A study from the Melbourne Energy Institute suggests that the benefits of solar energy on the National Electricity Market could outweigh the costs of feed-in-tariffs, and could deliver energy cost savings for all customers, rather than an impost as is commonly believed.

The conclusion comes from a draft of the latest update of its study – which also includes researchers from the ANU’s Solar Thermal Group, Beyond Zero Emissions, and Clean Technology Partners – into the merit order effect, which relates to the impact that energy sources with small or zero marginal costs (such as wind and solar) can have on the overall grid by lowering prices.

The merit order effect is considered crucial in the debate around clean energy deployment because it suggests that the cost of incentives – such as renewable energy certificates or feed in tariffs – can be offset by the benefits this energy has on wholesale prices in the NEM. Once a wind farm or a solar farm is constructed with an upfront subsidy, its low marginal cost means that it can bid beneath coal and gas generators into the energy stack. This reduces margins for the coal and gas generators, but it also delivers considerable savings on wholesale prices, particularly solar, as it delivers into the grid at times of higher demand.

The study reinforced its previous modeling that 5GW of rooftop solar PV in the NEM could have depressed prices in the wholesale market by $1.2 billion in 2009 – or 12 per cent of the total market value – and $630 million in 2010 (the latter year is a smaller number because there was less price volatility due to milder weather conditions).

But it goes further. It suggests that a properly calibrated net tariff – where the householder is paid for only the excess energy from the rooftop array that exported into the grid – could be offset by the reductions of the wholesale price, which should flow through to all consumers.

The study calculated that with a net export rate of 60 per cent, for example (note: suburban export rates tend to be much lower, but export rates from larger systems in regional areas much higher), then for a installed capacity of 2 GW, a net tariff of 35c/kWh would not impose any additional cost or burden on the electricity consumer base.

A tariff less than 35c/kWh would deliver a net saving to the wider consumer base. In this case, it says, “the scheme could be considered a progressive measure, with those that install capacity creating a benefit for those that cannot. Overall this would represent a wealth transfer from generators to consumers, and not a (regressive) wealth transfer from consumers to PV system owners. “

This is a crucial addition to the debate, because in politics over green energy incentives – particularly in NSW where the previous Labor government introduced a foolishly generous and uncontrolled scheme – feed in tariffs have been painted as “unjustified burden” (in the words of the Department of Energy), or a “regressive tax”, as AGL economist Tim Nelson wrote in widely read report last year.

But the Melbourne Energy Institute study says significant photovoltaic energy generation has real and substantial economic value. “These results indicate that policy incentives such as Feed-in Tariffs actually produce an economic benefit – savings in wholesale electricity prices via the Merit Order Effect,” it writes. “Therefore the cost of such policy schemes should not be considered in isolation from their benefits. Incentives can be set slightly below the breakeven point, such that a net transfer of wealth to consumers occurs.”

The merit order is a sore point for the incumbent energy industry because not only does it undermine their argument that renewable energy incentives only put the price up, it also erodes their profit margins. The NEM was designed to deliver the lowest cost of energy, and did so effectively. But it also ignored all environmental impacts. Now that one has been introduced in the form of an upfront subsidy, the merit order effect no longer serves the interests of the incumbent industry quite so well.

Unfortunately, the merit order impact has been largely missing from the policy debate surrounding the design of feed-in-tariffs and recognising the “fair value of solar”, with utilities and many energy consultants downplaying the impact, or describing them as too hard to calculate. Because of this, it has not been included in the deliberations of IPART, which is investigating how exports from rooftop solar should be valued in NSW.

But the existence of the merit order effect cannot be denied, even if it’s quantum can be debated. The International Energy Agency has recognized it, and uses it as an example of how such incentives can deliver savings rather than costs. It regularly points to the example of Ireland, where it says the impact of more wind energy lowered the wholesale cost of energy by more than the cost of the incentives that got them constructed. Similar impacts are felt in Denmark and in Spain, and one study in Germany found that the merit order impact of its massive rollout of solar PV was some Euro5 billion, which when combined with the economy value of the industry it created, was more than the cost of the subsidies.

Its impact is also real in Australia. The Victorian auditor general noted that this was the primary reason why the coal-fired generators in Victoria successfully lobbied the state government to dilute the state’s renewable energy target in 2007. And there is this quote, too, from the recent IPART roundtable on feed in tariffs, when the issue of the merit order came up in discussions. Said Andrew Dillon, a representative of TruEnergy: “In terms of the merit order effect (of solar PV) … that absolutely is a real effect, there is no doubt about it.”

It would appear it’s time, then, that that value was recognized in the policy making. And it’s not just for the framing of FiTs, the energy industry needs to recognise this impact for the day when solar PV reaches grid parity, as it has already done in some areas of Australia and will surely do in the years to come.

As the Melbourne Institute’s Mike Sandiford said after the release of the initial report last year, grid parity – and the deployment of solar at a scale that the modeling contemplates – is coming whether the governments and the utilities like it or not, and it’s time policy makers faced up to the issues that it presents. “We can either hide from grid parity or we can embrace the challenges,” Professor Sandiford said at the time. “All we ever hear is that it is expensive, can’t deliver, or is not worth investing. We rarely hear of the opportunities.”