Solar energy needs smart solutions, not dumb economics

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Grattan Institute reports makes some valid comments on how to regulate a grid dominated by solar and storage. But in seeking cheap headlines it has buried the important bits by making wrong assumptions about the costs and benefits of solar. Will the industry ever learn?

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Oh dear. Here we go again. The solar industry is clearly winning the battle to turn the global electricity industry upside down and inside out. The plunging cost of battery storage will accelerate that process. It’s just that some people have a hard time accepting it.

This week we have seen another big report into solar, and yet another that gets it terribly wrong.

“Solar homes burnt by the sun”, wrote Fairfax Media, and others followed. Predictably. But Why? Because the Grattan Institute wrote in a report that the economic costs of rooftop solar outweighed the benefits by more than $9 billion.

If Grattan’s goal was to secure big headlines, let’s give it a credit. But to achieve it, it had to concoct a witch’s brew of mistaken assumptions and omissions.

That’s a shame. The conclusions it makes at the end of the report and its recommendations on how to incorporate the inevitable surge in battery storage are important, even if not terribly new.

But they will be obscured by the numbers that have and will be used like confetti by those seeking to restrain the deployment of solar PV in an attempt to protect vested interests.

The numbers it uses are wrong in so many ways it is difficult to know where to start. But because it got the headlines, let’s start with that $9 billion figure.

grattan solar

Grattan Institute argues that the cost of solar PV ($18 billion) overwhelms the benefits ($9 billion mostly in avoided generation costs, and a little in avoided emissions), and it further suggests that individual households are getting little bang for their buck from their individual systems

The first thing it gets wrong is to base its report on the assumption that solar systems only last for 15 years. Most solar systems are likely to last 25, or even 30 years. Some even more. So from the outset, Grattan has underestimated the benefits in avoided grid costs and abatement by at least 40 per cent. That’s a critical number that delivers an entirely different outcome.

And then – like so many other reports – it adds up the costs, but not all the benefits. In this case, it dismisses the lowering of wholesale electricity prices caused by the proliferation of solar PV, which, it argues, “does not constitute a net economic benefit to society”.

Instead, Grattan borrows terminology from the Warburton Review to describe this lowering of wholesale prices as a short-term financial transfer from “existing generators to electricity retailers” who may then pass these savings onto consumers.

Well, it just happens that most of those existing generators and electricity retailers are one and the same entities – hence the name “gentailers” (Origin Energy, AGL Energy, EnergyAustralia). If they are pocketing the profits, it’s the incumbents with their hand in the till, not the solar households, and a regulatory fault.

And there is no doubt that wholesale prices have fallen. The Queensland government’s biggest coal generator, Stanwell Corp, blamed solar PV exclusively on its inability to deliver a profit result in 2013.

Green Energy Markets, in late 2013, estimated the cost reduction from solar PV at $2.70/MWh. Spread over a year that amounts to $540 million in savings (based on the 200TWh consumed in the National Electricity Market). Spread over the 15 years used in Grattan’s calculations, that amounts to $8 billion.

But the University of Melbourne argued that the savings were even greater. It suggested that rooftop solar PV could be responsible for a reduction of $2-$4/MWh in average price per 1,000MW across the NEM. Given that there is now nearly 4,000MW of solar PV installed in the NEM (that doesn’t include WA), then the savings per year could be $2 billion. Over 15 years, that makes a total of $30 billion.

Those falls in wholesale prices do find their ways through to the general market. It explains why some major energy users – data centres for banks for instance – pay a price of just 8c/kWh. That’s one-quarter what the average household pays. The same experience can be said of Germany, which now delivers some of the lowest costs of electricity to big business, because of the fall in the wholesale price.

That cross subsidy, from homes to business, is just one of many that exist in the Australian market.

Not only do households pay higher bills than businesses, people in the city pay more to offset the cost of delivery to regional areas. In Queensland and Western Australia, this amounts to $600 million a year in each state. Over 15 years, that’s a total of $18 billion. If those subsidies were removed, there would be an incredibly powerful economic incentive to install solar, storage and micro-grids, as some networks suggest.

Then, of course, there is the cross-subsidy to those households using air-conditioners, estimated at $330 a household, per year.

Another juicy, but largely ignored subsidy is the so-called “head-room” for retailers. This is the kitty used by the retailers to offer “discounts” to consumers. In NSW, this headroom costs around $140 per consumer – or a total of around $140 million. It’s bit into their power bills, just so the retailers can offer a discount to neighbours.

