Solar no freeloader

A new report shows that solar may actually help reduce the bills of all electricity consumers, not just those that install systems. It illustrates that regulators need to gather much better data and exercise care in changing tariffs.

The Australian PV Institute has released a report today showing that, far from freeloading, households that install solar PV could be reducing electricity bills for other customers. 

At present, both regulators and electricity companies have suggested that solar PV customers are increasing electricity charges faced by other customers. This is because of a belief that while solar PV significantly reduces the overall electricity consumption of households that install them, it doesn’t reduce their load on the distribution network during peak periods, which is what drives the cost of network infrastructure.

Because residential customers predominantly pay for electricity based on overall consumption and solar customers have reduced consumption they pay a lower share of the network costs than they are assumed to use, and other customers have to pay a greater share of the network cost.

However, this new study comes to a different conclusion because unlike other studies on this issue which tend to use solar output assumptions based on averaged output across a year or season, the authors used very finely grained 30-minute increment data on actual installed solar PV systems output taken from the Blacktown Solar City in Sydney.  

What this data reveals is that at the time of very high demand peaks on the local distribution network – driven by air conditioner use on hot days in summer – solar PV systems tend to still be generating about 20 per cent of their capacity.  

So solar PV installations can act to offset the impact of air conditioners on requiring new network capacity.

The chart below provide a summary of how a 2.5 kilowatt solar PV system not just reduces the bills of the household that installs the system (entitled ‘responsible customer’) but also makes a small dent in the costs of other customers’ bills. The ultimate result that matters is that marked ‘third order’, which is furthest to the right. It shows that the installation of PV systems reduces the annual bill of other customers from an average of $1818 to $1799.

Effect of installation of air conditioner and solar PV on changing electricity bills for customer that installs them and other customers

Graph for Solar no freeloader

Note: This is based on 20 per cent of households within a distribution node installing an air conditioner in the light shaded bars and then in deep coloured bars they also install a 2.5kW solar system. Source: Australian PV Institute (2013) Impacts of PV, AC, other technologies and tariffs on consumer costs

To explain further, the study looked firstly at how the installation of air conditioners (AC) changes electricity bills for those households that install them but then also other consumers. Prior to installation of AC, all customers’ bills are $1735 per annum – the ‘original’ case on the far left. The light shaded bars then show the impact on power bills of installation of air conditioners for the household installing them (assumed to be 20 per cent of households) and flow-on impacts on other customers’ bills.  

The first order impact is that the customer who installs an air conditioner will find their overall consumption of electricity goes up. This increases their bill from $1735 to $1831. Now, if this air conditioner did not add to peak demand (highly unlikely) it would mean we could offset the cost of network infrastructure over a larger volume of electricity – which would reduce prices per unit of electricity – this is entitled the second order effect. 

But because the air conditioner also tends to increase peak demand and therefore increases the cost of network infrastructure we get a third order effect which drives electricity prices up. This more than offsets the benefit from the extra volume of electricity meaning the household with the AC pays $1977 per annum and the other customers pay $1818 instead of the original pre-AC installation of $1735.

The installation of solar PV then works in reverse. Because it reduces the overall volume of electricity over which you can offset network costs its second order effect is to increase prices and therefore bills of other customers. But because it also offsets the load the AC puts on network capacity the end result (third order effect) is other customer’s bills are lowered from a case where only.

Another interesting element to this report is that it also looks at how changes in tariff structures, such as moving to prices that vary by time of day (peak, off-peak and shoulder) or which have a separate charge based on your peak demand on the network, would affect the results of their analysis and revenues of electricity networks versus retailers.

What’s interesting is that, contrary to common belief, under the Energy Australia time-of-use tariff that they analysed, distribution networks receive less revenue than under standard flat rates, even when an air conditioner is installed. This suggests we need to think a bit more about whether such a tariff option is going to address some of the inefficiencies in our current electricity market.