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A fair price for rooftop solar? Try 10-18c/kWh

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This is the first of a series of articles produced by the fair value for distributed generation project. In this article we explain the background to the project and the basis for our calculation that local rooftop solar is currently worth in the range of 10-18c/kWh when all the network, environmental and health benefits are taken into account.

Solar feed-in tariffs (FiTs) have had a controversial and complicated history in Australia.

Many states started out with very high FiTs. Arguably some of the premium tariffs were allowed to continue for too long and should have been reduced gradually, but it is important to recognise that these policies did achieve significant benefits.

These schemes built a solar industry in Australia that delivers significant quantities of affordable, low-carbon energy into our grid. The renewable energy industry employs 14,000 people[1] and has led Australia to have by far the highest penetration of household rooftop solar in the world [2].

All the premium (i.e. paying more than the retail cost of electricity) schemes are now closed to new entrants, although some still have a number of years to run for existing eligible systems.

Setting of regulated minimum FiTs in Australia has always been a state responsibility. The current situation in the National Electricity Market (NEM) region is that regulated minimum tariffs are set in regional Queensland, Victoria and Tasmania.

There is no regulated FiT set in SA (as of 1 January 2017), NSW, ACT and SE Queensland, with governments and regulators arguing that in a competitive retail market, retailers will offer an attractive FiT to attract customers.

Regulatory bodies periodically review the methodology for determining FiTs and it was the combination of three forthcoming state reviews that prompted a consortium of organisations to seek and receive funding late in 2015 from Energy Consumers Australia to review and advocate on these methodology issues.

The consortium consisted of Solar Citizens, the Alternative Technology Association, the Australian Solar Council, the Total Environment Centre, the Clean Energy Council and the Tasmanian Renewable Energy Alliance.

Submissions were made to state review processes in Queensland, Victoria and Tasmania, as well as to the review that led to the abandonment of regulated FiTs in South Australia. We also produced a range of advocacy materials that are currently being used in the Solar Citizens Fair Price for Solar campaign.

One of the headline findings of our project is that local rooftop solar is currently worth in the range of 10-18c/kWh when all the network, environmental and health benefits are taken into account as summarised in the following graphic.

Fair-price-factsheet-SC-2016-12-06-infographic

Our approach was to consider the various components of the electricity supply chain and estimate what contribution distributed generation could make to each. In order to do this we calculated national average costs for a typical residential electricity bill for the main components of the supply chain[3]. For more details and references see the project website.

Wholesale price of electricity

Regulators have traditionally used an average wholesale price for energy when calculating FITs. Arguably, solar exports are worth more than the average price because (except in Tasmania) they are fed in during times when wholesale energy prices are higher than average.

This is in line with the COAG agreed principle that FiTs should take into account “the time of day during which energy is exported.” In Victoria, from July 2017 the new solar FiT of 11.3c includes 8.1c for the wholesale price of electricity including a weighting to reflect the timing of solar export.

In addition to the avoided cost of purchasing wholesale electricity, solar pv can play a role in pushing down the wholesale price of electricity for all consumers through the ‘merit order effect’ which can be significant when demand and wholesale prices are high.

The range used in our estimate (5.1c-6.1c) is based on the national average price for 2014-2015 through to a 20% premium to cover time of day and merit order benefits. These figures are likely to be very conservative given recent and projected increases in wholesale electricity costs.

Avoided transmission costs

Retailers pass charges for the use of the transmission network on to consumers irrespective of whether the energy is sourced via the transmission networks or locally from solar pv. Customers pay for a service that is not provided (use of the transmission network for the proportion of their energy that comes from distributed generation).

We argue that transmission charges should only apply to the electricity actually carried on the transmission network and that these savings should be treated as a benefit of distributed generation. In the next article in this series we deal with this issue in more detail.

Reduced distribution costs

Distributed generation can place less strain on the distribution network and thereby reduce costs in at least two ways. Firstly, energy from solar pv is typically used close to the point of export and therefore makes significantly less use of the ‘poles and wires.’ Secondly, a significant proportion of the cost of the distribution network is the transformers which convert higher voltages down to 230V. Solar inverters have this capability built in and export power at 230V. The value of solar pv in reducing costs for network operators is highly dependent on time and location, as well as the capacity and asset life cycle of local distribution infrastructure. Our maximum value saving assumes local solar avoids using the high voltage and subtransmission parts of the distribution network, which account for over 50% of costs.

