Chapter 2 - Power from the People - Draft Report - Victorian ...

bluegooseexchangeNetworking and Communications

Oct 26, 2013 (3 years and 10 months ago)

476 views

D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


7

2

Distributed generation in Victoria

2.1

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

M
arket structure


Source: Commi ssion analysis.

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 Electricit
y 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 CitiP
ower, Powercor, Jemena, SP AusNet and
United Energy. Each DNSP is responsible for a defined region.


physical
electricity flows

transmission network

distribution network

generators

AEMO

schedules
wholesale market

retailers

consumers

physical electricity
flows

dispatch
orders

supply
offers

electricity settlement payments

electricity settlement payments

feed
-
in tariff

electricity payments

financial
contracts

8

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

Box 2.1

Electricity

industry key participants (cont.)



Retailers


act as an interface between the electricity wholesale market and
customers. qhey manage

customer transfersI connectionsI billingI c
omplaint
handlingI
and
service information
.

qhey also deliver a range of Commonwealth
and
state programs
I including

community service obligationsI energy efficiency
schemesI hardship schemes and

renewable and oth
er energy generation
schemes.

oetailers operating in sictoria includeW Ad䰬 Australian mower and
dasI Click 䕮ergyI aodo mower and dasI 䕮ergy AustraliaI 䱵mo 䕮ergyI
jomentum 䕮ergyI keighbourhood 䕮ergyI lrigin 䕮ergyI mowerdirectI oed
䕮ergyI pimply 䕮e
rgy and qorenergy. oetailers are not constrained to operate
in a particular region and are free to compete for customers.



Consumers


purchase and use electricity.

qhese assets and businesses physically operate in sictoria

and are governed by the
rules of the k䕍 which is a wholesale market for the supply of electricity to retailers
and end
-
users. qhe k䕍 consists of
five interconnected regions

Eessentially
nueenslandI kew pouth talesI sictoriaI pouth Australia and qasmania
F. qhe k䕍 is
operated by the Australian 䕮ergy jarket lperator EA䕍lF under the kational
䕬ectricity 䱡w and oules.

Source:

Commi ssi on analysi s.

2.1.1

Market for distributed energy

The Victorian energy market has historically been shaped by large brown coal en
ergy
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 privatisatio
n, 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 factor
s

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 distr
ibuted 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 generatio
n 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 Victoria’s installed capacity
(ESAA 2011, pp. 18,
20)
. The Institute for
Sustainable Futures (ISF), however, suggests that while Australian
distributed generation i
s 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
-
sca
le 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 act
ive
in the
small
-
scale solar
market
, having published offers
D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


9

under the standard, premium and transitional feed
-
in tariff schemes (SFiT, PFiT and TFiT).
Indeed, e
lectricity retailers with more than 5000 customers
are required to offer f
eed
-
in
tariff
s (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 s
cheme uptake (at 31
October 2010)


SP Ausnet

Jemena

Powercor

CitiPower

UED

Total

Number of PFiT Customers

9

152

2

467

7

259

1

451

5

236

25

565

Instal l ed capaci ty (kW)

12

953

3

969

10

648

1

654

7

977

37

201

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 r
etailers 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 i
nverters
, arranging for finance, arranging
install
ation by licensed accredited installer
s, o
rganis
ing 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,
a
ll
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 ac
credited 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 hav
e a completed report before the system has

been
commissioned

and R
ECs

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 trans
itional 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 dist ribute
d 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 gr
id, 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 c
o
-
generation

and tr
i
-
generation

facilities.




1

See
http://www.solaraccreditation.com.au

for more details.

10

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

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 th
e 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 engage
s

the relevant

energy
distr
ibutor

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
pe
r cent of Victoria’s 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,
b
y volume, is medium
-
scale.

