Australia's solar disconnect
The big energy retailers could hardly have anticipated a better outcome from the IPART review of solar panel pricing had they written the report themselves. They didn’t need to, because the terms of reference were so restrictive that the report virtually wrote itself. If you ask a silly question, you usually get a silly answer. And that’s what IPART delivered. It seems that even the NSW government was sufficiently sheepish that it sought to hide the conclusions under a confected cloud of controversy about its plans for power privatisation.
The most disappointing aspect of this review is the exclusion of the sort of externalities that are factored into the feed-in tariffs of the near 100 other countries that use them, either because they were not asked to, or because they were deemed too hard. These include the so-called merit order effect, the calculation of avoided losses, or even the broader economic and employment benefits of ensuring a thriving solar industry; or the contribution that solar PV and other distributed generation will make to the energy grids of the future.
The effect of this is to perpetuate the short-term economic rationalist approach that got us into this pickle in the first place. To borrow a phrase from the delightful Oscar Wilde character, Lord Darlington, this report purports to know the price of everything and the value of nothing. And it hasn’t even got the pricing bit right.
The main finding of the IPART review is that electricity retailers should pay between 8c-10c/kWh for electricity exported to the grid from rooftop solar, but only if they feel like it. As the electricity exported into the grid amounts to around one third of the electricity generated by the average 1.5kW system, this is a crucial calculation for would-be installers. And if you believe some of the forecasts for solar PV take-up, such as the one shared by Suntech last week, it’s a critical one for retailers as well.
The polemic of how to value solar PV were summed up in this article we published in September, based on the submissions to IPART. In short, the retailers think it should not be valued any more than electrons from a coal-fired generator, although the value may increase because of the time of day of its output. If there are benefits on transmission and distribution networks, then the retailers shouldn’t be paying for it. The solar industry said the value of solar is much broader, both in avoided capital costs for generators and networks, but also for its impact on wholesale prices (it makes them go down) and as an industry support measure.
IPART has recognised this disparity, decided that some of the externalities are too hard to calculate, and swallowed the retailer’s argument that there should be a ”light handed” approach to regulation, in the name of "competition." But as the solar industry points out, the experience of the last six months, where some retailers offer nothing and others are locked within a narrow range of 6c-8c, competition is clearly not working. The Clean Energy Council’s Tim Sonnreich said this is a little like the Wage Commission setting a minimum wage and agreeing with employers that it should only be voluntary. In one of its most strident statements on the issue, the CEC said customers were in danger of being “ripped off” if the IPART recommendation was adopted.
The IPART review was brought about by the newly-elected conservative state government, which concluded that the best way to try and solve the mess created by the previous government’s absurdly generous tariff was to avoid making a decision at all, and commission a year-long review instead. It has left the local solar industry in near collapse, with massive job losses, company closures, and the suspension of production at the country’s only module manufacturer.
(Interestingly, the state where the solar industry continues to thrive is in Queensland, which had a sensible tariff and is the only state-based scheme to remain in place. The state’s net tariff of 44c/kWh paid for electricity exported from the home back into the grid, will add just 0.03c/kWh to retail electricity costs over the next few years, according to the Australian Energy Market Commission. The Queensland rate will inevitably be wound back as the price of PV falls, but policy stability has allowed the solar industry to thrive.)
This delay, though, suits the larger utilities because it is part of a broader power play between solar and the rollout of gas-fired generation. The utilities are wary about a large-scale rollout of solar PV because, as the University of Melbourne/BZE report found, the addition of considerable quantities changes the model of the generators. That report found that 5 gigawatts of solar PV would have a considerable dampener on peak pricing and remove almost half the revenue the utilities get from those few days of extreme peaks. This point was reinforced by German energy expert Roman Dudenhausen, who told Climate Spectator the scale of the roll-out of solar PV in Germany had flattened the cost curve in Germany to such an extent that the incentive to build gas generators has been removed.
