The Rudd government’s ventures in subsidising energy-saving measures such as home insulation haven’t exactly covered it in glory. It’s not alone in this respect. The Howard government had similar problems, and Spain had a huge boom and bust in solar photovoltaics. The common feature in all of these cases was that the schemes got into difficulty because take-up was much more enthusiastic than was expected. This in turn reflects the fact that the economics of these measures, particularly solar PV, are improving fast.
I recently got solar PV installed on my roof, and the deal (available from Origin here), though not the cheapest on the market, was very attractive. A modest upfront payment, and monthly payments that are substantially offset by the cost savings, especially when the system is exporting back to the grid and attracting the feed-in tariff. And it is just so cool to open the meter box and watch the wheel turning backwards and the numbers going down.
The deal is attractive because it is subsidised in two ways: the capital cost is offset by Renewable Energy Certificates, and the cost savings are amplified by the feed-in tariff. Looking ahead, it is clear that governments will want to reduce the subsidy element of the feed-in tariff, as is already happening in Germany. And recent changes to the REC scheme have been designed to ensure that household installations don’t have such an edge over large-scale renewable generation.
The impact of lower subsidies will be offset by declining costs. Globally the cost of solar panels has declined by about 20 per cent and is likely to decline further, now that size economies are starting to kick in at all stages of production, and particularly in the supply of silicon. Until about 2005, the industry relied on offcuts from the semi-conductor industry. When demand outgrew that supply, prices rose for some time, and it’s only recently that a declining trend has resumed. With the decline in panel costs, and the growth in demand, it is now become worthwhile to look hard for cost savings in the more prosaic elements of the process, such as installation costs, and there are some interesting innovations here. Within a few years, the subsidy-free capital cost could fall to a level comparable to the current subsidised price.
Looking at feed-in tariffs, I’m getting 55c/Kwh compared to a daytime retail price of 22 c/Kwh (quoting these from memory, I’ll check later). That’s a pretty big subsidy, but the gap would be smaller if the grid supply were priced properly. A carbon tax of $50/tonne would add at least 5 c/Kwh, maybe 7 c/Kwh with retail margins and GST, and peak-load pricing would raise the price on sunny summer days, when the system is producing peak output for long periods, maybe by as much as 10 c/Kwh. With those changes, no feed If the average cost saving were 30 c/Kwh and the output averaged 6 Kwh/day, the annual return would be $650/year which would make a $5000 investment look very good.
In policy terms, I’m ambivalent about all this. I’d prefer a straightforward pricing system that reflects all the costs of energy, including carbon costs, either through a carbon tax or an emissions trading scheme. But we don’t have anything at present, and even it gets through, the government’s ETS is full of exemptions and special deals. In effect, the REC scheme works roughly like an emissions trading scheme, since non-renewable generators have to trade to get credits. Similarly the feed-in tariff is embedded in the pricing system. The big defect is that these schemes don’t distinguish between non-renewables like gas and coal which differ greatly in their emissions intensity. So, they are somewhere halfway between a proper carbon price and the kind of winner-picking scheme proposed by Tony Abbott.
Sooner or later, the need for real action will become so pressing as to be irresistible. In the meantime, efforts like the REC scheme will help to drive continuing innovation. The economic cost of responding to climate change will be much higher than it would have been had there not been so much delay and delusion on the subject, and the damage to the global environment much greater. But that’s true of so many areas of policy, it’s perhaps not surprising in this case.
You can do your own calculations using this spreadsheet worked out by my colleague Tim Coelli.