Why generators are terrified of solar

Here is a pair of graphs that demonstrate most vividly the merit order effect and the impact that solar is having on electricity prices in Germany; and why utilities there and elsewhere are desperate to try to reign in the growth of solar PV in Europe. It may also explain why Australian generators are fighting so hard against the extension of feed-in tariffs in this country.

The first graph illustrates what a typical day on the electricity market in Germany looked like in March four years ago; the second illustrates what is happening now, with 25GW of solar PV installed across the country. Essentially, it means that solar PV is not just licking the cream off the profits of the fossil fuel generators – as happens in Australia with a more modest rollout of PV – it is in fact eating their entire cake.

Both graphs were published last week on the website Renewables International, and were sourced from EPEX, the European power price exchange. The first graph, from 2008, shows peaking power prices rising to around €60/MWh and staying there for most of the day, with some visible peaks around noon and the early evening – the size of which would depend on the temperature and the usage.

The second graph shows a brief leap to €65/MWh around 9am, before the impact of solar PV takes hold – erasing the midday peak entirely and leaving only a smaller one in the evening. The huge bite out of day-prices is also a bite out of fossil fuel generators’ earnings and profits. Note that the average peak price in the second graph is barely higher than the baseload price.

Deutsche Bank solar analyst Vishal Shah noted in a report last month that EPEX data was showing solar PV was cutting peak electricity prices by up to 40 per cent, a situation that utilities in Germany and elsewhere in Europe were finding intolerable. “With Germany adopting a drastic cut, we expect major utilities in other European countries to push for similar cuts as well,” Shah noted.

Analysts elsewhere said one quarter of Germany’s gas-fired capacity may be closed, because of the impact of surging solar and wind capacity. Enel, the biggest utility in Italy, which had the most solar PV installed in 2011, highlighted its exposure to reduced peaking prices when it said that a €5/MWh fall in average wholesale prices would translate into a one-third slump in earnings from the generation division.

Imagine how that graph might look in Australia with a similar deployment of solar in a country that actually has some sun. Wind has already helped reduce wholesale prices in South Australia, although it has left daytime peaks more or less untouched. Solar would have an altogether different impact.

The NSW government – which owns the state’s generators, if not their output – doesn’t want to find out, and has abolished the feed-in tariff, on the basis that it costs too much. But here’s another interesting graph.

Figure 1: components of average retail bill 2011-2012

It comes from the Australian Energy Market Commission’s report on its “Power of Choice Review,” looking at range of demand management and energy efficiency opportunities, that was released on Friday. It suggests pretty clearly that the cost of green energy incentives – the renewable energy target, feed-in tariffs, and demand management and energy efficiency schemes – in Australia is minimal. They total just 6 per cent of the cost.

The average power bill is dominated by transmission, distribution, wholesale and retail costs. This is what the AEMC report is trying to address – what measures can be introduced that can help consumers protect themselves against rising electricity costs? – and it canvasses a whole range smart grid and smart appliance opportunities that could be introduced.

It’s not quite clear how easily that can be introduced. Most utility, generation and retail businesses are geared towards simply selling more electrons, or building more poles and wires. The AEMC report says some $11 billion of current $45 billion spend on network upgrades could possibly be avoided, but it is not yet ready to offer solutions. Notably, it says it has to try and unravel how to apportion costs and benefits among consumers, generators, retailers and network providers. IPART tried to do the same thing in its review of solar feed in tariffs and declared it to be too hard.

And just letting the forces of the market work is not necessarily an answer either. Competition in the retail market hasn’t achieved much because, as the AEMC pointed out in a previous report, “the increase in retail competition has served to increase costs” and increased retail margins are expected to contribute more to rising energy costs than green energy schemes.

While the AEMC report is at least a step in the right direction, there is a big question remaining over whether the energy industry is moving fast enough. It’s not simply a matter of changing the rules and the incentives, it is also a question of culture.

Having spent decades simply delivering their product to the door using a “take it or leave it” approach (did the consumer have any choice?) the energy utilities now realise that they have to learn how to bring their business inside the household – in ways that the AEMC envisages; with smart meters, in-house displays, load controllers, storage and the like.

A study in 2010 from Ernst & Young showed how difficult a task that would be. Electricity retailers were not skilled at customer service. There was little interchange with the customers, and if there was, it was sparked by complaints around blackouts and connections.

The report noted that, with the deployment of new technologies, power and utilities companies will come under competitive attack all along the value chain, as new interactive customer relationships and new competitive models allow third parties to enter the market. The incumbents can choose either to evolve, or face a revolution where “market rationalities and business strategies change completely.”

The recent experience with feed-in tariffs suggests that the utilities will be slow to evolve. The first graphs from Germany illustrate their fears, but as David Crane from NRG pointed out last week, trying to stand in the way of this evolution could be pointless.

The arrival of solar PV, and the achievement of parity against retail prices, means that consumers do now have a choice. As Jeff Bye, the head of solar at CBD Energy told RenewEconomy last week, he is fielding dozen of calls each week from consumers asking how they can install solar and be taken off the grid.

“People are annoyed by their growing bills – even if they reduce their usage, the bills are still going up,” he says.

Bye is advising his customers to stay connected to the grid, but to use it simply as a backup, a sort of battery of last resort. This can be done, he says, by using a 3-5kW system on the roof, battery storage and a power router – which can set excess PV power to go into the battery instead of the grid, and can source energy from the grid to top up the batteries when they get low.

“Customers are making decisions on what they are spending – 20-30c/kWh – not on what they export,” he says. On a larger scale, the City of Sydney is planning on achieving its own independence for the 300MW of capacity used within its boundaries through a network of cogeneration and tri-generation installations, backed up with distributed energy such as solar PV and battery storage.

Postscript: after strong interest from readers, Jeff Bye has expanded on his comments about doing away with the grid (almost). It’s interesting stuff.