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Get solar PV FiTs right, or get the electricity market all wrong

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The Conversation

Contrary to expectations, demand for electricity in Australia has been falling for several years. Reasons for this include large price rises (of which the carbon price is a relatively small component), improved home insulation and appliance efficiency, subdued manufacturing, and the rise of rooftop photovoltaic systems (the output from which is not included in demand figures).

Falling demand is placing pressure on the business models of the electricity industry. The potential for the installation of tens of thousands of megawatts of cost-effective rooftop PV systems places severe additional pressure on business models.

The cost of generating electricity from roof-mounted solar photovoltaic panels has fallen far below the retail tariff for both domestic and business customers everywhere in Australia, and is projected to fall further. The simple payback time for a domestic PV system is about five years in Adelaide, seven to eight years in Perth, Melbourne, Brisbane and Sydney, and 10 years in Canberra and Hobart. The expected life of a PV system is 25 years.

Large businesses that primarily use electricity during business hours self-consume most of the electricity produced by PV systems on their own rooftops. However, small businesses and house owners rely on the grid to balance the supply of electricity from their rooftop PV system with their own demand. Only rarely would PV production balance with electricity demand within the building.

So a fair and reasonable price needs to be struck for electricity fed into the grid from rooftop PV systems.

The PV industry advocates a 1:1 relationship between the price paid by utilities for electricity fed into the grid by rooftop PV systems and electricity purchased from the utilities. However, some states are allowing utilities to pay very low prices for fed-in PV electricity.

It is widely recognised that electricity providers have over-spent on equipment to meet peak electricity demand. It would be better to manage rather than meet this peak demand.

Cost-reflective retail tariffs are one way to moderate electricity use during times of peak demand. But time-of-use price signals in the wholesale market are muted in the retail market: flat tariffs are more prevalent.

Introducing retail time-of-use tariffs would allow the true value of electricity from roof-mounted PV systems to emerge – particularly in meeting weekday daytime business loads and air-conditioning loads, both of which are well-correlated with PV-availability.

Should state governments and utilities persist in offering very low PV feed-in tariffs, perverse outcomes may result.

If the PV feed-in tariff is below the domestic off-peak tariff (now a common situation in the eastern states) it makes sense for PV owners not to put their power back into the grid. Instead, excess electricity from a domestic rooftop PV system should be used to make hot water in a conventional resistance-heated storage tank. Using PV electricity this way is now competitive with hot water supply from domestic off-peak (night-time) electric, conventional solar and gas hot water heating systems.

However, given electricity is much more useful than heat, from a national perspective this is a poor use of solar electricity.

Another example of a perverse outcome is that battery storage systems, in conjunction with PV systems, are economic in competition with domestic retail tariffs in most Australian capital cities. Batteries allow smoothing of PV system output, storing power when generation is high and releasing it when it’s low. This leads to much higher self-consumption of PV electricity and avoids unrealistically low PV feed-in tariffs.

For example, using current battery and PV system prices, a Sydneysider could store half the electricity generated each day in well-maintained lead-acid batteries, for use in the evening and early morning, and the result would be very economic.

However, domestic battery storage comes with risks. Maintaining and disposing of batteries requires technical skill and care.

This approach illustrates the absurdity of offering PV feed-in tariffs far below 15 c/kWh when the domestic electricity tariff is 20-35 c/kWh. If electricity storage at the domestic level is cost effective, then it must be far more cost effective to do it at suburban, city or state level. At this scale, we could use much larger and lower-cost storage techniques, including industrial-scale batteries, compressed air, flywheels and pumped hydro. Demand management – through switching optional loads on and off to balance supply and demand – is cheaper still.

In order to avoid the perverse outcomes mentioned above, we need reasonable PV feed in tariffs in the range of 15 c/kWh. These should be established in conjunction with demand management, retail time-of-use tariffs and increased use of storage.

This will allow rooftop PV systems to contribute substantially to continued falls in electricity consumption with associated reductions in greenhouse gas emissions.

Andrew Blakers is Director of the Centre for Sustainable Energy Systems (CSES) at Australian National University

This article was originally published on The Conversation. Reproduced with permission.

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  • Rob

    This isn’t true at all:
    “For example, using current battery and PV system prices, a Sydneysider could store half the electricity generated each day in well-maintained lead-acid batteries, for use in the evening and early morning, and the result would be very economic.”

    At current prices, and properly amortising life effect of cycles, the marginal cost of storing energy in lead acid batteries is well north of 30c/kWh and even that assumes perfect sizing which doesn’t happen in the real world. That’s just the cost of putting power into and out of the batteries. If you then have to pay for the PV kWh to put in the batteries in the first place (as the article describes) then its certainly not “very economic”.

    We are a few years off this yet, assuming some level of progress is made in storage costs over those years which I sincerely hope occurs.

    This article looks to be the classic statment of someone who doesn’t actually deal in the commercial world. Academics seem to often imagine that consumers can get materials without needing to cover supply chain costs, even at break even for the supply chain (i.e. zero profit). The costs are more than just materials, they include shipping, storage, power, wages, warranty etc, etc, etc. Normal companies then needs earnings on top of that break even point to continue to exist.

