The Hon Barry O’Farrell MP
Premier
Minister for Western Sydney
Level 40, Governor Macquarie Tower
1 Farrer Place
Sydney 2000
Dear Premier
I write to express concern about the Cabinet decision to retrospectively alter consumer contracts under the Solar Bonus Scheme (SBS), and to expand the Scheme to allow another 40,000 applicants (extra 65 MW) access to receive subsidies.
My concerns can be summarized as follows:
Retrospectivity: It is a central tenant of Liberal and Conservative philosophy that any retrospective legislation to alter contracts is unprecedented and repugnant. As Jeff Kennett recently said “The concept of retrospective legislation I find to be totally unacceptable. I can think of no example when and where retrospective legislation can be justified.”
Retrospectivity is specifically prohibited in the US Constitution (a restriction on both Federal and State Governments). Where as a rare, last resort retrospective legislation has been considered in Australia (eg to close “Bottom of the Harbor” tax loopholes) it has been to resolve flaws that confound policy intentions. The proposed retrospective changes to SBS changes the policy itself, causing deliberate and disproportionate harm to a specific class of investors.
Honoring our commitments: In the year leading up to the 26 March Election, our policy as repeatedly determined by Shadow Cabinet, the Party Room and re-checked with your Office, was that we would honour SBS contracts.
Our commitment, (which is still displayed on the Barry O’Farrell website) states:
"The NSW Liberal & Nationals policy will ensure that NSW leads Australia in establishing a decentralised energy sector, by honoring the State Government’s current commitments and improving the scheme to make it more effective.”
On this basis numerous statements have been made by myself and others to Parliament, the media and the community that reassure consumers their investments under the SBS would be safe.
One consumer has advised me that he literally submitted an email from Andrew Stoner’s Office assuring him we would honour contracts to the bank as part of his loan application. Another invested $100,000 in a 10 kW system after carefully checking our position. I am receiving numerous emails detailing distressing cases where significant financial losses will be incurred if we proceed with the proposed legislation. There is a major issue of integrity at stake. Allowing an extra 40,000 participants into the Scheme: I do not support expansion of Solar Bonus beyond the Keneally Government’s legislated 300 MW cap. The focus should be on closing the SBS – not making it bigger. Evidence presented to the Solar Summit suggests the Solar Bonus is no longer needed as panel prices are so low, and electricity prices have risen to the point where payback is achievable without a gross tariff subsidy. The industry can still thrive by installing panels with net metering. I estimate the cost of this decision to lift the cap at $140 million.
Clearly this large expansion of SBS is to be funded by slashing the tariffs of existing participants. The use of retrospective legislation to force the full costs of a public policy decision onto one small group of investors is unethical in my view.
Perverse impact – the legislation will further increase electricity prices: The admission of a further 40,000 SBS participants will cause another stampede prior to 1 July when the Federal Government’s subsidies (RECs) are reduced. The NSW SBS has been the key cost driver for the blow-out in federal subsidies and by expanding the Scheme we will be indirectly driving those costs up again – ultimately they will be recovered from all electricity consumers. If we complain that it’s a Federal impost, the Gillard Government will point the finger straight back at us for removing the cap on a discredited SBS.
There were better ways to reform and achieve savings in the Scheme: I estimate $500 million could be saved, without the need for retrospective legislation by:
respecting the 300 MW Cap ($140 million);
recovering the financial windfall to retailers (gained through resale of the solar power @ 6 cents p kW) ($200 million). This issue concerns the value of 300 MW of Solar power entering the grid and being on-sold by energy retailers. At present no value is ascribed to this power, and the 6 cents per kW that would be paid to a generator business in the Hunter Valley is being pocketed by some retailers (Country Energy) or returned to customers (Energy Australia pay a 66 cent solar bonus subsidy). This value should be extracted and used to offset the costs of the SBS. I note the SA Government is legislating to extract this value to fund the tariff payments for their customers.
removing “old solar” from the Scheme – over 15,000 participants had Solar already installed – some as early as 1998 and their investment decisions predated SBS. ($120 million)
Investigating fraud: The closure of the 60 cent tariff at midnight on 27 October allowed a 3 week transition period for applications to be received for people who had paid deposits by midnight 27 October. It is widely understood that during this period, the SBS was subject to fraud on a grand scale.
For the first 6 months of the SBS 28,500 systems (52 MW) were connected. On 27 October 2010 2,800 applications were lodged (7 MW) and in the following 3 weeks, another 37,000 applications (79 MW) were accepted at the 60 cent rate. It is unbelievable that 37,000 deposits were received for eligible solar systems in just one day. The 5 year cost cost of accepting these applications allegedly finalized in a single day is in the order of $400 million. If just 10% were found to be fraudulent (industry suggestions are that the fraud was far greater than that) it would save the SBS some $40 million. An “amnesty” offering transition to the 20 cent SBS could significantly increase the savings. Some consideration ought be given to this issue.
