Why does the minimum feed-in tariff change each year?
02 December 2021
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 minimum feed-in tariff changes each year mostly because of changes in wholesale electricity prices. Wholesale electricity makes up most of the costs covered by the minimum feed-in tariff. In recent years, wholesale electricity prices have been going down in the middle of the day when most solar is exported.
This is driven by increased rooftop solar installations which decrease demand for electricity from the National Electricity Market and increase supply during solar generating hours. However, we review the minimum feed-in tariffs each year to capture changes in the wholesale electricity price at the time of publication of each decision.
Legislation controls how we regulate the minimum feed-in tariff. The costs we must include are set out in the Electricity Industry Act 2000. By no later than 28 February each year, we must set the minimum feed-in tariffs to apply for the next financial year.
We calculate the minimum feed-in tariff by forecasting the wholesale price of electricity for the year ahead. This has the following affect on the minimum feed-in tariffs:
The forecast includes wholesale electricity market information available up to the time of the decision. This means that for each decision effective from 1 July, the forecast wholesale prices are based on market information up to February of that calendar year.
Any changes in wholesale electricity market after the publication of the final decision in one year are included in the next decision. This means any changes in the wholesale electricity market after the final decision is made will be incorporated in the wholesale electricity price forecasts for the feed-in tariffs effective from 1 July of the next calendar year.
The wholesale price varies across different times of the day due to changing supply and demand. As solar panels generally export power between certain hours of the day, we only use the forecast wholesale price for electricity during these ‘solar hours’.
The wholesale price is set in a competitive national market, based on the supply of and demand for energy. The wholesale price is not set by government or a regulator.
The chart below shows how the components of the minimum feed-in tariff have changed over time.
We calculate the minimum feed-in tariff by forecasting the wholesale electricity price for the year ahead. The wholesale price varies across different times of the day due to changing supply and demand. As solar panels generally export power between certain hours of the day, we only use the forecast wholesale price during these ‘solar hours’.
In our calculation, we also include:
Avoided transmission and distribution losses: the value of energy saved by not transporting the energy long distances from large scale generators.
Other avoided fees and charges: the value of market fees and ancillary service charges that retailers avoid when energy is produced by solar customers.
Avoided social cost of carbon: the value associated with avoiding carbon emissions when energy is produced by solar customers. It is currently set at 2.5 cents per kilowatt hour (c/kWh) by the Victorian government.
Components we include in the minimum feed-in tariff
Wholesale electricity prices
Retailers purchase electricity from the National Electricity Market to serve their customers.
This cost is avoided when solar customers export to the grid.
Other fees and charges
When retailers purchase energy from the National Electricity Market they are charged fees by the Australian Energy Market Operator.
These costs are avoided when a small renewable generator exports to the grid.
Network or line losses
Line losses occur when electricity is transported through transmission and distribution networks.
This is minimised when a small renewable generator exports to the grid.
Social cost of carbon
Carbon emissions are reduced when energy is sourced from solar systems.
The Victorian Government recognises the associated value as an avoided social cost.