If you’ve got solar panels, you’ve probably wondered why there is such a big difference in the price you pay for electricity, versus what you get for your solar electricity. It doesn’t seem fair and it might not make sense, so let’s unpack it.
What feed-in tariff are you on?
Firstly, it’s important to understand the different types of feed-in tariffs available and which one you’re on. If you’re not sure, check out our blog about feed-in tariffs.
If you’re on a premium feed-in tariff (that’s above 60c in Victoria and 44c in Queensland), you’re being paid generously for your solar electricity. In fact you’re getting paid well above the market price most of the time, because you’re being rewarded for investing in solar panels early when they were more expensive. Make sure you know what happens if you’re on a premium FiT and want to switch power companies.
If you’re one of the over three-quarters of solar households that get a standard feed-in tariff, you’re probably paying much more for the electricity you buy from the grid (up to 30c/kWh or higher) than what you get through your feed-in tariff. And, you might think this is pretty unfair.
Why are some power company’s feed-in tariffs higher than others?
Depending on the state, electricity companies are either regulated or recommended to provide a certain standard feed-in tariff by state governments. However, they can choose whether they give you the lowest rate, or above that.
What does that mean in your state?
- VIC: minimum FiT of 9.9c (regulated until 1 July 2019, then goes up to 12.0c)
- NSW: recommended range of 6.9 to 8.4c (until 1 July 2019, unknown after that)
- SE QLD: power companies can choose their own rate
- Rest of QLD: minimum FiT of 9.4c (regulated)
- SA: power companies can choose their own rate
- TAS: minimum FiT of 8.54c (regulated until 1 July 2019, unknown after that)
- ACT: power companies can choose their own rate
Why do you pay more for electricity than your standard feed-in tariff?
The harsh reality is that your solar electricity is only worth (from a purely financial sense) as much as the market will pay for it at the time that you’re exporting it. This market is called the National Electricity Market (NEM) in the eastern and southern states.
The other reality is that the price you pay for electricity at the point of consumption is made up of more than just the value of electricity.
Electricity supply and demand
Your solar is exporting electricity to the grid in the middle of the day at the same time as all of the other solar systems in Australia. This means that there is more electricity available at that time, so the wholesale value of that electricity is lower. It is a simple case of supply and demand.
The above graph shows the wholesale value of electricity for this past January in Victoria. You can see that the solar exports spike outside of the peak usage time of 4pm to 9pm when the wholesale prices are higher.
Now you’re probably thinking – why don’t those prices align with what I pay for electricity? Well, this is where it gets a little more complicated. Let’s talk about what else goes into the price of electricity.
Generation and consumption costs
The price of electricity is made up of a number of costs, from the cost of generating that electricity to the costs associated with transporting it to you. These charges are always paid for by the end consumer at the point of consumption (that is, at your house or business). That’s just how the system is set up.
This means that when you buy (or consume) electricity you pay for all of these costs and when you create and export your solar power, you only get paid for creating it.
How power companies buy electricity for you
We’ve talked about generation and transport costs, but another factor that affects the price of electricity is how power companies purchase it.
Most power companies buy electricity in bulk at a set price and well in advance of when you need to use it as a consumer. They can buy it in large chunks, or small, and have a team of experts who pick the best time to buy. Their aim is to buy it at the cheapest price.
The price of this chunk of power they buy is typically made up of a base wholesale contract, a peak wholesale contract, as well as risk protection and profile risk.
These last two components are kind of like insurance that power companies take out for their customers. They protect customers from paying exorbitantly high prices when demand is really high (and old power stations struggle). Think of those 45 degree days in summer.
The risk protection and profile risk are two elements that power companies struggle to change, because they need to ensure their customers are protected against market volatility and bill shock. These are not reflected in the graph above.
Solar power and coal-fired power are valued equally
It costs more to buy and use electricity than the market values the solar power that you generate, but what you may not know is that this is true for all electricity sources.
Regardless of whether the power is from a coal-fired generator, a wind farm, or your house, it’s always going to be more expensive to buy.
The industry just doesn’t care. All it sees is an electron and the value of that electron depends on what someone is willing to pay for it in the market. Of course, remembering that the cost of generating and transporting the electrons are paid at the point of consumption on top of the cost of the actual electricity.
The popularity of solar power has lowered its value
While electricity is valued the same regardless of its source, the growth in solar power has caused a huge shift in the market. With the increase in solar households and new industrial solar farms, more and more electricity is fed into the grid during the day and therefore the value of electricity has decreased in the market at that time.
It comes back to what we mentioned earlier – the imbalance between supply and demand results in a lower value. Another way of looking at this is that solar power is reducing the cost of electricity for everyone.
Is this fair? Yes, from a purely economic perspective. No, from our perspective as solar owners. At DC Power Co we’re working to change this, but in the meantime we have to work with what we’ve got.
The secret to getting the most value from your solar?
There are a few ways you can get the most value from your solar panels and you’re probably doing some of these already.
Track your solar exports and usage
Monitoring, monitoring, monitoring! As you know, one of the best ways to make sure you’re making the most of your solar panels is to track your exports and usage.
By understanding when you’re using electricity, you can shift this load to the middle of the day when your exports are highest (only if you’re on a standard feed-in tariff of course). So if you haven’t already, switch your dishwasher and washing machine to run during the day instead of at night.
Invest in a solar storage battery
Any solar electricity that is not consumed at the same time that it is generated will flow into the electricity grid automatically, and our estimates show most people are only ever utilising around 25% of their solar electricity with just panels. With a storage battery, a typical solar household could boost their use of their solar panels to over 80% or even higher.
By utilising solar storage, you can minimise the amount of electricity you buy from the grid and instead run your home on solar electricity to maximise your return.
With typical prices ranging from $10,000 to $17,000, batteries are a little expensive and not quite cost-effective for most households yet. With some governments offering rebates, they will be more attractive very soon.
In Victoria, from 1 July 2019, the State Government is offering a rebate for up to half the value of the installation of the battery (up to $4838). It’s only for 10,000 households and we’ll share more on this soon.
A cost-effective battery package
The DC Power Co Solar Battery Package is our powerful yet simple and affordable battery package that’s compatible with any existing solar system. Starting at just $6750 plus installation, it’s a modular battery package that comes with great warranties and blackout protection included at no extra cost.
Don’t have solar panels yet? Our solar and battery package is designed for people adding solar and a battery at the same time. It combines world leading solar panels, an Australian-designed battery system and local, experienced installers. Find out more