The Essential Services Commission (ESC) has released its final report on feed-in payments for distributed solar in Victoria. It is a thoughtful and careful report and to be commended as a valuable contribution to the debate.
Their main point is that a flat minimum rate, as applies now, fails to take account of the fact that the value of distributed generation varies across the day and to some extent also by location. So they suggest some sort of time-variant (and perhaps also location-variant) price would be better.
In Victoria, the regulated minimum feed-in price to be paid by retailers sets a floor. Retailers can offer more if they want to and some retailers – Diamond and Click – do offer meaningfully more than the floor price. None offer time-sculpted or locationally differentiated prices as the ESC suggests, but there is nothing stopping them from doing so.
Are retailers failing to properly value distributed generation? Is there a “market failure” that justifies regulatory intervention? This is a difficult question to answer. Small retailers (such as Diamond, Globird, Powershop among others) that are unable to hedge spot prices by controlling their own generation to match their retail load can purchase hedges, typically ones that cap spot prices at $300 per MWh. For the past 12 months in Victoria, 1551 such caps were sold through the Australian Stock Exchange.
The average price of these was 0.47 cents per kW per hour for the 8760 hours in those 12 months. In addition, the demand-weighted average spot price in Victoria (capping these at $300 per MWh) and weighting prices at the net system load profile was 4.9 cents per kWh. Adding these two amounts together, plus an allowance for losses, ancillaries and market costs, and you get roughly to the regulated minimum price.
But if you are a large retailer who has more generation than retail demand (say AGL Energy or Simply Energy) and you can sell $300/MWh caps, then the opportunity cost of distributed solar is not the capped price, as above, but the price of electricity in the spot market. This might be very much more than the cap price, if there are extreme price spikes. But it also might be very much less, and often is – particularly in Victoria. Indeed for three of the four quarters in the year, cap prices are inconsequential, reflecting very low price spike risks in these three quarters.
The bigger issue – and perhaps outside of the ESC’s terms of reference – is the very large retail charge: for almost all households in Victoria the charge for retail services is much larger than the charge for generation. Distributed generation avoids central generation and it also avoids at least some part of retail costs and profits.
These are not counted in the ESC’s report or in the Victorian regulated minimum feed-in charge. A reasonable argument can be made that at least some of these retail costs and profits can be avoided by local production and so should be counted in the regulated value of distributed generation. Indeed this is the essence of the one-for-one “net metering” policy still widely adopted in the United States.
So where will all of this end up? Regulations take time to develop and implement. Inevitably they usually lag market developments. There is undoubtedly a market demand for higher feed-in tariffs. Humans tend to value a dollar earned more than a dollar saved, and the feeling many households have, that they are getting a raw deal on their excess solar production, tends to irk them.
The application of block-chain accounting might make it possible for households to sell their PV production, easily, to competing buyers. And so if they think they can get a higher price than their retailers are offering them, to do so. Indeed this technology already exists in allowing owners of electric cars in Germany to control the price they pay for recharging their car battery (have a look at here).
But we need not wait for block-chain. Indeed there is nothing stopping anyone from offering households more for their PV production than their retailers are offering now. The half-hourly smart meter data is available and accessible. In considering the nature of regulatory interventions, it would be valuable to understand why this is not already happening.
Bruce Mountain is an energy economist and Director of consultancy, CME.