Do consumers want to pay reliability premium in era of rooftop solar and storage?

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What is the cost, or value, of power outages? It may come down to whether you like cooking or not. The energy regulator is trying to find out. Seriously.

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Australian consumers pay through the nose for their electricity, mostly because of the country’s extraordinarily high network costs – which come courtesy of its uniquely long and stringy grid, and its obsession with “reliability.”

The reliability factor in Australia is 99.998 per cent. It’s the highest in the world and it’s translated into a “gold-plated” grid and hefty costs for consumers.

But would Australian consumers prefer to pay less for their electricity, in exchange for risking an extra hour or two of lost power a year?

Indeed, have views on the value of reliability changed since the South Australia blackout of 2016? And in the era of growing rooftop solar installations and battery storage with back-up capabilities, do consumers really care?

These questions are being put by the Australian Energy Regulator, which in July was handballed the fun job of estimating the “value of consumer reliability” (VCR), in an effort to guide future investments in networks, as well as the market operator’s response to the threat of “unserved energy”.

The AER issued a consultation paper on the subject on Friday, calling for responses in a month’s time and leading – in the traditionally glacial pace of Australian energy regulation and rule-making – to a final decision by the end of 2019.

The paper raises some interesting issues, particularly around the emergence of rooftop solar, battery storage and “virtual power plants” – given that so-called “distributed energy” could account for nearly half of the country’s demand by 2040, if not earlier.

It means, for instance, that many consumers will be investing in their own grid security – for many, that is the primary reason to install batteries.

Networks, themselves, are never shy of spending; they get a regulated and generous return on every dollar of spending approved. But they are also conscious of over-cooking the goose on network charges, if they haven’t already, and driving consumers off the grid, now they have these new technologies.

The AER document notes that these technology developments “will require a broadening” of what VCR and unserved energy (not having enough supply to meet demand, which actually rarely happens) represents.

“A possible downward driver on VCR would be storage solutions such as battery, solar/battery and other Uninterruptable Power Supply (UPS) solutions as these further decrease in cost and are taken up by a greater number of customers,” the paper notes.

“These technologies could provide a backup in the event of outages for grid-connected customers. From a network planning perspective, the potential VCR for such customers may be close to zero where the outage does not exceed their storage capacity.”

On the other hand, it suggests that for the growing number of customers who become ‘prosumers’ through feeding excess solar PV generation or discharging batteries into the grid, a network outage also means a lost opportunity to transact in the NEM.

“This may either directly impact individual prosumers, or the entities that enter commercial relationships with households and businesses to establish ‘virtual power plants’, aggregated fleets of individual distributed solar PV and battery resources.”

The difficulty noted by the AER is that everyone has a different view on the value of reliability. A 10-minute outage may go unnoticed by many consumers, but be thoroughly annoying and costly for others.

The matter is further complicated by the emergence of “demand management”, the idea that some consumers are happy to get paid and switch things off, or turn them down, in exchange for payment.

This is generally agreed to be a cheaper, smarter and more efficient solution than the recent approach of building dirty and costly “peaking plants” that might only be used for a few hours a year.

The owners of generators have hated this idea, for obvious reasons, and the networks are only now putting their fingers into the pie because of new rules that will give them revenue for doing so. Polly wants a cracker.

The AER notes that because it is impractical to ask each customer their VCR for every conceivable outage permutation, VCR is typically estimated by conducting surveys on a representative sample of customers, with “willingness to pay” consumer survey techniques being the most common approach.

The consultation poses some interesting questions that could have an impact on market rules and structure going forward.

These include whether any changes should be made to the current market price cap ($14,200/MWh), and floor price; should there be a price limit on frequency control services? And what should be the priorities of “load shedding” should there by an incidence of unserved energy?

It will also look at the VCR and how it fits in with AEMO’s emergence reserve trader mechanism, the key control it has at its disposal to ensure enough capacity to deal with the heatwaves that cause demand to spike, and put pressure on thermal and other generation.

But assessing this value stands to be horrendously complex. The AER notes that a residential customer might respond to a one hour interruption by deciding to spend $50 ordering takeaway meals. Another might spend $10 travelling to a shopping centre if they can’t use air conditioning.

On the other hand, avoiding time and effort spent preparing and cooking a meal, and cleaning afterwards, might represent a $10 benefit. Alternatively, it might be a further blow to those who enjoy cooking. And what about the potential spoil of ingredients? (No, seriously, this is in the paper).

“The takeaway meal may also taste better than the meal they were intending to cook, providing further benefit. For example, this may be a benefit of $10 to the customer, but would depend on the customer’s culinary skills and what they were intending to cook,” the paper says.

“In the above example, the total additional benefit of the takeaway meal is $35, resulting in a net cost of the substitute to the customer (and hence the customer’s implied value of the one hour of unserved energy) of $15 ($50 cost minus $35 in benefits).”

The alternative is to do an economy-wide value of lost output. If the economy has GNP of $1.7 trillion (2017), then based on the 217 TWh of electricity production, this implies that approximately $7.80 of GNP was produced per kWh – a potential proxy for the cost of lost power.

Or, back to the prosumer, the VCR could be modelled on the cost of substitute products, such as solar and storage.

We wish them luck.

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