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How big utilities propose to kill solar PV

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A couple of nasty figures have been produced in recent weeks that will give energy companies – retailers, generators and distributors – cause to reflect on how they will manage to satisfy their shareholders’ insatiable appetite for increased profits in coming years.

The figures were inter-related. The first lot were the updated demand forecasts issues by the Australian Energy Market Operators. Demand for 2012/13 is now likely to be nearly 10 per cent below where it was predicted just a year ago, and demand out to 2020 might be 30 per cent below the most optimistic predictions. For an industry that has relied on an unremitting correlation of electricity demand to GDP growth, this has been a shock to the system.

AEMO chief Matt Zema acknowledged the problems facing the industry as it tries to eke out more revenue in the face of declining demand. Essentially, he said in an interview with RenewEconomy, as demand falls and investment in fixed infrastructure increases, the cost per megawatt grows – creating a vicious circle, or what AGL Energy described in a document last week as the Energy Market Death Spiral.

Part of this reduction has been blamed on reduced manufacturing, and partly on reduced demand from households and business in response to surging electricity costs, and on the massive investment in infrastructure to cope with peak demand. But the most enduring, and growing factor, at least on the demand side, is the penetration of solar PV. And AEMO forecasts give little consolation to the established industry – the amount of solar PV in the Australian market is tipped to grow 10-fold over the next two decades, and its impact on revenue and profits for the incumbent generators, retailers and network operators will increase accordingly.

Private forecasts suggest that the growth of solar PV could be much greater than that recognised by AEMO. Yingli, the world’s largest solar PV manufacturer in 2012, has said that Australia could, in fact, become the first “mass market” for solar PV in the world – thanks to a combination of declining costs, rising grid prices, lots of sun and innovative financing models.

RenewEconomy has written before that the proliferation of solar PV in the mass market – reducing household energy costs and offering negative cost emissions abatement – has the potential to redefine the energy price debate, if the politicians could seize the moment. But they are under intense pressure from the industry, and all along the value chain from retailers to state government-owned distributors.

AGL Energy’s answer to the “death spiral” was to push for time-of-use tariffs to ease pressures on the disadvantaged – low income earners and pensioners – and to help reduce peak demand. “It is not about making the industry more profitable, it’s not about that at all,” AGL Energy senior economist and co-author of the report Paul Simshauser told Radio National’s Saturday Extra program on the weekend.

Most observers, however, could conclude that is exactly what it is about, and the industry can be expected (their shareholders will surely demand it) to fight not just for tariff changes outlined in the AGL document, but also to fight back against the incursion of solar PV. They might not be able to kill it, but by acting to reduce its attraction, they could rein in its growth.

Here are some tactics that are being suggested to deal with what AGL Energy managing director Michael Fraser described on the Radio National Breakfast program 10 days ago as the “infiltration” of solar PV and distributed energy. “It’s been a good thing,” Fraser said. “But we will have to watch that.”

Replace net metering with gross metering

There is talk that at least one utility is working on a proposal to push for gross tariffs to replace net tariffs. Gross tariffs were popular in some states at the height of the inflated feed-in tariffs, because householders received a premium price for every kW of solar they produced. With the winding back of feed-in tariffs, net metering has been introduced which allows households to use solar PV as a hedge against rising electricity prices, using the electricity they produce to reduce their requirements from the grid.

However, while this offers significant savings to householders, this cuts the retailers and the network operators out of the game, and net metering would become even more attractive under the time-of-use tariffs proposed by the likes of AGL Energy, because those tariffs (around 52c/kW or more) are introduced when solar PV is producing the most. By introducing gross metering, particularly at low tariffs, it effectively deprives the householder of the right to “self consume” because, for accounting purposes, the householder must export all electricity back to the grid and import all its use at a higher price. This reduces the hedge the householder has against rising grid prices, and the value of solar and ties the volume of energy consumed into the spread sheets of the retailers and network operators.

