Networks to defend grid by adding fees to solar, storage

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Australian network operators have warmly embraced the conclusions from Ausgrid’s four-year, $100 million Smart City, Smart Grid program, which call for a system of “dynamic tariffs” to be introduced to control the proliferation of distributed generation, such as rooftop solar PV and storage.

The Ausgrid report, prepared by consulting firm Arup with the help of others, suggests Australia could reap $28 billion in benefits from the introduction of a “smart grid” over the next two decades.

But it also warns, in a note seized upon by the Energy Networks Association, that Australia risks $10 billion in over-investment in distributed generation if not managed properly – or if solar and storage are not subject to the “cost reflective” tariffs.

“If we stick with current electricity tariffs using outdated meters, the report predicts a more costly system with consumers paying $10 billion more than they need to, due to over-investment in onsite generation and storage,” ENA CEO, John Bradley said in a statement on Monday.

Bradley said there was a risk of higher and “unfair cross-subsidies”, if “early adopters” of new generation and storage technology passed costs to other users. “Tariff reform is essential if we are to avoid an electricity world of ‘haves’ and ‘have nots’ where those with onsite generation and storage are effectively cross-subsidised by other users, which in the report is estimated at $420 per year.”

There is no doubt that rooftop solar and battery storage present the biggest  threat to the grid operator’s business in more than a century of poles and wires – and managing this will not just be the key to the business models of those operators, but also the costs to the customers they serve.

And RenewEconomy is no fan of the idea of thousands of individual houses quitting the grid. It seems to us as a huge misallocation of capital, and dynamic tariffs could help address that – but only if they are truly “cost reflective”.

That means not designing tariff responses that seek to penalise adopters of solar and battery storage, but to address the built-in legacy costs of over-capitalised grids, built to respond to the indiscriminate, uncontrolled and heavily subsidised use of technologies that increase demand, such as air conditioners.

It’s not good enough to simply blame the adopters of solar and storage for the death-spiral. Those people will simply adopt the technology that makes economic sense for them. If the networks want to compete, they have to lower their costs.

The tables below are revealing of what the networks want to achieve by the introduction of “dynamic pricing” – a combination of a network capacity tariffs, retail critical peak pricing, or direct load control tariffs – to customers that have rooftop solar and/or storage.

The first is the residential case, where the introduction of dynamic pricing imposes charges of more than $300 a year on those with solar and or storage (the difference between the blue on the right and the pink on the left).

The Ausgrid report says this has the effect of reducing the supposed “cross subsidy” (the orange bits) from $420 to $42. Non solar customers are $156 better off, but the savings achieved by those with distributed generation are much reduced.

smart grid residential

The impact is even more dramatic with business customers, which the report recognises have even greater incentive to install distributed generation, because of the nature of their consumption, and the production and storage characteristics of distributed generation. It suggests this could reduce the “cross subsidy” by two-thirds, but increase bills for those with solar and storage by 150 per cent over business as usual.

smart grid business

That’s all very well, but what exactly is this “cross-subsidy”? It’s not really stated, but basically it reflects the sunk investments in the networks – including the $45 billion over the past five years that has drawn accusations of network “gold plating”. In brief, critics have suggested that the investment was one-third, or twice what was needed, and simply served to make the grid “bigger and dumber” rather than smarter.

This is the elephant in the room. RenewEconomy, and others such as the Grattan Insititute, have suggested that the only way that the networks can compete with the introduction of new technologies – and solar and storage is really only scratching the surface of what is available – is to consider write downs on the value of those assets.

The question has to be asked as to why these “cross subsidies” are important to solar and storage, and were not, and are not, for rampant demand boosters such as air-conditioners – the growing uptake of which was used to justify the huge investment in poles and wires that has caused most of the near doubling in consumer electricity bills.

Indeed, the entire focus on the report is to try to address the supposed “cross subsidies” of those who “reduce consumption,” rather than those who increase it.

According to the Ausgrid/Arup document, dynamic pricing would result in smaller rooftop solar PV systems (around 3GW less in total capacity) and about 1.8GW less combined heat and power in the NEM by 2034 – compared to business as usual.

By contrast, this would be balanced by around 3.5 GW of storage capacity.

The report estimates that up to $15.2 billion in avoided costs from the deployment of distributed generation and storage could be achieved through dynamic pricing. On the other hand, this means a need for increased volumes of centralised generation in order to meet consumer electricity consumption and peak demand requirements. This results in increased centralised generation costs (such as additional fuel and other operational costs) of $5 billion.

But the report also seems to be making some interesting bets. One is the idea that storage technologies will not be economic to be deployed until 2024, and that is only with “dynamic tariffs.”

