation ACIL Tasman concluded that: In a recent report to the AEMC, Ernst and Young noted that the network value of reducing growth in peak demand is complex and recommended exercising extreme caution in using any (general) measure of value. Ernst and Young considered that there was sufficient precedent for using rules of thumb of between $90 and $300 per kVA per year for deferred network expenditure If it is assumed that the network value is in the order of $150 per kW, and a 2.5 kW solar PV system defers a planned augmentation by three years, the network value is $375 per year for the three years for which the augmentation is deferred. (ACIL Tasman 2012b, p.83) But as noted above this value is not applicable to all generators and for many the network value will be zero or negative. The key to distributed generators being able to realise the network value of their generation is ensuring there is sufficient information on where distributed generation can substitute for network system investment, and clear incentives for distribution network businesses to consider distributed generation as an alternative to additional
outcomes to be reported on. This specific reporting requirement did not eventuate in the transfer of the economic regulatory regime to the AER (ACIL Tasman 2011a, p.6).

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investment in the network. There is clearly already reform in train that will improve these incentives. The amount of information available on the locations where the network is constrained is increasing chapter 4 noted that Sustainability Victoria has published maps that identify network constraints that can help inform where distributed generation could result in savings from deferred network investment. The proposal to allow aggregators to act on behalf of a number of generators will introduce a party into the negotiation, with the scale and capacity to accumulate the knowledge and expertise needed to negotiate with distribution network businesses about distributed generation based network solutions. Increasing and continued interest in distributed generation by industry, government and regulators will help to embed it as a part of the energy network. Improving information and connection processes for distributed generation (chapter 4) will make it easier to incorporate other issues, such as benefits for the network, into those negotiations. In the short-term it may be possible to strengthen the capacity of distributed generators to negotiate with distribution network businesses by further improving access to information. In correspondence with the Commission ACIL Tasman suggested this could be done by: Developing a small number of case studies where local groups have aggregated purchases of distributed generators in an area where there is a network constraint to defer network augmentation. These case studies could then be referenced by others. To expedite the development of the case studies, the government could fund a liaison officer that would (a) work the electricity distributors to identify the most prospective areas for non-network solutions, (b) then work with the local council to identify the most appropriate vehicle for aggregating the purchases (c) liaise between the identified local groups and the electricity distributors to ensure that the required amount of small scale distribution generation is installed and the participants are paid the network value. (ACIL Tasman 2012b, p.49) It may also be possible to improve existing sources of information, for example by improving the way information on areas which the network will need to be expanded can be accessed and used. Such initiative improve market information and help balance market power, but they do not ensure the regulatory environment includes strong incentives for distribution businesses to seek out cost reductions regardless of the source. Such changes would have broader benefits for the electricity market but would take some time to design and implement. The Commission notes that the AEMC conducted a review into the use of a total factor productivity (TFP) methodology in determining regulated prices and revenues for electricity and gas service providers. The AEMC noted that: use of a TFP methodology in setting the allowed revenue path has the potential to create stronger incentives for service providers to pursue cost efficiencies compared to the building block approach. This is because it could provide higher returns to the service provider when it makes investments and improves operating practices which deliver continuing productivity improvements. There would be more pressure on all service providers to out-perform, or at least maintain, the rate of industry group productivity growth Accordingly implementing a TFP methodology as an alternative to the current building block approach could lead to increased FUTURE VICTORIAN FEED-IN TARIFF ARRANGEMENTS 129

productivity and lower prices for consumers in the long term. Therefore such a methodology could in principle contribute to the national energy objectives. However the AEMC found that: a number of conditions need to be satisfied for a TFP methodology to work properly and promote efficient regulatory decisions. We find that such conditions are not likely to be met at the present time. Crucially, the current lack of a sufficiently robust and consistent data-set means that it could be too problematic to reconstruct existing data for the purpose of a TFP methodology We advise that the initial focus should therefore be on establishing a better, more consistent data-set. (AEMC 2011c, p.ii) In summary the AEMC proposed a two stage process for Rule changes. Firstly an initial Rule would be made which requires service providers to provide specified regulatory data which would then permit the AER to test for the conditions necessary for a TFP methodology and to undertake initial paper trials of the calculations. Drafting of the detailed design of the TFP methodology and making of the Rule the second stage should only occur once both a) the necessary conditions can be, or are likely to be, met and b) it is considered that introducing a TFP methodology would contribute to the national energy objectives given the status of the market at that time. (AEMC 2011c, p.ii) While these are national issues, Victorias next round of distribution business price determinations is not expected until October 2015. This provides time to work on a possible solution or solutions. Several current and proposed incentive schemes and regulatory changes aim to improve incentives for distribution network service providers to engage with distributed generators to reduce network costs. Which initiatives should the Victorian Government initiate or make submissions to in order to most effectively reduce the barriers to distributed generation?

Information request

6.3

Implications for existing Victorian feed-in tariff schemes

The terms of reference require the Commission to recommend whether existing FiT arrangements should be continued, phased-out or amended. It also requires that where phase-out of existing arrangements is proposed, the appraisal should consider whether any transitional arrangements may be necessary. The Commissions approach to future Victorian FiT arrangements reflects its view that the retail market is sufficiently competitive that, with a transition to allow for changes in consumer regulation and growth in market experience, this market is capable of setting prices for the energy value of distributed generation that are in the long-term interests of consumers and producers. The Commissions approach is consistent with the COAG National Principles for Feed-in Tariff Schemes, in particular:

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That Governments agree that residential and small business consumers with small renewables (small renewable consumers) should have the right to export energy to the electricity grid and require market participants to provide payment for that export which is at least equal to the value of that energy in the relevant electricity market and the relevant electricity network it feeds in to, taking into account the time of day during which energy is exported. (Commonwealth Government 2012c, p.1) Chapter 5 stated that the objectives of FiT policy should focus on ensuring that lowemission and renewable small-scale generators receive fair and reasonable value for the electricity exported to the grid. The following guiding principles have been used to assist the Commission in its consideration of future Victorian FiT arrangements. Specifically that the FiT arrangements should: (1) comply with good regulatory design principles (2) support, rather than hinder (or distort), competition in the retail energy market (3) be consistent with national agreements, including the COAG FiT principles and the National Electricity Objectives (4) correctly target the problems they are seeking to address and be the best instrument to address those problems (5) be administratively simple and capable of being implemented at a low cost (6) be neutral to the type of generation technologies (7) not lead to inequitable outcomes. A key part of future FiT arrangements is the determination of the payment for electricity generated by distributed generators. As previously noted, the Commission considers that the energy value of distributed generation is best determined with reference to the wholesale market-based approach, where the payment is based on the components of the retail price of electricity that is avoided by the distributed generation. This should be determined within a well-informed retail electricity market. Taking into account the available evidence, and the start of the carbon tax on 1 July 2012, the Commission is disposed to recommend that the existing Victorian TFiT should be phased out by 31 December 2013 or once the 75 MW capacity is reached (as currently provided in legislation), whichever occurs first. This allows for an orderly transition to a significantly amended SFiT. The amended FiT would be determined by the market and expanded to cover renewable and low-emission technology. The approach to phasing out of the TFiT also reduces the costs of future cross subsidisation borne by those not participating in the FiT market. Under the amended SFiT, retailers with more than 5000 customers would be required to offer to purchase electricity supplied by low-emission and renewable distributed generators of 100 kW or less. This price would be determined within the retail market and would need to be fair and reasonable based on the energy value of the distributed energy supplied to the grid. This last point would require changing the guidance provided by the ESC on the meaning of fair and reasonable. The Commission considers this is the appropriate next step towards phasing out regulated FiTs, which the Commission suggest be done within three years, subject to the satisfactory completion of the reforms to the NEM that are currently on foot. Consumer

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protection, information provision and better connection processes are part of the arrangements going forward. The Commission sees merit in the Victorian Government, through the ESC, publishing information on the likely range of prices that would be consistent with the fair and reasonable value of electricity supplied by distributed generators. Retailers would continue to be required7 to publish up to date information on their websites regarding prices and terms and conditions for the purchase of electricity from distributed generators, and would provide relevant pricing information to the AER consistent with price disclosure guidelines. This information could then be used as an input into the AERs price comparison website. During the transition the ESC would continue in its role in considering the extent to which FiT market offers are consistent with an amended fair and reasonable criterion that does not require a one-for-one tariff. Provided they are fair and reasonable, retailers would be free to offer a range of tariffs that could vary according to location and time of day. Throughout this transition period the Victorian Government (Department of Primary Industries (DPI)) should monitor the range of market offers that are made by retailers. This information would be used to highlight any significant failings in the market that might lead to a view that the obligation to offer should be retained post the transition period. As mentioned earlier, the Commission considers the SFiT should not be constrained to the principal place of residence, as this would simply lead to greater administrative complexity. Moreover, this would limit opportunities for distributed generation to contribute to improving the performance of the electricity system. The approach outlined above is consistent with the Commissions view that over time the retail market is sufficiently competitive to support market determined FiTs, if supported by consumer protection and access to relevant information. It recognises that immediate deregulation could create significant disruption and, given the current state of the market, a more managed transition to a competitive market would provide greater net benefit as: Changes to the national retail regulatory framework would have had time to bed down, reducing uncertainty in the market. Victoria would have had the opportunity to reduce the significant regulatory burdens that arise from the current cumbersome processes for connecting distributed generation and signing up for FiTs. These changes would make it easier for consumers to choose, and reduce a major business cost on small installers whose businesses would also be disadvantaged by any uncertainty in the transition to deregulated FiTs. Any consumer protection or information provision regulation could be bedded down, including the proposed move to national information provision, to ensure that these protections are sufficient to support effective competition. Victoria could monitor deregulation in NSW and use the experience there to inform and improve its FiT policy going forward. For these reasons the Commission is proposing a transition where the distortions in prices are removed in the first instance but certainty that the market will continue to offer competitive FiTs is maintained. It is proposed that this guarantee be removed after

Under the Electricity Industry Act 2000 (Vic).