Reduced CO2 emissions

Each kWh of solar pv that displaces coal-fired electricity avoids carbon pollution worth a minimum of 2.4c to 3.1c using current carbon pricing estimates. Carbon pricing consistent with the global objective of keeping global warming well below 2°C would translate to a much higher value.

Health benefits

Based on research by the Australian Academy of Technological Sciences and Engineering, each kWh of solar pv that displaces coal fired electricity contributes 1.3c in reduced health costs. This benefit is not currently reflected in any Australian FiTs but recent Victorian legislation makes provision for future FiTs to include a component based on the “avoided human health costs attributable to a reduction in air pollution”. In its determination of the 2017-2018 Victorian FiT, the Essential Services Commission concluded that “the necessary data to quantify those benefits with sufficient reliability to include them in a FiT are not available at present” so this is an important area for future research and advocacy.

Retailing costs

We did not consider retailing costs in our assessment. These make up 29% of typical residential electricity bills nationally or about 8.3c/kWh. Under current regulatory arrangements it is not possible for consumers to avoid these costs except by going off-grid. New technology such as local storage and system such as peer-to-peer trading provide the potential for new models that could avoid or substantially reduce the retailing components of the electricity prices. However this would require significant regulatory change.

Additional benefits

Distributed renewable energy generation, including solar pv, has many benefits on top of those considered in our methodology. These are real economic advantages even though they cannot be readily translated to a c/kWh value:

Direct jobs: Research by Ernst & Young for the Climate Council has shown that generating 50% of our electricity from renewables by 2030 would lead to over 28,000 new jobs and over 50% more employment than a business as usual scenario.

Industry development: Beyond the direct jobs in solar installation, building Australia’s capacity in emerging technologies such as battery storage and energy management will create the jobs of the future as the world moves to a decentralised and decarbonised energy system.

Energy security: An electricity system that is based on distributed local generation from a variety of renewable sources combined with local storage will not only reduce costs, it will make for a more robust and secure system that is less prone to failures caused by centralised infrastructure.

Price stability: Renewable energy technologies have high capital costs, but very low and predictable running costs and no fuel costs. This contributes to long term price stability compared with fossil fuel alternatives.

Energy literacy: Installation of solar pv gives homeowners a strong interest and motivation to better understand and manage their energy consumption. This will be an important driver of the uptake of new technologies such as local storage, demand management and integration of electric vehicle charging which can ultimately lead to a more flexible and economical electricity system.

In subsequent articles in this series we will look in more detail at the contribution of distributed generation in avoiding or reducing network costs, as well as discussing the difficulty in getting these benefits reflected in electricity pricing.

  1. 2015 figure from https://www.cleanenergycouncil.org.au/policy-advocacy/reports/clean-energy-australia-report.html Over half of these jobs are in rooftop solar.
  2. Preliminary Report of the Independent Review Into The Future Security Of The National Electricity Market, p.13
  3. NEM residential supply chain cost components, http://backroad.com.au/wp-content/uploads/2016/11/NEM-residential-supply-chain-cost-components-v07p.xlsx 28 Nov 2016. Based mainly on AEMC Residential Electricity Price Trends – base figures 2014-2015.

Jack Gilding is the Executive Officer of the Tasmanian Renewable Energy Alliance and was the project manager for the project “Research review and advocacy on the fair value of distributed generation”.

The project was funded by Energy Consumers Australia as part of its grants process for consumer advocacy projects and research projects for the benefit of consumers of electricity and natural gas. The views expressed in this document do not necessarily reflect the views of Energy Consumers Australia.  

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  • Jack Gilding

    Footnotes:
    1) 2015 figure from https://www.cleanenergycouncil.org.au/policy-advocacy/reports/clean-energy-australia-report.html Over half of these jobs are in rooftop solar.
    2) Preliminary Report of the Independent Review Into The Future Security Of The National Electricity Market, p.13

  • howardpatr

    For a government that frequently reminds ACT citizens that it is going one hundred percent renewable with electricity it is incongruous that it allows the likes of Origin and ActewAGL to pay as little as 6 cents per kWh.

    This is much like official approval of gouging by the fossil fuel giants.

    It makes even less sense when the FIT is comapred to what is paid to the owners of the few PV farms in the Territory.