    Assuming we achieve this goal of being “very economic” then all that will happen is that economic substitution will occur (as people take their homes off grid) and the grid prices will adapt and those grid prices will be capped. So you can be sure it will always be a marginal proposition for a house to go off grid and leave the utilities behind.

  • suthnsun

    I agree with your thesis, the environmental results of the perverse outcomes you refer to are very much to be avoided. Storage in the hands of the utility makes far more sense but they don’t appear to be engaged in the process of making it happen (as far as I can tell). I worry that the ‘demand management’ and ‘retail time of use tariffs’ will be very much manipulated by the industry players, so to keep it simple I would prefer a mandated 15c/kwh minimum retail feed in tariff and also a mandated collaborative storage mechanism wherever solar PV is moving into a ‘destabilizing’ effect on the local network. In that way I envisage there would be no logical reason to limit PV solar installations and both parties would be benefiting. The concerns about retail customers exacerbating peaks would be extinguished and significant moves in wholesale tariffs would also be passivated, hence no real need for retail time of use tariffs.

  • Warwick

    As a former graduate of both Engineering and Economics at the ANU, it’s interesting to note that Professor Blakers is advocating a Feed in Tariff based upon a “fair and reasonable price” but that is from the viewpoint that the owner of a PV system should receive a “reasonable payback period” (It seems to suggest 5 to 10 years in the article, which would give you a stellar return if you could get that in utility scale but just imagine the pricing!). Setting a 1:1 FiT based upon the full retail price means a significant subsidy is required on all consumers as roughly half the retail bill is network charges. i.e. you expect that a PV generator use the distribution network for free and get the charge that would normally be levied on retailers for using the distribution network. This will increase the costs on all other users. I’m quite certain that if you took a short walk across Sullivan’s creek, through the Union court and met your colleagues in the Copland building that they would question the merits of your FiT proposal.

    • suthnsun

      As I read the article the suggestion for FIT is ‘in the range of 15c /kwh’ not a 1:1 tariff. Also the consumer is still paying network charges and getting roughly half the retail price for exports. There are negligible transmission losses, which would normally account for a fair chunk of wholesale provision costs, so I can’t see this arrangement adding to costs on ‘all other users’.
      All suitable users have an incentive to participate.

      • Warwick

        Even 15c is a massive subsidy. If you take the time to do the calculation of the value of solar energy at the distribution level so including distribution losses and transmission losses as compared the the regional level, you might be lucky to get half that number (i.e. take the regional reference price from AEMO, multiply by 1 minute solar data from the BOM, uplift by loss factors). So if the retailer is earning 15c, the wholesale costs are about half of that, whilst billing, settlement, credit, metering and the retail margin make up the rest. The other issue you have is equity as current charges for the network are based on kWh for homeowners rather than network capacity so if enough people reduce their kWh through the meter then the network charges will be raised to compensate, which affects those without PV disproportionately. So yes, solar is a great technology but inefficient cross-subsidies through expensive FiT’s will cost consumers who cannot afford PV.

        • Paul

          The value to the system of the rooftop generated energy is higher than just the wholesale cost though. That is for a few reasons. First it can reduce the requirement for upgraded infrastructure in the local area. Second the energy isn’t coming from some far away source, with the associated distribution costs, and third solar tends to generate at demand peaks, so it can also displace the requirement for additional network capacity.
          I don’t think the fit should be a flat 15c. It should be set so as to encourage west facing solar, which would in turn reduce the daily peak load in summer. 15c seems like a reasonable maximum though.

          • Warwick

            Paul, the problem is that from the perspective of the PV owner or the panel seller they believe that there’s extra benefits from PV that exist but these are rarely borne out in reality.

            1) The way that solar could have a network value is that if it was able to reduce the need for or delay further network investment. This would be the case if the production was coincident with the peak demands in the system which it usually is not as solar peaks at midday whilst summer maxima are around 3pm and winter maxima usually occur in the evening. Ausgrid which is responsible for much of Sydney and Newcastle says the absolute best case is only 1c/kWh for a short time. (http://www.ipart.nsw.gov.au/Home/Industries/Electricity/Reviews/Retail_Pricing/Solar_feed-in_tariffs/11_Aug_2011_-_Issues_Paper/Issues_Paper_-_Solar_feed-in_tariffs_-_Setting_a_fair_and_reasonable_value_for_electricity_generated_by_small_scale_solar_PV_units_in_NSW_-_August_2011)

            2)The distribution network doesn’t become any cheaper just because the electrons flow from a neighbour’s house…it still requires the same poles and wires, so therefore the network charges on delivered energy to the neighbour should be the same. The value of PV is displacing grid supplied energy which does have losses and distribution/transmission charges to contend with. i.e. it’s cheaper for you to generate at home because you avoid all those costs but if you wish to export, you can avoid the loss factors and transmission use of system charges but you still need the distribution system which isn’t for free.

