It’s been called the death spiral, by AGL staff Paul Simshauser and Tim Nelson. And what it means is that as customers install solar and undertake energy efficiency measures the utilities respond by raising rates to continue to retrieve a similar level of profit to what they’ve received in the past.
This is particularly the case with the portion of your electricity bill that pertains to poles and wires. It isn’t a part of a competitive market but has a regulated rate of return guaranteed by the government.
The death spiral story as told by the incumbents guarding their old outdated business model involves a relatively affluent family purchasing solar panels and avoiding 30-50% of their billable electricity usage by using their solar generated power in house . This then causes a response from the distribution companies raising the tariff on each remaining unit (kWh) of electricity crossing the grid to recover the difference and cover their sunk costs. The raising of the costs disproportionately affects the poor (the utilities argue).
The death spiral story then goes on to suggest that this feedback causes the addition of domestic energy storage to cover demand when the sun isn’t shining. This solar energy storage product is expected to debut in 2014, which involves more self consumption and another increase in electricity rates.
Now the electricity companies or their state government owners are saying all sorts of things to justify changes to regulatory rules to impede this energy revolution. A market revolution experienced in the past by type-writer manufacturers, postal services and monopoly telecommunications carriers all over the world.
What will really happen?
Power companies (and state government owners) are seeking to maintain their old world revenue via increases in per kWh usage charges, or they are pushing for higher fixed daily network service charges that you can’t do anything to minimise.
By doing either of these two things they will encourage energy efficiency and the installation of ever more rooftop solar with the addition of storage to eliminate as much household demand as possible.
Then we’ll hit a critical point.
In those states where enough production can occur from rooftops in wintertime (sorry Victoria, South Australia and Tasmania), people will start to desert the grid. But the interesting thing is it will not be the wealthy who will go first. The first people to go will be low income households doing it tough. They’ll have low usage and probably use gas or wood for heating, or given the short heating season in northern Australia, they’ll just tough it out. Their usage will be less than 10kWh a day over winter (In Victoria it would have to be no more than 4 or 5kWh per day.) And they’ll leave in droves.
Now given how businesses work, losing 10% of customers at the margins is a really big deal. We’ve already seen what happens when the residential sector reduces demand, the drop in revenue has sent the likes of AGL, Origin and Energy Australia into a frenzy. They've been firing up their media machines and lobby groups, economic modelling reports have been churned out ten to the dozen, and corridors of parliament houses around the country have been pounded.
And then what?
With low income users and low electricity users who heat with gas shifting off the grid, fixed charges will rise further. This will then hit more affluent middle income and wealthier consumers who will then decide to go off the grid with much more sizeable and costly infrastructure , that if push comes to shove, they can afford. This will also mean more economies of scale and therefore cheaper prices and more opportunities for people to leave the grid altogether.
The attached chart shows just how much electricity can be generated in winter by what could soon be considered a standard size solar system (10kW). This real-world example shows that the amount of power a 10kW system generates over winter should be sufficient to allow many households to disconnect from the grid.
Matthew Wright is Executive Director of energy and climate security think-tank Zero Emissions.