EIR Insights: Let’s tax the COVID vaccine…

This article is part of our EIR Insights series from our Energy, Infrastructure and Resources team. Stay tuned for regular updates and commentary on topical issues across the sector.

Who will pay to upgrade the grid?

The need to upgrade if not over-haul much of the electricity network across Australia is not a new problem – and is a problem measured in billions.

We reported on 12 April 2021 on the Australian Energy Market Commission’s (AEMC) announcement to review plans to upgrade electricity networks – a decision which will be a barrier to operators financing their network projects.

A recent draft determination from the AEMC floated the equivalent of a charge for home owners that export to the grid during busy periods – to assist in funding the grid upgrade.

In effect, this is a tax for consumers that have invested in roof top solar for their homes. We consider this the energy equivalent of a tax on the COVID vaccine.

We understand that the grid needs funding in the billions to meet future demand – this is not a cost which should be borne by those home owners that have already invested in solar panels to minimise their energy costs.

Of concern for the industry as a whole, such a tax is reflective of a government seeking to offset costs to anyone they can palm it too. The reality is government at Federal and State levels have dropped the ball for decades in the management and upkeep of the grid.
What is the Solar Tax?

On 25 March 2021, the AEMC issued a draft determination outlining its strategy to deal with the integration of small-scale solar energy into the electricity grid.

To break this down further, the AEMC floated the idea that electricity grids should offer what’s called a ‘two-way pricing system’.  The two-way pricing system operates so that solar and battery owners1:

  1. are rewarded for exporting power to the grid when it is needed; and
  2. are charged for exporting power to the grid when it is busy.

We will refer to this two-way pricing system as a ‘Solar Tax’ throughout this article.

So how does the AEMC propose the Solar Tax be calculated?

How will the Solar Tax be calculated?

The AEMC have justified this draft determination on the basis that currently, the energy sector is suffering a ‘traffic jam’ problem with large volumes of excess electricity being exported to electricity grids.

The AEMC draft determination provided three different methods when modelling the impact of the Solar Tax2:

  • a flat export charge – $0.00-0.02/kWh;
  • a time-of-use (TOU) export charge – $0.00-0.02/kWh; and
  • a max export capacity – $2.93-29.31/kW.

Submissions were made on the effectiveness of the three pricing methods by various industry players including MEU, ARENA and the Clean Energy Council. So what was the basis for AEMC’s Solar Tax?

A long-term solution or a band-aid to patch a more systemic problem in the energy sector?

Underlying what appears to be a ‘quick’ and ‘cheap’ solution to this problem is a more systemic issue rooted by the failures of successive governments to ensure adequate infrastructure and electricity grids to store the increasing electricity supply by mum and dad solar panel owners.

In the early 2000s, the Australian Government introduced a renewable program which provided rebates to Australian households who acquired solar photovoltaic (PV) energy systems.

This program was very effective and successful with over 20% of Australian households having rooftop solar PV systems, which is a rate that is among the highest in the world3.   Households which produced excess solar energy would then typically receive a credit for the excess solar energy which is then exported back to the electricity grid.  The credit amount will vary between each electricity retailer.

With such a significant uptake by Australian households of rooftop solar PV systems, it would be logical to then consider implementing sound policies that look to ensure that projects commence to expand the existing electricity grid infrastructure to withstand the exponential increase in supply of electricity.

There’s just a couple of problems:

  1. the electricity networks are considered to be natural monopolies and unlike other industries, the electricity networks do not compete and drive to lower costs and invest in adequate infrastructure; and
  2. there is a lack of political will in both sides of government to implement sound policies for the development and renewal of infrastructure and in most cases, projects that are government funded are late, over budget and poorly managed.

To drill the point home, this is analogous to government approving 1,000 units in a low density suburb without approving any policies for the upgrading of roads in that suburb, inevitably leading to traffic congestion… then taxing each person living in that suburb a tax for using their cars during busy periods of the day.

If this is absurd, then why don’t we consider the existing Solar Tax absurd?

Way forward 

The energy market is constantly changing, improving and innovating at a rapid pace and as a result there is no real ‘quick fix’ to the problems faced.  The government at Federal and/or state levels must lead by example and implement sound policies to incentivise the upgrade and expansion of infrastructure in the energy market, particularly electricity grids.

At best this ‘Solar Tax’ is poor policy which will cost home owners and make very little impact to the upgrade of the grid – a problem orders of magnitude greater than such a tax will yield.

What’s next – a tax on the COVID Vaccine? It makes about as much sense.

This article part of Hamilton Locke’s Energy, Infrastructure and Resources team article series, “EIR Insights”. Stay tuned for regular updates and commentary on topical issues across the sector.

The Hamilton Locke team advises across the project life cycle – from project development, grid connection, financing, construction, including the buying and selling of development and operating projects – through to the resolution of major project disputes.

Veno Panicker is the lead Construction and Infrastructure Partner within Hamilton Locke’s Energy Infrastructure and Resources team and has a strong track record in EPC contracting and the delivery of EPC projects across Australasia, including adjudication, litigation and arbitration.

1  Australian Energy Market Commission, ‘Draft Rule Determination’ https://www.aemc.gov.auhttps://hamiltonlocke.com.au/sites/default/files/2021-03/Draft%20Determination%20-%20ERC0311%20and%20RRC0039%20-%20Access%20Pricing%20and%20Incentive%20arrangements%20for%20DER.pdf 25 March 2021, p. ii, para 4.

2  Ibid p. 246

3  Best, R., Burke, PJ. and Nishitateno, S. (2019), Evaluating the effectiveness of Australia’s Small-scale Renewable Energy Scheme for rooftop solar, CCEP Working Paper 1903,  Aug 2019. Crawford School of Public Policy, The Australian National University.  https://ccep.crawford.anu.edu.auhttps://hamiltonlocke.com.au/sites/default/files/publication/ccep_crawford_anu_edu_au/2019-08/wp_1903.pdf p. 3