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How to avoid energy death spiral – and build more solar

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The Australian photovoltaic industry has proposed the introduction of a new “distributed energy market” as part of a suite of measures that could avoid a potentially catastrophic energy market “death spiral” caused by reduced use of the electricity grid.

Although there has been much talk about the need for something to be done to overcome this problem and still allow ongoing uptake of PV and energy efficiency, this proposal is the first to develop a properly integrated package of measures.

The new market would allow the modern “prosumer” – households and businesses with rooftop solar and maybe battery storage – to buy and sell electricity from organizations other than their retailers. It also opens up the opportunity for network operators to enter the domestic market in what might be the most radical change in the industry for more than a century.

The “death spiral” has been a coin termed by the utilities themselves to describe the situation where revenues for network operators are reduced dramatically by the increased use of rooftop solar, battery storage and energy efficiency.

Because all these technologies mean reduced consumption from the grid, the network operators are then forced to impose higher charges on other consumers, possibly in the form of fixed tariffs, driving even more people from the grid. As Chris Dunstan wrote recently, it sets the potential between the big energy incumbents and consumers.

In a bid to short-circuit this death spiral, and collateral damage on the solar market and households, the Australian Photovoltaic Association has proposed a suite of measures that could radically change the way the market operates. These include the creation of a “distributed energy market” which will allow the production from rooftop solar to be traded, and allowing network operators to effectively enter the home energy market

“We’ve got two main problems at the moment,” says the APVA’s Rob Passey, who is also the senior research associate at the Centre for Energy and Environmental Markets At UNSW. “We’ve got lots of people wanting to install solar PV and energy efficiency (to reduce costs). And we’ve got problems for the network operators, which are owned by the state governments” (who are facing revenue shortfalls).

To align market incentives to benefit both consumers and the incumbent network operators, the APVA argues that the electricity system needs to be realigned from the current “top down” structure” to one where there is equal competition between supply-side and demand side options.

In short, it wants distributed energy to be treated equally with network augmentation during the planning process to minimise the need for large networks, and it wants this to be done through the use of what is called Integrated Resource Planning.

It says network operators also need to be regulated under a revenue cap, rather than a weighted average price cap (WAPC) – which results in network operators opposing anything that reduces electricity sales – as is likely to happen next for NSW and the ACT.

Passey says network operators also need to be allowed to participate in the distributed energy market because they are best placed to know what needs to be done to provide network support. They just need the right incentive to make the most economic decision for all parties, but also need to be appropriately ring-fenced so they don’t have an unfair advantage over their competitors.

The CEFC recently noted that a focus on the distributed generation could save billions in network costs. But as AGL Energy managing director Michael Fraser noted today, the take-up of solar could be heavily influenced by the way tariffs are structured in future years.

The APVA also says that consumers should be able to source their electricity from, and sell their PV electricity to, entities other than their retailer. This follows on from what Jeremy Rifkin once called the “internet of things” in his book the Third Industrial Revolution, where he envisioned such a market.

And, the APVA says, there should be an extension of current measures that include information and training, minimum energy performance standards, house energy rating schemes, and feed-in tariffs and white certificate schemes.

The future of the grid has been a cause of concern ever since it became clear that rooftop solar – and soon battery storage – would change the dynamics of the market because it gave consumers the ability to lower the cost of energy. Residential energy use from the grid has been declining in Australia since 2008/09 – falling between 5 and 10 per cent in some areas in the past year – and similar trends are occuring in the US and Europe.

Network costs have been the biggest contributor to electricity price rises, and now in some states such as South Australia, one in five houses now has rooftop solar. This percentage is expected to increase in coming years, with some analysts saying it is a “no-brainer” for households. Australia currently has 2.5GW of rooftop solar, but this could rise 6-fold to 14GW by 2020.

Despite a lot of talk about going off the grid – the US-based Edison Electric Institute produced a nightmare scenario (for its network members) where consumers “leave the system entirely”, and the owner of the biggest utility in the US suggested the network may only be used as a backup – there is no real belief that the grid will simply disappear, or that consumers will leave in large numbers. Unless, of course, the incumbents are dumb enough not to change their stripes.

Given it stays, who pays for it and how? The APVA has echoed previous suggestions made on this web-site that once the distributed energy has been used to reduce network expenditure as much as possible, then a proportion of network costs could be paid through a fixed daily charge based on a customer’s monthly demand peak.

So a customer with little need of the grid has a smaller payment, but then cannot draw more capacity than he or she has paid for. A heavy consumer pays a higher capacity to reflect its reliance on the grid.

“This will be fairer for all,” the APVA says. “The fixed and variable tariff components should be designed to ensure that the various DE options are supported through their ability to reduce both energy use and peaks in demand.

The APVA says that while moves are being considered, and it will take time to develop a fully competitive distributed energy market, changes will be needed soon.

“Distributed energy is developing very rapidly and electricity utilities are likely to be left with stranded assets if regulatory processes are too slow to adjust,” it says.

Rob Passey and Muriel Watt have written up their summary of the report here. The full APVA report “A Distributed Energy Market: Consumer & Utility Interest, and the Regulatory Requirements” can be found on the APVA homepage.

