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Is solar PV our best bet against the impending gas price bubble?

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There has been a major debate raging in Australian energy circles these past few years about which energy source will deliver the cheapest prices for electricity and the lowest-cost abatement, as we commence the task of decarbonising the grid.

Essentially, for home owners and businesses, it comes down to a choice between two: solar PV on rooftops, or gas – notwithstanding the fact that the renewable energy target will deliver a lot of wind energy. Most utilities, heavily invested in the gas industry, want you to believe that gas is the most efficient option – and appear to have the support of some of statutory bodies. This has helped define the political posturing around solar PV incentives, and some of the surprising decisions made in policy formulation.

Instinctively, however, homeowners are leaning towards solar, and they are probably right. But they won’t get much help from the statutory bodies that are employed to analyse the issue and provide advice to federal and state governments.

In matters of electricity, particularly with the dramatic technological advances and declining cost curves, Australia has been poorly served by bodies such as independent pricing regulators, and the Productivity Commission. They are simply unable or unwilling to keep up with developments, continually are out of the ball park on technology costs, and like to present rosy scenarios of conventional fuels. Utilities are using these ill-conceived conclusions to protect their own interests, and politicians are simply being hoodwinked.

A submission from the Melbourne Energy Institute to the Productivity Commissions’s recent report on electricity prices highlight how – contrary to the “institutionalised” belief that dominates policy formulation – solar PV can deliver the most cost-effective solutions to distributed generation, and its cost of abatement is probably little different to the carbon price.

That’s not what the Productivity Commission found, but the Melbourne Energy Institute accuses it of working with out-of-date cost assumptions, and says it took the worst-case scenario on solar PV and the best-case scenario with gas.

Let’s take the Productivity Commission’s conclusion on solar PV’s ability to meet peak demand. It suggested it would come at a cost of $1.5 million per MW, but the institute says this was based on a levellised cost of energy at $350/MWh. But the recent tender for the ACT solar auction was at a price of half that, and proponents of utility-scale solar PV farms in Queensland and Western Australia suggest they can be built cheaper again.

The IEA suggests utility-scale solar PV is around $150/MWh, and in many areas it is below that. The Institute says that even allowing for the supposed ability of PV to be able to supply 30 per cent of its capacity in peak demand, this cost to supply peak power falls to $0.8 million.

The Institute also notes that the Productivity Commission’s estimate of the cost of installed capacity of rooftop solar PV is based on a costs of between $5,030 to $5,845 per kW. Again, the institute suggests that the price of rooftop PV for rooftops in the Australian market is already less than half that estimate.

It is not surprising that the Productivity Commission struggles to keep up with developments. It even forgot its own revisions to its cost of abatement estimates of solar PV, which had originally put at $432 and $1,042 per tonne, before revising these down to $177/t/CO2 and $497/t/CO2 late last year. Now it’s returned to its original formula, but the Institute suggests these are way out of kilter.

Apart from relying on out of date technology costs, they also calculate the total cost of subsidy rather than the marginal cost. The institute suggests that the drop in subsidies implies a current cost of abatement of as low as $25/tonne (over  a 25-year period). It could be argued that the vast majority of Australia’s rooftop PV capacity will be installed at a zero cost of abatement.

Gas also gets an inside run with the Productivity Commission. Its cost of meeting peak demand is put at $0.3 Million/MW peak, but the Institute points out that there does not appear to be any consideration for either the cost of gas distribution (more networks), or even the cost of the gas itself.

The gas industry itself expects domestic gas prices to at least double from recent levels within two years, and perhaps even quadruple, as prices rise to match the international price of gas. This will happen because most of the gas on the east coast will go to meeting export contracts from the large LNG facilities now being built. That means that the levellised cost of electricity from gas will also jump, from the $100/MWh that the productivity Commission uses for its calculations, to at least the $150/MWh level suggested by the recent assessment of the Bureau of Resources and Energy Economics. That puts the cost of gas in the same ballpark as solar. That’s where things get very interesting for both industries.

