Why solar households should learn to love demand tariffs

File this one under Tough Love…

Two years ago the Total Environment Centre joined the Australian Energy Regulator in defending the its decision to reject a bid by SA Power Networks to introduce a solar tariff.

It would have resulted in solar owners paying more for their grid imports on the basis of what the network called their ‘less favourable load profile.’

We won, but the judgement left open the potential for SAPN or another network to  introduce a tariff that discriminates against solar households, if it was framed differently.

No network has tried since then, but last year we witnessed the AEMC seriously consider the option of changing the rules so solar owners can be charged for the privilege of exporting energy to the grid.

The reaction the solar industry, advocates and owners was swift and strong, but they are about to have a closer look at it again this year, starting next month.

So not only is it important for solar owners and advocates not to take anything for granted (the price of energy liberty is eternal vigilance).

It is also important to take a holistic and balanced approach to the costs as well as benefits of rooftop solar for the market as a whole – wholesale, networks and retail, as well as other, non-solar consumers; and the environment too.

The benefits of solar are many.

Apart from the financial benefits to individual owners and the environmental benefits to everyone, the ‘whole of system’ pluses include:

reducing early afternoon peak demand in business areas;

reducing wholesale prices by lowering overall demand (the merit order effect);

and reducing the need for expensive infrastructure to bring centralised generation to our homes and business from hundreds of kilometres away.

But we still need to make sure that any negative impacts are not borne disproportionately by other households which cannot, for financial or other reasons, install solar (and batteries).

Let’s focus now on the costs. Even without the premium feed-in tariffs previously offered by state governments, there are a few:

  • The STCs now available for 13 years under the RET, which retailers pay for but which they then recoup through all customers’ bills. (The total cost of this program is running at around $500 million, or around $50 per customer, per year.)
  • The cost of rectifying technical issues for networks caused primarily when there are net upstream flows to substations historically built for downstream or one-way energy flows. (Evidence of the scale of such issues is scant, but the AEMC made much of them last year, so they need to be addressed.)
  • The fact that while networks recover less revenue from solar owners, due to their lower overall grid imports, they may still have roughly similar peak demands, so cost networks a similar amount in infrastructure spending. (Modelling for the AEMC a few years ago put the cross-subsidy from non-solar to solar customers at around $200 per year. But see this excellent paper from the CEEM team at UNSW for a different view.)

If you agree that the energy system should be decarbonised not only quickly but fairly, there are solutions to each of these costs.

For instance, there is a good argument for recovering RET costs through the taxation system rather than through energy bills, so that those who can afford to contribute more do so.

And there are some relatively cheap and simple solutions available for technical issues such as voltage and frequency fluctuations; the new inverter standard is already helping here.

The third issue relates directly to network tariffs.

Under the revenue caps that operate throughout the NEM, if networks recover less revenue from solar customers, they are entitled to increase the tariffs for all consumers (solar and non-solar) to maintain their revenue.

This is a major reason why networks – and retailers – have been ramping up their fixed charges in recent years.

If they can’t recover their regulated revenue through variable energy charges they’ll get it by increasing your daily fixed charge.

More on this in my final article next week.

Nevertheless, instead of ramping up fixed charges, the tariff/revenue issue can be largely overcome by moving consumers onto demand tariffs.

But first, some background.

There is much debate about when and where critical peaks occur on networks.

It varies, but basically, on hot summer (and, occasionally in the southern states, cold winter) late afternoons and early evenings in residential areas; earlier in the day in predominantly commercial or industrial areas.

Peaks can also vary according the level of the system. That is, the peak on my street may be different to that of the local substation, zone substation or transmission system peaks. But increasingly, critical peaks occur in residential areas in the early evening and are driven by high aircon loads during heatwaves.

Network data shows that solar owners have lower daytime grid consumption (obviously). And that helps to delay the network-wide afternoon or evening peak. However, there is conflicting evidence about but whether solar reduces the height of the evening peak in residential areas.

Under some scenarios PV does appear to reduce critical peaks, constraining future costs for non-solar as well as solar consumers.*

This mitigates against the idea that PV owners are being cross-subsidised – an important point. On the other hand, I’ve seen one network claim that its solar households actually have higher evening consumption than non-solars, but this makes little sense.

On balance, let’s say that the evening peak demand of solar households appears, on average, to be not much different to similar-sized non-solar households. So the revenue recovery issue remains.

Fortunately, there is a ready and equitable solution.

Assuming you accept the argument in my previous article that well designed demand tariffs –

that is, ones that encourage consumers to reduce their demand at the time of the network’s critical peaks rather  than your or my household peak

– can help to constrain peak demand and thus reduce the cost of future infrastructure investment, solar and non-solar owners alike can pay their fair share of future costs by all being on a demand tariff. Everyone would then pay the same amount per kilowatt for their peak demand.

So on a demand tariff, the network may still lose on daytime revenue from PV households, but at least it is recovering its ‘future’ costs equitably.

