Solar's status quo slap

The Queensland Competition Authority’s recent report on a fair feed-in tariff for solar PV seems to be more intent on defending the smeared and highly subsidised provision of electricity than improving competition and efficiency.

There can be an inherent tendency for human beings to see the status quo as the natural order of things. You get used to its imperfections and compromises and they don’t bother you because you know how to manage around them. As they say, ‘if it ain’t broke, don’t fix it’.

On the other hand something new tends to be looked at with a very critical eye. Shortfalls in a new process or technology are weighed heavily and can be looked at in isolation from the challenges and flaws that are already managed day-to-day within an existing system. 

It may be possible with some reconfiguration that a new technology could be incorporated and the entire system may indeed be better off. But if you are stuck in thinking the current configuration of the system is the only way then you can cut yourself off to opportunities for improvement.

We have seen this quite markedly with the Queensland Competition Authority’s (QCA) recent report on a fair feed-in tariff for solar PV. 

Firstly I have to agree with the QCA that the cost imposed on all households of the 44 cent feed-in tariff was too high. Although their rhetoric that this was an injustice of the poor subsidising the rich was a gross and erroneous simplification of the available evidence. This evidence suggests that it is more about those in inner urban locations - which tend to be characterised by wealthier households but also some very poor households - subsidising those in outer urban and regional areas. 

This cost is expected to peak in 2015/16 at $276 per household which is simply not sustainable, and would be deemed unacceptable by a large number of households that don’t or can’t have a solar PV system. 

But the QCA’s report and associated terms of reference refuse to acknowledge that the advent of affordable and widespread solar PV is revealing the need to re-evaluate the structure of electricity pricing more generally. Technology is now readily available and affordable that enables the consumer to become a more active participant in the electricity market (with some assistance from energy management professionals). 

The report and its terms of reference are structured almost entirely around keeping, and indeed defending, the highly smeared and subsidised model for how electricity is provided in Queensland, where people pay the same price no matter when or where they consume that electricity.

It is also based around the assumption that the current energy company incumbents should be the primary arbiters of how best to satisfy consumers’ electricity needs. Rather than taking a technology neutral approach, the QCA seems to see solar PV as a threat to the current order that needs to be stamped out.

In particular it continues to suggest that a separate rule should be imposed just for solar PV owners that acts to discourage its use by making network charges fixed and unavoidable, while ignoring the deeper problems with the heavily cross-subsidised model for pricing electricity more generally. As the Queensland Government’s Department of Energy Water Supply informed the QCA:

For residential customers in Queensland, avoided DUoS [Distribution use of system] charges are partly a function of cross subsidies inherent in the current Tariff 11 structure, where fixed charges are lower than cost reflective levels and variable charges higher. The poor cost reflectivity of general tariffs means that small customers without PV (such as customers with large air conditioner loads) are also contributing disproportionately (less than their fair share) to the costs of their network usage, resulting in cross subsidy. The Department questions the appropriateness of recouping these avoided charges from some but not other contributing customers when costs cannot be isolated between categories.

The most appalling example of status quo bias was how the QCA dealt with the areas serviced by Ergon that are off the main NEM grid.  The QCA railed against the cost of the feed-in tariff as unfair, which carries an accumulated cost of $2.9 billion to 2028. But it was unwilling to question or touch the far larger distortion where electricity in remote areas of Queensland is heavily subsidised.

The cost just last year of this 'community service obligation' was $415 million, so by 2028 it would accumulate to $6.6 billion. These highly subsidised prices act as a distortion that inhibits consumers from employing their own power generation even though it would in a number of cases be cheaper than Ergon’s current monopoly over electricity supply.

The QCA states that it estimated the potential economic value of PV exports in Ergon’s isolated isolated networks (excluding Mt Isa-Cloncurry) at between 28 and 33 cents per kWh based solely on avoided diesel fuel. 

So what did it suggest PV owners should be paid? 

Well firstly it said it didn’t want to mandate any level of payment and it should be left to Ergon. It then reluctantly provided the possibility of paying PV owners 6.3 cents. 

How on earth did it get from 28-33c/kWh to 6.3c? Well, there was no genuine justification. Instead it was chosen because Ergon suggested it, and the QCA was told that estimating the avoided costs of solar PV was very complicated because diesel generators’ efficiency levels change as their load changes, and high penetration of solar PV might create challenges for maintaining power quality and reliability. 

Again the QLD Department of Energy and Water Supply exposed the nonsense of the QCA’s approach:

To meet the terms of reference, the final report would need to include an estimation of a fair and reasonable value for PV generation in isolated communities. The Department rejects the Authority’s assertion that Ergon Energy is best placed to calculate this value, noting that this conflicts with the Authority’s position in recommending a regulated tariff in the Ergon Energy [NEM] distribution area. There is little competitive drive for Ergon Energy to develop products in this market for its NEM and non-NEM customers…..

Investigations should also examine the cost/benefit to the Community Service Obligation (CSO). The Department again refers to the Horizon Power Renewable Energy Buyback Scheme, which provides a helpful guideline on effectively managing the technical limitations of solar PV in isolated networks, and sets a precedent for examining the localised value of solar energy, including with a CSO in place.

The QCA’s argument that this is complicated hardly justifies leaping from an avoided diesel cost of 28 cents to paying PV owners 6.3 cents – and is plain lazy. Ergon does not need to have monopoly ownership over provision of all energy into these remote grids in order to manage power supply quality and reliability, as has been shown by Horizon Power.

If the QCA was to genuinely live up to the “competition” part of its name, it should have proposed establishing a system of pricing-up Ergon’s services and then allowing others to also provide these services where they could match that price.

Sure a substantial amount of Ergon's costs are already locked-in, but then so were those of photographic film industry when digital cameras came along.  

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