What's wrong with business solar?

Today’s charts of the week consider why Australia’s solar PV market tends to be so heavily concentrated on residential rooftops rather than business rooftops.

The chart below, prepared by Green Energy Markets in combination SunWiz and SolarBusinessServices, illustrates that residential systems make up around 85 per cent or more of the capacity installed in the country.

Source: Green Energy Markets (2014)

The dominance of residential rooftops in Australia is quite unusual relative to markets in Europe, the US and China where installations on business premises and mounted on the ground as utility-scale power stations play a far larger role. For example in the US the ratios are completely reversed. In 2013 they installed 2847 MW as ground mount, utility-scale installations, 1112 MW on business rooftops, and just 792 MW on homes.

A range of analyses suggest that solar PV output provides a much better match to demand peaks in commercial and industrial zones. So solar has a better chance of offsetting network capacity in these areas and would provide better overall value.

So why is Australia so residential focused?

Part of it is most likely down to history. In the past government subsidies were highly concentrated on residential installations, and so solar businesses have developed around a focus on that market rather than business.

But the difference in support has progressively narrowed over the last few years. Now the level of policy support is the same for any system up to 100 kilowatts in size (after which a system is no longer eligible for an upfront rebate from small-scale renewable energy certificates or STCs).

Instead, there is another key factor which makes solar more attractive in the residential sector rather than large business rooftops – the structure of electricity tariffs. Patrick Greene from the solar company Ingenero presented the chart below at the Forum on Doubling Productivity being held in Sydney.

Households and small businesses tend to pay on a set rate per kilowatt-hour of around 25 cents to 35 cents. After taking into account the STC rebate and assuming a 7 per cent financing cost, Greene suggests the cost of energy from a solar PV system would lie around 10 cents per kWh (the solid yellow line). This is way below the level of residential and small business retail electricity rates.

But larger commercial businesses and industrial plants tend to pay a charge for their kilowatt-hours of energy which is much lower than households, with a large chunk of their bill instead being taken up by a fixed charge based on an estimate of the maximum capacity they require from the electricity network (known as a demand charge).  

Even though solar PV output tends to be well correlated with commercial business peak demand, no solar business can guarantee that the solar system will lower a business’ peak demand charge. Also, distributors can choose different ways to structure their peak demand charges which means solar businesses often have difficulty determining how solar might help a given business to lower its demand charge.

On top of this, Greene explains that the network connection process for a large commercial solar system is much more onerous, costly and time consuming, than the connection of a small household system.

So even though the installation cost for a large solar system is noticeably lower than a small residential system, it isn’t as economically attractive in the Australian environment.