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three years when the new market is expected to be mature enough to support competitive outcomes. Participants at the Consumer Group Roundtable suggested that consumers should have the option of selecting a simple tariff structure that is easy to understand. It was argued that FiTs are already complex and if the range of offers was even broader some consumers would find it very difficult to make an informed choice, even if information was available. At this stage it is not clear to the Commission: whether a simple FiT would be automatically offered by retailers in a competitive market if such an offer needs to be regulated whether regulation would be possible under a competitive market model.

Draft Recommendation 6.1


That, to improve the efficiency and effectiveness of the operation of feed-in tariffs (FiTs) in Victoria, the Victorian Government: close the Transitional FiT, either by 31 December 2013 or once the 75 MW capacity is reached (as currently provided in legislation), whichever occurs first amend the Standard FiT to require that Victorian electricity retailers with 5 000 or more customers offer fair and reasonable prices for electricity exported to the grid by all small low-emissions or renewable distributed generators (100 kW or less) until 31 December 2015 establish a fair and reasonable price for energy supplied by distributed generators through the retail electricity market. define low-emissions technology as generators that produce 50 per cent or less of the emissions intensity of electricity generation in Australia allow market-determined arrangements based on gross payments by mutual agreement ensure that FiT prices are published by the Australian Energy Regulator under the requirements of the National Electricity Customer Framework. That the Essential Services Commission: publish information on the likely range of wholesale market-based net FiT payments which would be consistent with a fair and reasonable offer updated at regular intervals consider the extent to which FiT market offers are consistent with fair and reasonable criteria, redefined to be based on the wholesale price of electricity (the energy value).

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Given that there is effective competition in the electricity retail market, is it necessary to retain an obligation to offer a price for the purchase of electricity supplied by distributed generators within the transitionary period? Why?

Information request

Are there any significant costs of retaining the obligation to offer? If so, what are they? Is the three year transition to market determined feed-in tariffs appropriate? If not, what might be a more appropriate transition period?

6.4

Transitional arrangements

The Commission is aware that the process for moving from current Victorian FiT arrangements to what is set out in draft recommendation 6.1 requires careful consideration. The Energy and Water Ombudsman Victoria (EWOV) highlighted some of the issues and problems resulting from the closure of the PFiT and its replacement by the TFiT. EWOV noted that: when the Transitional Feed-in Tariff (TFiT) expires in five years (as intended) those customers would move onto the SFiT. Currently, however, these two FiTs have different eligibility criteria. Customers who apply for TFiT must not have a PV system greater than five kilowatts (kW), and customers applying for SFiT must have a PV system greater than five kW but less than 100 kW. Based on this criteria, there are residential consumers who may miss out on receiving a FiT entirely as they do not meet the current criteria around the size of the PV System. This is one of the transitional issues that will need to be considered by VCEC. (sub. 48, p. 4) Reflecting on the experience with closing the PFiT, the Solar Energy Industries Association suggested during consultation that greater clarity with respect to information and time-paths were needed, and that a dedicated website be available for clients to understand the changes (what is required, and who is responsible for various installation and contract activity). As outlined in chapter 4, existing connection and sign-up processes are complex involving installers, retailers and distribution businesses, which would be addressed by the Commissions previous draft recommendations.

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Box 6.1

Energy and Water Ombudsman Victoria (EWOV) case study

The customer submitted all the required solar paperwork prior to the cut-off date of 30 September 2011. Soon after she received a bill without a solar rebate and immediately contacted her electricity retailer. Her electricity retailer initially advised that it had not received the required paperwork. Dissatisfied with the response, the customer made a complaint with EWOV. However, after the complaint was lodged, it was confirmed by the electricity retailer that all paperwork was sent. It was revealed that her electricity retailer had raised a service order to install a bidirectional meter, which occurred on 20 July 2011, but had raised an incorrect service order requesting SFiT instead of PFiT as the solar tariff. EWOV is continuing to investigate this issue with the electricity retailer. It is unlikely that this customer will receive PFiT, even though this was a retailer error, as the scheme is now closed to new customers.
Source: sub. 48, p. 3.

The Commission is of the view that DPI should continue to provide FiT information on its website, including links to relevant AER price comparison information. During the transition to the proposed FiT arrangements DPI should also engage in an information campaign and outline the changes and transitional arrangements including: relevant dates and cut off criteria contact information (retailers, EWOV and so forth) who is responsible for various activities fact sheets and useful tips outline of the new arrangements what is different and the implications for customers. The Commission understands that the design of the cut-off trigger, which determines whether the owner of a PV system is eligible for the TFiT when the scheme is being closed to new entrants, has implications for the fairness and orderliness of the phaseout. The Commission sees merit in basing the cut-off on the lodgement of relevant paperwork with the retailer by a specific date. This design would minimise the number of eligibility issues that are caused by factors outside of the control of the consumer. The terms of reference specifically state that any changes to existing arrangements would not be applied retrospectively. The Commission understands this to mean that customers who are currently on a PFiT would remain on this tariff until its contracted expiry date on 1 November 2024. On expiry, these customers would be eligible for the amended SFiT or market-based FiT. Similarly, those customers currently on a TFiT would continue to remain on this tariff until its contracted expiry date on 31 December 2016. This non-retrospective approach would also apply to customers currently on a SFiT. The terms and conditions of existing SFiT contracts may be one means of managing this transition. The Commission will look further at the issues for existing SFiT customers in its final report. The Commission is considering making recommendations on how to manage the transition and welcomes further input from inquiry participants regarding the type of information and criteria that would be most useful.

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135

A preliminary view is that the TFiT cut-off should be based on the lodgement of relevant paperwork with the retailer by a specific date. Are there other options that the Commission could consider to ensure an orderly and fair phase-out of the TFiT?

Information request

What information should be provided by DPI about transitional arrangements, when should it be provided, and how should the information be disseminated? Are there any SFiT, TFiT or PFiT contractual issues that the Commission should be aware of in its consideration of transitional matters? What are they?

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Appendix A: Consultation
A.1 Introduction
The Victorian Competition and Efficiency Commission (the Commission) received the terms of reference to undertake an inquiry into feed-in tariff arrangements and barriers to distributed energy on 13 January 2012. In keeping with its usual process to consult extensively during public inquiries, the Commission advertised the inquiry in The Age, Herald Sun and the Weekly Times in January and February 2012. The Commission also published an issues paper in February 2012, which outlined: the scope of the inquiry how to make a submission the Commissions consultation process the inquiry timetable. The issues paper invited participants to register an interest in the inquiry and to make submissions. The Commission received 1065 registrations of interest, including 86 individual and 844 proforma submissions via Environment Victoria, before the release of the draft report (section A.2). The Commission held three roundtables. The first roundtable was held on 8 March 2012, with participants from the Energy Efficiency Council. Participants discussed issues relating to connecting distributed generators to the distribution network and feed-in tariff pricing. The second roundtable, held on 15 March 2012, focused on connecting distributed generation and establishing fair and reasonable feed-in tariff prices from the perspective of electricity retailers and distributors. It was attended by representatives from electricity retail and distributor businesses. The third roundtable, held on 10 April 2012, discussed similar issues but from a consumer perspective. Roundtable participants included government and non-governmental organisations that deal with, or advocate for, consumer rights (section A.3). The Commission consulted extensively (including meetings, visits and telephone discussions) with Commonwealth, State and local government departments and agencies, businesses, academics, associations and individuals (section A.4).

A.2

Submissions

The Commission received 86 submissions (table A.1). All submissions are public documents that can be viewed on the Commissions website.

Table A.1
No. 1 3 5 7 9 11

Submissions received
Participant No. 2 4 6 8 10 12 WattSource Exigency Gerard Noonan (2) BRT Consulting Pty Ltd Dandenong Ranges Renewable Energy Association (DRREA) Jeremy Ashton 137 Participant

Comfortid.com Pty Ltd Jill Dumsday Gerard Noonan (1) H Malcolm Walter Alistair Smith Bill Grant

APPENDIX A: CONSULTATION

Table A.1
No. 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 138

Submissions received (cont.)


Participant No. 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 Jay Smith Trish Sharkey Johanna Winchcomb Lucy Armstrong Patricia Rivett Roger Willshire Louise Flaherty Sandra Coventry Christine Easdown Robin Jensen Rebecca Edwards Dawn Gilson Alan Jones Neil Rankine Prof Alan Pears Judy McShane Energy & Water Ombudsman Victoria Ironbark Sustainability Saturn Corporate Resources Pty Ltd Susie Burke Australian Solar Round Table Simply Energy Enviromate Rachel Cook Beyond Zero Emissions David & Pamela Rothfield Alex Macleod Liz Burton AGL Energy Supply Association of Australia Clean Energy Council Renewable Energy Solutions Australia Holdings Ltd CitiPower & Powercor Participant Lucinda Young

Janet M Fitzwater Solway Nutting Maria & Paul Hayes Nicole & Jason Drage Duncan Brown & Jeanette Gillespie Gordon Donaldson Emerald for Sustainability Mike Reeves Maria A Bell Dean Bridgfoot Sally Kaptein & Jack Carolan Fiona M Chant National Electrical & Communications Association Jenny Francis Ceramic Fuel Cells Limited David Sparks Climarte Frank Barbara Mildura Development Corporation Environment Victoria Regional Cleantech Solutions LIVE Advance Solar Electrical South East Councils Climate Change Alliance Darebin City Council Australian PV Association F Lisner APA Group Warburton Community Hydro Project Union Fenosa Wind Australia Alternative Technology Association Moreland Energy Foundation United Energy Jemena

POWER FROM THE PEOPLE: AN INQUIRY INTO DISTRIBUTED GENERATION

Table A.1
No. 81 83 85

Submissions received (cont.)


Participant No. 82 84 86 Participant Graham Scarlett Neilson Electronic Systems Pty Ltd Grattan Institute

Origin Energy Loy Yang Marketing Management Company Lumo Energy

In addition, the Commission received 844 submissions from individuals submitted as an Environment Victoria proforma submission. Of these, 718 submissions consisted of the Environment Victoria proforma without any additional comments and 126 provided additional comments or replaced the proforma. A list of Environment proforma submitters can be found on the Commissions website at www.vcec.vic.gov.au. A copy of the Environment proforma submission and individual additional comments can also be viewed on the Commissions website.