Table 2.2

Capacity of embedded and non
-
grid generation
in Victoria


June 2010

All embedded/non
-
grid

MW

Non
-
hydro renewabl e
embedded/ non
-
gri d

MW

Natural gas

133

Black liquor

55

Waste gas

45

Landfill gas

40

LPG

0.6

Sewage gas

22

Hydro

103

Solar

75

Non
-

hydro renewable

619

Wave

0.2



Wind

428



Solar hot water

131,000 units

Total

900

Total

619

Note:

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 ab
solute 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
acco
unt 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
generat
ion technologies in favour of solar PV.

Figure 2.2

shows

the capacity of solar PV installed annually, and highlights the impact of
the PFiT.

D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


11

Figure 2.2

Annual capacity of solar PV installed in Victoria
(MW)


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 c
o
-
generation

contributed
around 478
MW of Victoria’s
electricity generation
in 2010 (table 2.3
).

Table 2.3

Co
-
generation in Victoria


2010


MW

Brown coal

195

Natural gas

124

Waste gas

45

LPG

0.6

Bioenergy

113

Total

47
8

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.

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



a

SFiT introduced

PFiT introduced

TFiT introduced

a

Forecast based on first 8 months

12

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

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 elect ricity 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 a
t 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 (m
arket 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 liabilitie
s 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 multiplie
d by the spot price and any loss factors
(AEMO
2010a)
.


Net work 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 en
ergy 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)
.




2

Based on the av erage customer bill in the Australian states where network prices are set by gov ernment.

D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


13

Ret ail services

Electricity retailers purc
hase 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 det
ermined 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 El
ectricity 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 settle
ment 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 e
nergy
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 secti
on 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
a
ppendix
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 NEM’s
high level regulatory structure is outlined
i
n figure 2.
3
.

The r
egulatory 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 regulat
es

the NEM
. The
14

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

AEMC
makes

rule
s

in response to requests for rule changes,
usually from NEM
participants.
The AEMO manages and operates the NEM and coordinates planning of the
market.

A
ppeals are considered by the Australian Competition Tribunal.

The
NER
are made un
der 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
N
ational 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

generat
ing

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

Electri
city regulatory structure



Source: Com
mi ssion analysis.




Standing Council on
Energy & Resources

Council of Australian
Governments (COAG)

Participants & Consumers

Australian Energy
Market Operator
(AEMO)

System operator and
planning

Australian Energy
Market Commission
(AEMC)

Rule maker and adviser

Australian Competition & Consumer
Commission (ACCC)

Australian Energy
Regulator (AER)

Economic regulator of
transmission and
distribution networks

Essential Services
Commission (ESC)

Licensing and service
standards

D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


15

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

jurisdiction’s 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; O’Brien 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 ge
nerators

may be

excluded from
,

or find it more difficult to access
,

one or other of these
connect
ion

processes. There are
various fees and charges associated with connecting distributed generators to the
distribution network applied by DNSPs. These costs v
ary 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 connect
ed 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 ce
rtain 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 ele
ctricity 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, t
here 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 agree
ment, including
technical standards, with their DNSP on a case
-
by
-
case basis.

16

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

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 custome
r
s, 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
acco
rding 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

wh
ich 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 serv
ices 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 th
e 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, o
r 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.


D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


17

Table 2.4

Connection process for distributed generators from 1 July 2012

NER

Applies to

Generator type

Connection

Right to

connect?

Chapter 5



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
generat
or
s
>
5

MW and
<
30

MW
capacity
which export
<
20

GWh in
any 12 month period
)

Various
combinations of:



scheduled,
semi
-
scheduled
and
non
-
scheduled



market and
non
-
market

Negotiated


cl
5.5
outlines access
arrangements for
embedded
generators wanting
to connect to the
distribution network

Yes


if automatic acce
ss 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

Chapter 5A

(excludes
registered
generators)

Retail customers who are
micro
-
embedded generators

Generator size not
specified but must
meet Australian
standard AS4777

Basic connection
service

Yes


DNSP must provide model
standing offer

Retail customers

(includes
non
-
registered embedded
generators and micro
-
embedded
generators)

