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Utilities want higher charges to shade business model from solar

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The electricity supply industry has resumed and intensified its efforts to change the tariff system for rooftop solar households, in a bid to protect revenues that are falling and their business models that are eroding because more customers are producing their own electricity.

A new discussion paper was released this weekend, “exclusively” to News Ltd newspapers which enthusiastically took up the chance to demonise the cost of renewables once again.

The upshot of the paper is that households with rooftop solar are “avoiding” network costs, and these in turn are being passed on to other users, which the electricity supply industry says are mostly less wealthy households.

The ESAA estimated the current total of “avoided” costs at $340 million, or around $30 per household.

To put this into context, this sum is – according to the ESAA’s own data – just one eleventh of the cross-subsidy paid by households with no air conditioning.

The ESAA estimates these air con network costs at $330 per household, and it is certainly not “hidden”, because it has been one of the key reasons why networks have been “supersizing” their grids over the last few years, at an aggregate cost of nearly$40 billion.

And herein lies the contraction in the ESAA position. Does the ESAA suggest that air conditioning households should be hit with higher fixed tariffs to pay for network extensions? No, of course not, because the increased use of air conditioners adds to the revenue pool of the electricity industry, and they want to get a return on their grid investment.

The use of solar, however, detracts from the incumbents because rooftop solar households draw less electricity from the grid – leading to the now well documented “death spiral.”

The ESAA wants to arrest this spiral by lifting fixed charges or introducing tariffs for solar households to maintain the revenue pool and protect its business model. This has already begun in several states, and to make itself look like an innocent bystander, the industry has brought the violins to play a song of woe on behalf of the least well off.  But this is not about protecting less wealthy households, it is about protecting the business model of the utilities.

What seems inevitable however is that the industry will one day soon need to change its business model of face the same decline as fixed priced telephony or printed photos. They are fast approaching their Kodak moment.

The ESAA complains that rooftop solar households can cut their network charges by 62 per cent (not to mention their overall energy costs), and says the costs of providing the network are “mostly the same or even more expensive as a result of rooftop solar energy”.

But they need not be. It could, for instance, be more effective to encourage the use of battery technology that would smooth out the output of solar panels, and extend that output into and across the early evening peak. Germany recently introduced a feed in tariff to encourage battery storage. It is the first country to do so.

Solar is causing problems for traditional utilities because it is taking revenue away from the day-time peaks. Extending rooftop solar’s reach into the early evening, and combining it with smart technology, would remove the evening peak as well – and with even more revenue from the incumbent generators, network providers and retailers. But it would certainly reduce costs for customers.

And this is the problem facing the incumbent utilities, as we point out in the article today from SunPower’s analyst briefing last week. Basically, SunPower is saying that the solar industry has barely scratched the surface of the $2 trillion global electricity industry, but intends to “change the game” by introducing battery storage and energy management systems. SunPower, incidentally, owns a share in a small Australian renewables-focused electricity retailer, Diamond Energy.

The Edison Electric Institute, the US equivalent of the ESAA, said in a recent report that solar is changing turning the incumbent electricity industry on its head. It noted that the ability of rooftop solar, battery storage and energy efficiency programs to reduce demand from the grid would likely translate into lower prices for wholesale power and reduced profits. Worse still, customers were just as likely to “leave the system entirely” if a more cost-competitive alternative is available.

The ESAA, on the other hand, seems to ignore this, and simply rails against what it sees as added costs, while refusing to acknowledge the benefits of rooftop solar and distributed generation – both real, as the Melbourne Energy Institute’s Mike Sandiford has pointed out, or potential, such as the $15 billion of savings outlined by the likes of the Institute of Sustainable Futures.

ESAA’s paper, for instance, also reported that the cost of feed-in tariffs is costing around $680 million, which when added t the “avoided” network costs, adds up to a nice round evil number of $1 billion.

The reality is that the retailers have actually done quite well out of the feed-in tariffs, as even the pricing regulators have noted, and they have accelerated this “death spiral” by profiting from a 25 per cent mark-up on the cost of renewable energy certificates, and from being able to sell electrons bought from one households for 6c/kWh to the neighbouring household for four or five times the price.

