Why rooftop solar makes networks such a hard sell

Report says asset value of NSW networks needs to be written down by nearly half so they can compete with rooftop solar. If they don’t, consumers will be forced to pay more and the assets will end up being stranded.

The NSW government will have to write down the value of its electricity networks by nearly half if the soon-to-be privatized poles and wires business is to compete with rooftop solar and other distributed technologies such as battery storage.

That’s the assessment of a report commissioned by the Public Interest Advocacy Centre, and completed by Bruce Mountain of Carbon & Energy Markets.

It finds two factors – the massive overbuilding of network assets in recent years and the plunging cost of rooftop solar – means that the poles and wires can no longer compete with rooftop solar.

It recommends that the regulated asset base of the networks be written down from $22 billion to $13 billion, a fall of $9 billion. Only if this happens will the networks be able to compete with solar and embrace new technologies such as storage, electric vehicles, and evolve into truly smart grids.

It’s an important finding, particularly as the NSW and the Queensland governments try to position themselves to sell their network businesses. The higher the regulated asset base, the higher the returns being sought by the new owner – and the higher the cost to consumer.

The report says that the long terms cost of rooftop solar is already cheaper than just the delivery cost of grid-based power – which is basically just the transmission and distribution costs.

An earlier study by Mountain estimated the life cycle average cost of electricity delivered by the 900,000 solar PV rooftop systems installed in Australia between 2010 and 2013 was 16c/kWh, and average costs of rooftop PV have declined further since that time. That is cheaper than the delivery charge of the network, as shown below.

“In other words, households in NSW are now able to produce solar electricity for themselves more cheaply than the price of network services alone, even before counting the cost of electricity production and retailing. This has potentially significant implications for network stranding,” Mountain says.

It estimates that by cutting the value of the regulated asset base, bills for consumers will be reduced by around $200 a year for some customers, and up to $325 a year for those in country NSW.

If the networks want to compete, they need to work off a smaller asset base. That, says Mountain, would give nw owners more confidence in the future of the business, and may encourage them to pay a higher multiple.

What clearly won’t work is for the government to maintain the high regulatory asset base and try to “lock in” the business model by erecting barriers to rooftop solar and other technologies, and against other service providers. This they have been doing, as we point out here and here and here. Still, 9 out of 10 Australian households are thinking of moving to solar, if they haven’t already.

A push-back from utilities, as Michelle Groves, the CEO of the Australian Energy Regulator pointed out this week, will simply encourage customers to generate and store their own electricity and leave the grid. Mountain says that if that happens, then the assets will become “stranded.”

It’s a thorny dilemma for the NSW and Queensland governments who are trying to privatize their networks and get top dollar. Queensland has even higher costs per consumer for the delivery of electricity than NSW, and is state owned generators are even more exposed to the incursions of solar than NSW.

This graph shows that much of this has been decisions made in the last 10 years.

RenewEconomy has raised the issue of asset write-downs previously, arguing that until the networks reduce those costs that are already locked in from previous investment, then they will price themselves out of the market.

The Grattan Institute has made similar arguments. The network lobby group, however, has railed against any such suggestions, mainly because any write-down of state assets would probably have to flow through to the private sector.

It complains of “regulatory risk” – something that didn’t bother it so much when arguing for the renewable energy target to be changed – but it’s really just an economic reality that one technology is being superceded by another, and it needs to re-price its offering to compete.

And just how expensive is the network?

Mountain says that the asset base of the network in NSW is $6,800 per connection – that is about three times as high as it was in Victoria when those distributors were privatised, and about seven times higher per connection than the British distributors when they were privatised. And it about 10 times higher than the three main investor-owned utilities in California.

Despite this over-investment, overall demand from the grid is falling, and so is peak demand, and it will continue to be reduced by the anticipated influx of rooftop PV, which will jump from 5 per cent of peak demand un 2013 (by capacity) to 23 per cent by 2030.

Only one is 10 households in NSW have installed rooftop solar PV, compared to one in five in South Australia and Queensland.

“Since it is now possible for households to produce their own electricity for less than their network service charges (and less than half their total grid-supplied electricity charges) it would be surprising if increased production from rooftop PV did not account for a large part of any future increases in household consumption,” the report notes.

“Advances (and cost reductions) in battery storage would be likely to significantly increase the uptake of distributed generation and eventually disconnection from the grid in some cases, starting with ‘fringe of grid’ areas.”

Mountain does not mention this, but there is also the issue of 160,000 households in NSW currently receiving a generous gross feed in tariff of 66c/kWh.

When that tariff runs out at the end of next year, it will be highly likely that many of these households will look to consume their electricity, possibly with the addition of storage, rather than putting it into the grid for little or no reward.