Clouded vision on subsidies

BARRY O'Farrell's failure to cut the NSW feed-in tariff for solar electricity is another reminder of how Australia's climate change response has become a cascading debacle of ill-conceived, knee-jerk policy on the run.

In the case of rooftop solar, one of the most expensive ways to cut carbon emissions has become the most widely used because of its irresistible appeal as a visible demonstration of political eco-cred.

Aside from giant windmills, it is difficult to think of a better green symbol for a ministerial photo opportunity.

For this reason, governments, state and federal, have fallen over themselves to shower solar photovoltaic programs with subsidies. Whereas most countries debate whether to help finance renewable energy with either an upfront payment or feed-in tariff, Australia has done both.

The federal government provides a subsidy through renewable energy certificates and the states provide a complementary subsidy through a feed-in tariff.

The twin-subsidy system has had some perverse results.

The federal government decision to back rooftop solar starved investment in large-scale renewable projects, forcing a change of rules to ensure the two sectors are subsidised independently.

State government schemes to pay households a feed-in tariff have made rooftop solar financially irresistible for those who had the roof space and could afford an ever-diminishing upfront payment.

The scheme benefits solar-equipped households and power utilities to the detriment of all electricity consumers.

Even with lower manufacturing costs, solar PV is still much more expensive than other forms of carbon abatement.

Solar PVs produce electricity at a cost of between $450 and $500 a megawatt hour of electricity at the household.

Coal produces electricity at about $50 a megawatt hour plus distribution costs of about $100 a megawatt hour. Wind produces electricity at about $110 a megawatt hour plus distribution costs of about $100.

In short, it costs about $350 to save a tonne of carbon emissions from burning coal using household solar.

That said, the fact that the Premier failed in his bid to unwind NSW's overly generous feed-in tariff introduced by his Labor predecessors is not such a bad thing.

Retrospective legislation is always bad policy, no matter how well-intentioned. O'Farrell must concentrate on avoiding similar mistakes in future.

The rooftop solar debacle highlights yet again that ad hoc schemes across state and federal boundaries are no substitute for a properly thought-out national scheme to cut carbon emissions.

This is, and has always been, a market-based carbon trading scheme.