Feb 22 2024

Green schemes: What are they and how are they causing greater inequality?

Since the Howard Government introduced the Mandatory Renewable Energy Target in 2001, state and federal governments have introduced various environmental policies aimed at incentivising households and businesses to be more energy efficient and to support renewable technologies to reduce carbon emissions. These policies are often referred to as ‘green schemes’ or ‘environmental schemes’.

These policies, while well intentioned, typically impose costs usually on the retailer which are then passed on through electricity bills to be recouped from the consumer.  As a result, they can have a distributional effect on energy affordability for some end users. Below we take a closer look.

National and State Schemes

Broadly speaking, these initiatives are split into two categories – national and state schemes. The national RET itself has two components - the large-scale renewable energy target, which supports utility-scale renewables such as wind farms and solar farms, and the small-scale renewable energy scheme (SRES) which supports systems like household rooftop solar and solar hot water systems. Certificates are created via the RET based on the capacity of a system. The scheme requires the purchase of renewable energy certificates by retailers from renewable generation sources, thus encouraging via subsidisation, a greater rollout of renewable generation.

States introduced their own policies, such as encouraging energy efficiency, or investment in rooftop solar. One of the most successful and common policies was the introduction of state-based Feed-In Tarriff (FiT) schemes which encouraged the uptake of rooftop solar by providing households with payments for the electricity their system generated, above the market value. As noted by the Australian Competition and Consumer Commission (ACCC) in its Retail Electricity inquiry report 2018, when first introduced, state governments provided very generous solar feed-in tariff schemes (for example, Victoria’s Premium FiT offered 60 cents/KWh) which paid consumers many multiples of the actual value of the energy they produced. As a result, the take up of the initial schemes was more than expected with the “substantial cost” of the schemes spread across all electricity users.

These FiT schemes, along with the RET and lower solar system costs, have helped see the installation of more than 3.6 million solar systems on household and business rooftops across the country as of December 2023.

Households and businesses also took up energy efficiency schemes which were introduced to entice consumers to invest in more energy efficient electrical goods. These schemes saw consumers receive discounts or rebates on energy-saving products such as whitegoods, hot water systems, showerheads, and insulation, or the free installation of energy-saving lighting.

Such schemes include Queensland’s 2008 ‘Big Light Switch’ campaign which saw the one million energy-saving light bulbs given away for free, as well as New South Wales’ ‘Home Power Savings Program’ where energy-efficient lightbulbs and water-efficient showerheads were offered for free to 200,000 households. In 2009, Victoria created the Victorian Energy Upgrades program which, to date, has supported 2 million households in upgrading their appliances and equipment.

How do these schemes affect your bill?

Since the national RET was implemented in 2001, the costs borne by consumers from environmental schemes have risen dramatically. In 2007-08, green costs made up around 2 per cent of the average customer’s bill, and that had risen to around 6 per cent of the power bill for customers in the National Electricity Market (NEM) by 2017-18. The latest figures, taken at the end of 2023, has environmental costs now between 9-12 per cent of an average bill, according to St Vincent de Paul.  The ACCC has estimated the cost of ‘green schemes’ to be 10 per cent for households and 12 per cent for small businesses (see figure 1 below).

Figure 1: Cost components of average bills 2022-23

Source: ACCC Inquiry into the National Electricity Market: December 2023

Whilst the percentages might seem relatively small, over a year, it adds up. Households in Victoria now spend on average $188 per annum on ‘green schemes’, while customers in Queensland, who currently spend the least out of all customers connected to the NEM, still pay $90 on average annually (see chart below).  Across the NEM jurisdictions[i]  ‘green scheme’ costs accounted for $145 of the average total bill of $1494 in 2022-2023, according to the ACCC’s most recent report (based on its analysis of retailer data).

Figure 2: Green Scheme Cost estimates

Source: Vinnies Tariff-Tracker Project report, 2023

Why do different states have different green scheme costs?

All states and territories have enacted their own environmental policies, separate to national schemes, with each jurisdiction determining how the costs of these policies are recouped. Queensland, which has the lowest average ‘green scheme’ spend, funded, for three years, their Solar Bonus Scheme through its State Budget rather than from consumers through distributer charges, which lowered environmental costs on electricity bills. Other states have not taken this approach, instead relying on retailers to foot the bill, which is then passed on to consumers. As noted above, Victoria (and New South Wales under its previous solar bonus scheme) offered some customers 60 cents per kilowatt-hour produced by solar PV systems, with the 88,000 Victorians who signed up for the scheme before 29 December 2011 receiving the FiT until 31 December 2024 (see table below). This cost is more than 12 times the current minimum FiT of 4.9c required to be offered by energy retailers in that state, which is repaid through customer bills, contributing to higher energy prices.

