Fear and loathing as utilities grasp impact of solar PV

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Australia’s power generators and electricity network operators are viewing the rapid falls in the cost of solar PV and an anticipated surge in installation with an increasing level of concern.

The potential of solar PV to deliver cost-effective options for home and commercial consumers has been apparent to many in the industry for some time.

The report delivered by the Victorian Competition and Efficiency Commission into solar feed-in tariffs merely confirmed this, and offered it as a potential excuse for the utilities’ apparently lack of enthusiasm to ensure connections for solar PV and other forms of distributed energy.

While plunging costs are good news for consumers, who can turn to solar PV in increasing numbers with the emergence of innovative financing solutions, it is a massive headache for the incumbent generators and network operators, who are about to witness business models built up over decades being shredded by a technology that is as disruptive to the electricity industry as mobile phones were to telecoms.

A couple of graphs that have come to our attention in recent days illustrate the problem – and the challenge – in different ways.

The first comes from Bruce Macfarlane, at energy and carbon market advisory firm Exigency. It seeks to estimate the impact of the anticipated growth of solar PV in Australia – on the demand profile on the National Electricity Market.

Australia has just over 1.5GW of solar PV installed on rooftops now – so there is little apparent impact on the NEM as it stands. By 2020, when the percentage of households with solar PV is expected to treble from around 7 per cent now to 19-20 per cent, the impact is significant.

By 2030 and 2035, it takes a large slice out of the generators’ earnings pie – an impact that has already been established in Germany, which has 25GW of solar PV and counting, and which we documented in our piece “Why generators are terrified of solar.”

It should be remembered that the profit projections – and the debt repayments – built into the Australian generators’ financing models depend almost entirely on the “super dividend” they receive when peak demand surges and the cost of wholesale electricity rises up to 10-fold for just a few hours of the year. A large deployment of solar PV will quite literally throw a spanner in those works.

The second graph highlights the concerns of the network operators, who are caught in the crossfire between centralised and distributed generation, because they are no longer too sure where their future revenue might come from.

This graph comes from a VCEC submission from electricity distributors Citipower and Powercor. It illustrates what happens with tariffs and rooftop solar. Citipower and Powercor say the pink line represents the electricity generated, the purple line the effective subsidy by other consumers, but then it describes the blue area – which represents the electricity generated by the rooftop system owner – as an “indirect subsidy,” because it represents the usage that the network is unable to recover from PV customers during the current regulatory period. i.e. the implication is that owners of distributed generation are being subsidised for not using the grid.

Citipower and Powercor use it as an argument in favour of gross tariffs rather than net tariffs, attempting to tie the owners of distributed energy to the grid, and their electricity tolling booths. Essentially, what it is saying is that the current tariff structure – with a modest fixed component and associated variable component – is unsustainable if solar PV installations continue at current numbers. They need to find a way of maintaining a network with an increasing variation of demand and supply, both in quantum and location. In some ways, it is a similar conundrum to that faced by fixed line telephony a decade ago – how do they spread the cost of increasingly expensive infrastructure among an ever decreasing number of users?

This, though, is just one part of the jigsaw that regulators and market operators are going to have to get on top of, as solar PV and other distributed technologies – not to mention the storage possibilities of electric vehicles, and the savings of energy efficiency measures – become increasingly disruptive to the incumbent oligopolies. So far, they – or more particularly the pricing regulators – have shown little gumption in taking on the established interests and, in the case of VCEC, simply wanted to handball the connection issues back to Canberra. But at least they raised them.

Same old, same old

It was interesting to note in some submissions to VCEC that some old chestnuts are still being traded around as fact, despite evidence to the contrary. Of particular interest was the submission of brown coal generator Loy Yang A, dated just one month after its announced purchased by AGL, which had already adopted the rhetoric of its putative owner, labeling solar FiTs as “inequitable” and “regressive”.

It also quoted the Productivity Commission’s report that put an “abatement” cost of solar PV at up to $1,043/t. Sadly, it seems to have missed out on the PC’s admission in December that it got these figures badly wrong, and the abatement costs were no more than $497/t, and possibly as little as $177/t – and, others would argue, rapidly decelerating and effectively zero when there is no FiT at all.

Just to put the costs of the various green schemes in perspective, here’s another graph from Exigency highlighting the relative inputs from transmission, distribution, retail costs, and the renewable energy target, feed-in tariffs etc. It shows that household PV subsidies have had only a minor impact on household bills and feed-in tariffs are expected to add 1 per cent to average tariffs in 2013, according to the Australian Energy Market Commission’s own forecasts.

And here’s another graph from Exigency, which we publish simply because it is a really good summary of where the states are at with their feed-in tariffs, and it’s a mighty handy reference. Victoria, obviously, is about to change. And keep a watch out for Queensland.

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  • Beat Odermatt

    It is not the first time new technologies changed the economy. When cars arrived and became affordable, railway companies either had to change their operations or they went “belly up”. “Democratisation of transport” caused massive changes and “Democratisations of Energy supply” may cause similar changes. Should we stop changes because somebody may lose some of its monopoly power? We have now an NBN to overcome real or assumed monopoly power of a company in the area of communication. Should we have a national electricity distribution system based on the NBN model?

  • Rob

    The relatively more generous QLD FiT has resulted in QLD installing rooftop PV at around 4.8 times the rate of NSW on a per capita basis. However the costs of the FiT are essentially borne on a per capita. So NSW electricity consumers are funding rooftop PV in Queensland. While the amount per kWh might be small when summed across a state its a large number and we can estimate it.

