Elsevier

Ecological Economics

Volume 180, February 2021, 106890
Ecological Economics

Analysis
Equity and effectiveness of Australian small-scale solar schemes

https://doi.org/10.1016/j.ecolecon.2020.106890Get rights and content

Highlights

  • We quantify inequality in subsidy receipts for two Australian schemes for solar panels.

  • There may be more inequality in feed-in tariffs than for an effective investment subsidy.

  • The Small-scale Renewable Energy Scheme (SRES) subsidy elasticity of solar capacity is 1.1.

  • The SRES promotes binary uptake of solar systems, but may not change size decisions.

  • Equity and efficiency of the SRES could be enhanced if payments are not proportional to system size.

Abstract

Two major subsidy schemes for small-scale solar panels in Australia, namely feed-in tariffs (FiTs) and the Small-scale Renewable Energy Scheme (SRES), have substantial inequity implications. Higher household wealth is associated with larger subsidy receipts for both schemes. Using household-level data up to 2018, we find that the top wealth decile had higher subsidy receipts than any of the bottom seven wealth deciles in respect of both subsidy schemes. There is also evidence of inequality between lower-wealth deciles for feed-in tariffs but not the SRES. For effectiveness of the SRES, we show a positive relationship between the SRES subsidy factor and solar panel uptake, but no significant association with size decisions of solar adopters. In contrast, wealth is positively related with both uptake and size decisions of solar adopters. Equity of the SRES could be improved by targeting subsidies to low-wealth households, while efficiency could be enhanced by equalising subsidies across system sizes.

Introduction

Climate change caused by the accumulation of greenhouse gas emissions is the most prominent problem posed for ecological economists (Anderson and M'Gonigle, 2012). As a ‘policy science’, ecological economics is central for attempts to reduce the scale of climate change risks over the coming decades (Daly, 2019). A key group of policies involves supporting the substitution among types of natural capital required for electricity generation in the transition from fossil fuels to renewable energy. We focus on the effects of policies to promote small-scale solar systems in Australia, the world leader in proportional uptake of solar systems (Best and Trück, 2020), using recent household survey data with large samples. Our study focuses on the equity effects of solar policies, in addition to effectiveness.

Environmental policies and transitions are often assessed as resulting in a trade-off between equity and efficiency (Kirchner et al., 2019; Landis, 2019; Sasse and Trutnevyte, 2019), although revenues from policies can be recycled to address equity issues where necessary (Beck et al., 2015; Felder and van Nieuwkoop, 1996). In a ‘trans-disciplinary’ way of ecological economics described by Dzeraviaha (2018), growth-inducing efficient allocation should be considered alongside fair distribution to consider potential trade-offs. It can also be argued that there is interdependency between equity and efficiency of environmental policies (Pascual et al., 2010). Difficulty for analysis lies with the issue of how equity is perceived and by whom: notions of fairness and what constitutes just distribution is normative in conception, relying much on the rules and criterion of that society at a point in time. As such equity (or inequity) is not easily measurable and determined, relative to what it is traded with (efficiency), and hence often disregarded in empirical analysis. In this paper, we rely on the positive concept of equality (or measured inequality), because that which is quantifiable can be determined and compared. Equity and just distribution, as effects of policies, can be suggested by comparisons of inequality.

Prior economic studies have often focused more on the efficiency and effectiveness of policies rather than equity considerations (Goulder and Parry, 2008). This is evident in the lack of studies on the distribution of payments supporting clean energy deployment across socioeconomic groups (Grover and Daniels, 2017). In particular, equity has not featured prominently in existing literature on small-scale solar uptake. This motivates our focus on equity, as just distribution of the benefit of the schemes precedes the efficiency of their implementation in the sense that a desired efficient outcome is a function of a given initial distribution (Daly and Farley, 2011, p. 417). Distributional concerns can be the main obstacle for environmental policies in practice (Klenert et al., 2018), further motivating our focus on distribution.

Inequality implications of environmental policies can be evident following broad effects across various economic sectors. The complexity introduced by these indirect effects suggests that modelling could underestimate adverse effects on equity (Perry et al., 2013). Broader economic impacts of solar policies can include unemployment effects if solar uptake contributes to closure of alternative electricity generators (Burke et al., 2019). The distribution of gains and losses between firm and household sectors is also an important issue, such as in the context of European solar photovoltaic plants. Substantial profits for developers came at the expense of electricity users even with profitability containment measures (Mir-Artigues et al., 2015; Monarca et al., 2018).

