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Why generators are terrified of solar

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Here is a pair of graphs that demonstrate most vividly the merit order effect and the impact that solar is having on electricity prices in Germany; and why utilities there and elsewhere are desperate to try to reign in the growth of solar PV in Europe. It may also explain why Australian generators are fighting so hard against the extension of feed-in tariffs in this country.

The first graph illustrates what a typical day on the electricity market in Germany looked like in March four years ago; the second illustrates what is happening now, with 25GW of solar PV installed across the country. Essentially, it means that solar PV is not just licking the cream off the profits of the fossil fuel generators – as happens in Australia with a more modest rollout of PV – it is in fact eating their entire cake.

Both graphs were published last week on the website Renewables International, and were sourced from EPEX, the European power price exchange. The first graph, from 2008, shows peaking power prices rising to around €60/MWh and staying there for most of the day, with some visible peaks around noon and the early evening – the size of which would depend on the temperature and the usage.

The second graph shows a brief leap to €65/MWh around 9am, before the impact of solar PV takes hold – erasing the midday peak entirely and leaving only a smaller one in the evening. The huge bite out of day-prices is also a bite out of fossil fuel generators’ earnings and profits. Note that the average peak price in the second graph is barely higher than the baseload price.

Deutsche Bank solar analyst Vishal Shah noted in a report last month that EPEX data was showing solar PV was cutting peak electricity prices by up to 40 per cent, a situation that utilities in Germany and elsewhere in Europe were finding intolerable. “With Germany adopting a drastic cut, we expect major utilities in other European countries to push for similar cuts as well,” Shah noted.

Analysts elsewhere said one quarter of Germany’s gas-fired capacity may be closed, because of the impact of surging solar and wind capacity. Enel, the biggest utility in Italy, which had the most solar PV installed in 2011, highlighted its exposure to reduced peaking prices when it said that a €5/MWh fall in average wholesale prices would translate into a one-third slump in earnings from the generation division.

Imagine how that graph might look in Australia with a similar deployment of solar in a country that actually has some sun. Wind has already helped reduce wholesale prices in South Australia, although it has left daytime peaks more or less untouched. Solar would have an altogether different impact.

The NSW government – which owns the state’s generators, if not their output – doesn’t want to find out, and has abolished the feed-in tariff, on the basis that it costs too much. But here’s another interesting graph.

Figure 1: components of average retail bill 2011-2012

It comes from the Australian Energy Market Commission’s report on its “Power of Choice Review,” looking at range of demand management and energy efficiency opportunities, that was released on Friday. It suggests pretty clearly that the cost of green energy incentives – the renewable energy target, feed-in tariffs, and demand management and energy efficiency schemes – in Australia is minimal. They total just 6 per cent of the cost.

The average power bill is dominated by transmission, distribution, wholesale and retail costs. This is what the AEMC report is trying to address – what measures can be introduced that can help consumers protect themselves against rising electricity costs? – and it canvasses a whole range smart grid and smart appliance opportunities that could be introduced.

It’s not quite clear how easily that can be introduced. Most utility, generation and retail businesses are geared towards simply selling more electrons, or building more poles and wires. The AEMC report says some $11 billion of current $45 billion spend on network upgrades could possibly be avoided, but it is not yet ready to offer solutions. Notably, it says it has to try and unravel how to apportion costs and benefits among consumers, generators, retailers and network providers. IPART tried to do the same thing in its review of solar feed in tariffs and declared it to be too hard.

And just letting the forces of the market work is not necessarily an answer either. Competition in the retail market hasn’t achieved much because, as the AEMC pointed out in a previous report, “the increase in retail competition has served to increase costs” and increased retail margins are expected to contribute more to rising energy costs than green energy schemes.

While the AEMC report is at least a step in the right direction, there is a big question remaining over whether the energy industry is moving fast enough. It’s not simply a matter of changing the rules and the incentives, it is also a question of culture.

Having spent decades simply delivering their product to the door using a “take it or leave it” approach (did the consumer have any choice?) the energy utilities now realise that they have to learn how to bring their business inside the household – in ways that the AEMC envisages; with smart meters, in-house displays, load controllers, storage and the like.

A study in 2010 from Ernst & Young showed how difficult a task that would be. Electricity retailers were not skilled at customer service. There was little interchange with the customers, and if there was, it was sparked by complaints around blackouts and connections.

