Solar economics: Not even Tony Abbott can kill rooftop PV

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Tony Abbott’s next clean energy target is likely to be incentives for rooftop solar. That could cause heavy job losses, but a UBS study suggests it wouldn’t stop solar in the long term because it will become a financial “no-brainer” for many households – whether utilities like it or not.

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AAP/Alan Porritt

As Prime Minister Tony Abbott continues his assault on the nation’s clean energy programs and incentives, one technology that could emerge relatively unscathed (in the medium to long term) is the market for rooftop solar PV – much to the frustration of the incumbent utilities that are pushing the government to try to lock the country into the business models and technologies of the past.

One of the biggest fears of the Australian solar industry is that the government’s review of the renewable energy target will result in an abrupt cancelling of the federal incentives that support the rooftop solar industry. They say that this could cause the loss of thousands of jobs, and the collapse of many businesses, as customers reassess their short-term commitment to rooftop solar. The industry says that solar will be targeted – despite its political risks – because it is a bigger threat to incumbent utilities than large-scale wind or solar projects.

The contrast with the political rhetoric in Australia and that of the US – where President Barack Obama has re-installed rooftop solar on the rooftop of the White House (it was removed by Ronald Reagan), and gotten major retail brands to commit to install nearly 1GW of solar – could not be any different.

There are strong arguments to keep solar incentives – as Alan Pears points out today – including that their removal will simply penalise those less wealthy or in less solar-rich regions, and will serve to protect only coal and gas-fired generators. And it will cause huge disruption to a growing industry.

But a new analysis by investment bank UBS suggests while a dumping of the solar support mechanisms could slow down the uptake of rooftop solar in the short term in Australia, the impact would not be permanent. Indeed, as its study shows – and as some of the more progressive minds in the energy industry now readily admit – the continued fall in the cost of solar means that over the medium term there is not much the utilities or the government can do to stop growth of rooftop solar PV.

The UBS report notes that the uptake of rooftop solar PV in Australia – around 3.2GW now sits on more than 1.1 million rooftops – has been consistent in trend terms despite the changes in policy – underpinned by a combination of rapidly rising delivered electricity costs (the network), and firstly by high feed in tariffs and then with falling technology costs.

UBS policy solar

Indeed, because of its extraordinarily high retail electricity prices, Australia was one of the first countries in the world to reach what is known as “socket parity” – where the cost of rooftop solar undercuts the cost of grid-sourced electricity.

The small scale component of the renewable energy target currently accounts for around 29 per cent of the up-front cost of solar panels – although there are variations across different states, as this graph below shows.

ubs solar capital costs

But the UBS analysis shows that even with the carbon price repealed, and solar incentives cancelled, rooftop solar still looks compelling to households. That’s because solar power used in the house avoids buying electricity from the grid at a cost of at least $260/MWh and the cost of installing solar is much lower than that.

UBS subsidies

Much of the cost is determined by assessing the “discount rate” – roughly equivalent to the time value of money. UBS says if 10 per cent is a reasonable discount rate then rooftop solar presently needs a price of around $140 MWh with subsidy and about $180 MWh with no subsidy to cover its cost of capital.

(In the US it could be argued that 6 per cent is a reasonable cost of capital, UBS says, but notes that Australia’s cost of capital – like so many other costs – is higher than other countries. If the discount rate is lowered to 7.5 per cent, it reduces the costs in Australia to $100/MWh with subsidy and around $140 with no subsidy).

“Therefore, if the household can use the solar electricity in the house, it is from a financial point of view a no-brainer decision,” UBS writes.

“Equally if the solar power is sold back to the grid it’s an equal no-brainer, but of a reverse outcome. From this perspective solar is just a financial arbitrage. Grid delivered electricity relies on the grid delivering “cheap” electricity produced 100s and even 1000s of km away from the point of consumption. Solar costs much more at the generation level but the unit cost of a 1 kW system bears little difference from a 1 GW system, and so it’s perfectly economical to install on the roof of the house and arbitrage away the wires and poles cost.”

The question is, if the government does remove the remaining solar incentives, what will happen to demand? This graph below provides an indication.

ubs s curve solar

According to the UBS data, the current IRR (internal rate of return) is currently around 18 per cent. If this were to continue, something like 50 per cent of households would likely adopt rooftop solar PV. The removal of the SRES would likely drop that IRR to below 10 per cent, a return that would likely mean only around 20 per cent of the market switches.