Solar uptake can also have inequity implications through impacts on electricity pricing, such as network-connection fees (Mayr et al., 2015). Grid-supplied electricity prices can be elevated to finance subsidy schemes, while grid-supplied electricity consumption and expenditure is reduced for households with solar panels. This has implications for energy or fuel poverty, which can be reduced for disadvantaged households with solar panels (Best and Burke, 2019). Households without solar panels can also potentially benefit in some ways, such as through reduced centralised generation spending and less air pollution when other households pay for solar panels (Young et al., 2019), potentially raising suggestions of free-riding.

The receipt of subsidy payments by households with solar panels can have direct impacts on inequality as higher-income households are more likely to be able to afford solar panels. For example, empirical evidence and modelling suggests that German feed-in tariffs are regressive (Grösche and Schröder, 2014; Többen, 2017; Winter and Schlesewsky, 2019). Consideration of utility scale solar plants in Europe is also useful to highlight the value of incorporating capital subsidies into analysis, which is less common than analysis of ongoing feed-in tariffs (Dusonchet and Telaretti, 2015).

Two main policies for small-scale solar in Australia are feed-in tariffs (FiTs) and the Small-scale Renewable Energy Scheme (SRES). Households generally receive both the upfront investment subsidies from the SRES and ongoing production subsidies from FiTs.

FiTs involve payments to households per kilowatt hour of solar-generated electricity that is exported back into the grid. The duration of the FiT schemes and payment rates have differed over time and across Australian states. In the early phase of implementation, amidst the absence of a federal mandate and lack of regulation, the states and territories implemented their own FiT schemes. This resulted in differences between FiTs across the various jurisdictions, and in the tendency of retailers towards the regulated minimum (Poruschi et al., 2018). In this paper, we focus on the substantial variation in FiT receipts across households, rather than changes over time. We consider multiple household surveys to assess contexts spanning different FiT rates.

The SRES is effectively a capital subsidy that is proportional to solar system size and varies by location; there are higher subsidies for households installing larger systems in regions with greater solar exposure.1 The SRES subsidy is calculated as:Subsidy factor×SizeKW×Deeming periodyears×Certificate price$

There are four levels of the subsidy factor for four geographical zones based on solar exposure. Households in Zone 1 where solar exposure is greatest are assigned the highest subsidy factor of 1.622. Subsidy factors are 1.536, 1.382, and 1.185 for Zone 2, 3, and 4 respectively (Australian Government, 2018). Multiplying the subsidy factor by solar-system size in kilowatts gives the time-invariant part of the SRES subsidy.

The third and fourth components of the SRES subsidy vary over time, although all installations up to 2016 were subject to the same deeming period of 15 years and the certificate price has been relatively constant, just below the maximum price of A$40 per certificate. The deeming period declines by one for each year from 2017.

The SRES is designed to provide roughly one certificate per megawatt hour of electricity but is generally facilitated as an upfront payment. In contrast, Cassetta et al. (2017) emphasise that policy effectiveness depends on electricity production performance over the duration of contracts in the case of wind auctions in Italy. This suggests a trade-off in the SRES design between alignment of payments with benefits from solar panels over time and the administrative simplicity of only having one payment.

The SRES and FiTs share some similarities, which suggests that inequality outcomes may also be similar. Both schemes involve payments to households with solar panels, with larger payments to households with larger solar systems, all else equal. While there is no explicit cross-financing, the SRES and FiTs have similar effects on raising electricity bills in most Australian states, with both schemes resulting in costs per residential customer of around A$20 per year (Australian Competition and Consumer Commission [ACCC], 2018). This equates to hundreds of millions of dollars in aggregate for each year. These costs are growing as capacity additions of small-scale solar have been rising substantially in each year since 2016, reaching over 2 gigawatts in 2019, and over 600 megawatts in the first quarter of 2020 (Clean Energy Regulator, 2020). The growing contribution of small-scale solar to Australia's total electricity generation surpassed 5% in 2019 (Clean Energy Council, 2020).

The subsidy schemes also differ in several ways. The SRES is a national scheme, in contrast to the state-based FiTs. The timing of the payments also differs, with the SRES involving an upfront discount at purchase, in contrast to ongoing payments for production of electricity in the case of FiTs.