The retailers, as RenewEconomy noted last month, are also profiting handsomely for mark-ups to electricity bills that allow them “headroom” – or more revenue – so they can offer discounts elsewhere. Even IPART concluded that this meant that households were paying $138 a year more than they needed to. As Kodak and so many other industries can tell us, short term greed is not helpful to long-term business models.

The Clean Energy Council, which is partly funded by some ESAA members, noted on Sunday that the ESAA proposal is like suggesting 20 years ago that people using email should chip in for stamps, the solar industry said today.

“It is no surprise that some of the big players in the traditional power industry are clutching at straws …  to try and discourage the competition they are facing from the emerging solar industry,” said CEC deputy chief executive Kane Thornton.

“It is ridiculous to single out solar power users, who are only one part of a nationwide movement by consumers to take control of their power use and save on the cost of living.

“Suggesting that people who have responded to government incentives to install more efficient appliances or  generate their own clean energy are somehow cheating the system is a self-interested grab from old energy businesses looking to turn back the clock to preserve their out-dated business models.”  

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  • patrickg

    “Worse still, customers were just as likely to “leave the system entirely” if a more cost-competitive alternative is available.”

    Indeed, the great thing is, the higher power companies jack their prices, the faster people will opt-out of using them – and the grid as a whole as batteries continue to fall in price.

    • Miles Harding

      The alternative doesn’t need to cost less, only be affordable. I suspect that the large PV Installations we are seeing are more a statement of sustainability than a cost reduction effort. Even taking away generous feed in tariffs hasn’t destroyed the PV installation industry.

      I look forward to my own exit from the grid. I would probably stay in if they offered a service model that I could agree with, but it looks like the opposite is happening.

  • Warwick

    This article and many others love to paint this as a “David and Goliath battle” and use plenty of profligate double quotes to emphasise their “point of view”. The real issue is that energy consumption by consumers is not reflective of the costs on the network, rather their maximum demand is. You have to remember that the regulators legislate that network businesses earn a specific return for their capital base so in a sense it doesn’t really matter to the network businesses how they earn their revenue i.e. fixed, kWh or demand charges. The ESAA are simply pointing out the obvious i.e. kWh usage is becoming less appropriate as a means of billing consumers as some consumers consume less kWh relative to their maximum demand than previously. In the interests of equity, this needs to change. This might upset those who have initially benefitted from this mispricing or those who wish to sell more product such as solar panels. The ESAA document reads ” One way to make the way we pay for electricity more equitable is to change network tariffs so they better reflect underlying costs. A higher proportion of network charges could consist of costs that are related to peak demand or fixed, and a lower percentage could be paid through simple variable (use) charges (c/kWh). This would better align prices charged with the cost of supply and be fairer for all users. Over the long term everyone will be better off if we get electricity pricing right.”

    • Giles Parkinson

      Gee Warwick, you’re slow today. You normally are first person to post to defend the incumbent utilities against solar pricing. Yes, it seems obvious from the point of view of ESAA. The other obvious thing – as the utilities know themselves, and is pointed out in the EEI document, and the AGL one – is that the higher the charges you charge the more incentive you provide for consumers to find other means. In the long term, it’s self defeating. That’s the point of this and the other articles.

    • Chris Fraser

      Legislate that network businesses earn a fixed rate earn a specific return for their capital base ? Why don’t we start right here by unlegislating them. Otherwise the state government has to fork out the difference and that’ll annoy the energy minister. Then we could allow that consumers that choose to consume less can do so without penalty ( well it is a state-sponsored objective so why not ? ). This then allows for a flexible investment model where investment is based on actual demand not what they want to sell us.

      And then the magic of TOU pricing. If tariffs are to be reflective of demand, they’ll need to increase the number of time brackets and price each one proportionately to demand and inversely proportionately to dispatchability. Otherwise I like other suggestions like charging per kW of demand x time.

      If these reasonable provisions can be established, then i’m looking forward to Warwick’s tariffs.

