Scrambling solar signals

It is deeply troubling that AGL continues to suggest low income households, such as pensioners, are now paying more for their electricity to enable Australians to get solar. This is simply not true.

If we rewind, to a bit over two years ago, before AGL tried to deflate the solar PV industry, many Australians were saving, begging and borrowing money or using their hard-earned savings to buy a rooftop solar system.

What motivated Australians to get solar?

The vast majority of the one and a half million Australians that have solar on their roofs wanted to make a difference. And as the cost of solar technology had dropped and the feed-in-tariffs on offer across Australia allowed them to break even or better on a purchase, they felt they were finally able to make the commitment to do the right thing, by the environment and by society at large by going solar.

What's changed?

AGL has inappropriately sought to imply (parroted by former electricity industry lobbyist Keith Orchison) that solar PV system owners are now hurting the poor through receiving payments for the electricity they produce from their rooftop solar systems.

AGL's paper appears to be designed to achieve three objectives:

1. Make existing owners of rooftop solar systems feel guilty about the positive contribution they have made to society and the environment.

2. Make prospective owners think twice about an investment in solar.

3. Convince governments to abandon feed-in tariffs entirely, discouraging anyone from investing further.

AGL's lobbying paper, which has the appearance of an academic paper, is intended to destroy the last remaining feed-in tariff and one of the most successful in Australia. In the paper we can read the authors revealing how their previous work had eliminated feed-in tariffs in all states except Queensland, along with some poorly supported and often contradictory claims.

The ownership distribution and class demographic conclusions the AGL lobby paper comes up with are rubbery at best, but irrelevant in terms of improving the situation of the poor. Especially when you consider that the result of the merit order effect in any new properly sized feed-in tariff program would be that all consumers would receive cheaper electricity.

Germany has a very well constructed and refined feed-in tariff regulation and policy structure that can be minimally adapted to achieve this ‘lower bills for all including the poor' outcome.

Given the merit order effect from installing rooftop solar means savings for consumers outweigh costs of funding renewables onto roofs, we need to have a look at some of the counter arguments to the feed-in tariff put forward by AGL.

Firstly, it is important to note the authors of the lobby paper accept that the merit order effect exists, however they write-it-off as being "transient" and "difficult" to value. They also contradict themselves by suggesting there will be a "security of supply" problem and coming up with a hypothetical "snap" situation to scare any government that dares encourage solar competition in the retail electricity market.

In order to come up with their conclusions, the writers of the report make some assumptions that lack credibility and would be very difficult to defend in light of both domestic and international trends in electricity markets.

1. They assume demand will rise as a consequence of new and increasing energy needs on a per capita and a growing population basis. This however, is not borne out by an analysis of the electricity market which shows that since 2007 demand has been reducing and is now down a considerable 10 per cent on where it was predicted to be in 2011.  

This trend has been sustained for a number of reasons and will continue to occur as the fruits of ongoing innovation (in efficiency) outpace growth in energy demand. This will occur at an ever-increasing rate. A classic mistake made by some economists is to underestimate the innovation and entrepreneurship that exists in business and the wider community.

2. If demand was to grow, then the lobby paper assumes that demand will rise faster than the increasing supply of electricity that is coming from newly installed renewables in order to achieve their hypothetical future "snap" condition. Yet even Grant King, CEO of Origin, is on record as stating there would be no need for new baseload plants (with wind and solar soaking up any new demand) in the next decade.

3. The paper assumes wind and solar are not getting cheaper all the time, which they are. The lessening cost of these sources means that feed-in tariffs can quickly be incrementally lowered while delivering a dividend for all consumers, even though the merit order effect becomes less pronounced as the share of solar becomes increasingly significant.

4. The biggest mistake of the AGL researchers is to assume that future (expanded or replacement) generation will be met by the same type of generators that have been built and dominated the world's power system in the 60s, 70s, 80s and 90s. They say "wholesale prices may eventually 'snap' when new thermal investment becomes vital to maintain security of supply."

