rss
11

Why utilites will pay a premium for rooftop solar

Print Friendly

A power company rang me up last week offering to increase my rooftop solar (RTS) feed-in tariff if I switched my contract to them. My first thought was that this was a marketing ploy but, on reflection, this did not make sense. Why would a power company want a customer who produces about as much power as the household consumes?

By contrast, others are claiming that ordinary householders are subsidising rich rooftop solar owners. For example, Mark McArdle, (Queensland Minister for Energy and Water Supply) issued a media statement saying “the QCA analysis showed the solar bonus scheme currently added $26 per year to everyone’s annual electricity bill, which will increase to $90 next year if an application by Energex to the Australian Energy Regulator was successful.”

He added, “Rooftop solar costs are projected to add more than $240 per year to average electricity bills within five years.” (These claims were based on the previous government’s feed in tariff of 44¢/kWh)

If rooftop solar really was driving up household bills, a power company that was paying a premium to buy more rooftop solar power would have to increase their charges to pay for this premium. Not an aid to competing in a cutthroat market.

So what is rooftop solar actually doing to household power bills in Queensland? And how high could the feed-in tariff go before it really would be increasing household power bills?

In the detailed section below, a comparison of demand and revenue vs time of day for 2008 and 2012 is used to answer the above questions. The quick answers are:

1. Rooftop solar is actually saving the “typical Queensland household” (without PV) $65/yr.

2. The feed-in tariff would have to rise above 96¢/kWh before rooftop solar actually stopped saving households (and power companies) money. Power companies can actually become more competitive by locking in extra contracts for the supply of rooftop solar, even if it means paying the small premium that was offered to me.

3. It is difficult to say what effect rooftop solar would have on household bills in five years’ time. My guess is that investment in rooftop solar will be justified at feed-in tariffs below what householders will be paying for power and that it will still be saving households money.

The Queensland government may actually believe that their decision to drop the feed-in tariff to a mere 8¢/kWh for new contracts will save householders money by killing investment in rooftop solar.

Smarter governments should be encouraging the steady growth of rooftop solar. They should also be seeking ways of using market forces to set the minimum feed-in tariff for new contracts. Both actions would help drive down household bills and boost employment.

Smarter governments might also consider the use of competitive tendering to set up contracts for the supply of rooftop solar power as one way of achieving both of the above aims. They might also consider allowing the use of alternative commercial models to make competitive tendering easier in addition to other advantages such as providing a small boost to the income of homeowners who can’t afford to install rooftop solar. (One possibility would have PV owners leasing roof area from householders.)

DETAILS:

If the feed-in tariff for rooftop solar is higher than what householders are paying for power it looks, at first glance, as though it would push up household bills. However, the reality is more complex. What really counts is the price of the power rooftop solar is replacing. Solar PV produces power during the high demand part of the day. Part of the power mix at this time comes from very expensive sources such as peaking generators that may only run for a limited amount of time during the year. It is these expensive sources of power that rooftop solar should replace. Moreover, added capacity from rooftop solar will increase downward market pressure on prices in general.

Despite the size of the feed-in tariff, it is quite possible that rooftop solar is actually driving down the average household power bill.

Figs 1 and 2 come from RenewEconomy. These graphs compare Queensland demand and revenue vs time of day for 2008 and 2012. This period is important for this discussion. RTS grew dramatically between 2008 and 2012.

The graphs exclude data for RTS

Screen Shot 2012-12-13 at 10.19.18 PM

Screen Shot 2012-12-13 at 10.19.22 PM

Fig 1 shows that average demand only differed during the time of day when rooftop solar would have been producing power. For this reason, it is not unreasonable to assume that the differences between 2008 and 2012 figures were due to its growth. We can also assume that the amount of rooftop solar for 2008 was small enough to be ignored in calculations.

Data taken from the smoothed curves was used to estimate changes in daily demand, revenue and price for non-rooftop solar. Between 2008 and 2012 there was:

1. A 1.87% drop in demand. (2.67 gWh/day).

2. A massive 31.3% drop in the daily revenue received by non-rooftop solar generators ($2.059 million/day)

3. A 30% reduction in the average price paid to non-rooftop solar generators. (1.41¢kWh)

Little wonder that the power generation industry is not completely enthusiastic about rooftop solar.

It is not clear how Mark McArdle’s $26/yr increase in a typical household power bills was calculated. If it is assumed that rooftop solar at 44¢kWh was simply replacing other domestic power at 23¢kWh and changes in the price of non-rooftop solar power were ignored:

1. The power bill increase would have been $26/yr for a household consuming 0.34 kWh/day of rooftop solar power.

2. The “typical household” would have an average power consumption of 18.2 kWh/day if rooftop solar was 1.87 per cent of the total.

18.2 kWh/day is about what might be expected for a typical household. This supports the idea that the $26/yr figure did not take account of the effect of rooftop solar on the non-rooftop solar power price. When this saving is included in the calculation, rooftop solar at 44¢kWh actually reduces the typical power bill by $65/year. It was estimated that the feed-in tariff would have to go  above 97¢kWh before rooftop solar increased the typical household power bill.

If governments are going to make intelligent decisions about rooftop solar it is important the calculations being used to guide these decisions are taking account of the effect of rooftop solar on non-rooftop solar power prices.