  • Giles

    Gee Warwick, you’re slow today. You normally are first person to post to defend the incumbent utilities against solar pricing. Yes, it seems obvious from the point of view of ESAA. The other obvious thing – as the utilities know themselves, and is pointed out in the EEI document, and the AGL one – is that the higher the charges the more incentive you provide for consumers to find other means. In the long term, it’s self defeating. That’s the point of this and the other articles.

    • Warwick

      Sorry for the delay Giles, the disqus thingy was playing up. 🙂 You’re spot on to suggest that increased network pricing will incentivise some to disconnect from the grid but much of the benefit people have recived today from PV is simply because the network pricing model is broken. A demand charge is more cost reflective and will charge according to use of the network so those who own air conditioners will pay more (which they should). So, what you’d likely have is that a demand charge would make less of a benefit to PV owners than exists now but if at some point that electricity from PV and storage combined is less than the cost of network and grid electricity then people will disconnect.
      What this shows is that we need to move away from kWh charges to be more cost reflective and equitable to all consumers. Advocating for continuation of a kWh charge simply so PV owners have a benefit to the cost of those without is inequitable. Essentially, more consumers have been switching to PV and have taken advantage of this broken pricing model. If the charges are re-adjusted for cost reflectivity it is true that this will slow up the take up of PV alone (and hence all the excitement about proposed changes) as they will only potentially save on energy not energy & network. This does not however prevent the possibility that eventually PV + domestic energy storage could be competitive with grid electricity + network charges, which would also mean increasing charges but over a smaller customer base.
      It’s simply no more fair that consumers without PV subsidise those with PV by reduced network charges than those who have airconditioning being subsidised by the rest of us. It is just an issue of equity rather than supporting networks, generators, retailers or even PV sellers (all of which have their fair share of vested interests).

    • Mick

      Warwick is dead on the money. Cost reflective pricing is sorely needed in retail electricity tariffs (for everyone, not just PV owners). A per kW capacity charge along side a per kWh energy charge would go a long way to removing some of the distortions that exist (particularly if they were both priced on a time of use basis, or at least reflective of time of use costs).

      And this has got nothing to do with supporting the “evil” incumbent industry supply industry (in fact this does not really affect generators). This is about users paying the appropriate cost for having energy energy delivered to their house (or indeed the costs of delivering energy from a solar PV system).

      It may indeed lead to more people going off grid – which would be great thing for everyone, if these were in costly-to-service connections such as fringe of grid / rural locations.

      Cost reflective prices are in the long term interests of everyone – including PV owners.

      • Louise

        “Cost reflective prices are in the long term interests of everyone – including PV owners.”

        Even for obsolete technology?

        There are two schools of thought, those who thing we need centralized power generation and an electricity grid, (the incumbent regional monopolies), and those who believe structures should be build to be energy self-sufficient, which is technically possible already today.

  • Mike R

    I think the key issue is how the ESAA ‘equitable’ is
    defined. If I am a solar customer (apparently avoiding $30 network costs) with
    no air conditioning and am subsidising someone who has (receiving $330
    cross-subsidy), then if we got rid of cross-subsidies then I should be $300
    better off.

    The Victorian enquiry into feed-in tariffs called the 8
    cents solar tariff ‘fair and reasonable’ which only made sense to one group of
    people – the retailers and no-one else. They made a big issue of ‘cross-subsidisation’
    via the feed-in mechanism to justify this, but totally failed to mention air
    conditioners, or ‘headroom’ or some of the other market tweaking that goes on
    apparently.

    In the future, one could hopefully imagine a grid that doesn’t
    rely on pricing electricity flowing from a few large power stations based near
    coal fields. Instead it would be more of a matrix that doesn’t need to carry
    huge volumes of electricity because generation is distributed, and doesn’t’
    have to travel large distances. So, supply is a new model of renewables with
    base load temporarily supplied by the cleanest old technology until it can be
    mothballed.

    Although I disagree with 95% of what Warwick writes, the
    grid does need to be maintained, unlike the utilities that have clung to polluting
    electricity production for decades and hardly spent a cracker on upgrades or
    pollution control. Therefore I would suggest that the market should determine
    how many utilities can be supported, AEMO makes sure that it all works as
    cheaply as possible for the consumer and that a new model of funding for
    electricity distribution is created. I’d suggest we cut out the middleman and
    pay the distributers directly.

