Balancing the rooftop PV surge and new tariffs

Australia needs to weigh decisively the loss to networks from PV against the power augmentation that such systems avoid before it can move sensibly on new tariffs.

This is the third article in a four part series focusing on rooftop PV and, particularly, the 899,017 rooftop PV systems installed between the start of 2010 and end of 2012. The previous two – available here and here – looked at the question of windfall gains and free-riding, respectively. This article looks at the question of whether the rapid rise of rooftop PV justifies the adoption of new tariff designs.

A report by ACIL Allen to the Energy Supply Association of Australia – an association that represents the chief executives of electricity producers and distributors in Australia – suggested that households with PV should compensate the incumbent centrally dispatched electricity producers and retailers and also the monopoly network service providers. Their argument is that, by meeting their own needs for electricity through their rooftop PV “they avoid paying for electricity (from the grid) they do not need”. 

This claim is not credible in respect of compensation to grid-based electricity producers for their loss of market share to non-grid competitors. However, in the case of “compensation” to monopoly network service providers – or more precisely, to their other captive customers – the arguments are more complex.

The argument for compensation is that networks were designed to meet expected demands – in the case of households around 20 kVA per household. Households with PV are still drawing similar peak demands from the grid, but as a result of their rooftop PV their annual consumption from the grid is much lower and so their contribution to the recovery of the fixed costs of the grid is lower.

The commonly accepted view in Australia is that the current regulatory arrangement grants monopoly rights to network service providers and with this an implicit right to recover revenue lost from one group of customers, from the remaining customers. Network service providers do this, in due course, by raising their prices so that they recover their regulated revenue entitlement. In this sense, household PV, like other distributed generators or indeed other forms of demand reduction, are able to impose higher prices on others if they reduce their purchases from the grid. Consequently, it is argued that households with PV are being subsidised by other electricity users.

On the other hand, it is also necessary to have regard to positive externalities of rooftop PV for which those households with PV are not being currently compensated. In Australia, leaving the FiTs to one side, households with PV are paid 6-8 c/kWh for electricity exported to the grid. This is determined by regulators based primarily on the energy value of their grid exports. But the discussion in the previous article presented preliminary estimates that the 899,017 rooftop PV systems constructed between the start of 2010 and end of 2012 avoid network augmentation that could be valued at between $0.9 billion and $2.1 billion or between $72 million and $168 million annualised. While more needs to be done to confirm the magnitude with greater certainty, the impact is likely to be non-trivial.

These 899,017 rooftop PV systems produce around 3.4 TWh per year, of which 1.8 TWh displaces electricity in those households that would otherwise be supplied by the grid. We estimate that this results in around $252 million of income that monopoly distribution network service providers have lost from households with rooftop PV. In many cases, this loss is likely to be more than the network augmentation that PV avoids, although a more rigorous assessment may find that in some parts of Australia the benefit exceeds the disbenefit.

If we assume that network service providers have a right to recover lost income, then some form of tariff adjustment is needed to adjust for the difference between the disbenefit of lost income and the benefit of network augmentation avoidance. However, it is hard to see that this difference will be large, and the question remains whether network service providers should have the right to recover all of the income that they have lost, effectively to competitors, from their remaining captive customers.

The question of the appropriate way to change tariffs to households with rooftop PV is also contentious. A peculiar feature of the contemporary Australian tariff debate is the view, seemingly widely held, that cost reflective tariffs for households with PV will not be politically acceptable, and therefore a “crude way” to fix the problem – of the network disbenefit – is to raise the fixed charges that households with PV pay for their usage of the network.

However, households with PV are generally connected to half-hourly meters and have typically been placed on diurnal tariffs. Tariffs for households with PV that are more cost reflective – i.e. greater temporal and locational differentiation – would surely encounter little (reasonable) opposition. 

Furthermore, the proposition that fixed charges should increase is likely to contradict the proposal by the Standing Council on Energy and Resources, that tariffs should be based on long run marginal cost methodologies.

In considering changes to tariff structures, it is also essential to be clear on the existing situation. Network and energy charges are bundled in the tariffs that retailers charge to households. There are no regulatory controls on the way that network charges are reflected in the tariffs that households actually pay, and the split between fixed and variable elements of both network and retail tariffs, vary widely across Australia.

An acceptable resolution of the tariff debate in Australia will inevitably reflect not just economic arguments but also perceptions of fairness and equity. Again there are conflicting views. On the one hand the popular perception that overly generous FiTs have led to windfall gains for PV owners – a misconception we suggest (see our first article) – will sway public opinion. On the other hand households with rooftop PV will smart at the suggestion that they should pay higher network charges because they are using the network less, when one of the reasons for such high network charges is that households that installed large air-conditioners failed to face the full cost of the consequential network expansion, and from which network service providers have profited handsomely.

Like the death spiral debate, the tariff debate in Australia has a long way to run. The least that may be concluded is that an acceptable resolution requires the careful construction of economic arguments and also a detailed understanding of the actual circumstances and data and a fair assessment of equity concerns.

Bruce Mountain is director of Carbon and Energy Markets.

*This article is the third in a four part series based on the chapter Australia’s million solar roofs: Disruption on the fringes or the beginning of a new order by Bruce Mountain and Paul Szuster to be published in Distributed Generation and its Implications for the Utility Industry, edited by Fereidoon P. Sioshansi, published by Academic Press.