The report noted that, with the deployment of new technologies, power and utilities companies will come under competitive attack all along the value chain, as new interactive customer relationships and new competitive models allow third parties to enter the market. The incumbents can choose either to evolve, or face a revolution where “market rationalities and business strategies change completely.”

The recent experience with feed-in tariffs suggests that the utilities will be slow to evolve. The first graphs from Germany illustrate their fears, but as David Crane from NRG pointed out last week, trying to stand in the way of this evolution could be pointless.

The arrival of solar PV, and the achievement of parity against retail prices, means that consumers do now have a choice. As Jeff Bye, the head of solar at CBD Energy told RenewEconomy last week, he is fielding dozen of calls each week from consumers asking how they can install solar and be taken off the grid.

“People are annoyed by their growing bills – even if they reduce their usage, the bills are still going up,” he says.

Bye is advising his customers to stay connected to the grid, but to use it simply as a backup, a sort of battery of last resort. This can be done, he says, by using a 3-5kW system on the roof, battery storage and a power router – which can set excess PV power to go into the battery instead of the grid, and can source energy from the grid to top up the batteries when they get low.

“Customers are making decisions on what they are spending – 20-30c/kWh – not on what they export,” he says. On a larger scale, the City of Sydney is planning on achieving its own independence for the 300MW of capacity used within its boundaries through a network of cogeneration and tri-generation installations, backed up with distributed energy such as solar PV and battery storage.

Postscript: after strong interest from readers, Jeff Bye has expanded on his comments about doing away with the grid (almost). It’s interesting stuff.

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  • http://www.sunwiz.com.au warwick

    The challenge will eventually be felt by Solar Farms too, whose price will be derived from the wholesale electricity price. If everyone is generating at the same time, it can (Strongly) affect solar farm revenue too.

  • Roy Ramage

    As if any more proof were needed. The graphs alone now demonstrate beyond argument that the mass rollout of solar panels has massive economic advantages. The first regional towns to do it will be able to offer cheap power as an attractant. At some point our elected members will have to ignore the lobbyists and allow by law the transmission of clean (solar) power over OUR existing grids. Bring it on!

  • Frank

    Giles I have suspected this for some time but this very good article nails it.

    Qui bono, or in this case who doesn’t benefit, is always a good starting point into analysing actions.

    For NSW at least it looks also like checkmate is not too far down the track particularly in the privatisation arena. Or maybe the sale contract will, like the motorway contracts, include a guaranteed return on investment come what may.

    Keep up the excellent work Giles.

    Frank

  • Warwick

    If CBD energy is proposing that customers buy a PV system and battery but stay connected to the grid because “Customers are making decisions on what they are spending – 20-30c/kWh – not on what they export,” then surely this makes the need for a Feed-In-Tariff irrelevant?

    • Steve W

      Warwick, a feed in tarrif is more efficient than battery storage, so it’s still a good thing.

      The action by NSW to remove it will be the initial driver for solar owners to essentially stick it to the established generation and grid industry with batteries though.

      The outlook for coal generators is getting bleaker by the month as solar pv just keeps on dropping.

      Next will be commercial installations. I wouldn’t be surprised if industrial estates across the country quickly turn into massive solar farms before too long.

  • Ron Horgan

    Giles, Thank you for illustrating the merit order effect of solar PV in the German data.
    The virtual elimination of peak demand costs during the day is dramatic.
    The remaining shoulder peaks would be an obvious target for solar thermal with storage.
    In combination PV and STS would seem to change the economics of power generation and make further baseload coal capacity a less attractive investment.
    The CBD option looks attractive.
    Staying connected would then be an “insurance cost” against your home power system failure.
    Many years ago a company I worked for used a large gas engine to power a process fan and had the original electric motor on standby.
    This experiment was terminated when the power company threatened to disconnect the mains power supply if we did not use their power!
    As the generators are now separated from the distributors this is less likely to happen today.

  • Dean

    Great Giles, contrast your analysis with that of the Australian newspaper….which reports the pushback from Origin and the other vested interests in Australia for the rollback of any support for renewables see http://www.theaustralian.com.au/national-affairs/energy-prices-to-keep-on-rising/story-fn59niix-1226306638244

    Also understand from that why a community campaign like 100% renewables is working on big solar and making our MPs and the public aware of the benefits of large scale solar in Australia

  • Chris Fraser

    Thanks, Giles. Every day I think we get closer to a more thorough understanding of the forces acting within this industry. The price on carbon does not have me worried. Most people would look forward to not having another $12,000 of their annual income taxed. Where are the neoliberal progressive taxation thinkers when you need them ?