    The SRES will cost electricity consumers $1.76B in 2011. 40% of that will go to QLD which is double the per capita amount since Qld has 20% of the population.

    This means that the QLD effectively gets a $352M inflow in 2011 from the other states due it taking more than its per capita share of the SRES.

    My guess is the other state premiers don’t really understand this.

    • Rob

      Sorry that should have been 2012 not 2011 above.

  • Rob

    With 1/3rd of the Australian population NSW pays 1/3rd of the cost of the SRES which in 2012 is $587M.

    With 1/7th of the installations NSW receives 1/7th of the SRES income which is $251M.

    So the SRES results in a net outflow from NSW of $336M in 2012 due its relative under performance in installing rooftop PV. I wonder if Barry O’Farrell understands this. I am sure he wouldn’t happily hand $336M to the other states.

    2013 will be another big year for the SRES with STC registrations accelerating far above expectation resulting in a much bigger target in 2013 to mop up the excess. So it will be another similar SRES driven outflow from NSW in 2013 again. Will Barry let this go through to the keeper?

  • Warwick

    2 questions…

    1) Could the generators who are terrified of solar please make yourselves known?

    2) Also which generators in the NEM were “… built into the Australian generators’ financing models depend almost entirely on the “super dividend” they receive when peak demand surges and the cost of wholesale electricity rises up to 10-fold for just a few hours of the year.”? (Good luck getting finance on a project like that!…i.e. uncontracted waiting for a price spike)

  • Derek B

    I’d like to see an analysis of the long term impact. If peaking plant is less profitable, won’t that mean a reduction in relative supply, increasing the average spot price in the evening?

    • Jonathan Maddox

      Almost certainly, yes. The evening peak is going to become harder to manage, but since it’s going to be shorter than the present broad middle-of-the-day peak, it might be a little easier to manage : some large consumers can probably handle being paid not to use power for a couple of hours after 5pm, much more easily than they could handle being paid not to use it for the hours 10am-4pm.

      This study suggests that in some markets overbuilding wind is cheaper than building gas peaking generation … since many Australian wind resources peak in the evenings, this might become a no-brainer.

  • Jonathan Maddox

    Please use png’s for graphs not jpg’s, the compression artifacts are very ugly.

  • Ross McNeilage

    Beat’s analogy is very good, evolution theory in a commercial world, adapt or die. See Kodak, or watch Nokia.
    I see the end game as every home and factory having their own RE systems and storage, so that there is no need for huge infrastructure imposts on the utilities or their customers, however the utilities are going to become less relevant, like the railway companies.

  • I think in South Africa a lot of solar water heaters are being implemented to cut the household cost on electricity but not to generate current itself. How does this impact the outcome as there will still be a need for “generators”

    • Jeremy

      Solar hot water and solar power, very different.

    • Clinton Clark

      Jamie yes in SA they add plenty water heaters, only problem its done in a haste, they face in all directions except the correct one and if they do its in the shade of a tree. Most new homes have to have the prepaid meters fitted, they do not work with a PV system for net-metering. They main reason that it wont get political support is that, 1 rooftop, private grid tied generation is not easy to admin funds to carder pockets. 2 It will in-power the rural communities to be less depending and therefore less dependent on carder interventions!

  • Scott

    Solar Thermal with storage would be a useful complementary generating source to cover (and flatten) the 18-21:00 evening peak (time-shifting to meet demand).

  • Perhaps I have missed something Giles. The electricity generating and distributing industry largely makes money out of selling energy not capacity. Let’s suppose that rooftop solar PV does rise to 4.5 GW by 2020. In Australia we consume about 700 GWh of electricity per day over a year. 4.5 GW of solar PV will generate on an average day about 16 GWh. This is only 2.3% of total electricity. Please explain how that can make a “significant impact”.

    • Giles Parkinson

      Because it will producing most of that energy at the very time that the current generators normally get a large part of their revenue – when it’s hot and sunny. If it was 2.3% spread evenly over the whole year then it would’t impact much at all, although the small fall in average MWh prices in the last year appears to have been devastating enough to highly leveraged balance sheets.

      • Beat Odermatt

        I fully agree! Go back to the late 90s when we had widespread serious blackouts in Adelaide and many other areas across Australia. A friend of our daughter almost died because her life depended on medical support system which required electricity. During the blackout the lady had to be rushed to a hospital in an ambulance. The ambulance hardly could move because the traffic lights did not work and the lady almost died on the way.
        My wife and I were working at the time at a coalmine. The manager called for a staff meeting a few weeks later and announced how “lucky” we were and that we all would get a big bonus because of the high power prices. My wife confronted the manager and told him that she was disgusted about his attitude to human lives. She said bonuses should be earned for doing a good job and not because of misfortune of others. Her comments were career changing in nature for both of us!
        Solar PV systems seem to be having had an impact on the “well earned” bonuses of some workers and companies with massive debts. Should we lose sleep over the fact that we have fewer black outs and that a few well paid workers are not getting a big bonus on top of their good wages? I may lose sleep over the fact that the current carbon tax may bail out companies from bad investment decisions made during time of massive peak price spikes.

      • Giles I think you will find that most generators enter into forward contracts with retailers and large users so they get paid the contract price, irrespective of the actual spot price. There may be some peaking plants that rely on the spot market but as I understand it this is a minority of total trades.

        • Giles Parkinson

          You would think so, Martin – but not entirely. The reasons I cited were those provided by Loy Yang A which move from a profit to a loss this year – movements in the spot price caused by lesser demand than forecast and the impact of renewables on the wholesale price. European generators, particularly Enel, cite a similar situation – which is why they have managed to convince the Italian government to put a MW cap on solar.