Two-Way Tariffs and Rooftop Solar in Australia
A Carrot and Stick Approach to Grid Congestion
Rooftop Solar in Australia
Australia has a significant adoption of residential solar due to large insolation values and good Feed-In-Tariffs (FIT); as of April 2023, rooftop solar accounted for the majority of the Solar PV generation, with 11.2% of Australia’s electricity supply (report).
The government recognized that both rooftop and grid-scale PV are key to our energy transition to renewables and it is balancing the contribution and the needs of each type. In particular, recent changes (August 2024) are boosting the acceleration of grid-scale, see the latest table below.
In this post I want to highlight a recent mechanism used in Australia to help with challenges imposed by this high growth but first I need to provide some background on the Australia electrical system.
Brief Recap of Electricity in Australia
Caveat: the summary below is to the best of my knowledge. Please let me know if they are inaccuracies through comments.
There are multiple actors in the Australian electricity market:
Electricity Retailers sell, and perhaps buy, energy to/from the household. The retailer buys electricity from one or more generators (including DERs) through the energy markets. Retailers are deregulated and they set their rates.
The Distribution Network Service Providers (DNSP) own the distribution lines in a given distribution area and connect to the transmission lines. DNSP are a monopoly and their rates are regulated by the Australian Energy Regulator (AER). Ausgrid is one of three DNSP’s for NSW.
The transmission lines are owned by the Transmission Network Service Providers, (TNSP) and are managed by the AEMO. TNSP are monopolies and their rates are regulated by the AER (see their latest rate proposal). There are 5 TNSPs; TransGrid is the TNSP for NSW.
Australia has two geographically separate energy markets (the National Electricity Market and the Wholesale Electricity Market) that are managed by AEMO in real-time. Retailers and Generators participate in the market. The Australian Energy Market Commission (AEMC) sets the rules for the market.
Generators (including batteries) participate in the markets. DERs can connect to the distribution grid and are registered in the NEM or Western Australia’s registrars, directly or indirectly through the retailers.
If you want more details, check AER’s State of the Energy Market, 2023.
Feed-In-Tariffs
The original feed-in-tariffs in Australia used net metering. While current tariffs are not as high, they are still quite generous. An article on SolarChoice reported FITs as high as AUD 12c/kWh from retailers like Globird Energy, and also indicates that energy is paid at rates that vary between AUD 20 and 30 c/kWh, which encourages exporting electricity to the distribution grid.
If you are curious, check out this site to compare all solar and battery FIT retail offers.
Large Solar PV Share
A challenge when a large share of the electricity being from rooftop PV share is that it may reduce the price of electricity in the middle of the day, and this discourages investment in grid-scale PV. Another problem is congestion in the distribution grid, which can require build up and may raise the issue of “cost-shifting”.
In this post I want to explain a mechanism being piloted in Australia by a DNSP to address congestion, the Two-Way Tariff.
From the perspective of an Australian household with a Solar+Battery, we would like to find a retailer that will give us electricity at good price and that it will buy our surplus at a good price. That retailer will need to interact with our local DNSP, and will need to buy and sell electricity in the market at a price that makes sense for them, at the given time and location within the larger grid.
Two-Way Tariff
Ausgrid is the largest DNSP on Australia’s east coast, providing power to 1.8 million customers throughout Sydney, the Central Coast and the Hunter Valley. Ausgrid is addressing the challenge created by Solar Tariffs through the Two-Way Tariff, designed for residential and small-business owners.
The two-way tariff provides a monetary signal: you are paid if you export at the right time and you pay if you export at the wrong time.
Below is a graph showing the daily behavior for November (summer in the Southern Hemisphere):
There is a small threshold to accommodate small variations around the limits but otherwise the signal is very simple and direct.
Two-Way Tariff and Retailers
Recall that these new two-way tariffs are at the DNSP level, while the customers experience is at the Retailer level. Ausgrid expects that most retailers…
will pass on this tariff via changes in the feed-in tariffs they offer customers, by reducing these feed-in tariffs during certain hours of the day and increasing them during other hours of the day.
Opt-In First, Mandatory Later
The two-way tariffs were trialed this last year. Ausgrid adjusted the charge/reward values and introduced a final proposal on July 2024 as an opt-in tariff for new and existing residential and small business customers. The tariffs will become mandatory in July 2025.
The reward trialed this last year was quite high (26.6 c/kWh!); your web searches may encounter articles reporting experience with that value, like this article by Amber and in this consumer’s note. The reward value was lowered very substantially to 2.3c/kWh for the final proposal - see this discussion. The charge value in the final proposal was also changed and it is now 1.2 c/kWh.
The opt-in period, with the new charge and reward values, has just started. We should start seeing reports in the next months.
Reflections
I had read about the two-way tariffs in some Linkedin thread. As I started reading, I had to adjust several misconceptions but I learned quite a bit that I tried to capture in this post. A couple of overall thoughts…
On Deregulation
I really like the structure of the Australian market (which, incidentally, is the same as that of most of Europe and Texas). The structure is:
Monopolies (DNSP and TNSP) are regulated, but Generation and Retailing is Deregulated. Generators and Retailers connect through National Markets. Retailers package the complexity of the market, including feed-in-tariffs, and market it to the Consumers.
I also like that DERs can participate in the market through retailers and directly.
This setup allows the benefits of the open market to set prices and reward innovation and efficiencies. The setup is also much more conducive to experimentation and innovation than what we have in California where we the IOUs like PG&E have control transmission, distribution and retailing, with some oversight from CPUC and some limited flexibility via CCAs.
Carrot and Stick is better …
One of the things I like about the two-way tariff is that it is not just a stick mechanism nor just a carrot but that it has both. I think that together they will encourage households to modify their behavior.
The reward/charge values in the tariff are also significant - though not as much as in the trial - and are relatively easy to reason about. In contrast, in California, even through are rates are much higher than in Australia, the NBT rates, based on ACC, change through the year and the hours and are minimal through most of the year.
Dynamic Flexible Exports
Some DNSP in Australia are taking a different tackle to manage congestion and are using Dynamic Flexible Exports where the exported value can change depending on the status of the grid. Here is a post from SA Power Networks, the TNSP in South Australia, and another describing adoption by Solar Victoria.
Dynamic flexible exports is somewhat similar to the “connect-and-manage” approach used in ERCOT for grid-scale interconnects.
I’ll read more about dynamic flexible exports and will try to write about them in a future post.
More Readings
Some more links for readings…