How can the feed-in tariff go down while retail prices are increasing?
27 February 2023
Each year we consult on the minimum electricity feed-in tariff that your energy company is allowed to pay you for power you export to the grid (from sources including solar panels). We receive a lot of stakeholder feedback and questions on the minimum feed-in tariff.
In this article we look at one of the most common questions.
The short answer is that the feed-in tariff is going down because electricity prices during the day are going down. Because most solar exports happen during the day, this means the value of the solar exports is lower. In turn this leads to lower feed in tariffs.
Wholesale electricity prices are going up during the night
Wholesale electricity prices have gone up recently and are forecast to go up further. This increase is due to high wholesale prices in the evening when electricity demand is high. This has led to much higher average wholesale and retail prices.
Wholesale electricity prices are lowest during the day when solar exports are high
During the day, when most solar exports happen, wholesale electricity prices have fallen over recent years. As more people set up solar panels, they need less electricity from the grid (lowering demand). It also increases the supply of electricity during the day.
Low demand and high supply are leading to low daytime wholesale electricity prices.
Solar weighting measures wholesale prices when exports take place
Solar weighted wholesale prices measure the value of rooftop solar generation in the wholesale market. The solar weighted wholesale price is a type of average price. Prices at times with more solar exports contribute more to the average. Prices when fewer solar exports happen contribute less.
For example a high prices on a cold cloudy day, with low solar exports, would not affect the average much. But low prices on a sunny but mild day, with high solar exports, would contribute more.
Most solar exports take place during the middle of the day. So prices around midday contribute the most to solar weighted prices.
When demand is low and supply is high prices can become negative
Generators sell their electricity in the National Electricity Market. Generators bid the lowest price at which they would agree to sell electricity into the grid. The Australian Energy Market Operator choses bids starting from the lowest price, towards the highest, until there is enough power to meet demand. All of the chosen generators then sell their electricity at the bid price of the last generator chosen. If enough generators bid negative amounts this can lead to negative prices.
Negative bids signal generators will pay to produce electricity rather than switch off. There are many different reasons generators may pay to send their electricity into the grid.
For example, it may save large coal generators money if they pay to keep running. Once they stop generating it can be very costly to start coal generators again.
It can also make sense for some renewable generators to pay to export their electricity. Some of them sell renewable energy certificates or power purchase agreements linked to their output. If they do not generate they cannot claim the certificates or may be in breach of their agreements. So, if they get more money from the certificates and/or purchase agreements than they have to pay to export, they will send power into the grid.
Recently negative prices have started to happen more often during the middle of the day. With more solar panels, demand is lower and supply is plentiful during the day. The combination of these two factors have led to supply often being greater than demand. The result of this is that prices are often negative when solar exports are at their highest level.
These conditions have led to a rapid growth in the share of solar exports at times of negative prices. The chart below shows the change in the share of solar exports when prices are negative.
Over the coming years daytime demand is likely to fall further, especially in the middle of the day. This is likely to lead to even more negative pricing periods.
Share of annual solar exports taking place when prices are negative