It’s time to reform solar rebate scheme and adapt it for household batteries

As explained in part one of this two-part article, accelerating the roll-out of home battery systems in Australia is becoming increasingly important to ongoing roll-out of solar and decarbonising of the grid while also helping improve energy affordability and reliability over the longer term.

This second part of the article outlines one straightforward way we could do this that is reasonably quick and easy to implement.

At present the policies supporting the uptake of batteries are simply too small in scale and subject to the vagaries of annual government budget expenditure review committees that mean they could be here today and gone tomorrow.

The number of batteries being supported by these existing state government battery rebates are a tiny fraction of the number of solar systems being installed.

It may not be perfect but a better measure to support batteries would be to reform the existing main support mechanism for rooftop solar  – the Small Scale Renewable Energy Scheme.

Being embedded within legislation and far larger in scale than current state rebates, it provides a vastly better basis for supporting long-term supplier investments and the entry of a greater number of competitors.

It would also cut down on administration for installers and customers. It would also inherently couple the decision to purchase solar with that of a battery under one single rebate system.

We suspect this coupling will exploit people’s loss aversion psychology to make them more inclined to add a battery to their solar system.

The support for batteries could be provided through adjustments to what is known as the deeming rate. Back in 2003 it was recognised that solar systems can last well beyond 15 years and so solar PV systems were provided with financial support via certificates (now known as STCs) based on their expected or “deemed” power generation over 15 years rather than the 5 years that was originally provided under the Renewable Energy Target.

Over a decade later the Climate Change Authority recommended that the years of generation awarded certificates should be tied to the number of years remaining until the Renewable Energy Target was scheduled to end in 2030.

At the time the Authority argued that while solar systems installed prior to 2030 would deliver emissions abatement well beyond 2030, this abatement would be rewarded via the Emissions Trading Scheme that was in place at the time.

That emissions trading scheme is no longer in place and the government has no plan to re-instate it.  Given the constraints facing solar explained in the part one article, a simple reinstatement of 15 years deeming is not advisable. But we could re-instate it for solar systems where they were coupled with a battery system.

This restored 15 years of deeming need only be a temporary measure because as battery system costs decline, the level of policy support required to deliver significant uptake will also fall.

We expect that from 2026 onwards the level of deeming could begin to steadily decline such that by 2040 solar systems with batteries would no longer receive STCs.

A realistic goal for such a measure would be to drive the roll-out of half a million home battery systems over the period of 2022 and 2025. This could be expected to deliver close to 2,500 megawatts of dispatchable capacity nationally.

Also, by the time we’d reached 2025, the aim should be that half of all new solar systems being installed that year would be coupled with a battery.

Interestingly, it’s quite likely that the total cost of the SRES would still be lower in 2025 than it is today due to the ongoing reductions in deeming for solar systems that aren’t coupled to a battery.

By 2030, it’s conceivable that 10,000MW of battery capacity could have been induced by the program.  This would go an extremely long way to filling the gap left by retiring coal power plants.

Ensuring batteries deliver what consumers and the broader energy market need

In introducing such a program it is critical that it is coupled with an enhanced standards and testing regime for home battery systems. We need to avoid a situation where unscrupulous solar suppliers anxious to access 15 years of deemed STCs, saddle consumers with cheap and nasty battery systems.

But at the same time we also need to make sure that battery suppliers don’t milk the scheme through upping prices and enhancing margins, rather than growing scale – a problem we’ve encountered with other rebate programs.

While nothing can replace customers and installers sharing information about their product experiences, the Clean Energy Regulator should enforce a set of minimum standards covering battery performance in order for them to qualify for enhanced STC deeming rates.

These standards should cover key characteristics of battery performance that influence the value they provide to customers such as:

• Capacity in peak kilowatts and usable kilowatt-hour storage capacity are as claimed;
• Energy storage degradation rates;
• Charging and discharging efficiency; and
• Warranted cycle life.

The Clean Energy Regulator would need to implement a regime for random as well as risk-weighted check testing of products to identify flawed products.

In circumstances where suppliers’ products failed to live up to these standards they should be subject to clear penalties that ensured they made good on poor performance with consumers or were withdrawn from eligibility under the program.

In addition, to ensure that solar-battery system could be effectively controlled to deliver power to the power system when it was most critical – systems would also need to be enrolled as virtual power plants that could be dispatched via a company participating in the wholesale electricity market.

As well as meeting performance quality standards, battery installers would also need to deliver product below price benchmarks (per warranted cycles of kilowatt-hours) for a fully installed system that would steadily decline over time. At the beginning such benchmarks should begin at a reasonably easily achieved level.

But in addition, installers would need to submit invoice pricing data which would be published on an anonymised basis, just as with the SA Government’s rebate program.

