How to avoid energy death spiral – and build more solar

The Australian photovoltaic industry has proposed the introduction of a new “distributed energy market” as part of a suite of measures that could avoid a potentially catastrophic energy market “death spiral” caused by reduced use of the electricity grid.

Although there has been much talk about the need for something to be done to overcome this problem and still allow ongoing uptake of PV and energy efficiency, this proposal is the first to develop a properly integrated package of measures.

The new market would allow the modern “prosumer” – households and businesses with rooftop solar and maybe battery storage – to buy and sell electricity from organizations other than their retailers. It also opens up the opportunity for network operators to enter the domestic market in what might be the most radical change in the industry for more than a century.

The “death spiral” has been a coin termed by the utilities themselves to describe the situation where revenues for network operators are reduced dramatically by the increased use of rooftop solar, battery storage and energy efficiency.

Because all these technologies mean reduced consumption from the grid, the network operators are then forced to impose higher charges on other consumers, possibly in the form of fixed tariffs, driving even more people from the grid. As Chris Dunstan wrote recently, it sets the potential between the big energy incumbents and consumers.

In a bid to short-circuit this death spiral, and collateral damage on the solar market and households, the Australian Photovoltaic Association has proposed a suite of measures that could radically change the way the market operates. These include the creation of a “distributed energy market” which will allow the production from rooftop solar to be traded, and allowing network operators to effectively enter the home energy market

“We’ve got two main problems at the moment,” says the APVA’s Rob Passey, who is also the senior research associate at the Centre for Energy and Environmental Markets At UNSW. “We’ve got lots of people wanting to install solar PV and energy efficiency (to reduce costs). And we’ve got problems for the network operators, which are owned by the state governments” (who are facing revenue shortfalls).

To align market incentives to benefit both consumers and the incumbent network operators, the APVA argues that the electricity system needs to be realigned from the current “top down” structure” to one where there is equal competition between supply-side and demand side options.

In short, it wants distributed energy to be treated equally with network augmentation during the planning process to minimise the need for large networks, and it wants this to be done through the use of what is called Integrated Resource Planning.

It says network operators also need to be regulated under a revenue cap, rather than a weighted average price cap (WAPC) – which results in network operators opposing anything that reduces electricity sales – as is likely to happen next for NSW and the ACT.

Passey says network operators also need to be allowed to participate in the distributed energy market because they are best placed to know what needs to be done to provide network support. They just need the right incentive to make the most economic decision for all parties, but also need to be appropriately ring-fenced so they don’t have an unfair advantage over their competitors.

The CEFC recently noted that a focus on the distributed generation could save billions in network costs. But as AGL Energy managing director Michael Fraser noted today, the take-up of solar could be heavily influenced by the way tariffs are structured in future years.

The APVA also says that consumers should be able to source their electricity from, and sell their PV electricity to, entities other than their retailer. This follows on from what Jeremy Rifkin once called the “internet of things” in his book the Third Industrial Revolution, where he envisioned such a market.

And, the APVA says, there should be an extension of current measures that include information and training, minimum energy performance standards, house energy rating schemes, and feed-in tariffs and white certificate schemes.

The future of the grid has been a cause of concern ever since it became clear that rooftop solar – and soon battery storage – would change the dynamics of the market because it gave consumers the ability to lower the cost of energy. Residential energy use from the grid has been declining in Australia since 2008/09 – falling between 5 and 10 per cent in some areas in the past year – and similar trends are occuring in the US and Europe.

Network costs have been the biggest contributor to electricity price rises, and now in some states such as South Australia, one in five houses now has rooftop solar. This percentage is expected to increase in coming years, with some analysts saying it is a “no-brainer” for households. Australia currently has 2.5GW of rooftop solar, but this could rise 6-fold to 14GW by 2020.

Despite a lot of talk about going off the grid – the US-based Edison Electric Institute produced a nightmare scenario (for its network members) where consumers “leave the system entirely”, and the owner of the biggest utility in the US suggested the network may only be used as a backup – there is no real belief that the grid will simply disappear, or that consumers will leave in large numbers. Unless, of course, the incumbents are dumb enough not to change their stripes.

Given it stays, who pays for it and how? The APVA has echoed previous suggestions made on this web-site that once the distributed energy has been used to reduce network expenditure as much as possible, then a proportion of network costs could be paid through a fixed daily charge based on a customer’s monthly demand peak.

So a customer with little need of the grid has a smaller payment, but then cannot draw more capacity than he or she has paid for. A heavy consumer pays a higher capacity to reflect its reliance on the grid.

“This will be fairer for all,” the APVA says. “The fixed and variable tariff components should be designed to ensure that the various DE options are supported through their ability to reduce both energy use and peaks in demand.

The APVA says that while moves are being considered, and it will take time to develop a fully competitive distributed energy market, changes will be needed soon.

“Distributed energy is developing very rapidly and electricity utilities are likely to be left with stranded assets if regulatory processes are too slow to adjust,” it says.

Rob Passey and Muriel Watt have written up their summary of the report here. The full APVA report “A Distributed Energy Market: Consumer & Utility Interest, and the Regulatory Requirements” can be found on the APVA homepage.