IEA sides with utilities on ‘free-riding’ rooftop solar PV

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The IEA questions whether ‘grid parity’ is correct way to value residential solar PV, and suggests solar is becoming a ‘free-rider’ on networks.

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The  International Energy Agency is likely to upset the growing global solar PV industry, after questioning the value of residential solar PV, and accusing it of becoming a “free-rider” on networks that could lead to increased costs for other consumers.

In its World Energy Outlook 2013 report released overnight, the IEA says many parties suggest that the dramatic fall in the cost of solar PV in recent years means that it has – or is fast becoming – competitive with electricity generated from fossil fuels.

It says these arguments are based on the concept of “grid parity”. (Actually, it is probably more accurate to say they are based on “socket parity”).

But, the IEA asks, is grid parity the right criterion to measure the full competitiveness  of residential PV, after which it can survive without the need for subsidies? The IEA says no – at least not for those who remain connected to the grid.

The  IEA sides with arguments put forward by utilities, in Australia and elsewhere (and this shouldn’t be surprising given the list of peer reviewers of the document, it’s hard to find a renewable energy representative amongst them) that solar PV effectively allows households with rooftop installation to get a “free ride” on the grid by not making their contribution to grid costs.

From a system perspective, the IEA argues, that the money invested in grids – construction, maintenance etc, needs to be recovered. And it seems to indicate it should. And it says that when allowance is made for these costs, the cost of generation from solar PV systems would have to fall below grid parity to become competitive.

It gives the following example illustrated in the graph below.

Household A does not install solar PV, pays $300 per year in fixed charges (assuming all fixed costs are passed through) and another $400 per year for the 4MWh it consumes, to give an average retail price of $175MWh.

Household B installs a solar PV system which produces 1.6MWh for consumption on site, for a total cost of $280 (equal to 1.6MWh $175MWh). It additionally purchases 2.4MWh from the grid at cost of $540 per year (which includes the fixed charges of $300 plus energy consumed). Which, the IEA says to rousing applause from utilities, means that the solar PV household ends up paying more than Household A, despite installing solar and consuming less from the grid.

So, the IEA argues, the cost of the PV system would have to drop to $160 (1.6MWh $100MWh), well below some current notions of grid parity, for it to make economic sense, as is illustrated in Household C. This, says the IEA, is equal to the variable cost that the PV system is displacing.

The IEA further argues that any electricity exported back into the grid should get no more than the prevailing wholesale price otherwise it would “benefit from windfall profits”.

It is harder to imagine a more simplistic approach to the solar PV issue. It takes no account of the potential deferall of grid expenditure, its impact on sidelining fossil fuel generation, and numerous other benefits. The solar industry will be howling in protest, and so should households.

iea solar

Household A does not install solar PV, pays $300 per year in fixed charges (assuming all fixed costs are passed through) and another $400 per year for the 4MWh it consumes, to give an average retail price of $175MWh.

Household B installs a solar PV system which produces 1.6MWh for consumption on site, for a total cost of $280 (equal to 1.6MWh $175MWh). It additionally purchases 2.4MWh from the grid at cost of $540 per year (which includes the fixed charges of $300 plus energy consumed). Which, the IEA says to rousing applause from utilities, means that the solar PV household ends up paying more than Household A, despite installing solar and consuming less from the grid.

So, the IEA argues, the cost of the PV system would have to drop to $160 (1.6MWh $100MWh), well below some current notions of grid parity, for it to make economic sense, as is illustrated in Household C. This, says the IEA, is equal to the variable cost that the PV system is displacing.

The IEA further argues that any electricity exported back into the grid should get no more than the prevailing wholesale price otherwise it would “benefit from windfall profits”.

Because of this, the IEA says solar households could be benefiting from a “free-rider” effect, and suggests that a better measure would be “cost parity” which includes the value of the grid. It even recommends differentiated tariffs to ensure that costs are recovered.

It is harder to imagine a more simplistic approach to the solar PV issue. It takes no account of the potential deferral of grid expenditure, its impact on sidelining fossil fuel generation, and numerous other benefits, or even of the reality that grid operators have over-capitalised on their networks, and should not be rewarded for their greed.

The solar industry will be howling in protest, and so should households. The irony is that the cost of solar is heading down below $100/MWh anyway. It seems that this is more of a delaying tactic than a solution.

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7 Comments
  1. madankerr 5 years ago

    When my FIT expires in 2016, I’ll review the cost of adding more PV plus storage. Even if the payback period is longer than 10 years, I’ll be tempted to go offgrid. When the million+ households with PV are tempted to go offgrid, we’ll see the true cost of running the grid.