But the reviews by IPART, and a similar one in South Australia, also highlight just how ill-prepared the country’s biggest utilities are for the energy technologies of the future. As the submissions to both inquiries reveal, some of the retailers and the network operators say that handling distributed generation is just too hard, even to the point of coaching their call-centre operators. But they better get their minds and their business practices around it soon, because the experience across the rest of the world tells us that it’s coming, ready or not.
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Comments on this article
Tasmanian feed-in tarrif continues
One small correction: the article claims Queensland has the last remaining state system, but in fact the Tasmanian system continues, without apparent attack… just yet.
In Tasmania PV exported power is paid at the retail rate, there is no premium as in other states. In effect this is the 'grid as battery' notion Sam Richards mentions above.
Given line loss, transmission costs and other factors, this seems fairly reasonable; as a PV owner I'm tempted to argue the solar industry perspective (offset costs etc.), the environmental benefit, and to be honest, the hope for further savings.
At the same time, it's a system perhaps less vulnerable to attack, avoiding the appearance of largesse or favouritism, and given the carbon tax and cost of living hysteria, at least we can hope the feed-in tariff is not eliminated all together.
Feed in tariffs are fair when you consider the summer peaks
The cost of the feed in tariff doesn't seem so unfair when you consider how much the NEm goes up to for a few hours each year when the heat waves hit and everyone turns on their air conditioners. At this time generators make most of their money for the year, and the solar anels that are either not drawing electricty from the grid, or putting electricity back into the grid, at which time the retailers are saving a lot of money due to those solar electrons, and from the perspective of how much they are paying the owner for those solar electron, they are making a killing.
I suspect that if rooftop solar owners were able to charge the going rate for the electricty they produce at ALL times, in other words be on the NEM, then they would make a killing during those few hours each year, and more than make up for losing out on a feed in tariff for the rest of the year. And they'd always be bidding low because it would cost them next to nothing to produce the power. You would need installation subsidies or feed in tariffs because people would be able to pay off their systems and start making money much quicker.
With 5KW, 65 cent feed in tariff and smart meter
We get all of the tax concessions we need. Just lucky we got on when economic irrationalists were running the show.
Our daily consumption is unchanged. We simply time shift consumption to off peak (early morning and weekends). Shift to 11c a Kw off peak versus 24c a Kw peak. Dishwashers, laundry, pool pumps, etc.
We minimize consumption during peak solar generation periods so that we maximise of "totally tax free feed in tariff income".
This increasingly is looking like a tax free 10% return on investment. Not sure what other help we need .. especially when the returns blow out as the carbon tax increases electricity prices.
Even the fact that we replace peak consumption at 24 cents a Kw with our solar means that on a 20 Kw PV production day we save $4.80. If we could feed in the whole 20 Kw we would earn over $13.
As you might have guessed we are quite heavy users of power.
Take away the feed in tariffs and subsidies, the smart meter still would let us save with time shifting consumption even without solar. Just that impacts on emissions would then be zero.
advantages, disadvantages
Many readers agree that tariffs are bad, wasteful, etc and that for economic efficiency, PVers should be exposed to NEM rules and the Merit Order. But it should be asked - is this possible even with smart meters ? If fully-contestible PV electrons become desirable during an extended heatwave, this may be a windfall for PVers and come at a cost to somebody elses energy. Also, there is probably a logistical nightmare happening while the market operator tries to monitor hundreds of thousands of distributed systems on roofs, which only give feedback every so often. Then Paul asks the reasonable question would a PVer access tax concessions like all the big boys. I don't see why not, by then it would be a completely level playing field.
Merit order
Dave Smith and Chris Fraser are barking up the wrong tree.
In the NEM, merit order is the ranking at any time of the offered wholesale prices at which generators offer their product to the market. It has nothing to do with fuel cost or marginal cost or wages or interest rates or anything other than the price for each successive unit of electricity.
If a wholesaler (generator) puts too high a price on his power, he will be above the highest price which the market operator needs to pay to buy all the electricity that the market needs at that time and will miss out on the sale. This picture changes every 5 minutes. Generators are liable to be stood down or scheduled to start up, based on merit order.