            3) Appears to be the same point as #1.

            You could point the panels to the west to shift the peak production to the afternoon and potentially provide some network benefit (if the network is actually summer peaking) but you will reduce the energy production of the panels. i.e. a higher price may be possible but kWh will be reduced. You don’t outline your economic assumptions behind “15c seems like a reasonable maximum though” as it significantly above the fair value of PV that we have witnessed to date.

          • paul

            Even North facing solar is still operational at 3pm in summer, so it does reduce the peak load for summer peaking grids (which we have). Sufficient solar could delay the requirement for expensive peaking gas plants (as is already happening, though due to a general softening of demand, not just solar).

            Parts of the distribution network do come cheaper, though only if there is sufficient solar to reduce the requirement for HV line upgrades, for the simple reason that many generators are a long way from the load, and upgrading HV lines isn’t a cheap thing to do.

            Of course you could equally argue that there will have to be local upgrades of the distribution network to handle reverse power flow during the day as the solar flows from suburb to business area, so maybe that point is moot.

            15c is a number I made up. My point is that if you want to reduce spending on the grid you should be incenting people to install solar in such a way that it matches the peak demand profile. West facing solar has about a 13% lower output than North facing here in WA, so you would need to compensate by raising the FiT from 3pm-7pm.

            People are going to install solar anyway, it makes financial sense to do so, so might as well optimise for the grid they are connected to.

  • David

    I have to say I agre with Rob. It is a very consumer centric view to want to be paid a retail rate for solar to be fed into the grid. The arguement of the grid owner might be that they should charge you a cost for disposing of your waste electricity that you won’t pay to manage yourself. I think the other consideration is that this is actually “black” power. After all, you have already been paid an STC for it upfront to reduce the capital cost of the system. A reasonable price for black power is maybe $50/MWh based on the current market.

    It may well be that it becomes cost effective to store that electricity rather than exporting. Which may drive some interesting behaviour, but I am not convinced that it is “perverse”.

    • http://ronaldbrak.blogspot.com.au/ Ronald Brak

      David, $50/MWh is considerably below the average daytime wholesale price of electricity. I don’t see how it makes sense to pay less for electricity from solar than from coal, given how burning coal negatively affects the health of Australians and that the carbon price doesn’t nearly cover the cost of removing the CO2 released into the atmosphere.

      You mention that the grid owner could argue that people should pay to dispose of waste electricity that they don’t manage themselves. Well, I suppose they could argue that, but I don’t think they’d fool anyone. It would be like a begger charging me a clean up fee for throwing $2 coins at him.

      • David

        Ron,

        Current wholesale price of electricity in NSW is $53.23/MWh (1.12 pm), so not sure where you get your “considerably below” data. I do not dispute the value of solar electricity over coal generation for environmental or health reasons, which reflects the renewable certificate value already paid up-front to the PV system owner for the deemed generation of the system over its life.

        The grid owner (as distinct to the retailer) covers their costs by charging per kWh of transmitted electricity. In effect you are asking them to provide you with free access to a system which they must build and maintain. It is analogous to asking to use the sewer without paying.

  • Chris

    It is interesting to read daily the type of comments you get from Renew readers about rooftop solar. There are plenty of informed and progressive comments. However there appears to be a lot of people who don’t own solar panels and simply don’t understand how they work and the benefits that accrue. We also see “dog in the manger” comments from power industry trolls who fear the rise of rooftop solar power. This fear is well founded: rooftop solar, wind power and efficiency improvements are stifling growth of demand for polluting grid based power.In the past year, 3000mw of this coal fired generation has been switched off.
    In Victoria, more than 10% of power is wasted in transmission from brown coal and gas power stations in Gippsland.In contrast, power from rooftop solar is not transmitted past the nearest substation-it acts to prevent further power being drawn from grid based sources. Losses are minimised and grid costs are reduced.
    With good power management, a 12 panel PV system will fulfil the needs of a two person household and sell power back to the grid when the network needs it. I know, because I own one and have detailed record keeping which shows our household is in credit for the last 12 months. Governments need to ignore the vested power interests and get on with replacing all coal and gas based power with renewable energy. That includes offering a fair feed in tarrif to solar PV energy producers.

  • Ian

    A word of caution to the grid operators and pie in the sky would be policy makers contributing above . Householders will vote with their feet when it comes to the grid operators. The technology is available to go off grid completely. 60 to 70% of electricity consumption in the household goes to heating or cooling and to water heating. These requirements can be achieved using a combination of insulation, heat/cold storage and solar power. Solar panels are far cheaper to install than deep cycle batteries so other loads can be shifted to the day such as dish washing and clothes drying. Even refrigerators can be modified to provide a load for a supersized rooftop solar electricity generator. Cooking can be done with gas. All the network operator will supply is a trickle of electricity for a power -miser LED lighting system, and LED TV! And if the grid operator cries foul and wants to charge a poles and wires tariff then going completely off grid would require a small and therefore cheap deep cycle lead battery system .