(Well-designed demand tariffs should also ensure that owners of inefficient and ducted aircons will no longer be cross-subsidised by others to the much worse tune of $350*-$700** per year.)

This might sound reasonable, but it will mean that solar owners who don’t shift their load or have energy efficient appliances will pay more compared with the ‘anytime’ energy tariffs many are currently on.

But solar owners who can shift some load away from the evening peak, or who have aircons and heat pump water heaters with high coefficients of performance, will come out ahead.

Ditto battery owners – although a future with a high uptake of distributed batteries is likely to see the peak demand problem disappear (unless EV owners cause another evening spike).

The problems for networks will then be even lower cost recovery and – as SAPN is already facing – ‘negative load’ in the middle of the day, as the ‘duck’ (curve) starts to sink below the waterline of zero demand.

In the meantime, networks are increasingly likely to put all new solar customers onto time of use or demand tariffs. My advice is to take up the challenge and take advantage of these new tariffs – if and when they are better designed than most of those currently on offer or proposed for the five years from 2019 or 2020.

In return, though, we should expect more of networks:

  • Consumption tariffs should recognise the benefits of PV exports in delaying and possibly reducing peak demand.
  • Demand tariffs should be properly cost reflective and easy to understand and respond to.
  • Make better use of solar exports, for instance by moving overnight controlled loads into the middle of the day to soak up excess solar (‘solar sponge’ tariffs).
  • Not limit exports where local feeders and substations are not facing imminent constraints.
  • Introduce lower network charges for local use of the system.
  • Capital and replacement expenditure forecasts should take account of the opportunities for network down-sizing.
  • Put more effort into demand management programs to reduce peak demand – most obviously, by incentivising new solar owners to face their panels west. They could also encourage the uptake of more energy efficient aircons with direct load control (as Energex has done).

Sound fair?

* According to the Productivity Commission in 2013.

** According to NERA Consulting for the AEMC in 2014.

This is the second in a series of articles. You can find the first here; The long and winding road to tariff reform

Mark Byrne is Energy Market Advocate at the Total Environment Centre.

Thanks to Craig Memery, Rob Passey, Shani Tager and Dean Lombard for feedback on the first draft of this article.

Comments

18 responses to “Why solar households should learn to love demand tariffs”

  1. Robert Westinghouse Avatar
    Robert Westinghouse

    The major issue is the government sold the energy industry to PRIVATE enterprise. If there are any equity issues the government needs to compensate ordinary Australians for the 15 plus years of price gouging by private power companies. I have no sympathy for the Chinese, Singaporean, French etc…. power companies who have made lots of profits and exported them back to their homelands. I say bring on PV and batteries and let the power companies DIE….

    1. MaxG Avatar
      MaxG

      Exactly what I am saying… but then, people do not care.

  2. Ian Avatar
    Ian

    These issues are 4 or 5 years old, vomit doesn’t taste any better when it’s stale!

  3. Chris Fraser Avatar
    Chris Fraser

    My worry is that they’ll take the TOU tariffs away and have some awful broad banded middling tariff over most of the day, like they do in Victoria.

    1. MaxG Avatar
      MaxG

      Of course they would… and have (as you say) done so in VIC. Splitting a supply chain into specialised businesses, will increase the overall cost of the end product. Basic economics.

  4. cres Avatar
    cres

    I agree that demand pricing is an appropriate response… and that priced correctly (i.e. not simply a blunt fixed charge increase), demand pricing will provide incentives for better use of energy during peak periods, as well as hasten the uptake of residential storage. Note that residential storage (as well as solar) represents a very large private sector investment in energy infrastructure, which will have large efficiency impacts in the medium and longer term, as peak network infrastructure expenditure is reduced (in a sense, network owner expenditure is being displaced by customer expenditure). However I don’t agree that network companies (private or otherwise) should automatically assume they can raise prices to recover their investments and returns on those investments. Regulated infrastructure owners face market risks, just as competitive businesses do. They typically get paid a handsome market risk premium for bearing such risks. If peak network infrastructure (or non-peak infrastructure for that matter) faces falling demand – in this case due to technological change in the market they operate, then this represents a clear market risk. Previous investment decisions were made (or should have been made) with regard to this risk. Revenues reduce and asset values fall. Regulators must move away from revenue cap tariff setting and recognize that some asset investment is stranded. This is of interest in the West where the economic regulator is in the process of making a determination on Western Power’s next 5-year access arrangement. Western Power acknowledge that the demand for their services (both total demand and peak demand) is decreasing, yet are requesting tariff increases to make up their revenue shortfalls. It will be interesting to see how the regulator responds.

    1. Mark Byrne Avatar
      Mark Byrne

      That’s a valid argument re under-utilised or stranded assets. My article took for granted the current regulatory framework. We had a good look at asset writedowns a couple of years ago. Im not an economist but it was very difficult to see an easy way to do this without prompting cries of sovereign risk, etc.