However around the world today, according to Bloomberg, more upfront capital is being spent on renewable generation technology than conventional thermal fossil fuel power plants (and nuclear combined). The nature of the two significant commercial renewable technologies wind and solar is that they are mass-manufactured on production lines. This means they can readily capture economies of scale and learning by doing that are not available to conventional power plants constructed on-site and in much smaller numbers of units. So this greater level of investment will drive greater scale and significant reductions in costs.

This is the result of a trend that has been ongoing for some time now. Felix Ferlemann, CEO of Siemens Wind Power predicts that wind will be competitive in its own right in the world's power markets within a decade, which will occur as the industry delivers a further 30 per cent reduction in project costs.

The cost of solar technology will significantly reduce further and combined with chemical electrical batteries will become commercially viable and able to take up any capacity growth that used to be catered for by gas/diesel peaker plants.

Solar thermal with storage plants will also come down the cost curve to be competitive, or our government may choose to back them with some form of support until they're competitive like they have for wind (and to a lesser extent solar PV).

The paper diverts from trying to show the poor are subsidising the rich to have solar panels, by referencing some modelling of the South Australian system, also by AGL. The result of that modelling is a claim that the addition of wind power has increased the cost overall of the system in South Australia (despite South Australians having lower wholesale and retail electricity bills as a consequence of wind power contributing to supply in that state).

"The system's average cost over a year rises from $99.75/MWh to $109.75," they claimed. This cost is not borne out in anyone's bills today but based on the long run marginal cost of resupplying the state with an imaginary fleet of new but outdated technology (non-renewable fossil fuel plants) and erroneously assumes the electricity mix in a renewed system in South Australia would consist of a similar mix of coal and gas plants. This however, would not be the case as a new supply system needs to be based on renewables to be consistent with an objective of avoiding dangerous climate change.  Within a decade a system based on renewable energy would be cheaper than one from conventional plants fuelled by dirty fossil fuels due to the ongoing reductions in the price of renewables. In the meantime, the old outdated fossil fuel power stations that are already well past their original finance period will continue to operate, but possibly with less book value.  IBM and Olivetti still sold typewriters but had to reduce their costs as the competition from computers increased.

While the growth of wind power has been hindered by the additional support given to solar via the renewable energy certificate multiplier, the wind industry should be wary in backing AGL's attack on solar feed-in tariffs. When it comes down to it, AGL owns conventional plants, including a coal-fired power plant that emits more CO₂ per annum than any other in the country. Wind power advocates fighting solar will inevitably score an own goal while fighting over breadcrumbs. Not only does wind power itself cause a merit order effect, but more importantly solar has a greater level of social acceptance than wind. The success of growing rooftop solar installations provides the lens through which the public will inevitably positively see (and back) a renewable-powered future, half of which I expect will come from wind power.

While the AGL lobbyists are suggesting that 700,000 households with solar are being subsidised by almost eight million other households, if you look at wind power and were to adopt that same argument then you could say that half a dozen companies are being subsidised by eight million households to build wind power plants. An even bigger ‘regressive' wealth transfer from the poor to the rich.

However we know this isn't the case, as AGL staff were willing to argue (truthfully) against Origin's and International Power's claims it was costing a lot more to integrate wind into the electricity system than reality. It is unfortunate that AGL took such a different approach with solar, where they have different commercial interests.

Merit order effect is real and it will be permanent as we don't live in a market with a growing requirement of old 60s, 70s and 80s fossil-fuel plants. It will also continue to be relevant beyond the first five or so gigawatts of solar and for wind. Even though the effect of subsequent installs will be less, they will become a lot cheaper (due to technology cost reductions) and therefore won't require as significant a merit order effect to offset their costs.

A renewable future is coming and it will benefit the environment which benefits humanity. It will benefit the impoverished people in developing countries by providing a more affordable source of electricity where grid infrastructure is lacking and conventional centralized systems are beyond the capacity of governments to implement. By supporting solar we are redistributing wealth and market power away from a highly concentrated oligopoly of gentraders that are advantaged by extreme market volatility. This lack of competition and unnecessary market volatility especially hurts the poor.

Matthew Wright is executive director of Beyond Zero Emissions.