  • http://bluemarblesolarengineering.blogspot.com.au/ Brett Bidwell

    As Grid connected Solar PV (Distributed Generation) has been touted as revolutionising Centralised energy networks, Grid Connected Solar PV with on-site Storage (Distributed Storage) is on the verge of taking our fight to the next level. 20th Century utilities need to wake up and smell the photons.

  • Michael

    “This can be done, he says, by using a 3-5kW system on the roof, battery storage and a power router – which can set excess PV power to go into the battery instead of the grid, and can source energy from the grid to top up the batteries when they get low.”

    Hi Giles,

    Would it be possible to do a follow up post (CBD guest post) on this topic ?
    I would be very interested to hear some more technical and economic details about these type of systems, particularly the battery and power router.
    The rising cost of electricity makes this sound quite enticing.

    • David Hamilton

      Hi Michael,

      I have a grid backup system in Northern Tasmania. It consists of 5.2kW of panels (mounted on poles, in my case) and an SMA inverter. The backup system consists of the SMA Sunny Backup battery inverter/battery charger, automatic switch box and a set of deep cycle gel cell batteries (48V, 230 Ah). This setup exports power to the grid when I have a surplus, imports power from the grid when it is available and I don’t have a surplus, and runs the house on batteries + PV when the grid is unreliable or not available. It works very well.

      The latest edition of “ReNew” published by the Alternative Technology Association has a brief review of battery backup PV systems.

      Giles, wonderful article! It demonstrates what a game-changer PV can be.

    • http://www.clemstanyon.com Clem

      For battery back-up, see this TED Talk – liquid metal battery in modular form, many sizes, already the basis for a company:

      http://www.ted.com/talks/donald_sadoway_the_missing_link_to_renewable_energy.html

  • John Skene

    After reading this article, I now understand why the South African Government and Eskom the monopoly supplier of electricity in South Africa have been sitting on the F.I.T. schemes proposed for wind and solar. They (both of the above) are creaming massive amounts which would be seriously eroded with a comprehensive renewables policy.

  • Rohan Wilson

    Giles – good article -I guess we should call this phemonem something ? how about DSM – jeff Bye’s outlook should have traction as we stagger towards a solar renassiance in 2013 -14. I am sure by then an incoming Abbott Government and it’s Minister for Resources and Energy Clive Palmer will be all ears on a new FIT. Then you can be feed black or brown one lump or two.

  • David Rossiter

    Giles
    Such a wholesale price curve would not benefit solar if that market was its sole source of income as revenue would have dropped. But in Germany with its fixed feed in tariff for solar, detached from market forces, there are enormous benefits to solar producers.

    For Australia the REC market provides a shelter for solar and other renewable producers, though some revenue reduction would still occur from the selling the electricity component into the wholesale market.

    regards
    David

  • dB

    Haven’t we had “load controllers” since the 70s? My Qld electricity supplier turns my pool pump off at 5:40pm every day… earlier on peak-demand days.

    • Richard Simpson

      Th 1960’s.I remember my fathers hot water system being turned off in the morning peak period.

      • dB

        You got me googling. Turns out it’s 1956 technology, and according to one of their papers:

        ENERGEX operates the most extensive Audio-Frequency Load Control (AFLC) system of any distributor in Australia, with around 60 per cent of all connected premises having remote control receivers installed with no negative impacts on customers.

        Seems they were a big player in AS4755 and now use the technology to control exactly when compressors in aircons run.

        • out the back

          Nice point. Looks like we will not need to reinvent the wheel with the smart meter.
          BUT the consumers need control of the smart meter’s information to enable the consumer to gain financially. Give the consumer the information to make demand choices like switching off HVAC items at times of high grid prices.

  • JDL

    Really interesting article, Solar PV and battery storage are great ways for us to make ourselves independent of the grid (though how much do the batteries cost?). I’ve been following an Australian technology Ceramic Fuel Cells which looks to be another piece of the puzzle. It produces electricity and heat in your home and apparently can be turned up and down to work with solar. http://www.bluegen.info/BlueGen_Technology/ If we have technology like this, wind and hopefully some other innovations we can reduce our dependance on coal and those expensive transmission, distribution and wholesale costs.