Grattan says that the cross-subsidy in the various solar schemes amounts to $14 billion. There is no doubt that those schemes, mostly wound back several years ago, were more expensive than they needed to be. Former Queensland Premier Campbell Newman doubled the cost of the most expensive scheme, the Queensland premium feed-in tariffs, by giving six weeks notice of its closure, inviting tens of thousands to join at the last minute.

The Australian PV Institute says Grattan’s estimates do not take into account the fact that all mainland distribution network operators (DNSPs) in the NEM, apart from in Queensland and since July, 2014, in NSW,  operate under a weighted average price cap (WAPC).”

This means that the fall in revenue driven by reduced electricity use is actually borne by the DNSPs, not by customers as Grattan says. This applies to $3.7 billion of their costs to customers. (See more of the APVI analysis here).

And the benefits of some of those subsidies, the small-scale renewable scheme went to the retailers, not solar consumers. That was because the retailers were allowed by all pricing regulators (with the notable exception of the ACT) to charge $40 for every certificate even when the market price was little more than half that.

Grattan goes on to talk of the cost of network upgrades. This, again, is a little one-sided. As SA Power Networks has said, solar PV has not only shifted, narrowed and capped the peaks (the same has happened in Western Australia); it has also added stability to the grid in the summer heatwaves. EnergyAustralia says soalr PV accounts for 25 per cent of demand at peak times, which in any case varies enormously from summer to winter, north to south, and east to west.

Grattan takes a similarly narrow view in its estimate of emissions abatement costs. It puts these at $170/tonne of avoid emissions, and then compares them unfavourably with other carbon prices. But again this ignores the longer life of the solar systems, and the fact that three times as many systems will now be deployed in Australia, with few if any subsidies.

And that forms part of the broader benefits not included in the Grattan report. Yes, initial subsidies were more expensive than they needed to be, but Australia now has the cheapest solar PV anywhere in the world, and the reductions in the wholesale price and the emissions abatement will continue.

And that benefit will be amplified when battery storage becomes available – as it will do in a matter of weeks when AGL Energy rolls out a plan to put batteries on customer rooftops at no upfront cost (apart from signing up for a very long power purchase agreement).

As Muriel Watt, from the APVI, told RenewEcoomy: “All the supposed negative impacts on the network, if they exist, are likely to be reversed when batteries come in, and PV households will be the first to install them, potentially making the grid much stronger, if the utilities provide the right incentives.

“Why not have headlines which say the investment people have made in PV is soon to provide billions in benefits to all consumers, because adding storage provides a much more resilient power system?”

And this is the crunch. When this happens, solar PV, with battery storage, will be even more effective in reducing or even eliminating the peaks. So much so, that some analysts say that the business case for peaking gas generators – the equipment we usually use at great cost when everyone switches on their air-con at the same time – will lose their economic base.

Grattan also has a crack at costing a move off-grid, arguing that it would be horrendously expensive. Its costings of technology are highly debatable, but it misses an essential point.

off grid

It assumes that the individual households motivated enough to go off grid will make the same fundamental error that the grid made these past 10 years, creating a 20 lane highway that is needed for only a few hours a year, when a two lane highway will suffice for most of the year, and a 10 lane highway at peak times.

“From my 20 plus years of experience designing and building energy systems for off-grid homes, I find they typically have energy footprints of half or less of their on-grid cousins,” says Glen Morris, from the Australian Energy Storage Council, and one of the foremost experts in the country.

“Appliances are just getting better and better – take air conditioners, hot water heaters, even cloths dryers… their energy savings have been in the order of 3-5 times their predecessors of ten years ago.” Indeed, Morris says buying an efficient fridge might cost an extra $1500, but it is likely to save $15,000 in infrastructure costs. In this, households are learning lessons that the grid operators never did.

Grattan’s numbers look strange for other reasons. It contrasts a household’s grid costs of $1300 a year (they must not use much electricity) with a total off-grid cost of $72,000, with a 15kW solar system and 85kWh of storage. That means they must be using lot of electricity, and make no allowances for changed usage.

That has been the underlying cause of the massive over-investment in the grid, and the economic opportunity for solar and now battery storage. And it is much easier for a household to adapt their energy consumption to work around those peak periods, or when the supply is low. It is even easier for a small community of off-grid homes to do the same. Hence the push to micro-grids. No big networks or retailers needed there.

The headline numbers in the Grattan report are little more than scare mongering. And the industry, one hopes, has moved on. The signs are already good. Network operators talk of a future dominated by solar and micro-grids. Even the retailers are getting on board.