Table 1: Feed in Tariff premium schemes offered by state

Source: ACCC Retail Electricity Pricing Inquiry

How are these schemes creating greater inequality?

The purpose of these schemes was to encourage customers and retailers to invest in renewable energy and support what was still developing technology (in the case of rooftop solar) by providing financial incentives to consumers. The overall aim was to reduce their greenhouse gas emissions. Those early incentives for solar were mostly taken up by those on higher incomes due to the originally high cost of installing a solar PV system. Those who were able to sign up early received extremely generous returns, while those consumers who are only now able to afford the installation of rooftop solar are getting a 91.8 per cent lower return on the energy their unit generates.

There have been media reports that the current FiTs are too low and “unfair”.  Those tariffs are now based on the actual value of the energy generated to the grid. As highlighted by Victoria’s Essential Services Commission (ESC), which determines a minimum FiT annually, setting the minimum FiT above the actual value of the solar exports “would result in non-solar customers subsidising solar customers through higher electricity rates”. Ironically with the increased take up of solar because of the various incentives and lower cost of the technology, we are seeing increasing periods of negative or very low wholesale prices during the middle of the day, largely due to the amount of generation from rooftop panels. The ESC is proposing the FiT for 2024-25 be set at 3.3 cents/kWh (a 33 per cent reduction). Its reasons? “This is mostly because solar weighted wholesale prices are forecast to decrease. This is driven by the growth in solar installations which is leading to higher supply of, and lower demand for, electricity during daylight hours”.

Vulnerable customers are still less likely to have solar PV systems installed, meaning those in public housing, rentals or low-income households are unable to reduce their energy bill through ‘green schemes’, and are adversely, paying higher bills to subsidise those that can afford to install renewable energy generators and other low-cost technologies. This issue has been highlighted by St Vincent de Paul in its 2023 Tariff-Tracking Report. The issue was also flagged by the ACCC in 2018 when they released the Retail Electricity Pricing Inquiry Report. The ACCC went so far as to recommend that any costs remaining from premium solar feed-in schemes should be put on state budgets, as Queensland had done, rather than being recovered through higher customer bills. It also recommended that the SRES be wound down and abolished by 2021 to reduce its impact on retail prices paid by consumers. Neither recommendation was taken up by governments.

What can be done?

There are a few changes that could be implemented to help reduce the costs of green scheme costs to customers.

1. The proposal that state governments could bear the remaining costs of these schemes through their state budget could have the biggest and most immediate impact for customer bills. Like Queensland, states and territories could help fund their environmental policies through budget spending. This would lead to lower environmental costs on energy bills, as seen in Queensland (Figure 2).

2. More scrutiny should be placed on renewable projects to ensure investments will provide real value to the grid and will help meet generation demand.

3. Ongoing eligibility rules should be reviewed and tightened to ensure the costs of these schemes are minimized.

The ACCC and St Vincent de Paul have highlighted how "green schemes” are disadvantaging those on lower incomes as they are less likely to make use of the incentives, and yet are helping foot the bill. High consumption households will also pay more for ‘green schemes’ – when charges are linked to usage – but these households typically have more options available to help lower their usage. Low usage households on the other hand typically have less options to reduce their energy consumption, paying the charges without any way of reducing their costs.

It is clear consumers have helped meet the cost of the energy transition via their electricity bills. Green schemes have helped played a role in reducing carbon emissions. However, the question remains of whether it has been achieved in the most cost-effective way. In its most recent initiative to support more renewable investment, the Federal Government recognised the need to avoid putting additional costs on household and business’s power bills. The government chose not to extend and expand the RET as had been advocated for by some renewable proponents, which would have seen power bills increase. Instead, it announced the expansion of the Capacity Investment Scheme to include 32 gigawatts of large-scale renewable generation with the scheme to be funded by the government on budget. If we are to act on the inequality caused by these ‘green schemes’, then similar budget funded approaches may be needed to support investment while minimising impacts on consumers electricity bills.

 

[i] NEM – Queensland, New South Wales (including the ACT), Victoria, South Australia and Tasmania

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