In the space of a few days the Energy Networks Association put out three press releases that seem to suggest that we desperately have to reform the way we price electricity because solar is a major villain imposing a significant burden on vulnerable energy consumers.
According to the Networks Association, solar users are able to free-ride because the market charges for electricity based on overall energy, or kilowatt-hours consumed across the year (which solar acts to reduce) but most of the costs are incurred by demand during the late afternoon and evening on hot days (which solar doesn’t reduce as significantly as it reduces overall annual energy consumption).
It’s true that we should reform the structure of electricity tariffs but not primarily because of solar.
There are some real dangers that in following some vendetta against solar as the driver of tariff reform we’ll end up with a power system that leaves consumers disempowered, to the benefit of networks and power companies more generally -- both of whom are desperate to grow electricity demand.
Firstly, it’s worth explaining why focusing on solar as the primary reasoning for changing the structure of tariffs is misplaced.
Owners of solar systems have very diverse electricity demand patterns, just like households more generally. They aren’t necessarily all large users of network capacity during peak periods, meanwhile consuming few kilowatt-hours for the rest of the year. Some will fit this profile but some will not.
The Grattan Institute’s Lucy Carter, in briefing me on their recent report on electricity tariffs (which the Networks Association praised), told me she was surprised to find in their analysis of household 30-minute by 30-minute demand patterns that ownership of solar panels was not a strong indicator that the household was avoiding paying their fair share of the network capacity that they used. Another surprising finding was she found that ownership of an air-conditioner did not automatically indicate a household was a big network free-rider.
To illustrate with some examples of this diversity, let’s begin with my own home which has a solar system. We don’t consume many kilowatt-hours in total so we might be a candidate for network free-rider. But at the same time our power use over the peak period during the Victorian heatwave was also very small. As detailed in this article A power company’s worst nightmare, my household was effectively invisible to the grid for a large proportion of the peak period during the Victorian heatwave.
Then, as a counterpoint to my frugal household profile, there would also be households that have large solar systems and also consume a lot of power during peak periods. However, that doesn’t mean they’re a network free-rider either. It may be that occupants of this household are absent during the day and their solar system exports the vast majority of its generation to the grid. Therefore their solar system doesn’t do a particularly good job of reducing their overall annual kilowatt-hour consumption, and they may consume lots of kilowatt-hours during non-daylight hours, not just on hot days.
Of course, there will also be households with solar systems who place high demand on the network during peak periods but whose solar system substantially reduces their overall annual kilowatt-hour consumption. But then again there are far more households out there without solar systems who also have very high peak demand out of proportion to the overall energy they consume over the year.
Now if tariff reform is undertaken as some kind of vendetta against solar we might actually put in place tariff structures that do very little to improve the efficiency of the power system and reduce its ability to decarbonise at low cost.
In particular it is imaginable that rather than implementing wholesale tariff reform across the entire market, which politicians are desperately afraid of doing, governments instead put in piecemeal, halfway house solutions. These don’t actually do much to discourage peak demand but penalise households that are energy efficient or have solar systems.
For example, the best thing that could possibly happen from a networks perspective is that politicians allow them to shift more of their charges to be completely unrelated to a household’s power consumption or peak demand. This could be done by upping the daily fixed charge on our bill while reducing the price per kilowatt-hour. This would avoid the need to rollout new smart meters, and appeals as a quick and dirty option. This would deliver precisely the worst signal to consumers, encouraging them to be wasteful with electricity and, in fact, could encourage them to consume more electricity during peak periods, not less.
Another more subtle option, but which would achieve much the same outcome, would be to follow one of the Grattan Institute’s recommendations. Network charges are shifted from being smeared across all kilowatt-hours to instead being based on, say, a household’s five highest half-hour periods of demand across the entire year, and critically without the rollout of smart meters or other improved information feedback to consumers.
The problem with this approach is that households are in effect disempowered to control their electricity charges. They aren’t given information on a timely basis which allows them to monitor their demand. In addition they have to keep an eagle eye on their power demand (without the tools to do it properly) across the entire year, not just during the relatively short period of time when network capacity is constrained (very hot days between 3pm and 9pm). The end effect is likely to be that many will largely give up trying to control their usage because it’s all too hard.
Power companies may find it hard to get such tariff structures past politicians for the entire population, but they might try to get this instituted for those households that install solar. This would also act to destroy the business case for solar while also encouraging inefficient use of electricity and higher carbon emissions.