The Cabinet may have been misinformed about the impacts of the retrospective legislation:
The briefing material issued to Members contained significant errors including:
The 40 cent GFT is the most generous in Australia (ACT has a far more generous rate of 45.7 cents and their cap is 30 kW compared with our 10 kW cap)
The average consumer has a 1.5 kW system that will still repay itself in 4 years. In fact the average is 2.3 kW and for Country Energy it is 2.8 kW. The payback is being calculated in today’s panel prices – in fact prices (net of RECs) were double and triple current prices. Minister Hartcher’s modeling does not take account of the fact that most people have borrowed to fund their panels and the interest payments (compounding) were a key cost in their calculations. When SBS began, the payback period for 1.5 kW was 8 years at 60 cents. It is nonsensical to argue that those customers can repay their systems in 4 years at 40 cents.
The Solar Summit was misconceived:
“Administrative Simplicity”: The five guiding principles of the Summit included four to do with economic responsibility and openness, and a fifth principle of “Administrative Simplicity”. None of the principles related to impacts on people, including Scheme participants. The hallmark of our approach to Government was supposed to be putting people “front and centre” of policy. It is disappointing to argue “Administrative Simplicity” and omit “people” (this approach influenced the decision to adopt a formula cut to the rebate which has no regard for individual impacts).
The Solar Summit excluded the key stakeholders – being the participants impacted by the policy decision. The briefing notes claim all stakeholders reached a consensus at the Summit. In fact it appears the people who were denied a voice are the same people we now say should bear all the costs. This lack of consultation means the NSW Government can have no idea of the actual impacts of its policies.
Lack of proper policy framework: I am concerned that the decision to admit another 40,000 people to the SBS has been made without reference to a proper renewable energy policy. This means that we are tying up more resources in small scale solar without knowing if it is the best policy option to achieve our 2020 renewable energy target of 20%. Commonsense suggests it is actually the last thing we should be doing.
Scapegoating Scheme Participants:
The affected Stakeholders are being incorrectly characterized as “greenies” and wealthy people rorting other electricity customers. My experience of the affected constituency is very different. After a year spent discussing their circumstances and investments I would characterize them as follows:
People who didn’t or couldn’t invest: – The price incentives to invest in solar at 60 cents were in the order of $30 - $80 per week for payback of principal and interest. Rich people were not attracted to go into such a complex equation for this sort of money. This is why take-up rates were low on the North Shore. In the Inner City “greenies” who rent were excluded; those who owned their own homes or apartments did not have suitable and/or unshaded roof access for the panels. (in fact many inner city slate roofs are heritage listed).
People most attracted to invest in SBS: were those either struggling with their electricity bills and/or fearful of future price rises. This particularly applies to older people on fixed incomes.
This is evidenced by the higher take-up by Country Energy customers who have the highest prices and lowest incomes. Typically these people borrowed money – some took the short term interest free Green loan and hoped to repay principle quickly with the 60 cent subsidy before taking out a commercial loan for the residual. Others increased their mortgages. Families delayed investments such as a renovation, believing the SBS would repay itself. My experience is that people saw the 60 cent rebate as an opportunity to maximize the size of their systems – thus forgoing the opportunity for quicker payback with windfall profits. This fits with my belief that the main reason for investing was to “future-proof” their electricity bills.
There are no “typical” or “average” investors: The decision to invest was very different for each consumer according to their financial circumstances and the suitability of their roofs. The characteristics I have suggested above apply across a wide range of household types. What they have in common is that most will be very adversely affected by the retrospective legislation.
The politics of the decision are unacceptably high risk for the Government.
The affected constituency of fixed and mid-low income home-owners overwhelmingly voted for us and feel betrayed. Every electricity bill they receive from 1 July 2011 each quarter until December 2016 will anger them, because it will list the Solar Bonus Rebate at 40 cents and remind them in exact dollar terms of the extent of the betrayal.
In conclusion, I urge the Government to revisit the details of this decision to embark on retrospective legislation. I personally find myself in an unconscionable situation. I have given people my word that an O’Farrell Government would honour their contracts, based on Shadow Cabinet and Party Room policy. In good faith I believed the Scheme could undergo major reform and savings without the need for retrospectivity.
As you are aware our family are Scheme participants and while that has never been a factor in my position, I recognize the perception of a financial interest and I am consulting the Parliamentary Ethics Advisor on that matter.
I truly hope the decision by Cabinet can be revisited as there is ample scope for major improvement that avoids the twin evils of retrospectively and expansion of SBS.
Yours sincerely
Catherine Cusack MLC
CC Hon Chris Hartcher MP; Rob Stokes MP
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