Tariff changes and expansion of demand tariffs

Several readers – small business and farmers – have complained of tariff changes in Queensland and elsewhere that impose a higher “demand” charge for connection to the grid, and lower per kWh tariffs – again reducing the attraction of solar PV for self consumers. Geoff Bragg from the Solar Energy Industry Association highlighted the issue in this analysis, pointing out that some utilities wanted to expand such a tariff to smaller commercial users and even residential users.

“Anyone who currently installs solar as a small commercial user on a tariff in the range of 20 to 40c/kWh would be in for a rude shock if their tariff was switched to a 5 to 10c/kWh charge plus large standing charges or peak KVA penalties. The savings from slowing the meter down would be decimated,” he wrote. “Imagine if this same argument were moved across to the residential sector. Our customers might find themselves paying 8c/kWh plus $7 a day to be connected to the network or peak demand penalties perhaps? Supplying their own kWhs with solar wouldn’t make sense …. the future of the Australia PV industry could be in the balance.”

Retrospective tariff changes

The NSW Coalition government tried it on last year, before being forced to back down. However, one unremarked-upon part of the new Queensland package, which includes the slashing of the net feed-in tariff from 44c to 8c, and then to nil from 2014, is the change in rules to rental properties and properties that are sold. Anyone changing the name of an account – either through the sale of a property, or because of a different tenant – will lose their right to the 44c/kW tariff and will be switched over the 8c/kWh tariff. (It probably should be noted that most retailers and network operators in Queensland are government owned).

Absolute caps

Generators in Germany and Italy, the world’s two largest solar PV markets in 2011, were pushing for the deployment of solar PV to be capped to protect their earnings. In Germany, a cap of 3 to 3.5GW was contemplated. But the solar PV industry is now a powerful voice in Germany and, with the support of state governments, the federal government backed down. It has now announced that once solar PV deployment reaches 52GW (double its level of the end of 2011), then subsidies will end. Some experts think that will occur by 2015. German policy makers are now seeking to design a new system. Italy was put under pressure by its dominant utility, Enel, which complained of major losses in generation profits from the merit order effect. Italy cut its subsidies, but actually increased its target for renewables.

Network limitations

These are similar to an absolute cap. They are decisions by distributors to ban the installation of new rooftop solar PV, as has happened in WA, or to limit their size, as has happened in Queensland. The recent report by the CSIRO, however, suggests that distributors are not trying very hard, and/or are using solar as a scape-goat to hide other issues. The CSIRO report concluded that at current levels of around 10 per cent penetration there would be no problems for network operators. Indeed, even at 40 per cent, there should be little difficulty, although some weak, rural grids would need to address some issues, but these were considered manageable.

Changing renewable energy targets

The Renewable Energy Target is considered untouchable because it has bipartisan support, but both Labor (in Victoria) and the Coalition (Howard Government) have form in back-tracking on announced renewable targets. The same forces that won changes then are busy behind the scenes now, and are planning to put immense pressure on the Climate Change Authority when it conducts its review this year.

A change to the large-scale renewable target would limit the growth opportunities for both wind farms and utility-scale solar. A change to the small-scale technology target is also mooted. Although the multiplier is due to wind back to one in July, 2013 – would the government contemplate scrapping renewable energy certificates for small-scale deployment?

Planning restrictions: bury solar in red tape.

This has worked effectively to suppress the wind industry in Australia, mostly through the introduction of planning regulations that vastly restrict the opportunities for large wind farms. With distributed solar PV, that would be harder to control, but authorities could always try to bury the product in red tape. Barry Cinnamon, the CEO of Westinghouse Solar, now owned by Australia’s CBD Energy, wrote in Forbes last week that the cost of rooftop solar in the US was twice that of Germany because of the amount of paperwork and red tape that installers had to go through. And produced this graph to illustrate his point.

“Even though solar panel costs are about the same, in almost every other category German costs are lower,” Cinnamon wrote. “In Germany, the residential solar industry has no red tape, there is a highly‐tuned supply chain to get equipment to customer job sites, installers get projects completed in a day, permitting is virtually automatic, costs to acquire a customer are very low and overhead is negligible.

