Solar boom: We’re headed for an electricity war

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Caught napping by the solar boom, Australia’s electricity industry is fighting back. Without government action, our energy future could become an ugly war.

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The Conversation

The traditional electricity industry has been stunned by the enthusiastic uptake of solar panels across the nation. Why? Because rapid uptake of rooftop solar power, solar hot water and energy efficiency technologies are eroding the profits of coal fired power stations, retailers and network businesses.

It’s no surprise that with multi-billion dollar investments at stake, many businesses are fighting back. Without prompt government action, healthy competition for Australia’s energy future could turn into an ugly war.

Policy support for solar panels has already been slashed. There is talk of winding back the national Renewable Energy Target and even introducing new subsidies for coal power stations.

Perhaps the most insidious threat to clean energy is the move towards a new system of billing. Rather than the current system of charging customers mainly for what they use (in cents per kilowatt-hour), electricity providers are shifting a bigger percentage of each bill towards fixed daily access charges (in cents per day).

Fixed charges cannot be easily avoided by consumers who save energy or generate their own power. The Queensland Competition Authority has already proposed households with solar power pay a mandatory tariff along these lines.

But this rearguard tactic could prove counter-productive in the longer term. Increasing fixed charges increases the temptation for customers to avoid them by leaving the grid altogether. The solar power industry is keenly anticipating continued falls in the cost of battery storage that will allow solar customers to disconnect from the main network to extend the solar industry’s growth.

If this technological arms race gets out of control, we could have expensive battery storage capacity installed in streets that already have expensive spare network capacity.

Fortunately, some electricity industry leaders recognise thepotential dangers ahead. As Craig Severence describes it

The unspoken fear of all utility managers is the “Death Spiral Scenario”. In this nightmare, a utility commits to build new equipment. However, when electric rates are raised to pay for the new plant, the rate shock moves customers to cut their kWh use. The utility then raises its rates even higher – causing a further spiral as customers cut their use even more… In the final stages of that death spiral, the more affluent customers drastically cut purchases by implementing efficiency and on-site [solar PV] power, but the poorest customers have been unable to finance such measures…”

This is a scenario we can and should avoid. Our electricity networks will be crucial to determining whether the transition to clean energy will be smooth and efficient or wasteful and acrimonious. We urgently need our network businesses to embrace emerging clean energy technologies, to focus on consumer benefit and to develop more sustainable business models. For this to happen, we need governments to act.

The recent Institute for Sustainable Futures report Investing in Savings: Finance and Cooperative Approaches to Electricity Demand Management concludes that government should encourage and support electricity network businesses to invest in helping their customers reduce their demand and save energy.

Such “demand management” by network businesses can defer the need for expensive new supply infrastructure and thus reduce network businesses’ need to hit consumers with higher bills.

To support distributors and the clean energy industry collaboration for greener, more customer-friendly investment, governments should:

  • state a clear policy of supporting network demand management wherever it can reduce customer electricity bills
  • ask network businesses to adopt demand management targets to cut electricity demand and customers’ electricity bills, and report progress towards such targets
  • offer financial incentives to network businesses to invest in demand management (the Clean Energy Finance Corporation is one obvious existing institution to provide this)
  • let network businesses share in the future savings of avoided network infrastructure in order to recover their investment in demand management.

There are numerous case studies where Australian electricity network businesses have helped consumers to reduce demand, and reaped the rewards. For example, on Queensland’s Magnetic Island, electricity provider Ergon Energy has encouraged consumers to install solar panels and smart meters and replace inefficient lights. Peak electricity demand has been reduced by 46% and overall energy consumption by 40%. In the process, Ergon Energy has saved millions of dollars because they now will not need to install a new power cable to the island for at least eight years.

The rapid power bill increases we’ve seen in Australia over the past five years have mainly resulted from network businesses investing more in infrastructure to meet rising electricity demand. Electricity prices nationally have risen in real terms by 70% between June 2007 and December 2012. Network investment is still running at an unprecedented and astonishing rate of over $20 million per day.

It is easy to point the finger at networks businesses for “gold plating”, but the key reason they have been spending too much on the grid is because that is what their regulations ask them and reward them to do. While these regulations are now being reformed, it will take years before customers see the benefits.

This means years more of unnecessary grid infrastructure that will ultimately have to be paid for, either by customers, including through higher fixed charges, or by taxpayers and investors through writing off stranded investment. This in turn means long-lived financial incentives for network businesses to fight solar panels, battery storage, energy efficiency and smarter energy use that could cut both customer bills and carbon emissions.

Electricity businesses working with customers to reduce demand and costs must become the rule rather than the exception in Australia. We cannot afford for our network operators to become enemies of clean energy options such as solar power, batteries, energy efficiency and smarter energy use.

Instead, they must become strong allies in the fight for an affordable and sustainable energy future. Otherwise, both consumers and the climate will pay.

Chris Dunstan is research director, Institute for Sustainable Futures at University of Technology, SydneyThis article is based on a report from the Institute for Sustainable Futures, commissioned by the Clean Energy Finance Corporation Investing in Savings. It was first published at The Conversation. Reproduced with permission.

 

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10 Comments
  1. Kat Healey 6 years ago

    It would be interesting to explore the economic impact on the network of co- and tri-generation systems in large and commercial buildings. It’s happening on a different scale than the residential solar boom (fewer systems, but much much bigger, and in concentrated CBD areas). These are motivated by the need to address the high carbon intensity of grid electricity, and will also be eating into peak demand charges.

  2. Warwick 6 years ago

    Given that the cost of running a network is largely dependent on a large capital investment and the need to meet maximum demands, the number of kWh consumed has very little to do with the cost of running the network. So, just how can you suggest that increasing fixed charges is “insidious”?