Where once AGL energy demonised solar tariffs as a “scam”, it is now offering to buy a solar system for its customers and stick it on their roof. AGL will even buy you a battery system. Where once Origin once called solar households “free riders”, implying they were stealing from their neighbours, now they are urging customers to use their rooftops to “steal from the sun.”

Solar has won. Storage will see to that. It’s just that some people don’t know it yet. The onus is on the energy industry to be smart about its response, and not rely on dumb economics.

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40 Comments
  1. david_fta 4 years ago

    Over at Climate Spectator, ex-Grattan Tristan Edis simply argues that Grattan’s numbers might make sense if it was still 2009, and solar was still $10,000/kW – but thanks in part to all the industry-creating support, installed solar is down to ~$1,000/kW.

  2. Ken Dyer 4 years ago

    The Grattan report correctly identifies the subsidy dollars, that in no way equal the billions of dollars of subsidies that taxpayers have coughed up for years to subsidise the coal industry. The personal expenditure by taxpayers,of millions of their after tax dollars to purchase solar panels also seems to have been overlooked.

    As a policy, solar power subsidies were inspired and we should be thankful that right thinking Australians sacrificed their own hard earned after tax capital to install solar panels, and that the government of the day helped them. Anybody who failed to see the personal economic benefit of installing solar panels is a fool.

    The age of coal in Australia is coming to an end. This time of centralised, command and control, extraction resource base energy source exploitation will not end because we run out of coal, it will end because in addition to policy of previous governments, the sun is infinitely superior as an energy source, and the constantly evolving products, technologies and architectures that provide the means to harness its power are superior to the fossil fuel technologies of the 19th Century.

    The Grattan Report not only spells out the price of progress, it also foreshadows the demise of the existing energy architecture that will be replaced by smaller, distributed power plants everywhere. It is money well spent for the betterment of our World, but, we ain’t seen nothing yet!

    • Chris Fraser 4 years ago

      Exactly Ken the private investment that was leveraged out of the early subsidies makes them cheap relative to those parasitic FF bottom-feeders.

    • Jacob 4 years ago

      Yeah but the subsidies we paid helped solar panel factories outside AUS. What we should have done is put money into a solar panel factory or 2 in AUS.

  3. juxx0r 4 years ago

    I wonder what cold, dark hell they modelled where 7kW of solar and 35kWh of batteries would leave you without power for 18.25 full days a year, and this coming after two days of almost total darkness immediately prior in order for you to deplete your 35kWh of batteries.

    • WR 4 years ago

      Daily household energy use of about 14 kWh/day in Melbourne would give a result like that if the householders weren’t using any kind of demand management.

      • juxx0r 4 years ago

        Yeah, but assuming one spends $34k on a solar and battery system that will leave one in the cold and dark for 18 days a year, presumably it’s dark outside at midday too, you’d think one might upgrade one’s hot water system and virtually halve their demand.

        • WR 4 years ago

          Yep. At current prices you’d want to be aiming at an average demand of less than 5-6 kWh/day if you wanted to go off-grid.

  4. disqus_3PLIicDhUu 4 years ago

    Should have been large scale renewables from the outset, not an adhoc, patchwork of domestic installs, that’s what neoliberalism has brought, an expensive mess of systems owned by those that could afford it, profiting of those who can’t.
    Probably doesn’t directly relate to the Grattan report financially, but the whole domestic solar scheme generally, would have been much better served by large scale renewables, from the outset, we’d have much more installed, at less cost, then linking this to large scale storage would be the next natural step, instead storage will now be a hit and miss affair, depending on Mr/Mrs Smallscale.
    All too late now.

    • juxx0r 4 years ago

      What a load of rubbish. You’d have 5c/kWh solar centrally generated and delivered to your door for 25c/kWh, 45c/kWh, 50c/kWh? Or you can make it on your own roof for 10c/kWh without subsidy.

      • disqus_3PLIicDhUu 4 years ago

        There you go there’s the neoliberal talking about themselves being financially better off, compared to the nation having a better scheme of large scale renewable generators, that we know would have been engineered correctly to extract the maximum amounts of energy and have a proper maintenance program.
        How about yours, perfect north facing, tilt angle perfect etc?

        • Clem Stanyon 4 years ago

          I’d say that there is room for both; centralised anything leads to corruption, so the decentralisation of power generation will break the control of the neoliberal companies. If local or state govs had been smart, they would have organised massive buy-ins into the technology and distributed them for a fee, much like AGL and etc are finally doing. There again, though, is the issue with the corrupting influence of centralised power.

