Networks fret over threat of mass grid defections

Australia’s electricity networks are becoming increasingly nervous about the threat of mass grid defection and the prospect of significant write-downs in the value of their assets in the coming decade.

The growing popularity – and significant price drops – is challenging the incumbent networks to radically adapt their business models. Most agree that it would make economic sense that the grid is not discarded, but used to incorporate the new technologies.

But the fundamental difficulties for the current grid operators is how to price their assets, and how to justify and get a return on their massive investments – particularly in the last five years – when consumers may be presented with a cheaper option; to quit the grid, or use battery storage to significantly reduce their reliance on the grid.

Numerous studies have pointed to the fact that within a few years, individual households and some businesses may find it cheaper to quit the grid. Research groups have suggested networks may have no choice but to write down their assets. The industry talks of massive “disruption”.

Professor Ross Garnaut on Thursday weighed in with a prediction that the “creative destruction” of established electricity networks would take four to five years to play through, the result of competing technologies and surging network costs that would “overwhelm” the regulatory inertia of the existing pricing model.

“We’d see that happening through the 2020s, through the next decade,” he told the AFR before a speech to be delivered in Melbourne.

Hence the need for the network lobby to begin vigorously defending the grid, and to push for changes in network pricing as the proliferation of rooftop solar accelerates.

The Energy Networks Association on Thursday released a study highlighting what it says are the “hidden values” of the grid, and to point out the cross-subsidies it says exist not just with solar PV, but with air-conditioning. The idea is to push for changes to the tariffs to allow more fixed charges – a move some analysts have suggested could be perilous.

Still, this is the ENA argument. It hired consultants Oakley Greenwood to crunch some numbers on the uptake of solar, how it is used and its impact on the grid. Currently, there is more than 3.5GW of rooftop solar that accounts for nearly 2 per cent of all electricity demand, with around 4,000GWh of production. By 2022/23, this is expected to jump more than three-fold to more than 14,000GWh, or 7.5 per cent of demand from the National Electricity Market.

This is having, and will have, an impact on pricing models for the grid. The operators argue that a network with fixed costs cannot continue to try to get its money back with tariffs that are based largely on the amount of consumption. Critics argue that they shouldn’t have charged so much in the first place.

Hence the ENA focus on the “hidden value” and the cross subsidies. Hidden values include back up services, at night, start-up power services (you need a lot of power to switch on some appliances), balancing and quality. It also cites market access, but given that the average household with a rooftop solar panel will get just $93 a year from exporting nearly half its solar power back into the grid, that is not such a powerful argument.

ENA chief executive John Bradley says connected solar customers provide benefits of up to $10 per month by assisting in deferring network investment, but they also receive $69 per month in value by staying connected to the grid because they retain a backup supply ($61 per month) and are able to sell surplus energy ($8 per month).

And because the tariffs are currently based on volume charges, which don’t reflect network cost drivers, a grid-connected customer with solar is effectively receiving a cross subsidy of $98 to $163 per year.

To further underline their argument, ENA notes that the Oakley Greenwood analysis suggests that the cost to a suburban family of leaving the grid would be five-to six times greater than sticking to it.

It puts the cost at $56,000 a year – including solar 4kW of solar panels, 67kWh of battery storage, balance of systems costs and a diesel generator (really?!). It suggests that the cost of having enough power to run enough air-conditioning to cool the lounge room, master bedroom and possibly one other bedroom or study – would cost about $72,500 inclusive of GST, with 6kW of panels and 96kWh of storage.

Here are their calculations of the first scenario.

Now, it is clear that many will dispute those figures, and RenewEconomy looks forward to the discussion we hope will follow.

The Oakley Greenwood scenarios, for instance, are based on 14kWh consumption a day for the average household.

Glen Morris, from Solar Quip, says he quotes $3,000 to $6,000/kWh/day for houses going off grid, depending on how much redundancy they want built in. He says energy efficiency should get the average all-electric family down to 7-10kWh/day, which suggests a median price range of around $40,000. Others quote lower, he says.

It doesn’t really matter whether they are right or wrong, what matters is what happens when it is cheaper for an individual consumer to quit the grid or stay. UBS has suggested that time may come as early as 2018; the CSIRO says it might occur by 2030 (give or take a decade), some say it is already the case now.

The ENA does not seem to have a ready answer, and this is where Garnaut’s prediction of “creative destruction” becomes crucial.

“There is a lot of talk about people going off grid,” Bradley told RenewEconomy. “We think that while you could theoretcially go off grid now, it’s bit like having a computer without the internet.” It may make sense in regional areas, as some networks suggest, but not in major towns and cities.

Basically, the ENA is pitching a sales job on the value of the network, as an individual good and as a societal good. RenewEconomy agrees, but only if this good is priced right. If the individual finds more value in going off-grid, a scenario that Oakley Greenwood and the ENA don’t appear to accept, then the concept of a societal good becomes tricky.

That’s when the battle over tariffs will get really interesting. At the moment, the power, so to speak, lies with the incumbents, and they are seeking to use this to frame the tariffs of the future. (Bradley, for the record, said he had no knowledge of any network operator pushing for network charges to be imposed even when not used, as per sewage).

But in the coming years, as more solar PV and battery storage is added to households, that power balance may change.

As one industry analyst observed. “These questions are fairly difficult to answer and as usual there are so many vested interests.

“For the time being, I think the focus should remain on getting as many houses and factories with solar on them as possible, add in the storage. After the consumers have got, so to speak, all that power at their disposal we can have a discussion about how best to allocate it.”