    Taking this logic to another regular bill.. if you holiday six months a year in the south of France you should be arguing that you are entitled to half your local council’s normal rates because you are not using the council services as much. However this makes virtually no difference to the council’s costs for services such as road maintenance, parks etc.

    You really need to consider that reducing kWh through the meter makes little difference to the network’s costs. What needs to be understood is that the old way of charging for electricity largely on kWh was appropriate in the past especially before the advent of significant air-conditioning load as there was good correlation between kWh and the size of network investment needed. Times have moved on with increased air-con, PV and the opportunity for storage…charges will need to be more cost reflective so a larger share based on capacity and fixed charges will be more appropriate if we are to be genuine about fairness in pricing.

    • Graham Tea 6 years ago

      Absolutely spot on

    • Matthew Wright 6 years ago

      Warwick,

      On this basis, a low base charge for 4kW of network capacity combined with 10kWh per day of electricity can give the distributors their minimum money.

      Then capacity can be sold in 1kW bolt ons. And with more capacity the charge escalates disproportionately. Italy sells electricity in a similar fashion to this.

      Using Smart Meters customers can then choose to be disconnected for 5mins if they breech their pre agreed and paid for cap for longer than 5mins (an alarm can be set to go off to warn them when this is about to occur).

      OR they can just get charged a lot more for breeching on their next bill a bit like going over your CAP plan on the mobile.

      OR they can choose to just get charged based on how much capacity they use.

      OR they could choose to be curtailed – all of supply or certain circuits during demand peaks and receive a cheaper capacity charge.

      Alternatively they could buy all you can eat 80AMPS (or whatever their connection size is) for the appropriate rate and do as they do today but pay a lot more for it.

      This will soon bring demand down very quickly and end the need to provision anymore capacity.

    • Chris Fraser 6 years ago

      Fixed prices will be more appropriate ? Stop for a second, consider and respond to Wright’s idea of having some of the tarrif charged in proportion to kW of demand.

      • Warwick 6 years ago

        Chris,

        That would be as I said “..based on capacity and fixed charges will be more appropriate”. Call it capacity, demand or whatever.

        It’s time that the “debate” moved on from kWh charges and looked at fixed and capacity/demand charges. Many larger customers already have more cost reflective network charges measuring demand or capacity in kW or kVA (and fixed charges).

        A certain fixed component is essential i.e. there is a minimum cost to all network customers regardless of electricity consumption such as the minimum capital cost of a basic connection regardless of what you use. Also, the cost to regularly check a connection and read meters etc.

        Then there is a capacity cost related to the investment in transformers etc related to your maximum demand on the network.

        Essentially, then there is little merit in a kWh charge. Some may argue that this does doesn’t encourage energy efficiency but then again neither does increasing the size of a PV system in response to a generous feed in tariff. Ultimately, those of us who are genuinely concerned about CO2 emissions should probably promote the use of cheaper (but less sexy and less visible) measures such as insulation, efficient appliances and changes to behaviour which don’t normally attract generous incentives.

        It’s true that networks may benefit by unnecessary investment in poles and wires but this is unrelated to the sensible shift to cost reflective pricing based upon fixed and capacity charges rather than kWh charges. Owners of PV an/or storage can potentially benefit under this changed pricing regime so only those who don’t make tangible reductions in peak demand should be worried by these changes…

        • Chris Fraser 6 years ago

          Agreed, mostly, though I fear some complexity in charging is imminent (much like my phone bill). I still think the fixed component should be minimised, and charging per kWh, and per peak kW, are actually efficiency incentives and need to be driven firmly along.

          In Ausgrid, the fixed daily connection fee for a smart meter is more than an analogue meter, in spite of smart meters not needing to be visited to be read. This i consider inequitable, as it is likely not to be cost reflective. Fixed charges for connecting, disconnecting, and service calls for issues not the fault of the network, those are fair.

          • David Osmond 6 years ago

            We need to be careful about adding a charge relating to peak current draw. We shouldn’t penalise people for drawing lots of power during off-peak periods. This could be important if people want to charge their electric vehicles over-night.

          • Chris Fraser 6 years ago

            Absolutely. In an ideal situation, the profile of the energy load would be the same as the ability to dispatch (and within the capacity of the reticulation), with a focus on flattening that load profile as much as possible. Storage does help this, of course, but it appears that ability to provide storage is somehow a threat to incumbents.
            For David’s reasons, energy prices and peak charging prices could float around in periods of high dispatchability and low loadings. Is the retail system clever enough to allow it ?

          • Warwick 6 years ago

            Chris, it may become more complex in charging. The issue of charging based on kWh is that although it may encourage less energy use, it means the network charging is less efficient and your network bill will be higher. i.e. the cheapest network bill will usually be where the electricity load is completely flat 24-7. If you have kWh charges for energy efficiency, you are compromising network utilisation efficiency. This is the problem of energy efficiency goals competing with efficient network pricing. If you want people to consume less energy through pricing, you could also increase the energy price but this is not likely to be electorally popular. This is one of the dilemmas in energy markets of competing goals of equity and efficiency as well as environmental goals.
            With regard to Ausgrid pricing, it’s probably likely that the reason the cost for a smart meter is higher is to do with the capital cost that has to be paid for by the network. Even though it may be cheaper to read the meter, the ongoing fixed cost (i.e capital allocation) may be significantly higher. Additionally the real costs of collating and storing all this additional meter data does not come for free. Just to clarify, connection, disconnection and service calls are not really fixed costs…fixed costs are those that are incurred regardless of utilisation and for networks most of this is to do with the capital invested which is often significant.

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