        • juxx0r 4 years ago

          I don’t see why you think that it’s better? It’s certainly not more efficient else it would be cheaper. Why isn’t it cheaper?

          And extrapolate 20 years, your own roof for 4c/kWh, or from the grid for 60-80c/kWh, another 20 years, your own roof for 2c/kWh or the grid for $1/kWh.

          Neoliberal, comedy gold, I want a new car, would you like to buy me one?

        • Colin Nicholson 4 years ago

          Why would you want to face it perfectly north?

          • disqus_3PLIicDhUu 4 years ago

            So the system is optimized.
            So what’s better 1000 x 3kW randomly installed, systems or 1x 3MW solar farm.
            I’ve installed hundreds of domestic systems for solar companies in all types of orientations, with shading occurring and no monitoring or ongoing maintenance or cleaning, how do this stack up to a solar farm with correct orientation, possibly even tracking, and a maintenance program, the farm can even agument grid parameters.

    • Cooma Doug 4 years ago

      If large scale storage is a good idea, why don’t we use the 5000 gigga watt hours that is already available on the vic and Nsw grid. We dont use it as storage because its a bad idea on the hv grid.
      Im guessing you wont know where that storage is right now and that it has been there ok ver 50 years.

      • disqus_3PLIicDhUu 4 years ago

        Large scale wind and solar connects to the HV grid, storage can smooth out the intermittent behaviour of both, at the source, acting immediately and also as the amount of storage grows, remove the need for many peaking gas generators, by offsetting.
        If your talking hydro storage, is it always available to smooth out the whole national grid, immediately, on call and are they still using the wasteful method of using gas generation, to pump hydro back up the Snowy scheme, for storage?

        • Cooma Doug 4 years ago

          What you say is true. However the storage is not used because energy is already available in the dams and the market price determines the generation. When the storage is on the consumer side of the meter, that is a different ball game.

        • Cooma Doug 4 years ago

          The snowy scheme has never pumped gas generation. They could pump 9 gwh a day but, why pump gas? To store energy on the HV grid in this market makes little sense today.
          Pumps used to keep coal generators in service in low loads. That is a dead duck.

          • disqus_3PLIicDhUu 4 years ago

            Wrong it has pumped hydro, Tumut 3 station and the scheme was using gas off peak, to pump, therefore incurring losses in both directions pumping and then generating from that water.
            http://www.abc.net.au/worldtoday/content/2007/s1884682.htm

          • Cooma Doug 4 years ago

            write to me [email protected] and ill tell what does happen

          • Cooma Doug 4 years ago

            I operate those pumps. They have never run to store gas generator output.

          • disqus_3PLIicDhUu 4 years ago

            So where do they get the energy from?

          • Cooma Doug 4 years ago

            Write to me at [email protected]
            Ill send you a detailed response

          • disqus_3PLIicDhUu 4 years ago

            I’ll do that thanks, be interesting to know as we’re being informed different.

    • Jacob 4 years ago

      Spot on.

      Same with the cash for clunkers program.

      Both are a sheer waste of money.

      The $9 billion would have been better spent on removing level crossings in Victoria and putting $1 billion on the table to get Musk to build his huge solar panel factory in AUS instead of Buffalo, New York.

    • Roger Brown 4 years ago

      Thanks to Newman & LNP cutting off the solar deal , I & 100,000+ jumped in and Borrowed the money and installed solar Power on our roofs to collect free power from the sun and sell it to Newman for .44 cents and Origin gives me .06 cents a kw till 2028 .Going by the rate the LNP ramped up charges in 3 years (43%) and the service fee is 400% UP , the .44 cents is going to hit before 2028. Already have solar hot water(22 yrs) and a 3 kw solar power , so a couple of yrs time ? Batteries and more panels and then cut the dirty power line coming in.

  5. Steven Zilm 4 years ago

    data centres for banks for instance – pay a price of just 8c/kWh.

    Well, I’m calling bullshit on this one….. That would be their energy rate, you’ve forgotten about the network charges.

    • Giles 4 years ago

      You can call it what you want. But why the hell would they pay 8c/kWh when the average wholesale (energy rate) is less than 4c/kWh. That’s the massive free kick they get, they effectively dodge the network costs. That’s the cross subsidy. that’s the scandal.