  2. Nando 5 years ago

    While I am a full supporter of renewable energy deployment and believe that fossil fuel generation needs to be phased out, I agree with the argument from the IEA. The true benefit of a grid connected PV is the wholesale price of energy plus retail costs and transmissions / distribution losses that are avoided (outside from the installer’s lesser need to buy from the grid and of course deferred investment in grid upgrades, which will be considered). The distribution businesses need to be able to continue taking in revenue from its operations, which I would guess means increasing fixed costs, as the variable costs of operation (per MWh of energy delivered) are probably negligible.

    If this increase/decreased in costs is followed through what is likely to happen is that energy costs will go up and the incentive for PV deployment will be lowered as the variable component of a bill is lessened, until going completely off-grid makes economic sense (i.e. PVs will reach grid parity by the energy prices climbing, rather than their costs descending).

    It is obvious some over-investment has occurred in Australia and perhaps writing off some distribution assets is required (why should distribution and transmission businesses have super-profits and regulated returns such as those reported this week if there is little risk in the investment!?).

    What I believe is that network breakeven (or appropriate for its operations) fixed and variable costs should be determined by unbiased bodies, and these should be reflective of the cost of delivering the service. Participants (fossil vs. renewables) can then argue and lobby for policies, subsidies and incentives outside of the actual pricing (RET, Carbon, etc.). This would assign a cost directly to the externality, rather than embedding it in the system. The current problem is the incessant lobbying from generation, distribution and transmission businesses that seek to protect their business interests and soon-to-be obsolete business models without instead doing as real markets do, and adapt/evolve.

  3. Robert Johnston 5 years ago

    There is merit on both sides of the argument in my view. If your PV generation does not reduce your peak demand on the network (at times of other peak network demand) then you need to pay up.
    The networks are right to seek to charge for peak consumption (in kW NOT kWh). This will increase the cost for AirCon owners mostly and SOME PV owners will be rewarded.
    Unfortunately for networks it will also accelerate their demise by improving the business case for behind the meter storage as households seek to reduce their PEAK consumption as well as their energy consumption. This is the death spiral as it has been called in action. What is offensive in the whole argument to me is that unnecessary network assets must continue to be paid for by consumers.

  4. JohnRD 5 years ago

    Grid costs have increased massively over recent years because of the increased capacity required to handle peak power demands. This growth in peak demand has been driven by the growth in air conditioning. In effect, people who don’t use air conditioning are being forced to subsidize those who do.
    What we are finding now is that rooftop solar is reducing peak demand because solar output is high on those hot days when demand peaked.
    We are also suffering high power prices because the power industry responded to growing peak powers by business as usual instead of looking at strategies (including more rooftop solar) that would have reduced the peak demand and the reduced distance rooftop solar travels before it is consumed.
    Given that grid costs are largely fixed, it is not unreasonable that the power bill should take account of fixed charges as well as peak demand.

    we certainly need a more sophisticated discussion of power pricing than that being put forward by the IEA.

    • Miles Harding 5 years ago

      John,
      This is a strong argument for a peak demand charge model for network charges along the lines of the thin pipe proposed elsewhere here. As you say, it would need to be more sophisticated to allow for consumption use outside peak times. For example a HWS that only heats late at night should be treated differently to an air-conditioner that fundamentally responsible for the peak problems in the first place.

  5. Miles Harding 5 years ago

    Are we reading the chart wrongly?

    6.10 b) could be relabeled ‘gross feed-in tariff’ and
    6.10 c) ‘net feed-in tariff’
    It’s not a perfect fit for the chart, but I think it better reflects the arrangement.

    The problem the supply organisations have is that their network costs argument an attempt to deflect the argument from the underlying issue that they have comprehensively failed to embrace the potential of the future, which has now become the present.

    IEA is completely wrong here and obviously party to the politics. Rooftop PV does not increase stress on the networks**, but the vast uptake of air-conditioners surely does. Australian houses are now larger than American houses and have correspondingly greater energy needs. In the west, there is a proliferation of large houses of very poor design that obliges the owners to instal huge air-conditioners.
    Really this is one of the most egregious perversions of reason when discussing electricity supply.

    ** It is distributed generation near the point of use and the PV generators automatically disconnect for a short time when the line voltage exceeds approximately 260VAC, so they do not aggressively back-feed the network, as is often claimed.

  6. David D 5 years ago

    Power fed back to the grid by rooftop solar should be credited at retail value.
    This will reduce the peak load and help us all.

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