A.3

Roundtables

The Commission held three roundtables in March and April 2012. Roundtable participants are listed below (tables A.2, A.3 and A.4).

Table A.2
Simon Helps Randy Gadient Bob Norris Ben Samways Brad Knowles Mark Lampard Dr Matthew Butlin Deborah Cope

Energy efficiency roundtable


Organisation MWM Siemens Dalkia Honeywell Alerton AECOM Victorian Competition & Efficiency Commission Victorian Competition & Efficiency Commission

Participant

Table A.3
Nicole Wallis Siva Moorthy Alice Adriannse Ian Cupidon

Retailers and distributors roundtable


Organisation AGL Jemena Lumo Energy Lumo Energy Powercor and CitiPower Powercor and CitiPower SP Ausnet SP Ausnet TRUenergy Victorian Competition & Efficiency Commission Victorian Competition & Efficiency Commission 139

Participant

Annalisa Cattanach Matthew Serpell Julie Buckland Kate Jdanova Ross Evans Dr Matthew Butlin Deborah Cope APPENDIX A: CONSULTATION

Table A.4
Gerard Brody Gemma Dodson David Standford Dean Lombard Dr Matthew Butlin Deborah Cope

Consumer groups roundtable


Organisation Consumer Action Law Centre Consumer Affairs Victoria Consumer Utilities Advocacy Centre Victorian Council of Social Service Victorian Competition & Efficiency Commission Victorian Competition & Efficiency Commission

Participant

A.4

Stakeholder consultations

The Commission consulted with academics, businesses, industry associations and key interest groups, and drew on the knowledge and expertise of Victorian, Commonwealth and local government departments and agencies. In addition, the Commission conducted a short Victorian Energy Retail Business Survey to assist its analysis of current and future Victorian feed-in tariff arrangements. The Commission sent a copy of the survey to all electricity retailers in Victoria, seeking their comments and feedback. The survey responses form part of the Commissions broader stakeholder consultation process.

Table A.5
AGL

Consultation participants
Organisation or Individual Australian Energy Market Commission Australian Energy Regulator Ceramic Fuel Cells Limited Clean Energy Council Consumer Affairs Victoria Department of Business and Innovation Department of Human Services Department of Premier and Cabinet Department of Treasury and Finance Energy Efficiency Council Independent Pricing and Regulatory Tribunal Jemena Minister for Energy and Resources Office of the Renewable Energy Regulator (Cth)

Organisation or Individual Australian Energy Market Operator Australian Petroleum Production and Exploration Association City of Melbourne Consumer Action Law Centre Consumer Utilities Advocacy Centre Department of Finance & Deregulation (Cth) Department of Justice Department of Primary Industries Energy and Water Ombudsman Exigency Institute for Sustainable Futures (University of Technology Sydney) Lumo Energy Moreland Energy Foundation

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Table A.5

Consultation participants (cont.)


Organisation or Individual Property Council of Australia (Victorian Division) SP Ausnet Sustainable Melbourne Fund Victorian Council of Social Service

Organisation or Individual Powercor and CitiPower Solar Energy Industries Association Sustainability Victoria TRUenergy

APPENDIX A: CONSULTATION

141

Appendix B: Regulation of the electricity sector


B.1 Victorian regulation
The Electricity Industry Act 2000 (Vic) (EI Act) and predecessor legislation have regulated the Victorian electricity supply industry for almost two decades, following privatisation of the State-owned electricity industry in the 1990s. The EI Act supplements the national framework for economic regulation of transmission and distribution services by regulating various matters including: a licensing regime for those who generate electricity for supply or sale, or the transmission, distribution, supply or sale of electricity Victorian feed-in tariff (FiT) arrangements for the premium, transitional and standard FiT schemes. The Essential Services Commission (ESC), established by the Essential Services Commission Act 2001 (Vic), administers the licensing, price and service standard provisions of the EI Act. Box B.1 discusses the EI Act in more detail.

Box B.1

Electricity Industry Act 2000 (Vic)

The Electricity Industry Act 2000 (Vic) regulates the Victorian electricity supply industry. Part 2 Division 1 sets out the objectives of the Essential Services Commission (ESC), which include promoting the development of full retail competition in the electricity industry. Part 2 Division 2 sets out reserve powers of the ESC with respect to charges for connection to, and the use of, the distribution system. It also provides that the ESC has the power to regulate tariffs for the supply of electricity (s 12(1)). The Governor in Council may make an order to regulate tariffs for the sale of electricity if the Australian Energy Market Commission concludes that competition in a market for electricity is not effective (s 13). Part 2 Division 3 requires the ESC to license people who generate electricity for supply or sale, or the transmission, distribution, supply or sale of electricity unless the person holds a relevant exemption. Division 3 provides for conditions that regulate the conduct of licensees. Licences are transferable and the ESC can suspend or revoke licences. Part 2 Division 5 regulates the terms and conditions of sale and supply of electricity. It deals with matters including the publication of tariff information, and the terms and conditions for sale of electricity to certain customers. Part 2 Division 5A governs Victorian feed-in tariff (FiT) schemes. It sets terms and conditions for the purchase of small-scale renewable energy exports, distinguishing between premium, transitional and standard FiT schemes. FiT schemes are discussed in detail in section B.4.2.
Source: Electricity Industry Act 2000 (Vic).

A discussion of the national regulatory framework governing the national electricity market (NEM) can be found in section 2.2.1 of this draft report.

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143

B.2

Regulatory framework after 1 July 2012

With the commencement of the National Energy Customer Framework (NECF) on 1 July 2012,1 there will be significant changes to the regulation of the Victorian electricity sector, with many Victorian responsibilities being transferred to a national framework. The NECF includes the National Energy Retail Law (NERL), National Energy Retail Rules (NERR), and amends existing national regulation, including introducing chapter 5A into the National Electricity Rules (NER). The NECF will be applied in Victoria by the National Energy Retail Law (Victoria) Bill 2012, which is currently being debated by the Victorian Parliament. The Bill proposes to repeal a significant amount of Victorian energy regulation that will become redundant after the NECF is applied. However, Victorian-specific energy legislation will still be necessary in a number of areas after the NECF commences. The Department of Primary Industries (DPI) intends, where feasible, to consolidate the remaining Victorian-specific energy regulation (DPI 2011j; DPI 2011h). Importantly, in relation to the electricity sector: The ESC will retain responsibility for licensing distribution, transmission and generation activities in Victoria. However, although electricity retailers will no longer be regulated through a State-based licensing scheme and will instead be governed by a national retailer authorisation and exemption regime administered by the Australian Energy Regulator (AER). The NECF is silent on the issue of FiTs and the Victorian FiT schemes will continue unaffected by the commencement of the NECF although license conditions that were linked to feed-in tariffs will become direct statutory obligations under an amended EI Act (DPI 2011h; DPI 2011j; Explanatory Memorandum 2012, p.18).

B.3

Connecting to the distribution network

The process for connecting connection applicants (CA) to the distribution network will change with the commencement of the NECF. As of 1 July 2012, there will be two processes under the NER for connecting distributed generation to the distribution network: a process for registered generators or generators exempt from registration by the Australian Energy Market Operator (AEMO), under chapter 5 a simplified process for retail customers (including non-registered embedded generators who do not intend to participate directly in the NEM) under chapter 5A. Each connection process has associated rights and obligations in relation to accessing the distribution network and specific sizes/types of generators may be excluded from, or find it more difficult to access, current connecting processes.

In the event that the commencement of the NECF is delayed in one or more participating jurisdictions, the National Energy Retail Law (Victoria) Bill 2012 will commence at a later date agreed to among participating jurisdictions. This will ensure that the NECF commences throughout Australia on the same day (Explanatory Memorandum 2012, p.1; OBrien 2012, p.1447).
1

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B.3.1

Connecting registered generators under chapter 5

Registration as a generator
To be connected under chapter 5, registration as a generator in the NEM is required unless AEMO grants an exemption from registration where an exemption is not inconsistent with the national electricity objective (NER, cl 2.2.1(c)). Section 7 of the National Energy Law (NEL) states: The objective of this Law [the National Electricity Objective] is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to (a) price, quality, safety, reliability and security of supply of electricity; and (b) the reliability, safety and security of the national electricity system. Clause 2.2.1 of the NER requires that: each generating unit within a generating system must be classified as a scheduled generating unit, semi-scheduled generating unit or non-scheduled generating unit each generating unit must be further classified as a market or non-market generating unit. Generator registration has significant implications for participation in the NEM. The consequences of generator classification for distributed generators selling excess electricity into the distribution grid are discussed in section B.4.1. Table B.1 provides typical definitions and examples of the available generator classifications. Note that in certain circumstances, AEMO may approve a generating unit classification, even though it does not meet the typical definition of a scheduled, semi-scheduled or non-scheduled generator.2

See NER cl 2.2 and the NEM Generator Registration Guide (AEMO 2010b).

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Table B.1

Categories of registration as a generator


Market: A generating unit from which the sent out electricity is not purchased in its entirety by the local retailer or by a customer located as the same connection point Non-market: A generating unit from which sent out electricity is purchased in its entirety by the local retailer or by a customer located at the same connection point Scheduled non-market generator Example: 40 MW generating system under contract for all output to a local retailer located at the same connection point Semi-scheduled non-market generator Example: 160 MW wind farm under contract for all output to a local retailer located at the same connection point

Scheduled: A generating unit with a nameplate rating of 30 MW or greater or a group of generating units connected to a common connection point with a combined nameplate rating of 30 MW or greater Semi-scheduled: A generating unit with a nameplate rating of 30 MW or greater or group of generating units connected to a common connection point with a combined nameplate rating of 30 MW or greater and the output of the generating unit is intermittent Non-scheduled: A generating unit with a nameplate rating of less than 30 MW or a group of generating units connected to a common connection point with a combined nameplate rating of less than 30 MW
Source: (AEMO 2010b, pp.78).