The Institute makes two other salient points about renewable energy subsidies. One is that they should not be judged on abatement costs alone, because they also serve to bring down the cost of those technologies and to provide energy security. Indeed Australia, which once had no issues with energy security due to its reliance on coal, may find that position changed by an increased focus on gas – a situation that has driven many of the progressive renewables policies in Europe. “Increasing penetration of renewable energy in our market has the potential to de-couple electricity prices from gas prices, increasing energy price security,” the Institute notes.

And there is the cost of coal subsidies, and the fact that the cost of carbon is not yet being properly reflected in the electricity market. The brown coal generators, for instance, are receiving $5.5 billion in cash and free carbon units from the “Energy Security Fund”, while the NSW government’s proposed Cobbora coal mine could deliver $3 billion a year in savings to generators by shielding them from the export price. It is not clear what the status of those contracts are now, given that the NSW government is now proposing to sell the mine, and the contracted price was less than what private operators could deliver, and amounted to a subsidy of around $4 billion over the lifetime of the project.

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  • Beat Odermatt

    I am sure that the 5.5 Billion Dollar direct charity gift to the coal industry would pay for a few rooftop solar installations. I am sure that many people would be happy to have lower or no electricity bills. It seems whoever wines and dines the right people is getting their messages across.

  • suthnsun

    Natural gas has zero chance of keeping us within our global carbon budget and runs the risk of exacerbating global warming compared to coal, due to (lack of) aerosol cooling effects. Couple that with expected dramatic price rises in gas if any attempt is made to substitute it for coal and the case is well and truly made that renewables (particularly solar) are the only technology and investments we should be pursuing. Add in the expected lowering of costs of solar if widely adopted and it really becomes a ‘no-brainer’.

    Hence the utilities and productivity commission etc. and the government need to get on with actually engaging with the real problems of deep integration of renewables, as a matter of urgency.

  • Tim Buckley

    Giles
    Excellent discussion piece, thanks. Distributed rooftop solar PV will couple with intelligent residential power storage devices to make a transformational solution to the current trend of rapidly rising retail electricity prices. The retail grid parity point has already been breached by rooftop solar. The vested interests of the retail utilities, generators and transmission operators ignore the rapid move towards distributed solar plus residential power storage at their peril. Why would any residential electricity user sell their excess solar electricity at 0-8c kWh when storage will allow this same power to be retained for use in the early evening, saving many multiples of this token 0-8c offer. Watch this space – retail price spikes in 2011, 2012 and again looming again in 2013 drive residential power storage technologies ever closer to fruition. The result will be a continued decline in grid-transmitted electricity demand as energy efficiency measures combine with self-generation to reduce grid demand. Residential solar plus storage will cap retail electricity prices – unless the regulator prevents consumers protecting themselves from legacy assets (liabilities!) and SOE grid gold-plating.
    Tim Buckley, Arkx Investment Management

    • suthnsun

      Tim, general storage in the hands of consumers would be environmentally irresponsible compared to the utilities engaging with micro-grid distributed energy with storage sized for aggregated supply and demand. The per customer storage required in the hands of the utility to yield an overall diminution of demand for heavy metals and GHG emissions is very small, in the hands of the customer it demands an overall intensity which is not the best use of resources.
      IMHO, far better to get the utilities engaged in a new business model which gives the best overall environmental outcome and incentivizes all participants (thats the trick we need to learn)

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

    Something that many people overlook for some reason is that even if providing electricity to the grid from burning gas cost zero cents, it would still be more expensive for consumers than point of use solar, as rooftop solar competes with the retail price of electricity. Solar has already taken a bite out of daytime gas use in Australia and this trend will continue because people aren’t silly. As long as electricity costs them about 25 or more cents a kilowatt-hour they will install it to save themselves money. There would need to be a very large drop in the cost of daytime retail electricity to discourage point of use solar installation, and if this was accompanied by hikes in the retail cost of evening electricity then that would encourage people to install home and business energy storage. Because it’s the most competitive source of electricity available to most consumers, Australia’s future will contain more point of use solar, lower daytime electricity prices (wholesale definitely and presumably retail), more demand shifted to the daytime, quite possibly significant home and business energy storage, and less gas use.

