More solar, less power demand, higher prices: does it add up?

There is a real challenge ahead as our electricity system as it becomes more distributed. But nothing will improve if governments sanction penalties for solar, but ignore the real cost of our air conditioners.

The Conversation

If I install solar panels and a car battery to run my air conditioner, should I pay higher electricity network fees? The electricity industry and Queensland’s energy minister would say yes, but is that equitable?

Scenarios like this expose inconsistencies between the way we pay for electricity poles and wires, and what they cost to run.

Most retail customers pay a small fixed daily charge, and a larger variable charge based on the volume of electricity they use. So the (mainly fixed) cost of network services is 'smeared' over the total volume of electricity delivered.

However, there is no clear link between the volume of electricity a customer uses and the cost of providing them with network services. Network costs are mostly driven by how many appliances a customer has turned on when peak demand occurs on the local network. Critical peak demand often happens in summer, with an air conditioner adding an estimated $2,400 in grid costs that must be subsidised by all electricity users.

So there is a fundamental inequity between customers. Those with high demand at peak times drive up network costs. Others don’t, but still pay the bill.

This wasn’t a big problem while electricity use was rising. But lately electricity use has fallen by 4 per cent. That means the variable charge for network services is likely to rise to cover the difference. More than $42 billion of spending on network infrastructure has been the biggest factor in electricity price hikes since 2007. Further rises would be a political issue.

A recent electricity industry report, 'Who Pays for Solar Energy?', painted rooftop solar as a power-bill villain. It claimed poorer people are subsidising those who can afford solar panels. The report’s argument has three parts. First, rooftop solar reduces the total amount of electricity over which network costs are 'smeared', driving up variable charges. Second, solar consumers use less electricity and so pay a smaller share of total network costs. Third, the total cost of poles and wires will rise by millions of dollars due to rooftop solar energy.

Unpacking this argument reveals some large assumptions.

There is little evidence of how much rooftop solar has reduced total electricity demand. Yes, demand has been falling and rooftop solar is part of the story. Yet closures of manufacturing and aluminium plants, and possibly improved energy efficiency, may be more significant.

Solar consumers may use less grid supplied electricity than average consumers, but so do households which are energy efficient or remember to turn their lights off. That doesn’t mean they are “ducking” their fair share of network costs – unless they also use large air conditioning systems at peak times.

Claims of millions of dollars in network upgrades to accommodate solar panels are not backed by clear evidence. Energex in Queensland estimates the infrastructure cost at $200 per solar system. This includes system assessment, cost of meters and meter installation costs which solar consumers may pay for. However, Energex also state that it is difficult to accurately estimate network costs and benefits. Concerns around voltage fluctuations and reversed electricity flows have relatively simple technical solutions. Horizon Power already uses “generation management devices” that control and/or store the electricity generated from solar systems.

These claims also ignore the benefits rooftop solar may provide by reducing peak demand, deferring or avoiding future grid upgrade costs. A separate research report commissioned by the electricity industry last year estimated this at roughly $300 million to $528 million in present value.

Perhaps the most interesting assumption is that it is more politically and technically feasible to charge solar consumers higher fixed network fees, than to charge wealthy, high energy using households for turning on air-conditioning at peak times (see page 32 of the research behind the industry report). This sits at odds with earlier industry research that critical peak pricing – which would hit those who consume a lot when local power demand is highest – is the most effective pricing method for reducing peak demand. Industry-commissioned research last year estimated the present value benefit of critical peak pricing at $385 million to $1.3 billion in avoided or deferred network upgrades.

The 'Who Pays for Solar Energy?' report does make some very important points about managing the growth of rooftop solar.

It notes there is a logical limit to any upward 'spiral' in network prices as rooftop solar increases. This is because solar consumers are unlikely to completely supply all their own electricity. Falling battery costs will make it more financially viable for households to move toward self sufficiency. However, the costs of doing so completely are likely to remain high, at least for some time.

Paying solar consumers low rates for exported solar electricity (a feed-in tariff) increases the incentive to move toward self-sufficiency. If the return on exported electricity is much less than the retail electricity price, this increases the financial viability of storing the electricity in batteries for later consumption.

And the strongest driver of solar uptake is likely to be the 'distortion' in the way electricity prices are structured. This is likely to increase “if network costs continue to rise at the rates seen recently.”

This points to a real challenge facing our electricity system as it becomes more distributed. How do we get price signals right to smooth peak demand, minimise future network costs, and keep rooftop solar connected to the grid? The only way forward is to engage consumers to actively manage their energy use. Rooftop solar offers a pathway to engage consumers, particularly if solar exports receive real-time prices when networks are at peak capacity.

One thing is for sure. Nothing will improve if governments sanction penalties for installing solar panels, but ignore the real cost of my air conditioner.

Laura Eadie is a UTS Business School Associate, and has qualifications in environmental management, finance & investment, and industrial chemistry. She is also the Centre for Policy Development’s Research Director for the Sustainable economy program.The Conversation

This article was originally published at The Conversation. Republished with permission.