  • ekb87

    If solar is cheaper than coal, why does it require subsidies?

    • Giles Parkinson

      Probably for the same reason that coal, nuclear, oil, and gas all got subsidies when they were first developed, and still do, according to the IEA – by a ratio of around 10-1 over renewables. Soon they won’t need them.

      • Jason Kobos

        What date will the solar industry refuse to accept subsidies from governments? Or will it be like all the other energy producers and just keep accepting them forever?

        • Alastair L

          The subsidy in this case has the minor benefit to the community of helping save the planet from the extreme weather effects of climate change and in the case of coal removing particulates like heavy metals and carcinogens from our air. But by all means troll away…

    • http://www.trouw.nl/tr/nl/5151/Vincent-wil-zon/index.dhtml Vincent Dekker

      It doesn’t need subsidies anymore. That is: not in The Netherlands. We’ve had some programs for cheap PV, bought in quantities of 50.000 panels at the time, and those panels now deliver a kWh for 8 to 15 eurocents, depending on how much work you do yourself for installing and how much interest you have to pay on your investment (or how much you want to make on your investment).
      The Dutch government doesn’t give subsidies anymore on consumer PV installations, and still PV is selling like never before out here.
      We pay about 22 cents per kWh we consume from the utilities and get the same 22 cents for every kWh we deliver back into the network.

  • Mike Flanagan

    IEA estimate fossil fuel annual worldwide subsidies at $400Billon p.a. whilst total worldwide investment in alternative energy is of the order of $286Billion. Perhaps a redirection of those funds from the fossillised fuel would be both equitable and be a boon to our reaching our GHG emmissions targets and aspirations.

  • http://Www.supercleansystems.com Keith Munro

    In Qld we can currently get 50 or 52 or 54 cents/kwh (10 cents more than Ergon/Energex offer) for any excess power fed to the grid from solar PV systems. If an average user gets a quality 5kw PV system (should be under $10k installed ) and use 30% of their generated power during daylight hours ( assuming their normal bill is under 25kw hours per day usage), the system will pay for itself in less than 3.5 years – close to 30% annual return on investment. A self funding, no-brainer. Just watch out for dodgy ex-insulation groups who way overcharge or underperform. I worked for one who overcharged like the proverbial wounded bull and found their high quality comparison claims essentially baseless. Now working with a wholesale group who have more than 6000 happy clients and who use good LOCAL qualified installers all over Qld & northerm NSW. Won’t last. Gov’t are too used to the income, so new PV clients really need to hussle. Ergon is a pain for 5 kw systems and SWER lines. Just order under 5kw on your grid connection application. Good luck.

    • Richard Simpson

      Keith, it is not your money but middle class welfare paying you a subsidy, for installtion and FIT.
      This impacts on everyone, especially the poor.
      Hardly part of the socialist manifesto?
      In addition loads of poor quality cells are now penetrating the market

  • Alison Wain

    I want all this to be true, but have regular debates with a very good friend who raises the issue of how wind and solar power can satisfy baseload demands. Industrial use of electricity needs to be reliable, consistent, and high volume. Firstly becuase of volume requirements and second becuase large fluctuations are likely to damage machinery. At present there is a two tier pricing system – baseload (currently non-renewables) which is slow to start up and shut down, so is relatively cheap, and peak load which is more expensive but allows faster start up and shut down (the cream referred to above). Are renewables yet contributing to the provision of the baseload power requirement in Germany? And if they are not, what happens when substantial non-renewable capacity has been shut down becuase it is no longer profitable just to provide the cheap baseload power? Perhaps more of what I believe currently happens when Germany’s baseload proves inadequate – buy it from somewhere with a bigger surplus. For Germany I believe this is France. And that would be – er – nuclear power…

  • Guy

    if you look at both graphs at the top of the page , at the volume graphs , ,,, now forget about price difference , price baseload , price peakload ,this is all BS to divert your attention , look at volume ,,,,,the difference between the two ,,, thats solar,,,don,t get me wrong i’m pro solar , pro wind , pro all sustainable , environmentally safe forms of energy , but the fallback energy supply is going to become gas more and more ,,,what if i said we can clean up all the nuclear waste around the world , and at the sametime produce 50 years of free energy for the world ,,,using solar and wind ,,,even longer,,,

  • cristianoliveira75

    Te future is now and the time is now, to chance the things and to say NO to CO2!