It has taken nearly a decade and dozens of reviews, but finally an Australian regulator has recommended that rooftop solar installations – along with other distributed generation such as small wind turbines – be rewarded for the value they bring to the grid, and their environmental benefits.
The solar industry and renewable energy proponents have been scandalised by the assessments by most regulators in the past few years, which sought to place minimal payments for the export of excess solar generation back into the grid, because of their refusal by regulators to entertain any benefits from the technology.
That led to predictions that households and other consumers would grow increasingly frustrated with the their treatment by utilities, install battery storage and possibly be inspired to quit the grid. The utilities call this the death spiral and some argue that it a proposition that is largely self-inflicted.
Victoria’s Labor government last asked the Essential Services Commission to assess the value of distributed generation. After an allegedly faulty start, the ESC has produced a report that delivers a landmark shift in regulatory thinking, even if the solar industry no doubt thinks it could and should go further.
In its draft report, the ESC is recommending a change in the way that tariffs are structured, making the “energy” component of the tariff more reflective of demand and supply, and including three different time periods as well as a “critical peak”; including location benefits for avoided transmission losses, and adding in a credit for the reduction in emissions.
According to one proposed rate structure, this could result in a near doubling in the amount of money a household with 3kW of solar could receive from solar exports to around $150, from current levels of around $80.
But it should be noted that this change is notional only. The environmental component, for instance, assumes an avoided emissions credit of $20/tonne – it may be that governments deem an entirely different rate, and the ESC will not be drawn on what that should be. It could be more, or it could be less.
The ESC also suggests that the “flexible” component of the tariff – based on wholesale market prices – will vary year on year, but could present opportunities for households and businesses to change their consumption patterns to take advantage of price movements. Some software providers are proposing such programs.
The benefits to the households for their exports of solar PV could be further upgraded when the ESC adds in a network benefit component, which is likely to include benefits such as reduced and deferred spending on grid upgrades and extensions because of the presence of rooftop solar.
This component, to be looked at in a separate report, will include battery storage as well. That work will begin with the release of a new discussion paper in June, with a final report due early next year.
Looking into detail at this draft report
On the energy side, the ESC says that rather than the current flat structure of 5.2c/kWh, the new rate should include four different categories, ranging from off-peak, through shoulder, to peak and “critical” peaks, when the network is under stress of very high demand.
Tariffs will be further tweaked to add more to those households furthest away from the centralised generators, crediting them with avoided transmission losses. Again, these figures are nominal – the varying tariffs and prices will actually be set by actual wholesale energy price movements – but they give a rough indication.
Interestingly, wind energy is provided with a higher emissions credit that solar. The ESC argues that this is because solar is only likely to cause a decline in gas generation during the day, while wind is likely to affect brown and black coal.
Overall, despite quibbles in some of the details, the broad conclusion will be considered a major step forward for an Australian regulator, even if for many solar advocates the pace of change has been slow.
The ESC, for instance, did not include benefits from the reduced health impact of respiratory problems of particulates, on water use and reduced pollution of waterways, because it says these were too hard to quantify for the purposes of regulation
That aspect has not been too hard for regulators in other countries. In the US, for instance, the Minnesota regulator suggested that tariffs for solar should be higher than the 1:1 tariff (or net metering) prevalent in the US because of the increased health and envrionment benefits.
The ESC paper released on Friday also suggests that governments and regulators will continue to struggle with the reality that software and smart new technology is evolving rapidly and changing the game in ways that the regulator is yet to understand.
It argues against a 1:1 tariff that is common in the US because individual homes cannot act as full-scale utilities, with all the trading and transmission issues. But this ignores the development of “virtual power plants” which links individual homes, often to the benefit of the utility as well as the consumers.
Still, the fact that one regulator has broken ranks could be significant, although it should be noted – it says it only did so because it was asked a different question.
Still, the Queensland Productivity Commission was asked a similar question by its government and replied that it could see no benefits at all from distributed solar, and the state-based regulators have hitherto used each other’s reports as justification to ratchet down solar feed-in tariffs – under pressure from the utilities.
But this strategy is starting to backfire on the networks and the retailers. The falling cost of solar, the arrival of battery storage, and in particular of smart software, is providing all sorts of options – such as micro-grids, virtual net metering, and stand alone systems – that allow individual users, or communities to cut the link to the grid, or vastly reduce it.
The four-part pricing is interesting, although it is strange that the regulator wants payments to solar households capped at $300/MWh (30c/kWh) even when wholesale prices soar above that (sometimes to $12,000/MWh).
The ESC justified that by saying that these intervals did not occur often enough. Yet it is these same intervals that have been used to justify massive increases in network fees and have underpinned the earnings of large-scale generators. And some retailers offer up to $1000/MWh in those critical peak times.
The ESC response to this observation is that most retailers are hedged at around $300/MWh, and it is only setting recommendations for minimum payments – so if a retailer wants to offer more and expose their customers to the full gamut of whole price fluctuations, then they would be welcome.
The next stage of the review – network benefits – could also be significant. It is likely to be based on avoided network investment on the old network model. But some argue that this model is dead already, buried by its own gold-plating and over capacity.
It is more sensible now to be looking at sections of network, micro-grids, etc., and seeing how they work best with distributed generation and demand management, but that might be a step too far for the regulator at this point in time.