  • Sean

    how many GW solar panels can you buy with 4 Billion? 6GW?

    • Tom

      in the states, $5 per watt (installed PV, non-utility scale) is a lower end rule of thumb figure. let’s use $4/watt for ease, and we have 1 GW of solar PV, nameplate.

      that same figure, $4B, in utility solar thermal would yield maybe %25 or better increase in MWe/hr per $.

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

      Solar panels? Using the lowest cost per watt $5.5 billion would buy about 8.9 gigawatts because prices are currently quite good. But it would be impossible to buy that many at once without pushing up the price. In Australia the installed cost is about $3 a watt before Renewable Energy Certificates, so $5.5 billion could install nearly two gigawatts of point of use solar PV which would gnaw off a huge chunk of daytime fossil fuel use while lowering electricity bills for hundreds of thousands of Australians. Well, all Australians actually, unless of course the resulting reduction in wholesale electricity prices wasn’t passed on to consumers.

  • Concerned

    Beat.
    “I am sure that the 5.5 Billion Dollar direct charity gift to the coal industry ”
    Where does this figure come from?

    • Beat Odermatt

      In this article the author quoted: “ The brown coal generators, for instance, are receiving $5.5 billion in cash and free carbon units from the “Energy Security Fund”, while the NSW government’s proposed Cobbora coal mine could deliver $3 billion a year in savings to generators by shielding them from the export price.  “
      I am not sure what you are trying say. Do you think the coal industry should get more? Do you think that the CEO’s of energy companies are starving because they only get a few Million Dollars a year as payments and bonuses?
      If you have a good estimate, please let me know. How much would it cost just to control spontaneous combustion in old and existing coal mines? We know some have been burning for decades and will keep on burning for many more decades to come.

      • Concerned

        Honestly Beat, the Brown Coal generators are not receiving a subsidy. The relief, not payment, is to offset the tax that has been introduced.
        Subsidy for PV etc is estimated to reach $2 billion this. year, and how much has been paid so far. I would estimate between $8 and $10 billion. Then add in the tax on the poor, the FIT.
        Cobbora coal mine will never fly.NSW is broke, and now the price of coal is falling, and if it ever goes ahead, it will be sourced from other areas. The maximum loss per year, taking into account the cost of production would be $240 million a year, where do you get $ 3 billion from?. The NSW Govt is not silly.
        In any case, the planned production from wherever will not exceed 25% of coal used in NSW.A pittance, as no other areas of Australia are involved

        • Beat Odermatt

          It may pay to read the original article in full! Coal fired electricity has been supported with Billions over the year and it seems the begging efforts are not over yet. You know that many utilities were owned by Government’s and never paid taxes. Yes, it was for the public good and it ensured that Australia had cheap and plentiful electricity. Times are changing and like the horse and buggy, coal powered electricity is on the way out.

          • Concerned

            “It may pay to read the original article in full! Coal fired electricity has been supported with Billions over the year and it seems the begging efforts are not over yet”
            A lot of nonsense.Please put forward you references.
            Coal generation is not subsidised in Australia.

          • Beat Odermatt

            PLEASE read the full article and then make a comment.

          • Concerned

            Beat,you have not provided me with any relevant information.

          • Beat Odermatt

            You wish to remain nameless and call yourself “Concerned”. How on earth can anybody respect anybody hiding behind an avatar? In case you have forgotten, the original article is here again for you to read. I am sure you have you are “concerned” enough to fill in the gaps.

            “By Giles Parkinson on 27 November 2012

            There has been a major debate raging in Australian energy circles these past few years about which energy source will deliver the cheapest prices for electricity and the lowest-cost abatement, as we commence the task of decarbonising the grid.

