Making sure solar's price is right

The Australian Energy Market Commission has got the ball rolling on what will be a very interesting and worthy debate on network charges. Not a moment too soon. Their document, released yesterday, seems fairly non-committal, though it does seem to incline to the view that distributed generators – or more precisely households with PV systems on their roofs – are getting a free ride.

This debate has a long way to go. Much analysis needs to be done to properly inform the issues and to make sure any changes are sensible (Solar's contribution to peaking demand, October 24).

As a start, let's see what some parts of the electricity industry seem to think about this. One inkling can be found in a report by Jeremy Tustin from consultancy ACIL Tasman (now ACIL Allen) which was produced for the Energy Supply Association of Australia and published in April (it can be found on the ESAA website). His report contains the sentence right near the start of the executive summary:

This is a rather convoluted sentence so let's try to understand what it means by applying it to something commonplace. Say, for example, you decide to sell your car and instead get about on your bicycle. ACIL Allen’s logic is that you are getting an unfair gain (“overcompensated”) unless you pay the petrol retailers and road authorities for the income they have lost when you go it alone. Quite obviously this is bizarre, as I am sure you would agree.

So, if this logic makes no sense for transport substitutes, does it make sense for distributed generation? Let's see. Even before PV took off, there were already thousands of megawatts of distributed generation in buildings and supermarkets, and some heavy industrial users. Most of this is used as back-up in case of supply failures and is now also finding some use in demand-response in the NEM. If this generation is actually used, should the users that own it be required to compensate their retailers for lost sales? Of course not. So if the logic does not apply to other distributed generators, why should it apply to PV?

And, while we are on the subject of internal inconsistency, if you ask the question of whether PV on households roofs should pay for the use of the system to export their surplus power, you must at the same time ask this question of the existing centrally-dispatched generators who do not pay to use the network.

Yes, PV generation has taken the industry by storm. Yes, it has involved a great deal of subsidy – that energy users, not governments, are paying. Yes, it is threatening to make centrally dispatched capacity obsolete. Yes, it is threatening the network service providers. Yes, it does present fantastic opportunities for consumer empowerment, and commercial energy users are now hot on the heels of households in developing their own PV supply.

But as with all such market disruptions, there are winners and losers. The place to start is to do some sums to figure out how much and from whom and to whom. Then think about efficiency and equity. And keep a beady eye out for rent seeking dressed up as economics.

Bruce Mountain is director of CME Australia (Carbon and Energy Markets).