AGL Energy describes solar household tariffs as a “scam”

AGL Energy has described tariffs that affect households with rooftop solar PV as a “scam”, and has alleged that non solar households are subsidising solar households to the tune of billions of dollars.

In an extraordinary attack on rooftop solar, AGL Energy (Australia’s largest generator of coal-fired power), said solar households were being cross-subsidised by other homes, and inferred that there was already too much solar on household rooftops.

A research paper prepared by in-house economist Paul Simshauser was first presented in October, but released to the Australian Financial Review on Monday before a wider public release. (It can be found here on the AGL blog).

According to the AFR, Simshauser said subsidies paid for by non-solar households – such as feed in tariffs and the small-scale certificates that deflect the upfront cost of systems – are a “synthetic tax”, and a scam.

“This is a scam but it’s hidden,” Simshauser told the AFR. “If you don’t fix the problem, the rot will only get worse.”

The attack by AGL Energy comes less than a week after it claimed it wanted to transform its business to help solar and storage, although its forecasts for solar and storage technology showed a much slower deployment than most people expect.

This new attack, however, is just one of many on the solar industry by incumbent generators, retailers and networks. They are concerned that the proliferation of rooftop solar – and the impending impact of battery storage – will upset their business models.

They are looking to change tariffs to compensate for a loss of revenues, as one of many strategies to limit the deployment of solar. AGL Energy, and others, have argued that the small-scale renewable target should be cut; networks have prevented solar from being installed, forced homes and business to reduce their size on their systems, imposed limits or prevented them from feeding solar power back into the grid, and paid a desultory tariff for exports, which in some states is now voluntary.

This is despite being warned that the proposals that they have for addressing the issue – hiking fixed charges – are inequitable to low-income households, go against the energy efficiency gains sought for the last decade, and will probably accelerate, rather than solve, the death spiral that will encourage more users to install solar and ultimately, disconnect from the grid.

The existence of cross subsidies has long been noted, but were never much of an issue when it involved air-conditioning, because that added to demand from the grid and coal-fired generators – and was used by networks to justify the investment of  billions of dollars to meet peak demand, and by companies like AGL to invest hundreds of millions in gas peaking plants.

Now that solar has arrived and is reducing demand from the grid, the generators and the network operators are up in arms. As the AGL paper notes: “Unlike the air-conditioner, the flow of kWh through Solar PV units reverses rather than adds to total flows, and so tariff instability has become a serious problem.”

But as the Institute of Sustainable Futures has said, that peak demand never arrived, partly because of the impact of solar, but those network costs for meeting it are very present. Amazingly, the networks are now collectively seeking approval for another $45 billion to be spent over the next five-year regulatory period.

Network costs account for around half of consumer bills, and the cross-subsidy from air conditioners (from households without them) is estimated at $700 a year, by the Australian Energy Market Commission.  But AGL Energy’s analysis waves away the cross-subsidy for air conditioners because it says so many homes already have air conditioning.

But it says that “hidden subsidies” are driving marginal investments in solar PV capacity above the (otherwise) efficient level – in other words, there is too much solar.

AGL describes these hidden subsidies as an “avoidance” of network charges. If solar households consume less from the grid, then they pay less in network charges. AGL, and other network operators, want to stop that because it is driving “marginal investments in solar PV capacity above the (otherwise) efficient level. “

Including federal and state tariffs, and its estimates of the impacted of “avoided network costs”, it puts the cross subsidy from non solar to solar households at $236 per household.

It proposes a system of “demand” tariffs that would reflect that maximum demand that a household would draw from the grid. It is based on the assumption that solar households do not actually reduce their maximum demand, because – it says – solar does not coincide with peaks.

That assumption is disputed by many, and ignores the fact that households can apply a range of devices and techniques – such as monitoring, management and battery storage – that can reduce those peaks …  Switch on appliances while the sun is shining for instance.

Some modification of tariffs appears inevitable. What upsets the solar industry is that analyses such as AGL’s, and that of the Energy Networks Association of last week – is that it ignores the benefits that solar can bring to the network. In no tariff proposal are the benefits of solar – its reduction on wholesale prices, the avoided cost of transmission, distribution or emissions reduction reflected – unlike in the US where it is a major component.

Recognition of the benefits of solar is a fundamental part of the proposal by the Institute of Sustainable Futures to calculate solar tariffs based on a ”local generation credit” or a “virtual net wire”.

Key to the ISF – and other analysis – is that consumers should not be beholden to repay forever the costs of the over-investment in the networks justified by the need for rises in peak demand that never occurred.

Yet this is exactly what AGL Energy, and the networks lobby, are advocating. As AGL Energy notes, if the demand charge is not raise high enough networks would be unable to recover their regulated revenues. This is the fundamental flaw – the incumbents are unwilling to countenance a writedown of an asset that is being undercut in cost by new technologies.