“In Germany, you don’t need permission to connect to the utility, you don’t need a building permit, you don’t need any inspections and you don’t need financing (it’s automatic with a German bank). When rooftop solar was in its infancy, some of these regulations made sense. Now that rooftop solar is standardised, simpler, and safer – and the panels are much cheaper – this paperwork is unnecessary. This red tape is holding back the industry from creating even more jobs, driving innovation and building true energy security for our nation.”

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  • Ricardo

    Thank you Giles for this article. Typical rent seekin. Capitalism is sacrosanct while you are making a profit; but once you are ‘under threat’from a simpler, more efficient technology, then scream blue murder and get the goverment to slow down or stop ‘creative destruction’.

  • Michel Syna Rahme

    Someone I know in Queensland last week purchased a solar system. The road is a rural residential street with approx 75 houses – not many with solar systems.
    The maximum Ergon permitted her to install was a 3.2kW system (based on Ergon calculations on the capacity of the streets transmission lines) – although she has a perfect north facing roof and wanted a 5-7 kW system.
    So the question is: how can ordinary people who want to install solar systems check for themselves that they are not getting conned into smaller systems when the transmission lines may in fact have capacity for larger systems? How conservative are the calculations made by, for example, Ergon? How can these be checked? Can a home owner employ an electrician to do an independent test on the capacity of the transmission lines in their street?

    • Winston Smith

      Unfortunately it is not that simple. The identical problem is rife in WA with the ‘guardians’ of network integrity, Western Power, requiring significant network studies for larger commercial systems (30+ kW) and simple studies between 3 and 30 kW.

      You could not use an electrican to do this but would require an electrical engineer, an expensive and time consuming process.

      On Gile’s article though, another great insightful piece. I can see it happening in WA as the State government owned GTE are protected form competition and eroding margins to ensure that the profits (tax equivalents and dividends) returned to government are not eroded. Otherwise the Government could not continue to indirectly tax WA energy consumers at the rate they do and would have to rely on direct methods that would be obvious to the voting public to bolster the budget bottom line.

  • Bill

    I really enjoyed this article, thanks. You do have to be a bit suspicious when AGL management start sounding like they have a Socialist agenda…

    And I didn’t really have enough understanding to decide if I liked Gross or net Feed in Tarrifs before but this makes sense of that nicely.

    Hopefully they can only really fend off all this progress for a few years until battery technology makes having a grid connection redundant.

    • Robert

      If utilities seek to fend off PV progress too far, not only will it encourage greater exploration of batter technologies, but it may also create market opportunities for community based utilities to be be established in direct competition to existing solely profit driven operators. Many people are already out there scratching their heads about how to create viable community driven electricity service providers and if the likes of AGL etc go too far along the profit maximisation path with scant regard for the social and environmental consequences they may indeed unwittingly foster the development of successful competing social enterprise model based utilities. As someone said to me the other day, if Dodo can do it why can’t we ?

      • Chris Fraser

        I believe the States hold the aces. In the case of NSW, the Electricity Supply Act needs to broaden to allow more groups to obtain licenses to consume and sell energy to whoever they want, and to assess and permit augmentation of a grid if necessary.

  • Neil Barrett

    Giles, what size pv system does the graph refer to?

    • Giles Parkinson

      Hi Neil

      4kW

  • Jeremy Waller

    Killing off PV solar ? Not likely.

    Energy use strategy needs to be changed. With gross metering one is on the way to being ” snookered” and the main strategy would be to use some sought of storage to limit ones use of grid power. The brute force way is to have the house wired with two separate circuits so that most power points and lights can be powered from an alternative source. Switch to a large solar HWS and use gas for the cook top.

    With net metering one pre-empts the forcible change to gross metering by getting the house wired to accept the alternative source or with a ” fancy” circuit allow the existing power points and lights to be switched between grid and alternative sources.

    With storage very little can be done to stop the use of solar energy. As the scouts say

    “BE PREPARED”.