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  • dhw

    This problem is nowhere near as complex as it sounds and doesn’t require anything like a distributed generation market, the fix is much simpler. The energy ‘death spiral’ from domestic PV uptake is purely a result of the huge distortions currently existing in domestic retail tariff structures. The main distortion is that network and retail overheads are bundled into the energy price, so while it only costs the system around 6c/kWh to deliver an extra unit of energy under constant overheads, they are charging 30c in order to cover the overheads of operating the system. This is fine so long as domestic demand and therefore revenues to cover overheads are predictable, but introduce domestic generation and it fails. If however retailers charged connection/access fee based on what it actually costs to be connected and have access to the grid infrastructure, then an energy fee with a more reasonable markup of say 10-20% on wholesale, resulting in kWh charges of maybr 8-10c/kWh, then the problem goes away and no more death spiral. This is because even if PV systems are viable at 8-10c, the network doesn’t mind because it still gets the required revenue to operate from the access fee. This wouldn’t necessarily bad news for domestic PV however because the other main distortion is the lack of deployment of serious time of use pricing. If energy charges were raised significantly during peak times, or even better, access charges were based on peak power at peak times, then to the extent that PV can align with the peak, benefits to the user of reduced access charges or reduced peak energy exposure additional to the basic energy offset could be obtained. This might be achieved via either angling panels more to the west for example or installing some batteries to move the generation into the evening peak. Fix the retail tariff distortions, fix the problems.

    • Savonrepus

      The key problem with allowing increased fixed charges is that it supports dysfunctional behavior. It discourages investment in PV because you save less on your bill and it encourages going off grid altogether with wasted investment in battery technology that is currently unproven and not very nice environmentally so think higher marginal costs are better than high fixed costs. It would be difficult to adjust access charges for the fact of PV as the output to the grid (benefit to the energy retailer) has too many variables especially the in house use so you would get a double wammy on the retailers bottom line from sales lost for in house use as well as the reduction in access charge.

      Clearly if the problem is peak energy the answer is demand circuits that can be cycled off during times of peak demand. We have had such a demand circuit for decades with the off peak hot water circuit that was actually cycled on during times of low demand. Utilising this principle in reverse by cycling off during peak demand would assist significantly in managing the peak. There are many major electrical uses that can survive on intermittent supply and the introduction of demand circuits would only accelerate their popularity. Refrigeration, regulated airconditioning and water pumps spring to mind immediately. In addition the introduction of demand circuitry assists in battery storage development – eg appliance battery backup as in a laptop. Power outages are a fact of life but exposing the public to demand circuitry would assist in developing solutions to problems that do arise in such situations.

  • Chris Fraser

    It’s good that that consumers are meant to be able to source their electricity from, and sell their PV electricity to, entities other than their retailer. That is a true democratisation of the grid, and mirrors our relative freedoms to use public assets like roads. I imagine that any stored energy i may have would only reach a buyer via the network we share, so you’d think there would have to be some kind of notification to AEMO to allow them to adjust the ‘make-up’ energy needed to be produced by central generators. PV output fluctuates according to factors such as cloud cover, so this system would favour load-levelling devices such as batteries. The system could also need to be designed to allow fast response times by other generators, too.

  • Motorshack

    The computer and telecommunications industries have already gone through an almost identical set of changes, so, if you want to see what future business models will look like in the electric power industry, just look at your present cell phone and Internet connections.

    Most of us, almost everywhere in the world, now pay a fixed charge for phone and Internet connections, and nearly everyone buys a plan that is scaled to fit their anticipated level of usage. We don’t pay by the minute or by the packet, unless we exceed our agreed level of usage.

    This might seem a bit unfair to the network customers, since their cost per unit rises both if they use too little of their prepaid capacity and if they exceed that prepaid allotment. However, the advantage to the customer is that the network managers have a fixed, stable income stream that makes it possible to provide very stable, well-planned, adequately funded service, despite the extreme variations in actual customer usage.

    Moreover, this stability is really of very great value to the customers, which is why so few of us really complain about what we pay. Very few would want a crappy network, even if it meant substantially lower access charges. It would defeat the purpose of having the network connection in the first place.

    In addition, there is now considerable real competition among network providers, so the market price stays reasonable anyway.

    Also, what we are paying for is almost purely the network function, and everyone connected to these networks buys their own equipment for handling their own end of the connections.

    In particular, with the advent of both cheap personal computers and cheap cloud services, we can mix and match providers of processing and storage services with great flexibility, and also pay for only as much capacity as we need at any given moment – if we want to go to that much administrative trouble. However, increasingly people and companies are just buying a fixed block of processing and storage capacity that is scaled to their anticipated needs, and changes in capacity requirements are actually relatively rare.

    Substitute PV panels (and other generators) for computers, batteries (and other forms of energy storage) for hard drives, and networks for networks, and it is not at all hard to see what will eventually happen to the electric power industry.

    Namely, if you provide all your own services, and never buy from or sell to others, then you can skip paying for a network connection. If you do trade with others, then you will have to pay for network transport services. However, over time the network services will be contracted completely independently of your purchases and sales of the actual electrons.

    That is to say, it will not only be hard to maintain a business model in which both a supply of electrons and the necessary network services with be bundled in an obligatory way, but there will be no economic advantage in doing that anyway, for any party.

  • sean

    set up an electricity market for each transformer.
    the NEM has a price that is pretty much flatlined at $50/mwh. The major problem is the cost between the power plant and the end consumer. Encourage 100% use of the network by allowing the market to dictate the price. Congestion will drive up the price.
    Storage/consumer generation will prevent network companies from artificially restricting supply.

  • tomandersen

    The answer to this is obvious, necessary and not popular: When you run solar and use the grid as a battery, you need to pay for access to the grid.

    Spain is doing this – charging 5c/kWh for power produced by your own panels on your own roof, even if its used internally in your house. This charge is needed to keep the grid running so you can pull power at night and on cloudy days.

    The grid will not death spiral as people unplug, it will death spiral if its used as a battery, which it is not.

    Unplugging is really expensive, and only makes sense for large industry and homes away from the grid.