ACT’s power-ful new policy

This week the ACT settled on its feed-in electricity tariff for home-generated solar power. It is a beachhead in public policy.

Much will depend on the reaction of electricity consumers and therein lies its innovation.

The armoury of government policy-making contains: outright banning, market forces, education, subsidy and taxation. They are used by governments to change behaviour for the benefit of society as a whole or, in some cases, in the pursuit of some ideological belief.

The new electricity uses a mix of all of the whole armoury.

Sometimes markets simply do not work, especially when dealing with long-term effects. People are not well enough informed for market forces to make them to stay clear of unsafe products, so the products have to be banned. Asbestos is a good example. Conversely, people are often not well-informed about the long-term benefits of some products, so they have to be mandated. Insulation, seat belts and other vehicle-safety products are good examples.

Sometimes governments are unsure about the long-term effects of things. No government has, for example, determined that coal-fired power stations pose such a risk to society, that, like asbestos, they should be banned – even if that means a much higher cost for home-owners and others. No more cheap asbestos houses. No more cheap electricity. The long-term costs are too high.

But banning coal-fired power would be too disruptive and costly in the short term. No government would survive it. Instead, we are to be weaned off it with a series of subsidies and de-facto taxes, such as the measures that came into force this week’s . Let’s hope they work.

The ACT’s plan is similar to that in other jurisdictions but much more generous. You put a solar generator on your roof which supplies much of your own electricity. When you are not using much power the extra power generated is fed back into the grid. It is metered and you get paid for it at a rate of about 50 cents a kilowatt hour. That is very generous considering that when you buy electricity from Actew it costs about 12 cents a kilowatt hour.

Coupled with the Federal Government’s rebate of $8000 on your installation costs, it can make financial sense.

The big trouble is the interaction of the federal and state schemes. The federal grant is a flat amount. So the smaller the system you buy the greater the percentage of the purchase price is subsidised – it is a bit over 70 per cent of a small ($11,000) 1 kilowatt system. But a 1 kilowatt system does not generate much electricity – about a fifth of the average family’s consumption. So not much is going to be fed back into the grid – probably when the family goes on holidays or out for the day, and that would be it.

Bigger systems cost a lot more. That is one of the troubles with solar power: if you double the capacity you almost double the price because nearly all the cost is in the panels.

Nonetheless, the economics are not bad. Say you got a 5 kilowatt system which would run your whole household all the time and a lot of the time have excess going back to the grid.

The system would cost about $45,000, less the $8000 and less about $4500 in renewable energy certificates. For that you would get, say, $2000 off your bill and perhaps 2000 kilowatts fed into the grid each year, giving you $1000 back.

So you invest $32,500 and get $3000 back – a bit over 9 per cent. That’s not bad in this interest rate environment. And it is tax free. Also, you can expect the cost of grid power to rise substantially over the 25 years, so your return would increase. That would cover the depreciation over the next 25 years.

Now here comes the policy innovation. The more people go solar and feed into the grid, the more Actew is required to buy their electricity at four times the cost of coal electricity. As Actew buys this high-price electricity it becomes entitled to pass on the cost by charging more for the electricity it supplies across the grid.

So the more people go solar, the higher the cost of electricity in general and the biogger the incentive to go solar.

An extreme example illustrates the point. Say 90 per cent of households go solar. Actew would be buying a lot of very high-price solar power which would be passed on to the poor sods who did not go solar. Their bills would rise to, say $6000 a year, so that they, too would be almost forced to go solar.

Further, as more people take the solar option, the price of solar comes down, making it even more attractive.

In some ways it is a bit of a government cop out. “We gave you the incentive to take up solar, but you did not.”

However, in this economic climate the solar option looks quite good. Superannuation, even with tax concessions, has lost its luster as an economic performer. Low interest rates means money in the bank is not attractive. People looking at retirement in the next 10 years might well think a 9 per cent tax-free return – and rising – looks a pretty good investment.

And you have the feel-good factor of those clean solar panels replacing the ugly coal chimney stacks.

Power from the people, I say.