  6. Schit Cunce 4 years ago

    “Solar has won. Storage will see to that”.. What a disingenuous statement. Asserting that solar has won because of a non-existent storage technology is intellectually dishonest. Reliable grid level batteries do not exist and will not exist in the foreseeable future.
    As I’m reading this, at 9pm, the NEM watch widget embedded in the page shows that non-hydro renewables are contributing 0.5% to NEM currently. Which is to say, totally useless. A future grid based on unreliable energy sources based on climatic conditions would have me cold, hungry and sitting in the dark on a night like tonight.

    • Giles 4 years ago

      “Reliable grid level batteries do not exist and will not exist in the foreseeable future.”
      You better tell Ergon Energy, the operator of the biggest network in Australia, because they are installing 100 grid level battery storage systems. While you are at it, you better tell AGL chief Andrew Vesey. Under his direction, his former company AES was the biggest installer of grid level battery storage in the world. Schit eh!

      • Schit Cunce 4 years ago

        NEM is on 23000mwh as i type this. Non-hydro renewables are, for all intents and purposes, zero. Although I admire your optimism that a few dozen 100kwh batteries are somehow significant or even relevant to making solar viable, let alone that it has won, you might want to try some maths instead.

        • John McKeon 4 years ago

          I go right along with Giles’ triumphalism. Basically he is saying that those of us who want to avert a tragic climate catastrophe have completely won the argument against the ‘merchants of doubt’ and of self interest.

          It remains to be seen to what degree we have been too slow to commit to action.

    • WR 4 years ago

      For Australia to run a 100% renewable electricity supply, it would require about 200-250 thousand MWh of storage. That would be equivalent to the battery capacity of about 6 million electric cars. Maybe you can’t see it, but I can foresee that happening within the next 20-30 years.

      • Sim 4 years ago

        Not if the hydro power we have was used as an alternative to batteries. The centralised power has had it too good to long. They got greedy under Liberals they put prices up then Labour due to environmental reasons. The Carbon tax only made it worse. Prices were pushed far to high. Now they are paying for it as people decide to go Solar and off grid in some cases just to be free of continually gouging of their pockets. You pay now if you have a little extra for your retirement or otherwise. I still think financially with the subsides it is a little to high a price to make money off grid. But once you have gone off grid. you get used to working within your limits.

  7. Clem Stanyon 4 years ago

    Nice article. Could be improved with two things:
    1) Headings
    2) A graph of your own to contrast against each of TGI’s. There’s a reason people use pretty bar graphs to make a point… which is similar to the use of headings in effect.

  8. Miles Harding 4 years ago

    The good news has to be Stanwell Corp being unable to make a profit (in 2013). The remainder will surely follow as their peak sales are trashed by the inevitable uptake of PV and batteries. Onward to the brave (re)new(able) world!

    It would seem that the QLD govt should be taking this as a signal as to where the new world lies and abandon the idea that coal is part of any viable business. Did they buy this report?

    It’s good to see consumer behavior being given some consideration. It have been my experience that consumers halve their energy use when they become ‘energy aware’. Add to this PV-friendly behavior changes and the need for battery storage is minimised.

    I may have finally found a use for the Telstra ‘info-fridge’ — Put a big counter on it that shows minutes to empty for the battery. Also needs a wailing sound to accompany the battery being flogged by the toaster and kettle.

  9. Peter Grant 4 years ago

    Thanks Giles, but there is even more mirth to be had!

    For example
    1. The discount rate is set at 5% this may be reasonable for buisness but for households that are getting a pre tax return of 2.5% from the bank this is an excessive assumption that increases the capital costs of solar.

    2. The assumed energy inflation rate of 1% pa comes from another planet – in my world in WA retail tariffs increased by about 5% last week the forward estimates predict this to continue.

    3. On page 32 the report asserts that “the total cost of relying completely on the grid (with no solar or storage) for 10 years is about $13,000” (Giles $1,300 pa less if one applied that absurd 1% inflation assumption) with $0.50 day supply charge this gives a daily average consumption of about 12kWh . On the same page the same household is said to require 17kwh per day of backup storage if it went off grid…

    The basic economic assumptions and unsupportable assumption and maths seems plain wrong.

  10. Sim 4 years ago

    Was just offered a 45kw energy storage(top quality batteries) with 6.5kw solar panels and inverter installed for Aus $ 29,000. Top inverter system can be included for extra $4000 or Total $33,000. So things are still improving.

    • Sim 4 years ago

      House not finished for another 6 months. May be better not to connect to grid which will cost over Aus$5000.

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