Not specified

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)



Connection

is neither basic nor
standard connection service, or



Basic or standard connection service is
sought but CA elects to negotiate
terms and conditions

Not specified

Negotiated
connection
contract

Unclear


DSNP must use its ‘best
endeavours’ to make a negoti
ated
connection offer

within 65 business
days
. The AER will arbitrate where
agreement cannot be reached

Source: Commi ssion analysis of chapters 5 and 5A NER.
18

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

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 Exe
mption (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
introduc
e 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 multip
le generating units in the NEM and will only require a si
ngle
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.1

5)
.

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)
.

Vict orian feed
-
in tariff schemes

In Victoria, certain types of distr
ibuted 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 unde
r the FiT customer’s electricity bill. The SFiT is usually paid by way
of a credit to the customer’s 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
D
ISTRIBUTED GENERATIO
N IN
V
I
CTORIA


19

conditions that r
egulate 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
an
d
conditions of a licensed retailer’s
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.


20

P
OWER FROM THE PEOPLE
:

AN INQUIRY INTO DIST
RIBUTED
GENERATION

Table 2.5

Victorian feed
-
in tariffs schemes

Feed
-
in tariff

Applies to

Technology

Generator size

Tariff

Other terms and
conditions

Premium FiT

(closed to
new
applicants)



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.

Solar PV

5 kW or

less

60c/kWh statutory minimum



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
.


Transitional FiT

25c/kWh statutory minimum

Standard FiT



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)

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.

T
erms and conditions
must be ‘fair and
reasonable’
.

Source:
Commission analysis of Division 5A of the

Electricity Industry Act 2000
(Vic).

D
ISTRIBUTED GENERATIO
N IN
V
I
CTORIA


21

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
ren
ewable 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 r
egulat ory 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 nation
al 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 co
ntinue 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
conditi
ons:



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 P
t 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 regulat ory framework is
, in some respect s,

inconsist ent and
discriminatory


Processes for connecting distributed generation to the distribution network and for
receiving a regulated FiT for selling surplus electri
city 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 V
ictorian 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 ser
vice. Other embedded
generators are only
guaranteed

connection through a standard connection
22

P
OWER FROM THE PEOPLE
:

AN INQUIRY INTO DIST
RIBUTED GENERATION

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 rese
rved 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.

Regist ration
is
a high ent ry

barrier

t o participation

in t he 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 connecti
ng 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 nec
essary 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 g
enerators 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 e
lectricity
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.

C
onnect ion and selling

regulat ion does not cat er for all distributed
generat or
s

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 t
o 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
D
ISTRIBUTED GENERATIO
N IN
V
I
CTORIA


23

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 fr
om 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
r
estricted 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 distribut
ed 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 th
ey choose to do so.


24

P
OWER FROM THE PEOPLE
:

AN INQUIRY INTO DIST
RIBUTED GENER
ATION

Table 2.6

Connecting options for distributed generation from 1 July 2012


Micro to small generators <100

kW

Smal l to medi um generators

100 kW
to 5 MW

Medi um generators

>5 MW to <30 MW

Chapter of
the NER

Chapter 5A
a

Chapters 5 and 5A

Chapters 5 and 5A

Regi strati on
requi red?

No

Under chapter 5A:

no

Under chapter 5:
yes


registration or
exemption from registration is required.
A Standing
Exemption applies for
generators <5MW


Under chapter 5:

yes


registration or
exemption from registration is required


Type of
connection

Basic connection service,
standard connection service or
negotiated connection contract

Under chapter 5A:

standard connection service or negotiated connection contract


Under chapter 5:

negotiated


Automatic
right to
connect?