Prior empirical studies of solar policies in Australia have tended to focus more on effectiveness rather than equity. For instance, FiTs have been found to be an important driver of solar uptake in Australia (Poruschi et al., 2018; Poruschi and Ambrey, 2019). There is also a study showing evidence of the effectiveness of the SRES using postcode-level data, suggesting reasonable cost-effectiveness (Best et al., 2019a). In contrast, an earlier capital subsidy called the Solar Homes and Communities Plan was assessed as being an expensive way of reducing emissions (Macintosh and Wilkinson, 2011).

Regressive impacts related to solar panels in Australia have been discussed in some prior literature. For instance, there is subsidisation of payments to households with solar panels by other electricity consumers who face higher electricity bills (Chapman et al., 2016). The costs of FiTs for low-income households have been modelled as around three times higher as a proportion of income, compared to high-income households (Nelson et al., 2011, Nelson et al., 2012). This large impact is because state-based FiTs were generous initially, with high rates of payment per kilowatt hour (Chapman et al., 2016).

Our study provides new analysis on the inequality of solar subsidy receipts, showing inequitable outcomes. This contrasts to nearly all solar uptake studies which do not focus on equity. An important exception is a study by Winter and Schlesewsky (2019), who find that FiTs are increasingly going to higher-income households due to higher prevalence of solar systems for these households. In contrast, our study also includes focus on wealth inequality, an upfront subsidy, and the size of solar systems.

Our focus on wealth inequality, rather than income inequality, is a valuable addition for several reasons. Intuitively, wealth should be more important than income as very few households can afford solar panels from current income. Current income is only one contributor to net wealth, that also includes past income, consumption, and liability changes. The distinction between income inequality and wealth inequality has begun to receive additional attention (Jones, 2015). The importance of this distinction is amplified by growing wealth-to-income ratios (Piketty and Zucman, 2014). A growing number of studies on the substantial effects of accumulated capital on solar uptake (Best et al., 2019b; Best and Trück, 2020; Petrovich et al., 2019) also justifies our wealth focus. We are not aware of any studies of wealth inequality related to household solar outcomes.

This paper also contributes through detailed assessment of policy effects on solar outcomes using household-level data and detailed locational controls. This more detailed incorporation of location data compared to a study by Best et al., 2019b is useful to further reduce concerns over unobserved heterogeneity and because it allows us to analyse the impact of the SRES, an upfront subsidy. We use three nationally representative household surveys including two versions of the Survey of Income and Housing (ABS, 2017, ABS, 2019a) and the Household Energy Consumption survey (ABS, 2013). This complements our new analysis on FiT receipts as a dependent variable, to enable a comprehensive understanding of direct policy outcomes across both investment and production subsidies.

Another main contribution is the analysis of solar size decisions at the household level, rather than only binary solar outcomes or analysis of capacity at aggregated levels. Part of our analysis focuses on the subset of households that have adopted solar panels. This helps to determine whether subsidy payments affect decisions on installation size, beyond an effect on binary uptake. The focus on size also relates to equity, as both payments from both policies that we analyse in this paper are positively related to system size.

Section snippets

Data sources

In this research, we mainly focus on the Detailed Microdata from the Survey of Income and Housing (SIH), conducted by the Australian Bureau of Statistics (ABS, 2017; ABS, 2019a). This survey is conducted every two years. The 2015–16 version of this survey was the first to record household solar variables such as solar capacity in kilowatts and credits from FiTs (ABS, 2017). The 2017–18 version includes solar capacity in kilowatts, but not the FiT variables (ABS, 2019a).

The SIH survey is

Equity

Each of the lowest seven wealth deciles receive significantly lower weekly payments from FiTs compared to the excluded reference category of the highest wealth decile, all else equal, as shown in Table 1. For example, being in the third wealth decile is associated with lower payments by A$2.68 per week, compared to the reference category of the highest wealth decile. This association is statistically significant at the 1% level. There are similar relationships when using probability weights to

Key implications from the results

This paper quantifies the substantial inequality in solar subsidy receipt in Australia. Our analysis produces some consistent results across the SRES and FiTs. That is, higher wealth households receive higher direct benefits from the schemes. The lower seven wealth deciles receive significantly lower policy payments than the highest-wealth decile for both the FiTs and the SRES. This similarity is reasonable given that both policies result in payments to those who can afford the initial

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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