Scheduled market generator Example: 2000 MW power station from which all of the electricity is sold via the market

Semi-scheduled market generator Example: 160 MW wind farm from which all the electricity is sold via the market

Non-scheduled market generator Example: 10 MW generating system from which all of the electricity is sold via the market

Non-scheduled non-market generator Example: 10 MW generating system under contract for all of its output to the local retailer at the same connection point

Exemption from registration


Appendix 6: Guideline on Exemption from Registration as a Generator of the NEM Generator Registration Guide (AEMO 2010b) provides guidance on the circumstances in which AEMO may exempt a generator from registration. Where a Standing Exemption applies, the generator is automatically exempt and there is no need to apply to AEMO for an exemption from registration (AEMO 2010b, p.1). A Standing Exemption exists for generating systems with a nameplate rating of less than 5 MW, provided any of the following are met:

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the generating system has a total nameplate rating at a connection point of less than 5 MW the generating system is not capable of exporting to a transmission system or distribution system in excess of 5 MW the generating system has no capability to synchronise or to operate electrically connected to a distribution system or transmission system the sent out generation of the generating unit is purchased in its entirety by the Local Retailer or by a Customer located at the same connection point (AEMO 2010b, p.36).

In exceptional circumstances, AEMO may also grant an exemption from registration on a case-by-case basis. On application, AEMO may grant an exemption from registration for generating systems of more than 5 MW and less than 30 MW capacity which export (sell) less than 20 GWh in any 12 months (AEMO 2010b, pp.3637).

Registration process
Chapter 2 of the NER governs the registration of generators. The registration process is lengthy and requires the CA to provide detailed documentary evidence that their generating equipment will meet or exceed the technical requirements of chapter 5 of the NER. It may take up to three months for a CA to prepare the documentation required for registration as a generator (AEMO 2010b, p.4). The registration process consists of four key steps: (1) CA submits an application (using the appropriate form): for registration as a generator, accompanied by a registration fee (fees range from $5000 to $7100 depending on generator classification) or for exemption from registration as a generator, accompanied by an exemption from registration fee ($2000 for 2011-12).3

(2) AEMO reviews the application and responds within five business days. (3) AEMO may request additional information or clarification of the information contained in the application. If such a request is made, the CA has 15 business days to supply the additional information or clarification. (4) Within 15 business days of receiving the application or requested additional information or clarification, AEMO will notify the CA of its determination. If accepted, AEMO will notify the CA of the effective date of registration and of any applicable conditions of registration (AEMO 2010b, pp.56).

Connection process
The connection process under chapter 5 requires the exchange of detailed technical, prudential and commercial information, and extensive consultation between the CA and the distribution network service provider (DNSP). The process can be summarised into five main steps: (1) Connection studies and enquiry: the CA conducts a network connection feasibility study (which may include a network stability study) and approaches their local
See AEMO Schedule of Registration Fees 2011/12 (www.aemo.com.au/registration/0120-0031.pdf).

APPENDIX B: REGULATION OF THE ELECTRICITY SECTOR

147

DNSP detailing the type, magnitude and timing of the proposed connection. The information to be provided with the connection enquiry is set out in cl 5.3.4 and sch 5.4 of the NER. (2) Response to connection enquiry: the DNSP will liaise with other network service providers to determine the impact the proposed connection may have on existing connection agreements. Within 10 business days, the DNSP must provide preliminary information, including a preliminary program of proposed milestones for the connection process. The DNSP has 20 business days to advise the CA of the technical requirements and all further information required to enable an assessment of the application to connect. (3) Application to connect: the CA submits an application to connect accompanied by the application fee. The application must include proposed technical standards. The CA has an automatic right to connect if the relevant automatic access standards are met. If the application to connect deviates from the relevant automatic access standards, then there is no automatic right to connect, and the parties need to negotiate each proposed technical standard in consultation with AEMO. Schedule 5.2 sets out the automatic access standards for registered generators. The automatic access standards do not apply to distributed generators exempt from registration or eligible for exemption under Appendix 6: Guideline on Exemption from Registration as a Generator and where connection is unlikely to cause a material degradation in the quality of supply to other network users (NER cl S5.2.1(b)). This means that technical standards for distributed generators of less than 5 MW capacity must be negotiated on a case-by-case basis and there is no automatic right of connection for distributed generators of this size. The negotiated access standards must meet at least the minimum access standards specified in the sch 5.2 of the NER. In addition, the Electricity Distribution Code (ESC 2011a) published by the ESC, outlines technical standards that embedded generators connecting to the distribution system in Victoria must satisfy. The Commission understands that the Electricity Distribution Code will become redundant with the commencement of the NECF on 1 July 2012 but it is intended that certain provisions, including those relating to technical standards for embedded generators, will be retained in another form of Victorian regulation.

(4) Connection agreement and generator installation: once the access standards have been agreed, the DNSP must prepare an offer to connect based on the agreed standards within the timeframe specified in the preliminary program (or as agreed between the parties). The CA and DNSP will execute the connection agreement that describes the connection and outlines the applicable technical and commercial conditions. AEMO is to be notified within 20 business days of the execution of the connection agreement. The CA may then commence construction and installation of the generator. (5) Inspection and commissioning: Energy Safe Victoria will inspect and test the installed generating system and issue a Certificate of Electrical Safety. A range of connection tests will be performed with a DNSP representative present, before live connection to the distribution network. After connection, an installation engineer will test and commission the generator to ensure it is ready for regular service (AEMO 2011).

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B.3.2

Connecting retail customers under chapter 5A

With the commencement of the NECF on 1 July 2012, responsibility for the sale and supply of energy to retail customers including new connections to distribution networks will be transferred to a national regulatory regime. This includes the introduction of a new chapter (chapter 5A) in the NER, that provides for the electricity connection of retail customers. The connection process under chapter 5A will vary between DNSPs. Chapter 5A applies to retail customers, including embedded generators, who are not registered with AEMO (unless the registered participant is acting as the agent of a retail customer). Retail customers connected under chapter 5A of the NER will have direct contracts with their DNSP, as well as their designated retailer. Small customers will have a contract with a designated retailer to provide customer retail services (that is the sale of electricity) under a standard or market retail contract, governed by Part 2 of the NERL. Distribution services provided by DNSPs are divided into initial connection services and ongoing energisation services that come into effect after connection. A retail customer will have a distribution contract for connection under chapter 5A of the NER and a separate (deemed) distribution contract for ongoing energisation regulated by Part 3 of the NERL. At this stage it is unclear how these two sets of distribution contracts will interact (Newman & McDermott 2010).

Types of connection service


Chapter 5A provides for three types of connection service for retail customers: (1) A basic connection service, which will cover retail customers including those who are micro-embedded generators. DNSPs must have a model standing offer for basic connection services that has been approved by the Australian Energy Regulator (AER). Micro-embedded generators (micro EG) are not defined in chapter 5A according to generator size. The NER merely state that a micro EG connection is of the kind contemplated by Australian Standard AS 4777 (Grid connection of energy systems via inverters) (cl 5A.A.1). According to Standards Australia, AS 4777 applies to inverter energy systems with ratings up to 10 kVA for single-phase, and 30 kVA for three-phase, intended for connection to the low voltage electricity distribution network. The Commission understands that AS 4777 is currently under review (Queensland Government 2012). (2) A standard connection service, which can cover the terms and conditions for different classes of connection services or different classes of retail customers (including non-registered embedded and micro-embedded generators). DNSPs can choose to prepare a model standing offer for such services and have it approved by the AER. (3) A negotiated connection contract, which covers services that are not subject to a basic or standard connection standard offer, or where a basic or standard connection service is sought but the CA elects to negotiate the terms and conditions of the connection agreement. The terms and conditions for such services are negotiated and if agreement cannot be reached the dispute can be arbitrated by the AER. In relation to a negotiated connection contract, a CA is an applicant for a connection service that is: a retail customer (including an embedded generator) a retailer or other person acting on behalf of a retail customer, or a real estate developer. 149

APPENDIX B: REGULATION OF THE ELECTRICITY SECTOR

DPI has advised the Commission that DNSPs in Victoria will not be required to have their basic or standard connection service model standing offers approved by the AER until 1 July 2013. However, the requirement to have compliant offers published on a distribution businesses website will commence from 1 July 2012.

Connection process
The connection process under chapter 5A is broadly similar to the connection process under chapter 5. The connection process consists of the following key steps: (1) Preliminary enquiry: the CA makes a preliminary connection enquiry about connection services. The DNSP has five business days (or longer agreed period) to provide the enquirer with information required to make an informed application. (2) Application to connect: once an application is made, the DNSP must advise the CA if the application is incomplete and, if so, request the CA to resubmit it. The DNSP may also request additional information if reasonably required. The DNSP has 10 business days after receipt of a complete application/requested additional information (or some other agreed period) to advise the CA whether the proposed connection is a basic connection service, standard connection service or neither. A site inspection may be required for the DNSP to determine the nature of the connection service sought by the CA. (3) Connection offer where a basic or standard connection service is sought: within those same 10 business days (from receipt of a complete application/additional information) or other agreed period, the DNSP must make a connection offer based on the relevant model standing offer. The offer remains open for acceptance for 45 business days, unless extended by agreement. (4) Expedited connection where a basic or standard connection service is sought: where the CA requests an expedited connection and indicates that the terms of the model standing offer would be acceptable in the connection application, the DNSP is taken to have made, and the CA accepted, a connection offer according to the terms of the relevant model standing offer on the date the DNSP receives the connection application. (5) Where a negotiated connection contract applies: the DNSP must advise the CA of the negotiation process and related costs. The DNSP must use its 'best endeavours' to make a negotiated connection offer within 65 business days. A negotiated offer must comply with the minimum statutory requirements and remains open for acceptance for 20 days (unless extended by agreement). In the event that the DNSP and CA cannot reach an agreement on the proposed or actual terms and conditions of a negotiated connection contract, or the terms and conditions on which a basic or standard connection service is to be provided then the matter can be arbitrated by the AER. The introduction of chapter 5A into the NER is designed to simplify the connection of small-scale retail customers, including those with distributed generation. However, connection under chapter 5 will still remain an option and distributed generators wishing to sell through the NEM are required to register and connect through the chapter 5 connection framework (section B.4.1). The transparency of the process for small distributed generators connecting under chapter 5A will depend in part on whether DNSPs decide to provide model standing offers for standard connection services. The Commission notes that in April 2012, a rule change request designed to facilitate the process for connecting embedded generators to the distribution grid was jointly submitted to the AEMC by ClimateWorks Australia, Seed Advisory and the Property Council of Australia. This proposed rule change is discussed in chapter 4. The process for seeking connection under chapter 5A is illustrated in figure B.1. 150 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

