Australia’s leading mining and industrial groups, as well as the most powerful industry lobbies, are prone to raising the spectre of “sovereign risk” when campaigning against imposts such as the mining tax and a carbon price. They should be thankful they are not in the renewable energy industry.

The renewables industry has experienced multiple policy convulsions over the past decade that have stalled its development, but none may be so damaging as the decision last week by the NSW government to make retrospective changes to its feed-in tariffs.

The loss of faith and reputation from the breach of contract extends far beyond the 120,000 households that are impacted by this decision. The state government may be able to protect itself from legal action, but not from the hesitancy of international investors, who — already befuddled by the confusion of policies at a federal and state level in recent years — will take particular note.

The experience in Spain is instructive. Last year, the government announced similar retrospective cuts for ground-based solar installations. A group of high-profile international asset managers are now suing the government for more than $5 billion in losses, investment in renewables has slumped, Spain has been forced to reduce its renewable energy target for 2020, and is now reportedly considering raising its subsidies to try and attract new investment.

The situation in Australia is problematic because renewables, and climate policies in general, are clearly a political football. The sovereign risk — here about the consistency of policy rather than of government bonds going pear shaped — is compounded because the federal coalition has promised to repeal a carbon tax if elected, effectively applying a 50% discount to the anticipated carbon price; the Victorian government has brought the local wind energy industry to a halt, and now NSW has taken this action with solar. Clearly, there must be something in conservative waters.

The NSW government defended its decision to cut the feed-in tariff for rooftop solar systems in the state from 60c per kilowatt hour to 40c/kWh, including those systems already installed, as being based on “social equity” and as a measure to reduce the impost on the budget.

The question of equity has been distorted. The government’s own figures show the highest uptake of solar panels has been in the mortgage belt of western Sydney and regional areas such as Bega, Dubbo, Taree and the northern hinterland, while two separate studies have suggested half the recipients have been on household incomes of less than $65,000 (AGL), or 70% have been below $60,000 (University of Technology).

In any case, a far more equitable decision would have been to remove the windfall profits currently being enjoyed by the electricity retailers — who will receive electrons from some 350MW of installed capacity in the state for free, and then sell those electrons back to customers at the retail rate, as Warwick Johnston has noted in this piece. Those profits are about equal to the money being clawed back from households with solar PV.

In coming years, when retail rates rise further, and time-of-use tariffs — which already reach 39c/kWh and will no doubt rise as well — become more prevalent, the retailers will still receive those electrons for free. The value of that windfall — currently estimated at about $100 million a year, could double by the time the system ends in 2016.

(The value of this windfall will be hotly disputed. The retailers argue that the electricity from rooftop solar should have the same value as energy from large, remote utilities such as coal-fired power stations. The solar industry says this assumes rooftop solar shares the same transmission and distribution needs, which it doesn’t, because the electrons produced by the rooftop panels go through the household meter to be measured and then into the home, or perhaps into their neighbours’ homes. Indeed, the industry argues (see below) that rooftop appliances avoid network costs worth up to twice the value of the PV system, as opposed to air-conditioning units, which usually impose a  network cost on the community of at least three times their value).

It is not as though the NSW government was not aware of this windfall, because it was outlined by its pricing regulator, IPART. Even its own department of energy and resources canvassed cutting this windfall as one of the options available at the Solar Summit, 10 days ago. But the government chose against it.

Perhaps it decided that the power retailers were not to be messed with. The retailers would be delighted, given they are also making windfall profits from the federal government’s solar multiplier scheme which, at the moment, allows the retailers to pass on the full “fixed price” of a renewable energy certificate at $40 and then buy them on market for about $26.

Indeed, the power and influence held by the three big energy retailers on the eastern seaboard — Origin, AGL and TruEnergy — over the renewable energy industry — large-scale developers are beholden to them if they want to strike a power purchase agreement — has become an area of great disquiet, but that is another story.

The new NSW Coalition government also justifies the decision by saying the original rate was too generous. Everyone knows that, and no one disagrees, although it should be pointed out that the Coalition was an enthusiastic supporter while in Opposition, waving away the warnings of some of the more sensible voices in the industry. But by overreacting and making the cuts retrospective, and providing no guidance for new installations beyond the paltry 6c/kWh that will be offered by the utilities, it shows it is no more capable of sensible policy making than its much maligned predecessor.

Warwick Johnston, of advisory group Sunwiz, has emerged as one of the more insightful analysts on solar PV in this country. On Monday we published this commentary on the FiT decision, but Johnston also points out how government bureaucrats and policy makers misunderstand what they are dealing with, and don’t seem to understand the abatement potential.

The government has been advised that the cost of abatement in solar PV is possibly more than $500 a tonne of C02e. But that’s not where they need to be now. Costs of PV have more than halved since 2004, Johnston notes, and distributed PV offsets retail electricity charges rather than competing directly with coal- and gas-fired power.

“An $8000 unsubsidised investment in a 1.5kW PV residential system reaps $13,700 of offset electricity expenditure and offsets 42 tonnes of CO2 at today’s emission intensities, albeit at a (highly simplified) net present value (NPV) of $-2390 (assuming 4kWh/kWp/day with 0.5% annual degradation, 20c/kWh electricity price indexing at 5% per annum, 7% discount rate). Government injections of $2390 could effectively abate 42 tonnes of emissions for approximately $50.48/tCO2-e today, and would leverage private investment, thereby growing the industry until grid parity is reached.

“Though the abatement cost of PV is currently more expensive than other methods, once grid parity is reached (which in NSW could be within about five years) the cost of abatement for the system owner will be zero (on the basis that they pay the full cost of this system without any government assistance). After this time the cost of emissions abatement will be negative.

“It should be remembered that policy interactions led to the boom, just as they are now leading to the bust, for the reduction in the value of federal subsidy is compounded by the pull-back of state-government support. Having invested a billion dollars in the development of the NSW solar industry, the most wasteful use of that money happens when the industry collapses. It is more financially prudent to invest a further amount in a self-correcting support mechanism that transitions the industry to grid-parity’s self-sufficiency over the next three to four years.”

*This article was originally published at Climate Spectator.