            Essentially, for home owners and businesses, it comes down to a choice between two: solar PV on rooftops, or gas – notwithstanding the fact that the renewable energy target will deliver a lot of wind energy. Most utilities, heavily invested in the gas industry, want you to believe that gas is the most efficient option – and appear to have the support of some of statutory bodies. This has helped define the political posturing around solar PV incentives, and some of the surprising decisions made in policy formulation.

            Instinctively, however, homeowners are leaning towards solar, and they are probably right. But they won’t get much help from the statutory bodies that are employed to analyse the issue and provide advice to federal and state governments.

            In matters of electricity, particularly with the dramatic technological advances and declining cost curves, Australia has been poorly served by bodies such as independent pricing regulators, and the Productivity Commission. They are simply unable or unwilling to keep up with developments, continually are out of the ball park on technology costs, and like to present rosy scenarios of conventional fuels. Utilities are using these ill-conceived conclusions to protect their own interests, and politicians are simply being hoodwinked.

            A submission from the Melbourne Energy Institute to the Productivity Commissions’s recent report on electricity prices highlight how – contrary to the “institutionalised” belief that dominates policy formulation – solar PV can deliver the most cost-effective solutions to distributed generation, and its cost of abatement is probably little different to the carbon price.

            That’s not what the Productivity Commission found, but the Melbourne Energy Institute accuses it of working with out-of-date cost assumptions, and says it took the worst-case scenario on solar PV and the best-case scenario with gas.

            Let’s take the Productivity Commission’s conclusion on solar PV’s ability to meet peak demand. It suggested it would come at a cost of $1.5 million per MW, but the institute says this was based on a levellised cost of energy at $350/MWh. But the recent tender for the ACT solar auction was at a price of half that, and proponents of utility-scale solar PV farms in Queensland and Western Australia suggest they can be built cheaper again.

            The IEA suggests utility-scale solar PV is around $150/MWh, and in many areas it is below that. The Institute says that even allowing for the supposed ability of PV to be able to supply 30 per cent of its capacity in peak demand, this cost to supply peak power falls to $0.8 million.

            The Institute also notes that the Productivity Commission’s estimate of the cost of installed capacity of rooftop solar PV is based on a costs of between $5,030 to $5,845 per kW. Again, the institute suggests that the price of rooftop PV for rooftops in the Australian market is already less than half that estimate.

            It is not surprising that the Productivity Commission struggles to keep up with developments. It even forgot its own revisions to its cost of abatement estimates of solar PV, which had originally put at $432 and $1,042 per tonne, before revising these down to $177/t/CO2 and $497/t/CO2 late last year. Now it’s returned to its original formula, but the Institute suggests these are way out of kilter.

            Apart from relying on out of date technology costs, they also calculate the total cost of subsidy rather than the marginal cost. The institute suggests that the drop in subsidies implies a current cost of abatement of as low as $25/tonne (over a 25-year period). It could be argued that the vast majority of Australia’s rooftop PV capacity will be installed at a zero cost of abatement.

            Gas also gets an inside run with the Productivity Commission. Its cost of meeting peak demand is put at $0.3 Million/MW peak, but the Institute points out that there does not appear to be any consideration for either the cost of gas distribution (more networks), or even the cost of the gas itself.

            The gas industry itself expects domestic gas prices to at least double from recent levels within two years, and perhaps even quadruple, as prices rise to match the international price of gas. This will happen because most of the gas on the east coast will go to meeting export contracts from the large LNG facilities now being built. That means that the levellised cost of electricity from gas will also jump, from the $100/MWh that the productivity Commission uses for its calculations, to at least the $150/MWh level suggested by the recent assessment of the Bureau of Resources and Energy Economics. That puts the cost of gas in the same ballpark as solar. That’s where things get very interesting for both industries.