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 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 po
wer 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




D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA



25

Table 2.6

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


Micro to small generators <100

kW

Smal l to medi um generators

100 kW to 5 MW

Medi um
generators

>5 MW to <30 MW

Statutory
ti meframe
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

Under chapter 5A:

Yes


for standard connection services a DNSP has 10 days to make a model standing
offer. Expedited conn
ection 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
connecti ng

Subject to AER connection
charge guidelines

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
fe
e

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.



26

P
OWER FROM THE PEOPLE
:

AN INQUIRY INTO DIST
RIBUTED GENER
ATION

Table 2.7

Selling options for distributed generation in Victoria

Technology

Micro to small generators

Small to medium generators

Medium generators


5 kW or less

<100 kW

100 kW to 5 MW

>5 MW to <30 MW

Solar

Solar PV:



Premium FiT (closed to
new customers)



Transitional FiT for new
customers

Standard FiT



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



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

Standard FiT

Standard FiT

Hydro

Biomass

Other forms of renewable
energy specified in an Order
in Council

Low emission



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

Non
-
renewable

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 o
utside 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: Commi ssion analysis.
D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


27

2.3

Policies for distributed generation and
renewable energy

Policies regarding distributed generation form part of a broader policy framework
de
signed 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 Australia’s main policy measures for
reducing carbon emissions. The fundamental purpos
e 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
Commonwealth’s climate change strategy as well as house
holds’ 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 in
itially 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 issue
d 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 go
vernment 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 an
d mandatory RET with a commitment that 20 per

cent of Australia’s
energy will come from renewable sources by 2020. The Government predicts the
28

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

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 negotia
te 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 component
s: 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, geothermal
-
aquifers, 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 station’s 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. 7

10)
.

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 electr
icity generated or displaced over the system’s 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
numbe
r of STCs quarterly
(Clean Energy Regulator 2012a, pp. 11

14)
.

Solar credit s

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
c
reated 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)
.

R
enewable 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 wa
ter system or $1 000 for
a solar hot water system (that replaces an electric hot water system). The
D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


29

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 manufacturi
ng 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 2012
b, 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 CEFC’s focus. The CE
FC 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 f
und’s 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 l
ow
-
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. 13

16)
.

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 Commonwealth’s
Clean Energy Act 2011

(Cth)

and the introduction of a carbon price, a recent review
found that separate state
-
based targets were unnec
essary
(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 th
e 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 e
fficient 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 speci
fic 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 improvemen
ts 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.

30

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

Currently, VEECs are created for around 30 prescribed energy effici
ency
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 renewabl
e 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

Future trends

2.4.1

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 f
actors 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 fol
lowing
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 reduction
s 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 China’s massive increase in production capability will continue to
reduce prices, while an increase in silicone production capacity will alle
viate supply
constraints
(MEI 2011, p. 2)
(figure 2.4).



D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


31

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 t
o 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 increm
ental
technological improvements represent a significant potential for cost reductions
(figure

2.5).



32

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

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 ha
s 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
lear
ning 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)
.

D
ISTRIBUTED GENERATIO
N IN
V
ICTORIA


33

The CSIRO modelled the price of key technologies under va
rious 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 b
ecome 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. 201
1, 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 i
ntent 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 i
t 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 electrici
ty price is
expected to produce a shift in electricity consumption as consumers seek low cost, low
demand periods.

0
50
100
150
200
Wind
Solar
thermal
Rooftop PV
Large scale
PV
Wave
Black coal a
Black coal b
Nuclear
5 per cent emissions reduction
25 per cent emissions reduction
34

P
OWER FROM THE PEOPLE
:

INQUIRY INTO DISTRIB
UTED GENERATION

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

2.5

Conclusions

Distributed generation is a relatively new part of Victoria’s electricity industry and, as
such, does not always fit neatly into Victoria’s traditional electricity market. Although
it
currently accounts for only a small portion of Victoria’s 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 enco
urage 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
t
he 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 indepen
dent
generators. Distributed energy is diverse and many generators are managed by
households or small businesses with little knowledge of electricity regulations.