Another is the assumption that smart metering – one of the key technologies that underpin the “smart grid” concept – is not made redundant in coming years by the arrival of other software, which offer controls through the “cloud’ that bypass the grid. As it is, this report suggests that smart meters may not deliver an economic return at scale for another 10 years.

Confusingly, it also notes:

“Modelling showed that despite anticipated price reductions in distributed storage devices, without changes to retail electricity pricing structures (i.e. under BAU) there will be no deployment of storage through to 2034 in Australia. Modelling clearly shows that the existing tariff structures effectively discourage the uptake of battery storage technologies.”

That’s a completely different take to anecdotal evidence of battery prices, and predictions by analysts such as those at UBS, who see solar and storage in combination offering a competitive alternative to staying with the grid.

That’s the big challenge for the utilities – how to price their service to stop a mass migration to alternatives. Slapping extra charges on solar and storage, and doing nothing about the legacy costs of an over-capitalised grid, is unlikely to be the answer.  

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  • Beat Odermatt

    How do you stop change? Henry Ford did not have to pay money to Cobb&Co. when he started producing automobiles. If a business cannot deal with the future, they cannot expect consumers to pay for their mistakes of the past. I hope to live long enough not having to look at ugly power poles.

  • Ken Dyer

    The fossil fuel power industry is fighting hard to maintain their profits. The tariff is no less than a sun tax. That said, why should I pay a tariff to spend my capital to invest in a solution to capture and store free energy from the sun. I look forward to going off grid (8 cents a KW is a big incentive!) and giving my excess power freely to my neighbours.

  • howardpatr

    Will be interesting to see what the fossil fuel industry and their supporters like Abbott and the LNP do when it becomes more and more viable to store solar energy and use it, behind the meter, for fueling your EV and heating your hot water?

  • Les Johnston

    Who pays (or who paid for) the connection cost of the large generators? Who pays for the maintenance of these connections and the HV grid which supports transfers of large quantities of electricity over the network? If rooftop PV generators are charged a connection fee, so should large generators. This fee (currently) not being paid, is a cross subsidy of the fossil generators being paid by electricity users.

  • Rory McGuire

    The fossil fuel sector seems to be completely unaware that an energy revolution is upon it. Have its executives not looked out their car windows as they drive around the suburbs? Or at what is happening overseas? With their type of thinking we would never have converted from horses to cars.
    But the big danger is: will our public servants and our politicians be fooled by this extraordinary proposal?

  • Chris Fraser

    I’m looking forward to learning more of the detail in dynamic pricing, and its influence on the propensity to buy storage.

  • Miles Harding

    Odd, No mention of the cross subsidies for air conditioner owners.

    • wideEyedPupil

      In the report you mean? Giles highlighted it.

  • Macabre

    Australia’s vested business interests are much too powerful and continually and brazenly advocate self serving solutions which are patently against the public interest.

    I’ve recently moved from Australia (where I lived for 19 years) to Germany and am making the transition from reading articles like this with my head in my hands, to reading them for light relief.

  • Surely the best shift for networks is for a capacity tariff. The driver for network investment and operations is not energy but power. This is very different to retail or generation who care little about the power demand (other than its influence on market pricing) but on the volume.

    As for “slapping extra charges” – this is an illogical kneejerk reaction from network company’s management who do not want to take a step back to reconsider the future role of electrical networks as enablers (as they have always been). Network companies should (and some have) be walking away from the old paradigm of energy flows always being monodirectional to a bidirectional power flow – with all the implications that this has for protection and operations. This is the new world that they have an opportunity to succeed in.

    The authors reference to “utilities” is somewhat disappointing however, as it fails to identify the nuances that separate the Australian NEM environment from other parts of the world with vertically integrated monopolies. The challenges of networks are very different from those of the gentailers in this brave new world we are fast being part of. It is not the networks who have most to lose (where the vast bulk of customers in Australia considering defection to off-grid would find it difficult, though not impossible, in this author’s opinion, particularly those not in rural locations) but rather the large generators (stand alone) and gentailers. The margins here are already being cut into and will continue to be nibbled away as their costs increase while the unit cost of distributed resources gets driven down. Sadly the author completely missed this, to the detriment of their closing paragraph.

  • Ken Fabian

    There’s a sound basis for time of use pricing but there has to be an open market, that doesn’t allow the available solar or wind energy to be refused or wasted in order to allow fossil fuel generation to take precedence. Incumbent suppliers have to adapt to intermittent abundance of energy with intermittent generation and see the costs of doing so passed on in their prices, not in penalties to their unappreciated competitors. The emissions benefits of burning less coal part of each day are a benefit and are a necessary transition to low emissions, with low emissions being an essential goal to be achieved, not avoided. They can’t have their cake – open markets when that suits their model – and eat it too – rejecting competition that provides energy with minimal supply costs once in place, such as solar.