The RenewEconomy article had graphs for a number of other states. These graphs looked similar to the Queensland graphs. Further calculations would need to be done to be certain that rooftop solar was saving householders money in these other states.

RenewEconomy Free Daily Newsletter

Share this:

  • Warwick

    Unfortunately this article is predicated on a number of flawed assumptions. It effectively assumes that the whole change in demand and spot revenue in Queensland 2008 vs 2012 is due to the installation of rooftop PV. Never mind that 2012 is not finished and depending upon what date the curve was produced, is likely missing half of summer so you’re not comparing like with like. There’s no account for la nina effects or weather, the roll-out of “pink batts”, generator outages, imports from NSW or the post GFC impact in the 2012 results. Most tellingly there’s no a single mention of the hedging contracts market which turns over 10′s of billions each year and have a material impact on generator revenues and retailer costs. I’d suggest you review your study but consider the impact of electricity hedging. http://d-cyphatrade.com.au/

  • Benj

    Exactly. A small drop in demand causes a significant drop in traditional generators’ revenue.

    So what will happen when smart meters start to achieve one of their stated goals, reducing peak demand? Would this further reduce the average price paid to non-rooftop solar generators? And how would this drop in revenue for the traditional generators benefit the retail customer?

  • Dave Smith

    John,

    To make sense of the offer from the competing retailer, you need to know how much of your current FiT is paid for by your retailer and how much is subsidised by the general consumer.

    Furnished with that information, you should be able to understand how the offer makes commercial sense and is not in any way inconsistent with the concerns expressed by the QCA.

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

      Dave the whole point of the article is that rooftop solar owners are actually subsidizing people who haven’t invested in rooftop solar.
      Do you know how the QCA has calculated the effect of rooftop solar on household bills?

      • Dave Smith

        John,

        I take it by your response that you do not understand how your FiT is paid for. That is why you are unable to understand the commercial motivation of the retailer offering you a better deal.

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

          Dave: It would be good if you would explain to me how it works and why this would prompt a power company to pay more.

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

          Dave: Power companies are willing to pay a premium for rooftop solar because it makes them more competitive under the rules they have to work by. However, anything that increases the average FIT will reduce the amount of subsidy rooftop solar free households receive from those who have invested in rooftop solar.
          As i said in the article I am all in favour of changes that make it easier for people who haven’t got much money to get some extra income from the installation of RST on their roofs. I am also in favour of the use of auctions or competitive tendering aimed at driving down the average FIT for new contracts.
          What I am not in favour of are governments and newspapers that don’t understand that rooftop solar is actually driving down all household power bills. Ditto governments that set FITs’ that are low enough to stop the rooftop solar industry in its tracks and put people out of work.

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

    Warick: This article (http://reneweconomy.com.au/2012/whos-afraid-of-solar-pv-38844 ) gives more details of what the graphs I used refer to: “Average demand for mains electricity in South Australia as a function of hour of day. Red line is the average for the two financial years from July 2007 to June 2009. Blue line is for financial year 2011-12. Left panel shows absolute demand, right pane shows demand changes referenced to 2007-09 averages as a percentage. Data from AEMO, figure by Mike Sandiford.

    In Queensland the story is very similar, although the proportional impact is lower with midday 2011-12 demand down only about 4% on 2007-09 levels.” By comparison, my spreadsheet calculation had midday demand down by 3.85% which is good agreement considering the spreadsheet data was based on a hand transcription.

    The first graph in the linked article shows how dramatically RTS has risen in the last few years. It was not unreasonable to ignore the amount of RTS installed before 2010.

    • Warwick

      John, I’m not really sure the point of “Average demand for mains electricity in South Australia” when you’re examining Queensland electricity. Mike Sandiford makes the exactly the same mistake of ignoring the effect of billions of dollars of electricity hedging which is analagous to examining the effect of supermarket shopper dockets on retail petrol against the Tapis oil spot price. Both analyses are a massive oversimplification of the complexity of the real cashflows and as such cannot be relied upon for meaningful conclusions. You’d do well to read the AEMO document on the NEM especially about page 20, to get an understanding of swap contracts as the primary hedging instrument.

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

    Benji: You are right. The price of the power being replaced by the latest solar installation will be much lower than the price of the power that was replaced by earlier RTS installations. My estimate is that the price reduction for non-RTS would have to have dropped below 0.4 cents/kWh before RTS at 44 cents/kWh feed in tariff (and 1.87% RTS in the power mix)would start costing householders money.

    On the other hand the cost of reducing RTS is dropping rapidly so RTS will be competitive with lower and lower cost non-RTS in the future as long as the feed-in tariff for new contracts reflect the new cost of RTS. This is why I am so enthusiastic about the use of some form of auction or competitive tendering to set the feed-in tariff for new contracts.
    The competition between companies that sell to the public is pretty cut-throat which means reductions in the price generators are receiving should be being passed on to consumers.

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

    Benji: Have a look at Origins time of use tariff. http://www.originenergy.com.au/files/necf/QLD_Electricity_Residential_Energex_Standard%20Published%20Rate.PDF

    Bit hard to imagine any user saving money on this tariff unless they switch all their usage to the middle of the night.