Solar's electric price shock

Just as the solar PV industry came within sight of grid parity – where the cost of generating power from solar PV reaches levels competitive with grid supply – it has been snatched away from them.

With huge ramifications for the viability of the sector, the NSW utility regulator, IPART, has judged that there should be one rule for those that sell electricity to consumers, and another for consumers who produce electricity. 

In the middle of the day an Australian household is likely to be charged between 30 and 44 cents per unit (kilowatt-hour) of electricity they consume by 2013. But electricity companies will only be expected to pay between 5 and 8 cents, and will be free to pay nothing for electricity householders might export to the grid. The SA regulator has proposed a similar inconsistent approach, although it has been slightly more generous. It seems reasonably likely that such approaches will spread to other states.

Unfortunately these findings have ignored the big fat elephant in the room. The model for how we regulate and price electricity supply is this country is very badly broken. Politicians, and the regulators who serve them, continue to ignore the need to reform the way we price electricity for both consumers and generators to properly reflect the cost of transporting the electricity and peak demand.

Recommendations dating back to 2002 from the Howard Government's Parer Review continue to be ignored. The end result is that small scale distributed generators (not just solar PV but also gas co-generation) are undermined, and we pay billions more for our electricity network infrastructure than we should.

What on earth can explain this bizarre one rule for one person and another rule for another?

To understand we need to look at the various different costs involved in supplying electricity to customers, which are illustrated below.

The total averaged cost (and I use the word ‘averaged' deliberately) of a kilowatt-hour of electricity a household consumes will be a little over 30 cents by 2013-14 (based on estimates by the Australian Energy Market Commission). This takes into account the carbon price (small impact) and rising network infrastructure charges (very big). Out of this, the actual cost of generating the power you consume is only about 10 to 11 cents. What makes the lion's share of the difference is delivering that electricity to your door from the power station via big transmission lines and the smaller poles and wires in your street. This makes up slightly over 13 cents of the cost. Then the retailer takes a cut of the pie for managing the administration involved with billing and contracting in risky wholesale electricity markets etc. The remainder is made of fractions of cents to fund government programs that support renewable energy and also improve our energy efficiency.  

Averaged cost components for residential consumers

(Cents per kilowatt-hour)

Source: Australian Energy Market Commission (2011)

At this point the solar PV industry and household owners of PV systems indignantly point out,

“We are located right on customer's premises so why aren't we entitled to at least get the energy, transmission and the distribution charges for our electricity! This adds up to 24 cents not 5 cents!”

And this is where things get extremely tricky because in reality the cost of supplying electricity to our homes does not sit at a nice averaged 30 cents across time, even though that's the way it's charged to customers. In reality the cost of meeting our electricity needs varies dramatically over time.

In relation to the energy cost component, the solar PV industry has an extremely good case because high electricity demand – which drives higher prices – tends to be during the day (when the sun is out) and during hot weather (when solar radiation levels are high).  The chart below, based on modelling by Melbourne University researchers, illustrates how solar PV generation tends to shave off the peaks in our system-wide electricity demand and therefore prices.

Modelled impact of PV on demand and price in summer 2010

Source: Melbourne University Energy Institute

This suggests solar PV owners should be entitled to pretty much all the energy component. In fact IPART in its report found that the direct financial gain to retailers from solar PV generation was between 8.3 and 10.3 cents. So in the end they erred against solar PV generators in their final determination of a minimum price of 5.2 cents. Interestingly, when it came to the NSW government's own interests, IPART is insisting that electricity retailers pay the government 6.5 cents for generation supported under the government's premium feed-in tariff scheme.

Also IPART's decision that prices paid for solar PV should be unregulated as it will be sorted out by retailer competition is in blatant contradiction with the fact that:

- IPART continues to regulate the prices retailers can charge consumers for their electricity consumption due to a belief there is insufficient retailer competition; and

- IPART complained that retailers were pocketing financial gains from the electricity generated from customer's solar PV systems rather than passing them onto customers. It stated in a 2011 report, “We consider that the costs of the scheme (the government's feed-in tariff scheme) can be limited by requiring the retailers to contribute to the cost of the scheme because they make a financial gain from customers on the gross feed-in tariff.”

So on balance the solar PV sector has a good basis to argue that it is entitled to capture a greater proportion of the energy value than what IPART is providing.

On justifying an entitlement to network charges, the solar PV sector has a much tougher task for the residential sector. Network costs are almost entirely a function of the maximum peak in demand, which may only last for a very short period of time. It essentially makes no difference to network costs if you reduce demand for 363 days a year but don't reduce demand on the 2 days that create the maximum peak in demand. The chart below, taken from the IPART report, illustrates that in residential areas during the peak period for consumption at around 6 to 8pm, the solar PV system is unlikely to be exporting electricity.

Illustrative example of a customer's generation and consumption profiles over one day

Source: IPART (2012)

However, this has missed the crucial issue – neither generation of the solar PV system nor consumption patterns are pre-ordained by God to be permanently fixed in the pattern illustrated above.  Solar PV generation could be shifted by changing the orientation of the panels to the west and by addition of electrical storage. Also consumption could be altered through changes in technology and behaviour. This could mean that provided the incentives were right, households would voluntarily make changes that meant solar PV could be entitled to greater share of the electricity value pie.

And this is why electricity markets are completely broken: the incentives aren't there. And if anything, politicians have been fighting to keep it that way. Back in 2002 the Parer Review recommended the roll-out of smart meters and time of use pricing across all electricity consumers. It also pointed out that prices paid for electricity generation failed to adequately account for benefits from locating closer to customers.

So what's happened since 2002?

We've had several government reports, including the latest federal government White Paper, agree with the Parer Review. But when the Victorian government actually tried to follow through it got shot down by the Herald Sun. The Herald Sun even ran stories that smart meters were bad for our health!

So politicians are rightfully fearful. They've hindered implementation of time of use pricing reforms in a number of cases, refused to roll-out smart meters, and actively thwarted pricing reform by continuing to impose price controls over residential electricity prices. In Western Australia, in particular, residential electricity prices are held well below the cost of provision. Meanwhile, peak demand has grown rapidly and electricity consumers have been hit with a $40 billion dollar bill from electricity networks.

This is a much wider problem than solar PV as it has implications for any type of localised electricity generation including gas-fired cogeneration. These technologies have the potential to lower greenhouse gas emissions and lower electricity costs.

The fact that governments (encouraged by the Murdoch press) are going after solar PV owners to make some paltry fraction of a cent saving on electricity prices, just shows how hopeless the politics around this issue have become.