    What I would think is ‘equitable’ is that there
    would be a sliding charge based on peak demand and kWh consumed. As a solar
    customer I would like to remain connected to the grid, because then I don’t
    have to buy a generator, or have an over-sized system to meet winter demand.
    When we talk about getting the price right we are talking about maintaining the
    correct infrastructure, not subsidizing generation models that have reached
    their use-by dates.

  • Sean

    I love how people in this discussion can, on one hand say, its terrible that there is subsidies for AirCon, and then on the other say we should keep the subsidies for Solar. (in so far as they remove consumption but NOT peak (evening) demand)

    I’m thinking Warwick has the right idea. Price the power mostly on the capacity (peak demand) provided. With a little bit of intelligence, PV owners can have a small battery bank to trim their peak useage, and everyone benefits from lower marginal power costs.

    Go one step further, and change the Kw/h charge to a floating spot price, allowing residential users access to the electricity market (NEM) – Suddenly all electricity infrastructure is running close to 98% use, at all times.

    • Marc Talloen

      Add one more step: why not having a FIT composed of

      a) a fixed component representing a base amount per kWh to fulfill pay out of subsidies committed to in previous contracts agreed upon by utilities and authorities to attract investment into PV.

      b) a variable component representing a floating spot FIT price per kWh that is linearly correlated to the floating spot price charged per kWh consumed.

      In other words, as a solar user I am naively hoping that utilities and authorities would honor previous commitments but I do understand their problem of peak capacity loading of network and as a private person I am willing to invest in a small battery bank that would help me to be less dependent on electricity from the net at evening peak times and eventually supply power to the net when demand is at its peak.

      Private and commercial PV owners should be encouraged to participate in “peak shaving and valley filling”. Germany has good reasons to subsidize and encourage energy storage at private and commercial level!

  • It is of course true to state that there are hidden costs with solar, but there are also hidden benefits – any claim of one is not valid without documenting the other. Virtually all solar addition in Australia to date have improved power quality, eliminated summer brownouts, reduced network spend, and contributed to reduction in demand and so the need for any new capacity in Australia for up to 10 years. I would suggest a thorough analysis would reveal the benefits outweigh the costs and are keeping prices down.

    Other articles document it well from an energy efficiency, solar production, and solar meets demand
    http://reneweconomy.com.au/2013/summer-on-the-nem-what-the-extreme-heat-didnt-do-to-demand-76173 and here
    But utilities not passing on savings –
    http://reneweconomy.com.au/2013/power-prices-beating-the-peak-without-punishing-the-poor-48420

    And in response to Sean, I don’t believe anyone here is saying subsidies should be ongoing for renewables. Certainly, subsidies should not exist for mature technologies, it only prolongs retention when new replacement tech comes to market that doesn’t benefit form the same subsidy – to add further subsidies from the tax payer to renewables to allow them to then compete with existing tax-payer subsidised tech such as fossil fuel is in my view perverse http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/2011-2012/FossilFuelTaxes.

    There is logic to providing subsidies to the market where you are trying to engender change by bringing new technologies into play, but overtime they too should no longer be subsidised. The presence of subsidies and the absence of cost reflectivity is economically inefficient and is holding up the transition to the better, cheaper cleaner energy that renewables will provide.

    • Sean

      Ray, I was referring to the subsidy implied in the ESSA report, regarding higher ratio of evening peak demand to overall consumption, hence the suggestion to move to a spot price for power based on NEM price + a multiplier determined by infrastructure utilisation to the customer

      This would require real time monitoring of infrastructure each step of the way, a real time meter at each consumption point and a little bit of computing power to determine the spot price at each metering/monitor point. Not technologically unfeasible today

  • James Ray

    Also needed is better pricing signals, (e.g. a spot price, critical peak pricing, or a spot price with a cap instead of the standard fixed tariff) appropriate metering technology and a whole suite of policies to create the right legal/market/regulatory framework for energy service companies to enter the market.