Figure B.1

Connection process for distributed generation under chapter 5A


Preliminary inquiry from potential applicant wishing to connect DNSP has 5 days to provide information Applicant lodges application on form determined by DNSP

Additional information required DNSP informs applicant of additional information needed

Application incomplete

DNSP informs applicant of deficiency

Application complete DNSP has 10 days to advise whether the service is covered by an approved connection process and, if so, make a connection offer offer open for 45 days expedited connection may be available

Completed application submitted

Site visit, if needed

Not approved service. DNSP notifies applicant of the negotiation process & possible changes & expenses DNSP uses best endeavours to make offer within 65 days of receiving completed application* Offer open for 20 days Agree d Offer terms form connection contract * This applies to negotiation, not dispute resolution
Source: Commission analysis of chapter 5A NER.

Basic connection service or standard connection service

Use agreement approved by AER Negotiated connection offer Not agreed Option of dispute resolution reduction through AER Legend Australian Energy Regulator DNSP Distributed Network Service Provider AER

APPENDIX B: REGULATION OF THE ELECTRICITY SECTOR

151

B.3.3

Cost of connecting distributed generation

There are fees and charges associated with connecting distributed generators to the distribution network. These costs vary depending on the size/type of generator being connected and type of connection. Generally, connection charges apply to the following four components of a typical connection: (1) Direct connection assets these are the premises connection assets which run from the connection point to the supply point and where applicable also include the consumer mains. (2) Extensions an augmentation that requires the connection of a power line or facility outside the present boundaries of the transmission or distribution network owned, controlled or operated by a network service provider. (3) Shared network augmentations an augmentation of a distribution network means work to enlarge the system or to increase its capacity to transmit or distribute electricity, caused by the connection. This is all augmentations other than extensions. (4) Incidental costs includes administration, design, certification and inspection fees (AEMC 2012c, pp.171172; AER 2011d, p.14).

Cost of connecting distributed generation under chapter 5


Chapter 5 of the NER provides that CAs are subject to fees and charges to cover direct costs (such as an application fee) and indirect costs (such as a registration fee). These costs of connecting under chapter 5 are summarised in table B.2.

Table B.2
Fee or charge Registration fee

Cost of connecting distributed generation under chapter 5


Description Registered generators and exempt generators (not subject to the 5MW Standing Exemption) pay a registration fee to AEMO. The registration fee varies depending on the type of generator registered (see AEMO Schedule of Registration Fees 2011/12) Registered generators pay participant fees determined by AEMO in accordance with the NERs cl 2.11 Exempt generators do not have to pay participant fees

Participant fee

Application fee (cl 5.3.4(b))

Payable on lodgement of application to connect No more than necessary to cover reasonable costs to assess application and prepare offer to connect

Connection service charge (cl 5.5(f)(1)) Use of system services charge (cl 5.5(f)(3)(i))

Paid by the connection applicant (CA) for the connection assets provided by the distribution network service provider (DNSP) Paid by CA for any required augmentations or extensions to affected transmission and distribution networks POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

152

Table B.2
Fee or charge

Cost of connecting distributed generation under chapter 5 (cont.)


Description Paid by the CA to the DNSP

Costs reasonably incurred to provide distribution network user access (cl 5.5(f)(4)(i)) Reasonable costs to address impacts on the transmission network (cl 5.3.5(e)) Reasonable costs associated with remote control equipment and remote monitoring equipment (cl 5.3.5(g)) Fee for assistance in obtaining approvals (cl 5.3.7(e))
Source: Commission analysis.

Paid by generating units with a nameplate rating of 10 MW or greater that impact on fault levels, line reclosure protocols and stability aspects Payment of these costs may be a condition of an offer to connect

DSNP may charge the CA a reasonable fee to enable preparation of applications for environmental and planning approvals

Essential Service Commission guidance on connection costs


In addition, DNSPs are subject to guidelines issued by the ESC, including Electricity Industry Guideline No. 14: Provision of Services by Electricity Distributors (ESC 2004b) and Electricity Guideline No. 15: Connection of Embedded Generation (ESC 2004a). These Victoria-specific guidelines were developed to clarify the connection process and regulate connection charging for distributed generation. Guidelines No. 14 and 15 regulate pricing aspects of connection agreements between DNSPs and CAs, including: the charges under, and other terms and conditions of, connections agreements, including the principles DNSPs must observe in setting those charges and other terms and conditions (Guideline No. 15) the payment to embedded generators of a share of DNSPs avoided distribution system costs (Guideline No. 15) the payment to embedded generators of DNSPs avoided customer transmission use of system usage charges (Guideline No. 15) the determination of customer contributions to the capital cost of new works and augmentations to the network (Guideline No. 14). In the discussion paper Victorian-Specific Regulatory Requirements Under the National Energy Customer Framework (2011j), DPI concluded: that with the insertion of chapter 5A into the NER, which provides a detailed negotiation framework for connection contracts with embedded generators and a connection charging regime, Chapter 5A will effectively cover the field of regulation covered by Guideline 15, and the guideline will therefore not be needed under the NECF that guidance on determination of customer contributions to the capital cost of new works and augmentation contained in Guideline No. 14 will be also addressed in the NECF or through AER guidelines and this guidance will therefore also be redundant after 1 July 2012. APPENDIX B: REGULATION OF THE ELECTRICITY SECTOR 153

Cost of connecting distributed generation under chapter 5A


Embedded generators connected through the retail connection process under chapter 5A may also be subject to connection costs. Under cl 5A.E.3(a), the AER is required to develop and publish connection charge guidelines to assist DNSPs to develop connection policies. Chapter 5A requires that DNSPs prepare a connection policy that complies with the connection charge principles in cl 5A.E.1 and the AERs connection charge guidelines. The AER may approve a DNSPs connection policy if satisfied that it complies with these two requirements. In addition, chapter 5A specifies that a DNSP may charge the following fees: site inspection fee (cl 5A.D.4): DNSPs may charge 'reasonable expenses' if site inspection is required to determine the nature of the connection service sought negotiation fee (cl 5A.C.4(a)): DNSPs may charge 'a reasonable fee to cover expenses directly and reasonably incurred' in assessing the connection application and making a connection offer.

Australian Energy Regulator draft connection charge guidelines


The AER has released Draft Connection Charge Guidelines for Electricity Retail Customers: Under chapter 5A of the National Electricity Rules (2011a) for public consultation. Key aspects of the connection charging regime established under chapter 5A and the draft connection charge guidelines are as follows: Retail consumers (other than non-registered embedded generators or retail developers) who apply for a connection service requiring an augmentation cannot be required to make a capital contribution to the cost of the augmentation if it is a basic connection service or below a threshold set in the DNSPs connection policy (chapter 5A cl 5A.E.3(c)(4)). Under the AER draft connection charge guidelines, DNSPs will have discretion to set multiple thresholds below which consumers will not be charged for the costs of augmentation. However, the AER has proposed default thresholds to apply where a DNSP cannot demonstrate that alternative thresholds would satisfy the requirements of chapter 5A. Retail consumers (which include micro-embedded generators) are required to pay connection charges relating to extensions of the network and for direct connection assets, even under a basic connection service. Non-registered embedded generators or retail developers may be required to make a capital contribution for a connection service requiring an augmentation (but only if these costs have not been included in distribution use of system charges). Retail customers (includes non-registered embedded and micro-embedded generators) are entitled to receive a refund where a dedicated connection asset originally installed for a single user becomes used by other consumers (within seven years of its installation) (AEMC 2012c, pp.172173). The draft connection charge guidelines provide that the total connection charge that a CA will pay to a DNSP will be calculated according to a specific formula (box B.2).

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Box B.2

Total connection charge under chapter 5A

The connection charge that connection applicants (CAs) will pay to the distribution network service provider (DNSP), may be made up of multiple connection services and will be calculated in accordance with the following formula: Connection Charge = AS + CC + PS Where: AS is the charge payable to the DNSP for all alternative control connection services. CC is the capital contribution payable to the DNSP for all standard control connection services. PS is the total payable to the DNSP, to account for any existing pioneer scheme, applying to the assets to which the customer connects. CAs may also be required to pay a security fee to the DNSP. In determining the total connection charge, a DNSP must:

(1) Determine the charge for each component in a fair and reasonable manner. (2) Calculate the charge for each component on the least cost technically
acceptable standard necessary for the connection service, unless: the CA requests a connection service or part thereof be performed to a higher standard. In which case, the CA should contribute the additional cost of providing the service to the standard requested the connection service involves augmentation to the shared network, in which case the CA should be charged no more for this service than the cost attributable to the CAs electricity demand.

Source: (AER 2011a, p.6). In relation to embedded generation, the draft connection charge guidelines provide: augmentation costs non-registered embedded generators are not eligible for the exemption from paying augmentation costs under cl 5A.E.3(c)(4) and so must contribute to augmentation costs regardless of their size shared network augmentation where a non-registered embedded generator is also a load customer, its shared network augmentation cost will be based on the greater of either its load or generation capacity. Non-registered embedded generators will not be charged a unit rate for shared network augmentation (based on generation output) in accordance with s 5.2.6 of the draft connection charge guidelines removing specific network constraints non-registered embedded generators should pay to remove constraints on the network unless there is a demonstrative net benefit of a shared network upgrade occurring (AER 2011a, p.19; AER 2011d, p.18).