Unless, that is, the generator is a solar generator. In NSW the remaining lucky ducks with the 60 cent feed-in tariff represent probably the highest price on the merit order list 99 percent of the time, yet they get that price whenever the sun is shining. The average price for other generators during the past 2 years has been between 4 and 5 cents. Sixty cents is a huge rip-off by any assessment. So is 44 cents in Qld. Feed in tariffs are a scandal and a rort.
If a loaf of bread is for sale at $4.50, would you be happy to buy the same loaf with a "solar" sign attached to it for $60? No? Neither would I. Why should I be forced to do so?
The fair thing Martin Nicholson is
The fair thing Martin Nicholson for home owners with Solar PV is to allow them to use the energy grid as a FREE battery.
Whatever they generate more than they consume is sent to the grid to be retrieved at night when they are not generating.
NO feed in tariff at all and no installation subsidies.
Even a small Solar PV will generate substantial power over a whole day.
The NSW 60 cents feed in tariff with installation subsidies was a disgrace, a transfer of wealth from the poorer to the richer.
Tariffs can distort markets
There is something seriously missing in this discussion about rooftop solar PV and feed-in tariffs.
Every watt-hour (Wh) generated by your PV panels is used in your home unless you are producing more electricity than you are consuming at the time. So every Wh you get from your panels means a Wh you don’t buy from your electricity retailer.
It’s a bit like growing your own vegetables. Every tomato you grow is one less tomato that you buy from the store. If you are a mad keen gardener you might produce more vegetables than you can eat so the rest you can sell at the farmer’s market AT THE CURRENT RATE for the vegetable you are selling.
Electricity is no different. If you produce too much you should be able to sell it to the “market” at the going rate at the time of sale. So the net tariff should be the current buy rate. When you don’t have enough (like between 4 pm and 8 am) you buy it from the market at the going rate at the time.
Gross tariffs make no sense at all!
Fixed tariffs either gross or net are an artificial contrivance to encourage people to “grow more vegetables than they can eat”. This distorts the market and eventually will be counter productive.
We don’t do it in other markets, why should we do it with solar PV panels?
Economic disconnect
Thanks for the interesting article Giles. Thanks too to fellow readers who have commented. A good discussion. Can anyone point out a good (hopefully succinct!) article on the current state of play regarding the various subsidies, feed-in tariffs etc.etc.?
My question, as a non-economist would be: "what happens if all subsidies were to be removed and everyone putting electrons into the system were paid at the same rate?" While I am inclined to prefer renewables, I would like to see an upfront accounting for their cost.
Can householders treat their solar PV systems as a business taxwise?
If we started with a clear picture of the economics, then we could have a rational discussion of the pros and cons of the various regulatory responses.
Power to PV
I wonder if there are assumptions in the report which naturally benefit the retailers. Such as the captive situation where PV'ers consume what they can, but have to export the rest ? (Which is good if you are at home all day, but bad if you leave the house to work all day). Therefore PV'ers can be offered any price retailers like on the export, whereas generators can always withhold ? PV'ers might have it all wrong. It would be great to store PV energy, use it at peak times, and never sell.
Nonsense
So Giles, forcing energy retailers to pay 44c/kWh for electricity exported from homes in QLD back into the grid will add just 0.03c/kWh to costs?
Yeah maybe, but only if hardly anyone has Solar PV on their roof.
Home Solar PV is one of those weird saving measures where the more you roll it out the more it costs you and the less you save.
NSW dumped it like a hot potatoe, it was burning a huge hole in their finances and household power bills were set to go even more ballistic.
NSW government wants nothing to do with power generation.
NSW governments have been wanting to privatise electricity generation for a very long time, and leave investment and regulation up to "market forces". This supposedly will encourage efficiency and innovation. What it does mean is retailer buy up and funding of infrastructure by foreign capital, with a strong incentive to send the income stream back overseas to foreign owners. This is at a time when the NSW government complains of a chronic funds shortage for public investment.