  • Scott

    As the utilities try to do this, it will simply drive people towards battery storage to maximize the capacity factor of their PV system.

    http://ev-power.com.au/webstore/index.php/12v-lifepo4-batteries/large-lifepo4-cells.html

  • Jamie

    The most important factor here is the battery and the advances in storage, its getting cheaper all the time. stuff the big power companies the Holden 4 wheel 29 kwh battery is on its way, they call it the volt. I have a hybrid solar system that exports nothing, but is sized just under my total consumption, so I buy in a very small amount and have not had to spend all the dollars on batteries. When the service availability free or network fees goes to high then I’ll buy more batteries and get rid of the power company. This will be worse
    When the network generators and distributors are sold then the private sector will do exactly what giles says and it will be time for me to cut my powerline down

  • Mike Reeves

    Re gross metering and the Victorian tariff inquiry, a number of distributers were in favour of this, but not all. However, the Advanced Meter Infrastructure (smart meter) roll out, costing about a mega-gazillion dollars is well underway and is all about only supporting net metering. There are also IT and administrative costs for the distributers to deal with in applying a gross FiT, even if the infrastructure were to be put in place. I refer to pages 122 and 125 of the draft report.
    It is a little like a water authority charging for the water you use out of your own rainwater tank I guess, when you are connected to the water grid. While they would be happy to charge you to put a meter in, they might find it not worth their bother to change all their computer models to send you a bill for your trouble.
    The commission has hedged its bets and left it open as an ‘option’.

  • Tim

    Good article. I think the PV cap in WA you refer to is for some individual towns not on the south-west grid. But at least Horizon power, the entity responsible, is transparent about the hosting capacity available per town, and talk about “generation management” tools to increase the percentage of renewables. They obviously recognise the cost of diesel, because they also offer up to 50c/kWh feed-in tariff depending on the town (as opposed to 8 c/kWh in the south-west).

    See http://www.horizonpower.com.au/renewable_energy_systems.html

  • Ron

    I spoke with a solar installer on the weekend who advised me that in Queensland if you have grid connected solar, you cannot also have a battery to set up “arbitrage”or other opportunities to get around the net / gross metering problem. If this is correct it is another form of keeping solar “in the box” until the grid is not needed. Hopefully the sheer number of people getting solar will eventually generate enough political pressure to overcome these unnecessary obstacles.

  • Jeremy Waller

    Gross metering does present a little problem.

    But in a net metered situation I see an argument. Is there a definition as to what sizes of batteries are ” allowed”. How much Energy can be storred? Enough to run a laptop? What about an electric kettle? What type of power inverter is to be allowed before one looses the fit – A Jaycar 150W inverter? A 1000W inverter, perhaps.

    If I chose to charge batteries and run the lights – is this a problem to the utilities?

    What size battery can I charge before they get upset? My model aeroplane batteries? What about a deep cycle marine battery?

    Are the utilities trying to limit our life styles for if one makes the definition of storage tight enough then no storage will be allowed as ANY storage during daylight hours will impact the the amount of energy taken from the grid.

  • Chris Fraser

    The article and some of the fears expressed in comments give rise to the spectre of some very anti-competitive behaviours. Funny but i thought we had previously legislated those out ! Our only worry is that some malicious and malignant federal government gives the ACCC some more “terms of reference” haha.

  • DWA

    While the theory expressed here is solid the economics are not – system costs for batteries & UPS capable inverter systems do not stack up against grid electricity costs (yet). Battery technology isn’t there yet. For example the round trip efficiency of lead acid batteries – the lowest $/kWh battery technology is ~ 80%. More exotic Li variant batteries are better but still lossy and much more expensive. All batteries have limited cycle life. Consider also the occasions when you have a week of bad weather – flat batteries are easy. It wouldn’t then be good for everybody to break out their little 5kVA gensset in suburbia – it’s different in remote applications. It’s interesting times in the electricity sector. I’m looking forward to the next 10 years, it will be interesting to reflect on these conversations & see how much things have changed.

    • Tim

      Actually, the genset is not a bad idea. Probably less environmental impact than over-specifying the battery system. And they run quieter than many cars!

  • Chris

    “it effectively deprives the householder of the right to “self consume” because, for accounting purposes, the householder must export all electricity back to the grid and import all its use at a higher price.”

    So in other words the electricity companies are getting free generation at the expense of the householder?