            The Institute makes two other salient points about renewable energy subsidies. One is that they should not be judged on abatement costs alone, because they also serve to bring down the cost of those technologies and to provide energy security. Indeed Australia, which once had no issues with energy security due to its reliance on coal, may find that position changed by an increased focus on gas – a situation that has driven many of the progressive renewables policies in Europe. “Increasing penetration of renewable energy in our market has the potential to de-couple electricity prices from gas prices, increasing energy price security,” the Institute notes.

            And there is the cost of coal subsidies, and the fact that the cost of carbon is not yet being properly reflected in the electricity market. The brown coal generators, for instance, are receiving $5.5 billion in cash and free carbon units from the “Energy Security Fund”, while the NSW government’s proposed Cobbora coal mine could deliver $3 billion a year in savings to generators by shielding them from the export price. It is not clear what the status of those contracts are now, given that the NSW government is now proposing to sell the mine, and the contracted price was less than what private operators could deliver, and amounted to a subsidy of around $4 billion over the lifetime of the project.”

          • Concerned

            Beat, you supply me with information that is not quite right. Just because you read it in the article does not make it correct.
            There is no subsidy, as the figure stated is not a subsidy, but a relief from a tax, to put it simply. It is a double entry book keeping exercise,to give it an explanation.
            In addition you should ask the Federal Government as to how much of your tax money is being spent on the admin, to recycle the funds.
            By the way if you wish to know who I am, ask Mathew Wright.

          • Beat Odermatt

            I agree that far too much of the carbon tax is wasted in running a massive new administration and to do “social justice” experimentation. NOBODY has any accurate information of how much aid a certain industry is getting. Most of the coal fired power stations and associated infrastructure were build and paid for by State Governments. The carbon tax remains one of the most stupid things a Government ever came up with. A gradual legislated move towards a low carbon economy would have given the electricity industry and consumer a clear path. The cheapest and most economical solutions would have prevailed if free market forces could have been allowed to flourish.

  • http://pragmatusj.blogspot.com.au/ John D

    Renewables can only deliver reliable power if there is some form of energy storage somewhere in the system. For example, the Beyond Zero Emissions stationary energy plan(http://media.beyondzeroemissions.org/ZCA2020_Stationary_Energy_Report_v1.pdf)argues that we could provide reliable power from 100% renewables using a combination of wind, solar thermal with molten salt energy storage and a minor amount of hydro plus biofuels. 60% of the power comes from the solar thermal plants. The molten salt provides about 17 hrs operation for each solar thermal plant.
    Power from solar PV can be used to charge batteries or store energy as heat or cold for direct use for cooling or heating. I suspect that solar PV plus storage would work out more expensive than solar thermal with molten salt storage.

    • Ken Fabian

      I think making firm predictions about what kind of storage is going to work best is already difficult, but in a positive way. There’s Isentropic’s pumped heat system, that is claiming lower costs of storage (electricity to electricity) than anything currently available including pumped hydro. No toxic materials either. http://www.isentropic.co.uk/ This one is going to be trialled in Britain.

      Lithium ion is still advancing, with the use of graphene giving a potential 300% boost to energy density, although lithium reserves are likely to be a limitation to mass use for both transport and utility scale storage. Although something like this could extend that significantly. http://www.nanowerk.com/news2/newsid=27098.php

      Graphene is also opening the possibility of whole new kinds of battery technologies with very fast charge and discharge and long life. http://www.monash.edu.au/news/show/graphite-water-the-future-of-energy-storage

      And early attempts at graphene solar cells turned out to utilise part of the IR spectrum; potential to harvest radiant heat by direct conversion to electricity? Or success with nantennas could also yield a means to harvest heat and therefore enable thermal to electric energy storage.

      • http://pragmatusj.blogspot.com.au/ John D

        Interesting reply Ken. Using a reversible heat pump could have a lot of potential.

      • Ron Horgan

        Thanks for the isentropic reference Ken I wonder if it could be linked into a solar thermal storage system?