The rise in electricity prices, is to pay for corporate funding of neglected infrastructure, to fund extreme reliability standards for peak demand times. A continued large PV rollout, as noted, would reduce average stationary energy peak demand so much as to make the extra dollars invested in external supply give a much poorer return. It would also help reduce carbon emissions. The NSW government would rather give the money to foreign owners of our electricity providers, than give rate payers cost relief, or reduce their carbon emissions.
what a pity!
If such a report would be produced somewhere in Africa, we all would suspect corruption. We know that we have no corruption in Australia and for this reason; we could suspect that many reports and policies are complied during “show and tell” sessions at the local Kindergarten.
Rooftop Power Producers
We just have to band together and turn off our panels en masse in the middle of a few really hot days. Can some Net-savvy type set up a site so we can get started? (!)
Regards,
Robert
Another short sighted policy
The supply of coal and gas in NSW is very finite. With projected increases in coal production Australia's economically viable reserves of coal, which include those that conflict with agricultural and other land use priorities, will be largely depleted by 2060 with peak production around 2040. (http://camwest.pps.com.au/renewable-energy)
The only solutions to both Global Warming and resource depletion is renew-able power and distributed power works better.
The best way to encourage renew-able power is with viable feed-in tariffs.
Currently the NSW power generators are supplied with coal at highly subsidised prices, some 25% of the price that it would realise in Newcastle Harbour. What happens to the price of electricity when the coal price is no longer subsidised?
With distributed solar, both investment in peak demand capacity and distribution networks are reduced further off setting the cost of renewable feed-in tariffs.
Dan
Define Merit Order Effect
I had merit Order Effect defined a little differently. It is similar to having those energy sources with the least marginal cost auctioned off to energy retailers first and the fuels with larger marginal costs auctioned after, if they are wanted at all. So the marginal cost of wind is merely the cost of somebody monitoring the wind, the turbines in their care and the AEMO, whereas the marginal cost of coal includes the costs of the whole coal supply line, someone to shovel it into the furnace and maintain a steam turbine.
Merit Order Effect
Giles,
The "Merit Order Effect" (that new generation capacity causes reduced wholesale prices) applies to all types of generation: solar PV, CCGT, coal, nuclear etc. So, if solar PV should be subsidised because of the benefit from the Merit Order effect, shouldn't these other technologies be subsidised too?
Plainly not. This argument for PV subsidies is economic nonsense
Time of Use Pricing?
Giles, surely you don't expect IPART to look after Australian consumers, do you? IPART's job is to look after the incumbent grid operators, generators and energy retailers and ensure they make strong returns from their monopolistic positions and to protect fossil fuel interests. Why else would solar not get a time-of-use premium given most solar energy is generated during the peak demand period? Why would a household face their solar system to the West when they can get more electricity with solar panels facing North? Who cares if facing North has a lower time value of generation - clearly not IPART. Why would IPART recognise the grid transmission savings and efficiencies of distributed solar? That might lower the value of Ausgrid before the NSW government gets its privatisation away! Why create an electricity system that is forward looking and less poluting? There might be health benefits to Australian consumers of reducing coal-related pollution, but that's apparently not the government's problem, either.
The disconnect I see is in in economics...
The statement "or even the broader economic and employment benefits of ensuring a thriving solar industry; or the contribution that solar PV and other distributed generation will make to the energy grids of the future." needs some comment.
The current situation of available infrastructure, its costs and employment and the price of that service and the level of security is a benchmark.
For there to be thriving employment, i.e. a big increase in wages costs, must mean that either cost or security of service must decline, or price must increase to pay for all the extra wages cost.
So PV parity with coal won't get you there, PV must be substantially less than parity with coal. Solar thermal and hot rocks at 3x the current generated cost of power wan't get you there (What carbon tax could you imagine for that to happen?). For more wages there must be a big technology driven increase in efficiency.
Reduced security of supply ..a non-starter as no politician wants enraged voters.
Increased price. Self explanatory and implicit in anything and everything you hear about renewables.
Labour Ministers are correct, 1 July 2012 will not be the end of the world when the carbon tax comes in, but watch what happens in October when the new electricity bills arrive in letter boxes and the cash give-backs have already been spent.