Connection charging from 1 July 2012


Both ESC Guidelines No. 14 and 15 and the AER draft connection charge guidelines require that embedded generator connection charges are fair and reasonable. The major change proposed by the national connection charging framework is that embedded generators will be liable for deep augmentation costs. Currently under ESC APPENDIX B: REGULATION OF THE ELECTRICITY SECTOR 155

Guideline No. 15 cl 3.3.2, embedded generators are only liable for shallow connection costs of network augmentation. Shallow connection costs cover impacts up to and including the first transformation in the distribution system, such as direct connection assets and extensions (AEMC 2012c, p.173). ESC Guideline No. 15 cl 3.3.2(b)(1)(B) specifies that embedded generators cannot be charged for deep augmentation costs. The Joint Implementation Group responsible for coordinating the implementation of the NECF has advised that each jurisdiction will institute transitional arrangements to ensure the smooth implementation of the NECF from 1 July 2012. This will include transitional provisions to govern the transition period for the connection charging regime under chapter 5A of the NER (Joint Implementation Group 2012, p.2). An interim connection charging regime will be inserted into chapter 11 of the National Electricity Rules, to modify the operation of chapter 5A, so that its operation does not conflict with electricity distribution price determinations. It is anticipated that chapter 5A will apply in full at the commencement of the next AER price determinations. DPI has stated that regulatory instruments currently governing charging in Victoria, in particular ESC Guideline No. 14, underpin or are linked to the AERs Electricity Distribution Price Determination 2011-15. Therefore, the current charging arrangements will remain in place until 2015 (when the pricing determination ends) to ensure that connection services are delivered at the correct price (DPI 2011h). As such, cl 38 of the National Energy Retail Law (Victoria) Bill 2012 provides that in the interim connection charging rules period (until 31 December 2015) transitional connection charging rules under chapter 11 of the NER will apply instead of chapter 5A (Explanatory Memorandum 2012, p.12).

B.4
B.4.1

Selling electricity generated


National regulation governing selling

Market generators and non-market generators


As noted in section B.3.1, distributed generators wishing to connect under chapter 5 of the NER are required to be registered with AEMO, unless an exemption from registration applies (cl 2.2.1 NER). Registered generating units must be classified as either market or non-market generating units (cl 2.2.1(f)). These classifications impose important restrictions on the selling of surplus electricity generated and sent back into the grid. Registration as a market generator is required to sell electricity through the NEM. Market generating unit (cl 2.2.4) a generating unit whose sent out generation is not purchased in its entirety by the local retailer or a customer located at the same connection point. A market generating unit must sell all sent out generation through the spot market and accept payments from AEMO for sent out electricity at spot prices applicable to its connection point. A connection point is the agreed point of supply established between a DNSP and distributed generator. Non-market generating unit (cl 2.2.5) a generating unit whose sent out generation is purchased in its entirety by the local retailer or a customer located at the same connection point. A non-market generating unit is not entitled to receive payment from AEMO for sent out generation at its connection point, except for any

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compensation that may be payable to it as a directed or affected participant (as a consequence from a direction from AEMO under cl 4.8.9(a1)(1)).4 Non-market generators can sell sent out generation through a private bilateral agreement outside of the NEM, for a (usually fixed) price agreed upon between the non-market generator and a local retailer or customer located at the same connection point. The entirety of a non-market generators sent out generation must be purchased in this way. In Appendix 6: Guideline on Exemption from Registration as a Generator of the NEM Generator Registration Guide (2010b), AEMO advises that: Clause 2.2.4(a) of the Rules [NER] states that a generating unit whose sent out generation is not purchased in its entirety by the Local Retailer or by a Customer located at the same connection point must be classified as a market generating unit. This requirement applies regardless of the size of a generating unit. One consequence of this requirement is that, where a person, who would otherwise be eligible for exemption from the requirement to register as a Generator, wishes to receive payment for electricity generated by their generating unit through the NEM, they must apply to AEMO for registration as a Market Generator and its generating unit must be classified as a market generating unit. (AEMO 2010b, p.35)

Small generation aggregators


In the future, there may be a third option under national regulation for distributed generators wishing to sell surplus electricity generated through the NEM. Currently, the NER provide for the registration of intermediaries where a generating system involves multiple parties in ownership, control and operator roles (cl 2.9.3). Generators ordinarily required to register as a market generator can apply to AEMO for an exemption on the basis that they have nominated another party to act as their intermediary. However, the intermediary will need to apply to AEMO for registration as a generator and each generating unit it is acting for will need to apply for an exemption from registration under cl 2.9.3, incurring fees each time. AEMO will only allow an intermediary exemption if the intermediary satisfies that, from a technical perspective, it can be treated as a CA with respect to the generating system (AEMO 2010b, p.2). However, where the ownership of generating units within a generating system is split, each generating unit must be registered separately as a market generating unit in order to sell through the NEM (AEMO 2010b, p.2; AEMC 2012a, p.2). AEMO recently submitted a rule change to the AEMC to introduce a new category of market participant into the NER called a 'small generation aggregator'. AEMC has released a consultation paper on the rule change and is seeking public submissions by 12 April 2012.5 Under the proposed rule change, small generation aggregators will only have to register once with AEMO. A small generation aggregator will have market responsibility for the participation of multiple generating units in the NEM. Separate registration of each of the generating units will not be required, significantly reducing

See Appendix 4: AEMOs Policy on Registration as a Non-Market Generator of the NEM Generator Registration Guide for the conditions that apply to registration as a non-market generator (AEMO 2010b, pp.2526).
4 5

See the AEMCs Small Generation Aggregator Framework website:

http://www.aemc.gov.au/electricity/rule-changes/open/small-generation-aggregator-framework.html

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costs and improving access to the market. This will allow aggregated generators to more easily enter and sell in the NEM (AEMC 2012a, pp.15). As registered participants, small generation aggregators would be required to connect to the distribution network through the NER chapter 5 process.

Distribution planning and reporting


DNSPs are required to consider the impacts of connecting distributed generation as part of their distribution network planning. The national network planning and development framework is supplemented by State-based planning and reporting regulatory arrangements, which vary among jurisdictions (AEMC 2009c, pp.107111; AEMC 2011b, p.5). Note, however, that the AEMC is considering a rule change request to amend the NER and establish a national annual distribution network planning and reporting framework.6 The current distribution planning arrangements are as follows: Chapter 5 of the NER requires that each DNSP review annually the expected future operation of its distribution networks over the next five years, taking into account forecast loads, future generation and market network services, and demand side developments (cl 5.6.2(a) and (d)). The NER do not require that DNSPs publish periodic planning reports (AEMC 2011b, p.5). In Victoria, the Electricity Distribution Code (ESC 2011a) requires that DNSPs publish annual distribution system planning reports (DSPRs) that plan for the next five calendar years (cl 3.5). A DSPR must cover: historical and forecast demand feasible options for meeting forecast demand, such as opportunities for embedded generation and demand management availability of contributions from the DNSP to embedded generators to reduce forecast demand and defer or avoid augmentation of the distribution system.

The EI Act s 40FJ requires that, as a licence condition, licensed distributors must regularly report7 to the Minister for Energy and Resources on: the number of solar photovoltaic (PV) systems connected to the distribution network operated by the licensee the aggregate generating capacity of solar PV systems connected to the distribution network operated by the licensee the total amount of surplus electricity generated by solar PV systems conveyed along the distribution network operated by the licensee.

When the NECF commences on 1 July 2012, the reporting requirement in the Electricity Distribution Code (ESC 2011a) will become a licence condition. This will ensure that DSPRs continue to be completed by distribution businesses until the AEMCs rule change process regarding a national reporting framework has been completed.

See (AEMC 2011b) and the AEMCs Distribution Network Planning and Expansion Framework website: http://www.aemc.gov.au/Electricity/Rule-changes/Open/Distribution-Network-Planning-and-ExpansionFramework.html
6

On a six monthly basis for solar PV systems eligible for the premium feed-in tariff and on a monthly basis for solar PV systems eligible for the transitional feed-in tariff. Feed-in tariffs are discussed is section B.4.2.
7

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These distribution planning and reporting obligations mean that DNSPs must consider, plan for, accommodate and monitor the effects of distributed generators connecting to, and sending surplus electricity generated back into, the distribution grid.

B.4.2
Licensing

Victorian regulation governing selling

The Victorian electricity industry is regulated through a licensing regime established under Pt 2 of the EI Act and administered by the ESC. DPI noted that: The licensing regime has also been utilised directly by Government as an instrument to deliver on specific policies, placing statutory obligations on licensed businesses while bringing compliance with those obligations into the purview of the regulator. (DPI 2011i) The licensing regime has a diverse range of functions, including: limiting entry to the energy sector imposing regulatory obligations on licensed businesses imposing statutory obligations on licensed businesses prohibiting cross-ownership between licensed businesses of different types identifying energy businesses that may exercise special statutory powers requiring exit from the energy sector (revocation) funding regulatory activities (DPI 2011i).

Restrictions on selling electricity


The EI Act prohibits a person from generating electricity for supply or sale unless that person has a license or is exempt from the requirement to hold a license (s 16(1)). Under s 17 of the EI Act, the Governor in Council can make an Order in Council exempting a person from the requirement to obtain a licence. An Exemption Order came into effect on 1 May 2002 (ESC nd, p.1). Exemptions available include: generators connected to the transmission or distribution network at a common connection point with a capacity of less than 30 MW the intermediary distribution and supply of electricity to a short term resident, long term resident, small business customer or large business customer within the limits of the premises owned or occupied by the person engaging in that activity the metered intermediary sale of electricity within the limits of the premises owned or occupied by the person engaging in that activity (Order in Council 2002; ESC nd, p.1). The ESC is empowered by cl 5 of the Exemption Order to issue certificates of opinion where it considers that a particular activity does or does not constitute: the intermediary distribution or supply of electricity, or the metered intermediary sale of electricity, and if it does so, that activity does or does not, as applicable, constitute the intermediary distribution or supply of electricity or the metered intermediary sale of electricity for the purposes of the Exemption Order.

