Govt modeller: Solar is expensive abatement ... cos it's cheap

The federal government’s appointed economic modeller for its review of the Renewable Energy Target has suggested that the component of the scheme supporting solar, known as the 'SRES', represents very expensive abatement of $186 per tonne of CO2 – but not for the reason renewable energy critics might think.

Meanwhile, the modeller believes the large scale scheme, know as 'LRET', which supports construction of wind power as well as utility-scale solar farms, comes at a far more moderate cost of $54 per tonne of CO2. This puts it squarely in the ballpark of the expected cost for the Direct Action scheme, to achieve the 5 per cent emission reduction target, of $58 based on detailed modelling work by carbon market analyst Reputex.

Now you might be thinking how on earth does ACIL-Allen manage to estimate a cost of abatement for the SRES that is about three times the cost of the LRET?

After all, the SRES involves a certificate price of around $39 per displaced megawatt-hour of electricity and the LRET cost is forecast to be closer to $50 or more per megawatt-hour. Also, the grid average emissions per megawatt-hour generated is roughly about 0.8 tonnes of CO2. This suggests a cost per tonne abated of $48.75, again in the ballpark of the Direct Action scheme.

But ACIL-Allen believe that the extra $39 subsidy for solar makes very little difference to households’ and business’ willingness to install a rooftop solar system. The chart below is a photo of the modeller’s results for megawatts of solar installations under the existing government support scheme, on the left and, on the right, without any government support for solar PV for the years 2020, 2030 and 2040. (Apologies for the poor quality of the image but the government refused to provide the original presentation.)

While the image is somewhat distorted, it appears clear that in 2030 there is little difference in the amount of solar installed with the SRES versus if it were scrapped. Note that this modelling assumes no carbon price or financial value whatsoever for carbon abatement.

Capacity of solar PV installed with government SRES support versus no government support

Source: ACIL Allen draft findings presented to stakeholders on 23 June 2014, obtained via tweets from Michael Mazengarb

Essentially, these results suggest that ACIL-Allen actually thinks that solar PV is likely to be an almost near zero-cost form of carbon abatement.  People will install it even without a carbon price or any other government policy inducement.

With the removal of a price on CO2 actually emitted, and instead policy structured around an imputed tonne of CO2 avoided relative to an imagined business as usual scenario, we are now in a bizarre world of government policy.   Instead of being financially rewarded for achieving low abatement costs energy technologies could be penalised by withdrawal of government policy support on the basis that they are close to achieving 'business as usual'. 

You don’t have this problem with a carbon price based on paying per tonne of CO2 emitted. If your technology is cheaper than other abatement options you are rewarded with greater market share and larger profit margins. No one really cares nor has to make judgements about whether or not the technology is business as usual.

But is ACIL Allen right?

There’s plenty of boosterism coming from solar advocates around how solar PV is some kind of unstoppable force of technological superiority, which would support ACIL-Allen’s conclusion.

Yet when you look at the underlying numbers this seems hard to believe. The solar market dropped back 25 per cent last year relative to the year before as the SRES rebate was cut. Also, solar PV sales have stepped down considerably in every state after eligibility for feed-in tariffs were removed. In addition, data on sales – as well as anecdotal feedback from solar retailers – suggests that sales surge in the period leading into rebates coming to an end or stepping down in value. This all tends to suggest household and business purchasing behaviour is quite sensitive to government policy support.

Now add to this:

– the fact electricity price rises will suddenly stall next year and even experience a slight decline; 

– the likely prospect of reforms to electricity tariffs that would shift a substantial proportion of costs to fixed charges;

– the potential for saturation of suitable rooftop space in the residential sector (already at 30 per cent of owner-occupied detached homes in South Australia); and

– the fact that a large chunk of costs are in installation labor, not the fast-moving technology of solar cells.

Taking this all into account, one has to wonder whether solar really is the unstoppable force some starry-eyed enthusiasts might like to imagine, especially if it receives no financial advantage for its low carbon emissions.