      1. cres Avatar
        cres

        Not a ‘sovereign risk’ Mark… but a ‘regulatory risk’. Regulators in Australia are (supposedly) free of government intervention (it will be interesting to see how the WA ERA treats the state-owned network operator in the current access deliberation). The point is that network investors get paid a premium to accept such risks (and spend a small fortune on lawyers and economists to maximise this market risk premium). If they prefer a low-risk or risk-less investment, their returns should reflect this. This is an important part of your argument for demand based tariffs. If networks are to recast their tariff structure – which both you and I argue that if done correctly, will lead to long-term efficiency gains; should they do so in a way which allows them a full return on investment (maintaining their revenue cap)… when in hindsight, their investments have been less-than-efficient due to technology change (a market risk). Of course, networks face ever decreasing revenues as behind-the-meter technology eats their lunch – and the kicker is that truly efficient demand pricing will only hasten this process. An invidious position for network operators and regulator alike!

  5. MaxG Avatar
    MaxG

    > “I’ve seen one network claim that its solar households actually have higher evening consumption than non-solars, but this makes little sense.”
    — In my books it does. Say you did not use A/C much because of cost; savings due to solar during day time will allow you to spend the savings on more comfortable (increased) A/C use later in the day. Or, more generally speaking, savings made with solar are spent during non-solar hours.

    I find the whole peak demand business a furphy; like telling people, not to drive during rush hour. It is not the people’s fault, but the problem of standard work hours. shifting standard hours will further negatively impact social cohesion, be it in the community or family setting.

    My point has always been to get rid of the leeches (retailer). They add no value other than funnelling profits into private coffers; where it state-owned it would flow into public coffers.

    Look at the cost shifting that is rightfully happening: meter installation / reader cost from distributor to retailers.

    GenTailers are even worse, as they create the same supply chain that existed under public ownership, now maximising profits even further — which is evident by the high cost of electricity to the consumer. — We are all being shafted by the free market, which will only benefit the corporations.

    Any privatisation of public goods should be prevented; and where possible reversed… but this would be democratic, a long lost cause in today’s fascist world.

  6. Mike Dill Avatar
    Mike Dill

    Peak pricing will drive more storage with solar. It will kill the peak, and maybe the utility.

  7. Jon Avatar
    Jon

    A demand tariff would be an effective way to reduce some of the peak demands but I don’t think it would be a lot. Most people aren’t going to change whether they run their air conditioner or TV during the evening because se of power prices.
    Anyone with solar that isn’t on one of the early high feed in tarrifs is way better off to be running loads that can be time shifted like Hot Water or pool pumps etc to peak solar generation time and use their own power. This isn’t going to change, it is disappointing how many people don’t have this pointed out to them by their installers and still buy “off peak” to run their HWS.
    As more solar comes around into the grid it would make sense for the “off peak” period to become more dynamic, Qld has ripple control which lets the off peak be turned on and off at will, how many other states do?

    The problem I do see with demand tarrif is like a lot of changes it’s the people who can least afford it that will be hit the hardest as they are unable to respond to the change.

  8. Robert Westinghouse Avatar
    Robert Westinghouse

    Just this week Energy Australia (EA) told me the Off-Peak tariff (20cents) was being dropped and there will be a single rate 35cents (down from 36 cents) and the supply charge will rise to $1.56 a day – from July1. Viva La Batterie and PV….and hope Big Energy (foreign owned like most of the country) dies and crawls away…(I am in the bush)

    1. rob Avatar
      rob

      how the hell do you get such a rate? mine with the same company in S..A is 45 cents all the time but I do get 20% off if I pay on time!

      1. rob Avatar
        rob

        and i pay the bastards $3000.00 per quarter

        1. Robert Westinghouse Avatar
          Robert Westinghouse

          Rob…I feel your pain. This is why we little guys need to yell and scream….I pay EA $6,000 a winter to heat the place with “cheap” gas….I am in the process of changing to Sonnen Flat – you need PV and Batteries, but they charge 25cents a kW/hr….I told EA to stick it!!!

          1. rob Avatar
            rob

            mate i have 10 kw solar system but my bills still increase every year
            The alternative is to go 3 phase., build a huge new carport to hold an other 20 kw ,2 inverters and 3 batteries…..total cost approx $100k …….i simply can’t afford that

          2. Robert Westinghouse Avatar
            Robert Westinghouse

            Me too. I have 3-phase 10kW PV and 10kW Batteries and yes it stopped for a while then prices went up…..BUT the government has Ducked me and put a limit of 10kW because I live in a crappy house in a heritage area….While I have you….I got a new modem and not I cannot connect to the Inverter Fronius – I know the ip address, but it does not appear on the list in the modem – always happens on the weekend. Same with Battery…..

  9. Nick Kemp Avatar
    Nick Kemp

    I suspect that it in the near future will be easier and possibly cheaper for people to simply not be connected to the grid. Then all the power companies and networks will be only useful for hi-rises and industry as the suburban customers drift away.

    Then they might realize that in their effort to scratch every last cent out of the customer they have lost a lot of cheap electricity

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