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The ESC made a policy decision in 2011 to cease issuing these certificates, due to confusion regarding their regulatory status (ESC 2011c).

Licensing from 1 July 2012


The commencement of the NECF on 1 July 2012 will introduce a national retailer authorisation scheme, designed to replace the jurisdictional licensing schemes for energy retailing currently in place in states and territories. In an issues paper discussing Victorian licensing arrangements under the NECF, DPI has stated that: It is assumed in this paper that commencement of the NERL in the retail sector will see the complete removal of any requirement for a retailer to maintain a Victorian retail licence to sell energy in Victoria. On the other hand, there is no proposed replacement scheme for the authorisation of distribution, transmission or generation activities at the national level beyond what is already provided by market registration requirements. The regulatory requirements of the NECF itself do not hinge on the concept of licensed energy businesses. Relevant entities covered by the NECF include authorised retailers, entities that retail electricity but are exempt from authorisation, electricity distributors who are Distribution Network Service Providers (DNSPs) under the National Electricity Law, gas distributors subject to access regulation under the National Gas law, and other jurisdictionally nominated distributors. Therefore, from the point of view of applying the NECF alone, no licensing regime is necessary. (DPI 2011i) DPI has concluded that although the NERL includes a retailer authorisation and exempt selling process, small scale generators who sell surplus electricity into the distribution grid are not catered for under the national framework. As such, a Victoria specific regime, regulated by the ESC, will continue to govern distribution licensing in Victoria. DPI has noted its concern that there is a high degree of regulatory fragmentation in the area of licensing, authorisation and exemptions and that it will investigate appropriate ways for rationalising this structure in the future (DPI 2011i; DPI 2011h). The Commission has been advised by DPI that the Exemption Order (in an amended form) will also continue to exempt generators of less than 30 MW capacity from the need to obtain a distribution license.

Feed-in tariffs
In Victoria, certain distributed generators connected to the distribution network are able to sell surplus electricity generated into the distribution grid through FiT schemes under Division 5A of the EI Act. There are currently three FiT schemes operating in Victoria: (1) Premium feed-in tariff (PFiT): started on 1 November 2009 and ended on 29 December 2011 (the declared scheme capacity day). The PFiT scheme is now closed to new applicants. However, generators participating in the PFiT scheme before the declared scheme capacity day can continue to participate for the 15 year duration of the scheme (until 30 October 2024). (2) Transitional feed-in-tariff (TFiT): started on 1 January 2012 and is currently open to new applicants. The TFIT scheme will run for 5 years from its commencement date until 31 December 2016. The scheme can, however, be closed to new applicants once certain discretionary trigger points are reached. The Minister for Energy and Resources may declare a TFiT scheme end day if any of the following occur: 160 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

the aggregate generating capacity cap of 75 MW of installed scheme generating capacity is met the average cost per customer of electricity per year arising out of the operation of the TFiT scheme is $5 or more the Minister considers it appropriate to do so (s 40FEA, EI Act).

(3) Standard feed-in-tariff (SFiT): open to new applicants. The SFiT was initially introduced in 2004 for wind energy generators and was extended to other forms of small-scale renewable energy in 2007 (Batchelor 2007). Unlike the PFiT and TFiT schemes, there is no end date. In Victoria, to ensure that the customer is paid (in the form of a credit) for any surplus energy generated that goes into the grid, licensed retailers are required to fund the SFiT scheme. The PFiT and TFiT schemes are funded by a distributor pass through model. Under this arrangement distributors apply the appropriate FiT rebates to electricity retailers network bills that, in turn, apply the credits to eligible customers bills. The AER regulates the distribution charge that licensed retailers pay the distributer.

Premium feed-in tariff scheme Eligibility


All licensed retailers with more than 5000 customers were required to offer a PFiT to qualifying customers. Licensed retailers with 5000 or less customers could choose to offer a PFiT to qualifying customers. Note that the PFiT scheme closed to new applicants on 29 December 2011. A qualifying customer: purchases electricity from a licensed retailer, and engages in the generation of electricity using a solar PV system with a capacity of 5kW or less connected to the distribution network, and for householders: is claiming only one solar PV system on a property that is a principal place of residence, or for persons that occupy one or more properties (other than as a place of residence): is claiming only one solar PV system at each of those properties, and the person's annual consumption rate of electricity is 100 MWh or less, and

has been exempted by Order under s 17 from the requirement to hold a licence in respect of the generation of electricity for supply and sale, and has net metering in place.

Price, terms and conditions


The PFiT is prescribed as not less than 60 cents per kWh for surplus electricity fed into the grid (s 40FA(2)(a) of the EI Act). A PFiT offer must comply with statutory minimum terms and conditions. Other terms and conditions of a PFiT offer must be fair and reasonable. A number of electricity retailers have offered top-up over and above the statutory minimum rate.

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Transitional feed-in tariff scheme Eligibility


All licensed retailers with more than 5000 customers must offer a TFiT to eligible customers (TFiT scheme customers). Licensed retailers with 5000 or less customers may choose to offer a TFiT to TFiT scheme customers. A TFiT scheme customer: purchases electricity from a licensed retailer, and engages in the generation of electricity using a solar PV system with a capacity of 5kW or less connected to the distribution network on or after 1 January 2012, and for householders: is only claiming one solar PV system on a property that is a principal place of residence, or for persons that occupy one or more properties (other than as a place of residence): is only claiming one solar PV system at each of those properties, and the person's annual consumption rate of electricity is 100 MWh or less, and

has been exempted by Order under s 17 from the requirement to hold a licence in respect of the generation of electricity for supply and sale, and has net metering in place.

Price, terms and conditions


The TFiT is prescribed as not less than 25 cents per kWh for surplus electricity fed into the grid (s 40FAB(2)(a) of the EI Act). A TFiT offer must comply with statutory minimum terms and conditions. Other terms and conditions of a TFiT offer must be fair and reasonable. A number of electricity retailers have offered top-ups over and above the statutory minimum rate.

Standard feed-in tariff scheme Eligibility


All licensed retailers with more than 5000 customers must offer a SFiT to relevant generators. A relevant generator is: a generation company, or a person engaging in the generation of electricity that has been exempted by Order under s 17 from the requirement to hold a licence in respect of the generation of electricity for supply and sale, and engages in the generation of electricity using a small renewable energy generation facility connected to the distribution network, with a capacity of less than 100 kW, defined as: solar, wind, hydro and biomass generating facilities other forms of small renewable energy specified in an Order in Council published in the Government Gazette. The Commission understands that the power to extend the definition of small renewable energy generation facility has not yet been used.

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The SFiT specifically excludes: energy created from the combustion of fossil fuels, or materials or waste products derived from fossil fuels, and since the commencement of the TFiT scheme, solar PV systems with a capacity of 5 kW or less, connected to the distribution system.

Price, terms and conditions


Unlike the PFiT and TFiT schemes, the SFiT price is not prescribed by the EI Act and each licensed retailer has discretion to set its own tariff price. However, the EI Act requires that the SFiT price and associated terms and conditions must be fair and reasonable (s 40FB). The ESC has interpreted a fair and reasonable price to mean that the rate offered to the customer must be not less than the rate the customer pays to buy electricity from the retailer (box B.3). Similarly, DPIs website states that SFiT customers receive a one-for-one payment rate for any excess electricity they feed back into the states electricity grid (DPI 2011d). Although not mandated by legislation, DPIs website also advises that: The Standard Feed-in Tariffs threshold is not designed for system installations where the generating capacity is significantly disproportionate to the actual energy used. This does not mean that the maximum system capacity must be in use at all times, although the entire capacity should be required for a significant portion of the year to offset your energy consumption. (DPI 2011d)

Obligation on licensed retailers to publish feed-in tariff offers


As discussed above, the EI Act regulates the electricity industry in Victoria through a licensing regime that, amongst other things, imposes statutory obligations on licensed businesses. This includes imposing a licence condition on electricity retailers to publish FiT terms and conditions online. The EI Act requires that FiT offer information on licensed retailers websites must be kept up-to-date (ss 40N, 40NA and 40NB) but does not provide any guidance on how this information must be presented. 8 Licensed retailers that sell electricity to more than 5000 customers (relevant licensees) must publish the terms and conditions of their PFiT, TFiT and SFiT offers (ss 40FF and 40G). Licensed retailers that sell electricity to 5000 or less customers (small retail licensees) and choose to offer a PFiT and/or TFiT, must publish the terms and conditions of their PTiT and/or TFiT offers. If a small retail licensee decides to no longer purchase electricity through a PFiT and/or TFiT scheme, it may publish a notice in the Government Gazette to that effect. The small retail licensees obligations under the PFiT and/or TFiT scheme will cease on the day such a notice is published (s 40FG). The terms and conditions of FiT offers take effect two months after publication, unless they are referred to the ESC for assessment (s 40H). The criteria considered by the ESC in
Note that the obligation on licensed electricity retailers to publish tariffs and terms and conditions of sale under ESC Guideline No. 19: Energy Price and Product Disclosure (2009a) currently under review does not extend to feed-in tariff offers. See Guideline 19: Energy Price and Product Disclosure Issues Paper (ESC 2011b).
8

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assessing whether a FiT offer is fair and reasonable effectively prescribe the matters that should be included in a fair and reasonable offer published by licensed retailers. The role of the ESC is discussed below. The EI Act also sets minimum terms and conditions for PFiT and TFiT offers (ss 40FA and 40FAB). These statutory conditions form the required minimum content of a published offer.

Role of the Essential Services Commission


The EI Act provides that the Minister for Energy and Resources may refer matters to the ESC for assessment if not satisfied that the terms and conditions of a licensed retailers FiT offers are fair and reasonable (s 40I): for licensed retailers that have published their FiT terms and conditions before the PFiT, TFiT and SFiT terms and conditions take effect (published terms and conditions take effect two months after publication) for licensed retailers that have failed to publish the their FiT terms and conditions as required at any time. The ESC must assess the referred terms and conditions and report to the Minister of its assessment (s 40J). The ESC can recommend or determine: the terms and conditions of a licensed retailers PFiT and TFiT scheme are not fair and reasonable and suggest alternative terms and conditions the price, terms and conditions of a licensed retailers SFiT scheme are not fair and reasonable and suggest an alternative price, terms and conditions (ss 40J(2) and 40L). A small number of referrals have been made under this mechanism. 9 The meaning of fair and reasonable is discussed in box B.3.