The Regulator would publish this data to help customers drive harder bargains, while also using it to inform future qualifying price benchmarks.

The final component of this reform would be to specify minimum levels of battery capacity households would need to install in order to access 15 year deeming on the solar system.

These would need to be calibrated to the capacity of the solar system, with a larger battery capacity required for a larger solar system in order to get a good bang for buck out of 15 year deeming.

Determining an appropriate calibration requires detailed analysis informed by a process of consultation with solar and electricity industry participants and consumer groups. This requires a balancing act between:

1. trying to squeeze the largest amount of battery kWh for each dollar of extra policy support provided; against
2. providing an offer that will be sufficiently attractive to induce as many people as possible to take up a battery when they buy a solar system.

This requires an evaluation of the financial implications for households considering installation of a solar-battery system and their likely willingness to add a battery to a solar system.

While it might be tempting to require a bigger battery in order to access 15 years of deeming, if no one takes up the offer because they find the extra capital cost too overwhelming, or the battery capacity substantially exceeds their electricity consumption levels, the program will not achieve its objectives.

It’s important to note that this is not just about a financial analysis, it needs to also consider the psychology of the household’s solar-battery purchasing decision.

How households approach the purchase of a solar system is usually not based on a spreadsheet calculation that aims to maximise return on investment or exceed a certain cost of capital.

\Instead rules of thumb are usually applied including psychological budget thresholds about what is a reasonable sum to spend on a piece of household equipment.

Further research is required, but in the interests of fostering debate we’ve provided an example of minimum battery capacity that might be tied to solar system size. This is intended to spur thought and discussion rather than a highly informed view on what should happen.

We selected sizes of batteries that shouldn’t exceed the average likely level of generation from a solar system that is excess to a household’s consumption.

Indicative minimum battery storage capacity required for a solar system to qualify for enhanced deeming

We should note that while policy penny pinchers may be tempted to specify larger batteries to qualify, it is likely that customers will select larger batteries than the minimum requirement.

This is because significant cost components associated with a battery system are fixed irrespective of the battery capacity, making larger capacity systems better value per kWh of capacity.

When politics and good policy align

Australian solar support programs were highly unusual compared to those in other countries by heavily favouring smaller household installations. In the past these were heavily criticised by policy analysts as delivering poor value per tonne of carbon abatement.

However, Australia managed to develop an industry that was extremely efficient in rolling out household solar systems and has been able to do this at significant scale that has meaningfully reduced electricity emissions.

In addition, this policy proved to be exceptionally popular with the electorate and managed to survive former Prime Minister Abbott’s assault on emission reduction policies while other policy mechanisms favoured by policy analysts didn’t.

The end result is that Australia is well positioned to exploit the full potential of solar systems to not just lower emissions and lower costs at the wholesale level but also cut out costs in distribution networks with the advent of affordable batteries.

This will also require reform to the regulatory regime governing electricity networks so that their revenue is no longer protected from declines in demand for their product (network capacity), just like almost every other industry.

Feedback from a wide range of solar industry participants, as well as published market research, suggests large numbers of Australian households are keen to install a home energy storage system. Households find the idea of being largely self-sufficient for power highly appealing.

But much like the situation for solar in the mid 2000’s, this large potential market demand for batteries is largely a latent one that will only be unleashed if the purchase price of batteries is substantially reduced.

A rule of thumb we’ve often heard from industry is that the out of pocket purchase price of a combined 5kW solar system and 10kWh battery needs to fall below $10,000 fully installed to fully awaken this large market.

We expect that a policy that delivers such an outcome would be highly popular with the electorate. At present the emission reduction policy cupboard for both the Morrison Government and that of the Federal Labor opposition is largely bare.

Both have reached the same page over net zero emissions by 2050 but have provided almost no detail on how they expect to achieve these targets. We know that such a target cannot be achieved without further scale up of renewable energy and energy storage.

We also know that neither party seems to be too keen on adopting some kind of broad-based emissions trading scheme.

The SRES program has enjoyed strong electoral support and it is time to lift ambitions towards the next challenge of affordable and widespread battery storage. Simple modifications to this existing program could deliver 10,000MW of batteries by 2030.

This would provide a buffer to help manage further closures of coal, drive technological progress in an area of great benefit to Australia, and support further expansion of renewables to reduce emissions.

Ric Brazzale is the Managing Director and Tristan Edis is a Director of Green Energy Markets – Green Energy Markets provides analysis and advice to assist clients make better informed investment, trading and policy decisions in energy and carbon abatement markets.

These articles are an extension of an original article detailing the 5 steps Prime Minister Scott Morrison needs to take to make his net zero by 2050 pledge credible. These articles expand on step 3 of this 5 step plan.