    It will be interesting to see how long it takes the Labor Government to rectify this anomaly and thus encourage more rooftop solar?

  • John Englart

    I was able to get the 66c early adopter Victorian FiT at end of 2010 with a 1.5kW system with a 15 year contract. But that means if I upgrade any part of that system, I revert to the current FiT. So I have a disincentive to upgrade. Currently this encourages me to load shift power consumption to grid power at night, and feed-in during the day to maximise the economic return. At least I pay the 100% green power levy for my grid power.

    • john

      If you are able to just upgrade to a larger system and if once again you are able to get a battery backup so you can do away with bills for at least 360 days of the year.
      Set out an excel page doing the sums and look at the outcomes you will be net beneficial to yourself.
      Who ever advised you to get a 1.5kw system were not exactly across the outcomes.

    • john

      If you are able to just upgrade to a larger system and if once again you are able to get a battery backup so you can do away with bills for at least 360 days of the year.
      Set out an excel page doing the sums and look at the outcomes you will be net beneficial to yourself.
      Who ever advised you to get a 1.5kw system were not exactly across the outcomes.

  • Brunel

    Wow. Aussies voted for the idiot Tony Abbott to “cut” the price of electrons by just 2.4c/kWh.

    • john

      In fact the Warburton Inquiry that was set up to find the costs to consumers was going to be awful actually showed that the return to consumers was cost beneficial, the exact opposite of what they expected. So no the outcome from people putting PV on their roof has been a bonus to those who have not.

  • David Osmond

    Nice one Jack,

    but looks like you should update your wholesale electricity price calculations soon. As you mention recent prices are much higher, and should give you a couple more cents per kWh relative to 2014-15 pricing

  • Professor Ray Wills

    Factor in value of further benefits that should not attract FiT payments, but bring value to the customer
    eg
    Reduced network demand means less brown outs, better network security
    https://twitter.com/ProfRayWills/status/809224977819963393
    And coming to a home near you – storage will bring added security
    Solar on hot roofs reduces air conditioning load / consumption of home
    reducing energy spend by solar self generation increases cash on hand for other expenses – including mortgage repayments improving affordability of homes https://twitter.com/ProfRayWills/status/830029000034512896

  • Tom

    Hi Jack,
    Note that futures are pricing NEM electricity at 9-13 cents/kWh for the next 3 years.
    Cheers,
    Tom

  • Jeff Wehl

    Great work Jack!

  • Tom

    Hi Jack (from a different Tom),

    A couple of things I’d like to expand on,

    Although your calculations for what rooftop solar is “worth” are likely as correct as they can be, all of these benefits excluding the transmission and distribution benefits also apply to large-scale solar. I’m not sure what the lowest price power purchasing agreement for large-scale solar has been in Australia, but worldwide there have been some PPAs around the $50/MWh mark.

    Let’s say with increased Australian labour costs the next PV PPA is $70/MWh (7cents/kWh), this effectively puts a ceiling price on rooftop solar of large-scale PV PPA plus the transmission and distribution benefits (1.8 – 7.7 cents/KWh). Otherwise rooftop PV is effectively being subsidised compared to large-scale PV.

    Second thing – you’ve stated: “Arguably, solar exports are worth more than the average price because (except in Tasmania) they are fed in during times when wholesale energy prices are higher than average.”

    Although it is true that PV is generated in Tasmania generally outside of peak consumption and pricing periods, PV generation in Tasmania is arguably MORE valuable than on the mainland.

    This is because it is generated in the sunny months when the dams are not spilling, so any generation can be immediately offset by not using water from the dams. This saved water can then be used when the Victorian prices are very high, absolutely maximising the value of generation. Effectively, Tasmanian PV is stored for use at the best peak price times that there are.

    • Jack Gilding

      Thanks Tom. Yes Tas situation is different in two ways. Solar PV has extra energy value because any export or reduced demand enables Hydro to save water and export on Basslink at times of peak prices in Victoria. On the other hand it is harder to argue that distributed solar reduces network costs that are driven by peak demand since our peaks to date have been cold monday mornings driven by heating and business getting going, not hot sunny afternoons when the sun is shining and air conditioning load is high.

  • Тихон Смотрящий

    who pays a reserve of electric networks?

  • solarguy

    Great report Jack.
    Cheers.