In an article published last week on Renew Economy (Bigger home batteries are taming the solar duck – and creating more room for rooftop PV) I pointed out that the average size of battery system being installed in the last few weeks has reached 20 kWh.
Interviews we’ve conducted with a range on solar-battery industry participants suggests that the average size of household battery will continue to rise, with 25kWh seen as most likely.
This size of battery will provide more storage capacity than most households will need to meet their own daily electricity consumption requirements. That remains the case even where they use electric rather than gas heaters and have an electric vehicle to charge.
In the prior article I highlighted that this would have a substantial positive benefit in allowing us to regulate the flow of power from rooftop solar to align far better with electricity demand. Yet it also highlights the need for reforms in three key areas.
Here are three big ones to consider.
1. Give consumers the choice to join virtual power plants that are separate to their power retailer
Having these household batteries enrolled in Virtual Power Plants will be important to maximising their potential to deliver energy when the broader market most needs it.
Yet so far customers haven’t been terribly interested in the VPP packages power retailers have been offering. We can see this in the fact that uptake of the VPP inducement under the NSW Peak Demand Reduction Scheme has been incredibly low.
The reality is that most electricity retailers aren’t all that good at engaging with households about how to use technology to lower their energy bills. Sales of solar and batteries have been almost entirely led by companies that are specialised in this equipment.
Energy companies have certainly tried to get in on the act, but have never really succeeded. For most small power retailers they don’t have the resources or the capabilities.
In terms of the larger retailers, they have the resources but are constrained by consumer mistrust and internal conflicts due to their substantial investments in large generation assets.
Consequently, we need to let householders have the same level of choice as large electricity consumers. Large consumers are free to join VPPs delivered by companies that are separate to their electricity retailer, and that choice should be extended to householders.
2. Put a freeze on network expenditure that will be imposed on solar owners to accommodate increased midday exports that probably won’t happen.
It is important to recognise that not only is the average size of battery system quite large but also that they are being installed in large numbers – greater than the number of solar systems being installed at present.
As I noted in my previous article, once you couple a 25kWh battery to a solar system of 10kW or less, the level of generation that solar system will export to the grid falls dramatically.
Almost all the generation is soaked up charging the battery and servicing the household load. So given battery installations exceed solar installations we are going to gradually see less midday solar generation on the network than we have at present.
This means that the Australian Energy Regulator needs to put an immediate freeze on any expenditure networks intend to pass onto solar owners (via the so called “sun-tax”) on the basis it is needed to accommodate increased solar exports to the grid. This could saddle us with another round of gold plating.
Dynamic export controls are a sensible reform (if done with input from solar equipment manufacturers and on a nationally consistent basis), but upgrades of physical distribution network infrastructure now look unlikely to be necessary to accommodate more solar.
3. Distribution networks’ revenue should be contingent on the level of consumer demand for network capacity
Thirdly, we need to question the underlying basis for how distribution network revenue is regulated. At present networks are guaranteed a level of revenue tied to how much they’ve spent on network assets (known as the Regulatory Asset Base) irrespective of whether there is the consumer demand for the capacity of assets built.
In addition, networks also charge a financing cost on top of the cost of their asset base. Of pivotal importance is that the financing cost is priced at a significant premium over what is known as the “risk-free” government bond rate.
The entire basis for them receiving a premium over the government bond rate is because distribution network investments are supposedly more risky than government bonds.
Yet unlike a government bond they face no risks associated with the impact of inflation which they are allowed to pass on to consumers.
As another example, when a Victorian network company was successfully sued as being culpable for bushfires ignited by powerlines, they were able to pass on the powerline remediation and extra insurance costs to consumers. So exactly what risks are we compensating them for?
Consumers, and the governments which represent them, should probably be asking why networks shouldn’t have to bear the risk from declining consumer demand for their service – network capacity.
The present approach is to give them money for nothing – they get a nice risk premium but then if they made a mistake in overbuilding network capacity they face no consequences. These network shareholders can’t have it both ways.
Furthermore, it should be noted many are large international corporations that are very capable of managing and diversifying their risks (e.g. Cheung Kong Holdings, Brookfield Asset Management, State Grid Corporation of China, Singapore Power, Kohlberg Kravis Roberts & Co, Ontario Teachers’ Pension Plan Board, Macquarie Asset Management, Qatar Investment Authority, British Columbia Investment Management, the list goes on).
If we grant these shareholders immunity from demand risk, then the alternative will effectively be a tax to compensate old energy companies for consumers taking advantage of advancements in new, low emission energy technologies.
This leads down two equally problematic alternative paths.
One is that networks keep increasing their charges per unit of energy or peak capacity consumed, which will drive more people to use technology to reduce consumption from the grid leading to further increases in charges for others reliant on grid electricity.
The other path is an increase in the network fixed charge, which penalises both:
- The poor – who tend to consume less electricity than the rich; and
- The virtuous – who have sought to reduce emissions by investing in clean energy.
Advances in battery technology should be a blessing to consumers, allowing them to force networks to finally compete for their custom. The shareholders in these businesses shouldn’t be protected from the risk of competition from new technology, given they’ve sought and received material risk premium returns on their assets.
Tristan Edis is Director of Analysis and Advisory at Green Energy Markets. Green Energy Markets assists clients to make better informed investment, trading and policy decisions in energy and carbon abatement markets.