“As with any other market though, the marginal new customer may require a higher incentive,” UBS says. “Some people will switch even if there were a net cost because of environmental reasons. Some households and businesses won’t or will be unable to switch at all. In between sit a group that will switch if the financial incentive is sufficient.”

So UBS estimates – that even with all subsidies removed and a low, and voluntary, feed in tariff in place in some states – the market for rooftop solar will likely remain around 400-500 MW per year. This would be made up of around 100 MW commercial (while expecting this component to grow) and around 300-400 MW of household rooftop PV. It should be noted that for large users of 100MWh or more, the cost of solar makes sense at $140/MWh or less – and PV is about there now ex-subsidy.

UBS estimates that around 37 per cent of a typical household’s daily electricity consumption occurs when the solar system is operating (see graph below). Therefor, if the household wants to avoid exporting any power to the grid, then the PV system needs to be sized so that peak output is roughly equal to average hourly household consumption.

“Our numbers suggest that for a household consuming 8 MWh per year (20 kWh per day) the solar system “should” be around 1.5 kW. That’s less than half the average size of new installations today.”

ubs solar consumption

UBS says that given a sufficient incentive, households can shift part of their power consumption around during the day, or even within a week.

“Fridges, typically the largest single source of consumption, obviously have to be on constantly – but washing machines, clothes dryers, swimming pool pumps, solar hot water heating etc. can all have their time of consumption shifted relatively easily. For households not receiving an FIT, there will be a preference to use equipment during the day when solar represents the low cost option.”

Ultimately, this leads into the question of storage. As we noted in our report on Friday, that could become cost competitive quickly, to the point that the average Australian household may not have to pay more if they disconnect entirely from the grid, as soon as 2018.

That’s a prospect which is causing enormous disquiet among utilities – scrapping schemes such as the RET, and institutions such as the Clean Energy Finance Corp and the Australian Renewable Energy Agency are just a crude attempt at buying the incumbents more time.

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16 Comments
  1. stuart 5 years ago

    Australian residential households consume around 28% of electricity production with commercial buildings consuming a further 22%. Thus around 50%, or more than 100GWh/yr, of electricity produced is consumed by a sector where solar PV is already economically competitive and only likely to become more competitive as the technology evolves.
    Thus if 40% of building owners fit PV ( and typically some storage capacity) the RET target of 41,000 GWh/yr shall be met. Seems like a sure bet over the longer term.
    Let’s also not forget that hybrid systems whereby solar reduces the requirement to burn expensive gas /diesel fuel are likely to play a role in the resource sector on remote sites.

    • Jo 5 years ago

      Isn’t the domestic solar installation on top of the RET target?

  2. Les Johnston 5 years ago

    When rooftop households act together as a power generation entity, the fossil fuel based generators will find their game is up. Rooftop PV has a big future – flexible and distributed across the country. Government regulation has a high likelihood of getting in the way of progress. The challenge to the Liberal Conservative government is to refrain from regulating the market out of the interests of the fossil fuel based generators. If the Abbott Government has an objective of removing red tape and small government, it should keep the existing RET and not act on the basis of vested interests.

  3. Simon_Strauss 5 years ago

    On the Gold Coast we pay water waste charges even if we have a block of land that uses no supplied water. I wonder if those that choose to go off-grid will have to pay for the power-lines that pass their houses via some sort of tax/levy?

    • Chris Jones 5 years ago

      Easy – don’t pay it. What are they going to do? Cut you off from something you aren’t connected to? Utilities cannot charge you for something you didn’t ask for or don’t want.

      • JonathanMaddox 5 years ago

        It’s hardly fair, but through legislation they actually can, in exactly the way that gas exploration companies can use your land without your permission and in the way that the federal government can charge you for the defence of the nation (even while buying attack aircraft you didn’t ask for and don’t want, or sending troops to foreign wars you didn’t ask for and don’t want).

        • JonathanMaddox 5 years ago

          Our democratic responsibility is to challenge and overturn such legislation, not just ignore it.

      • Simon_Strauss 5 years ago

        No that isn’t the case. Local councils and state governments have far more power than the individual. Imagine the costs, time and effort it would take to get the waste water issue fixed. My comment re the large utilities wasn’t entirely hypothetical… one large electricity supplier is talking/scheming to get it in place already.

  4. Bungarra 5 years ago

    When hybrid and fully electric cars become more common, people will use their car batteries to shift load as well. So the shopping trolly/kids to school/ local travel could be load evener as well. As well the hybrid can deliver power back as well ex gas or petrol if desperate.