Box B.3

Fair and reasonable feed-in tariff offers

The Department of Primary Industries (DPI) has published criteria for the assessment of whether feed-in tariff (FiT) offers are fair and reasonable. The DPI criteria outline the rights and obligations of customers and licensed retailers that must be included for a FiT offer to be fair and reasonable. The DPI criteria require that an offer must, among other things: require that the retailer will pay or credit the customer, for electricity supplied under a FiT contract, at a rate not less than the rate the customer pays to buy electricity from the retailer require the FiT will be credited with the same frequency as the customer is billed and address billing arrangements outline how the FiT credit will be calculated based on a reading of the customers meter state all additional costs related to the FiT contract provide for each parties rights and obligations in relation to under and overpayment of the FiT credit cover variation and termination of the FiT contract.

See the ESC website: esc.vic.gov.au.

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Box B.3

Fair and reasonable feed-in tariff offers (cont.)

In a guidance paper Methodology for Assessment of Fair and Reasonable Feed-in Tariffs and Terms and Conditions (2008b), the Essential Services Commission (ESC) outlined its approach to evaluating FiT offers referred for assessment under s 40I of the Electricity Industry Act 2000 (Vic). The ESC has clarified that it will apply the DPI criteria, plus the following additional criteria, when assessing the fairness and reasonableness of the terms and conditions of referred retailers FiT offers.

(1) Cost of service provision any charge and terms and conditions imposed under FiT
offers must be based on the reasonable costs that the retailer incurs in providing goods or services to small renewable energy generators in relation to the purchase of energy from such generators.

(2) Cost allocation the costs that a retailer incurs in accepting supply from a small
renewable generator must not include costs not associated with accepting that supply and only include an appropriate allocation of any common costs incurred by the retailer in accepting that supply and in providing any other goods or services in relation to that supply.

(3) Cost differentials a retailers FiT offer terms and conditions must be the same for

all small renewable energy generators unless there is a material difference in the cost of accepting supply from and providing associated goods and/or services to different small renewable energy generators or classes of small renewable energy generators. easy to understand.

(4) Simplicity the charges and terms and conditions for the FiT should be simple and
Source: (ESC 2008b, pp.812).

Regulation of feed-in tariff schemes from 1 July 2012


Once the NECF commences on 1 July 2012, the regulation of electricity retailers will be governed by a national regime and the Victorian retail licensing regime will be repealed. Although current retail licence conditions relating to FiTs will continue to operate unaffected in a practical sense, they will be enforced as direct statutory requirements under the EI Act instead of licence conditions. Clauses 75 to 95 of the National Energy Retail Law (Victoria) Bill 2012 propose consequential amendments to the FiT provisions of the EI Act (Division 5A, ss 40F to 40NC) to reflect the repeal of electricity retail licensing. The Explanatory Memorandum states: Currently, the requirement for retailers to comply with the feed-in tariff schemes is linked to their licences. The effect of the amendments made by this clause [75], and by clauses 76 to 95, is to create a direct statutory obligation for retailers to comply instead of the current deemed licence condition. (Explanatory Memorandum 2012, p.18) This means that under an amended EI Act: the FiT scheme provisions including the eligibility criteria, price, terms and conditions will be unchanged electricity retailers will still be obliged to publish on their websites, and keep up-to-date, their FiT offer terms and conditions the ESC will continue to assess whether referred FiT offers are fair and reasonable.

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Publication of feed-in tariff information


After the commencement of the NECF, there will be extra obligations on electricity retailers to publish information on their FiT offers. From 1 July 2012, the AERs Energy Made Easy price comparator website will become operational as part of the retail pricing information requirements under the NERL (AER 2012b, p.5). Division 11 of the NERL also requires that the AER publish retail pricing information guidelines. The AER released its final guideline, AER Retail Pricing Information Guideline in January 2012. The Guideline aims: to assist small customers in readily comparing standing offer prices and market offer prices offered by retailers, by specifying the manner and form in which details of standing offer prices and market offer prices are to be presented by retailers. (AER 2012a, p.2) The NERL (s 63) and the Guideline require that retailers produce an Energy Price Fact Sheet for each standing and market (contract) offer that a retailer offers to small customers. These Fact Sheets will be generated on the AERs Energy Made Easy price comparator website. Retailers are also required to publish Energy Price Fact Sheets for each of their generally available contract offers on their websites. The Guideline specifies what information must be included on each Energy Price Fact Sheet and how it should be presented (AER 2012a). Although the Guideline does not mention FiTs, the Commission understands that the obligation on retailers to produce Energy Price Fact Sheets will extend to FiT offers but that only basic information on FiT offers would be required. Retailers are not required to provide detailed information on FiT offer terms and conditions on the Energy Price Fact Sheets they submit to the AER. The amended EI Act will contain new price comparator requirements (a substituted Division 6). These provisions will require the ESC to maintain its own price comparator website YourChoice, to assist small customers to compare standing offer and market offer retail prices required to be presented by the NERL and AER Retail Pricing Information Guideline (2012a). It will also require that retailers provide the ESC with information and data about standing and market offer prices (Explanatory Memorandum 2012, p.20). The Commission is advised that ESC has no intention to include FiT offers on the YourChoice website.

Feed-in tariff application process


The process of installing a small renewable energy generation facility or solar PV system and applying for a FiT can be complex, and the terms and conditions in FiT contracts will vary between retailers. Unlike the process for connecting distributed generation under the national framework, the process for applying for a Victorian FiT is not provided for by legislation. Broadly, the process for installing a solar PV system and applying for a FiT involves a number of key stages. Note that some of these stages (such as submission of forms to the retailer and distributer) can be completed concurrently. Arrange for design and installation: select a suitable solar PV system and arrange for it to be installed by an accredited Clean Energy Council (CEC) installer. The customer will also need to complete connection and approval processes with the electricity retailer and distributor (section B.3). Paperwork: all forms required for solar PV installation and connection, to apply for any applicable rebates and to participate in a FiT scheme need to be completed. All necessary paperwork must be complete in order for a FiT applicant to participate in a FiT scheme. These include: 166 POWER FROM THE PEOPLE: INQUIRY INTO DISTRIBUTED GENERATION

a Commonwealth Solar PV STC Assignment and Written Compliance Statement to assign the right to create Small-Scale Technology Certificates (STCs) to the retailer or installer, in return for an upfront discount or payment. Note that this is not a requirement for a Victorian FiT, although most customers will wish to complete this paperwork in order to obtain an upfront discount on their solar PV system a Solar Connection Form to notify the distributor that a solar PV system will be installed at the customer's address and to outline customer rights and obligations in relation to this installation an Electrical Work Request (EWR) form and Certificate of Electrical Safety (CES), which are usually completed by the installer and forwarded to the retailer, to notify the retailer that the installed solar PV system has been wired and inspected for safety a Victorian FiT contract with an electricity retailer must be entered into any other paperwork specific to the retailer and/or distributer must be completed.

Installation: will generally occur before the customer enters into a FiT contract with a retailer. Once the installation has been completed, an EWR and CES (including sign-off from an licensed electrical inspector to vouch for the installation meeting all safety requirements) needs to be lodged with the retailer. The FiT contract can be entered into at the same time as the EWR and CES are lodged, however, it will not become effective until the appropriate metering is in place and the system is connected to the grid. After the EWR and CES are lodged, the installer completes the installation of the solar PV system and arranges for bi-directional metering (such as an interval or smart meter) to be installed and/or configured.

Metering upgrade/reconfiguration and connection: the solar PV system is connected to the distribution network and is ready to produce electricity. Feed-in tariff: the solar PV system starts generating electricity and receiving credits for surplus electricity exported into the distribution grid (CEC 2011b, p.2; CEC nd; DPI 2011e). A simplified application process for FiTs for a solar PV system is set out in figure B.2.

APPENDIX B: REGULATION OF THE ELECTRICITY SECTOR

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Figure B.2

Simplified example of the application process for feed-in tariffs for a solar PV system

Choose your solar PV system and installer

CEC accredited installer assists with the design and implementation of solar PV system

Complete Commonwealth Solar PV STC Assignment and Written Compliance Statement for any applicable REC/Solar credits

The submission of forms to the electricity retailer and distributor may occur concurrently Other paperwork specific to the retailer and/or distributor may be required

Choose your electricity retailer

Negotiate feed-in tariff terms and conditions and sign-off feed-in tariff contract with electricity retailer Submit Electrical Work Request and Certificate of Electrical Safety forms with electricity retailer

Confirm installation with electricity distributor

Submit Solar Connection form with electricity distributor


Source: Commission analysis.

Costs associated with participating in a feed-in tariff scheme


The EI Act does not prescribe any fees or charges for applying for and participating in the PFiT, TFiT or SFiT schemes. However, some electricity retailers may charge administration fees as part of their FiT electricity contracts (DPI 2011g). In addition, bi-directional metering is required to participate in a FiT scheme. Old style accumulation meters are unable to measure electricity generated and sent into the grid from distributed generators. Bi-directional meters allow two-way electricity flows and the ability to record those flows on a half hourly basis (DPI 2011a; DPI 2011c). The State Government is rolling out advanced metering infrastructure (AMI) across Victoria. The rollout is scheduled to be completed by 31 December 2013. The regulatory arrangements governing AMI are contained in several Orders in Council made under ss 15A and 46D of the EI Act (original Order dated 28 August 2007, AMI specifications Order dated 12 November 2007 and revised Order dated 25 November 2008) (ESC 2008a, p.3). AMI installation is paid for by electricity consumers through a levy on all household electricity bills (CALC 2011, p.1).

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