    Smart energy systems at the domestic level. Been there/done that on the farm before mains power arrived, with the 32 DC volt systems in the 50’s. Now just how long will they go for with solar panels and highly energy efficient appliances, as long as you do not turn on the welder in the workshop, next Christmas? Lots of opportunities to develop stand alone systems and keep DIY people very happy. Also the low voltage does not kill as does 240 AC. Just need an unshaded roof and no stupidity as in Alabama where the State Govt is taxing home solar as the power companies have bribed them.

  5. Jo 5 years ago

    Solar PV is a great investment for everybody who owns a home. It beats any other safe investment by a huge margin. You can calculate the comparison rate for your PV system here: http://www.sun2steam.com.au/?page_id=572

    The problem could come from the grid operators limiting the maximum size below 10 kW. It is also hard to understand why we actually have a 10kW limit in Australia for domestic PV installations. There is no cap at all in Germany and the grid is still working fine.

    • Max Boronovskis 5 years ago

      Good question and I am sure there is a good technical answer to the reason for 10kW domestic PV limit (5kW here in WA) I can’t do it justice, only to say that my understanding is that our grid infrastructure can cope with X amount system sizes and beyond this it requires more caution and review. A solar system can have the same affect on the grid as a load of equal size so similar planning needs to go into it. Combine that with the absolute bull run that solar has had these last years and utilities have a lot of keeping and catching up to do, all the while in a fairly resource constrained environment, so blunt administrative instruments like a residential limit are required. I think PV systems are allowed at 5kW on a street until a third of the transformers capacity is reached and then only 3kW is allowed (May have changed, I am out of the game) and this is to ensure that my PV, for example, doesn’t adversely affect my neighbours power supply.

      We maxed out a few towns in terms of PV capacity here in WA (to the point of affecting the smooth/efficient operation of (diesel) power generation and no more PV is permitted unless it has ramping (requires storage). PV suburb saturation was also trialled and operates successfully so the knowledge is building.

      • Jo 5 years ago

        I think these are just excuses in order to keep the amount of solar energy low in Australia.

        The lights did not go out in Germany when renewable sources produced 3/4 of all electric energy required.
        https://reneweconomy.com.au/2014/germany-62168

        • Max Boronovskis 5 years ago

          Different grid infrastructure, different policy support and uptake drivers, different mix of grid scale and residential PV. Hard to compare AUS and GER in many respects, technically, politically, geographically etc. to my mind residential solar uptake is still booming here and I think we already lead the world in household rooftop solar, the missing link to get us toward 100% renewables here is the grid scale stuff. There your battle is with vested interests who have something to lose and are driven to get return for there existing investment and business models, but that really is a fight (as in, by any means necessary) and the excuses are being cooked up by those vested interests in cahoots with the current pro fossil government.

          This is a good article.

  6. sean 5 years ago

    The idea that a fridge needs to be running the entire time is false. With correct modification you could have a fridge that ran a compressor to cool during the day and stored the cool through the night. A form of energy storage.

    • Chris Fraser 5 years ago

      That is an opportunity for a more responsible fridge. Due to the value of its contents, it’s just about the only high energy user that must be plugged in even when residents are not home, even if that be not home for a week (well, mine is).
      Using flexible materials being designed now, we could even optionally set it to store coolth at night when energy is cheap and grid not congested, for expenditure during the warm part of the day. Those materials may bulk out the fridge a bit, but it would be much more efficient. I have not seen a french door fridge rate higher than 3 stars out of 6 (even without the water cooler). The fridge is helped again by modern house insulation and more passive means of conditioning air in the room.
      With CEFC, ARENA, RET and price of carbon under threat without tenable replacement, with Solar Roofs gone, with opportunities for gas and coal power growing every day, these are the strange things we conjure up to do the best for ourselves ! But i would definitely consider such a fridge.

      • sean 5 years ago

        If you are willing to sacrifice the space you can DIY.
        For a fridge fill with water in containers. For freezers fill with iron.
        Both these materials have great thermal density, and will act as thermal storage to increase the time between compressor cycles. The amount you use is your trade off with usable space. Better insulation would be nice and was relatively easy to do before some designer decided that coils on the back of fridges were ugly and that they should build them into the walls.

        Word of caution with the thermal batteries. They release lots of heat. Make sure you don’t spoil the stuff in your fridge by going gungho and putting in large amounts of warm water or iron at once.

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