Will solar be blindsided by power price reform?

Last year was dominated by concerns in the solar sector that the government would move to shut down the small-scale renewable energy target which provides a rebate of around $650-$800 per kilowatt of capacity installed.

Given the average size of system installed in Australia over 2014 was 4.4 kilowatts, this rebate adds up to about $2800-$3500. That's a pretty significant incentive when you consider that it's now possible to get a middle of the range 5kW system for around $5000-$6000 post rebate if you have a straightforward installation (single storey, tin roof in major capital city). Without the rebate such a system would be around 45%-70% more expensive.

Yet it was interesting to learn that a representative from energy consultants ACIL Allen (who undertook the economic modelling for the government's review of the Renewable Energy Target) told a conference that he thought the real threat to uptake of solar wasn't the cancellation of the rebate, but rather reform to how electricity tariffs are structured.  

Right now a customer can use the power from their solar system to offset imported power from the grid at prices of around 25 cents or more. However in the future it might be that the cost of energy imported from the grid drops for most of the time that solar might generate, with a larger proportion of the power bill based on other factors.

Does this mean tariff reform is bad news for decarbonising the power sector?

Maybe in the short term and if done poorly, but in the long term it's essential.

This is clearly demonstrated by the analysis of Adjunct Professor Bill Grace from the University of Western Australia on the WA power grid which Climate Spectator reported on back in November. His work suggested that use of solar could reach such high levels that over a few years demand for power from the rest of the grid over a 24-hour period in March would evolve into something like the chart below. Such rapid ramping up and down of demand would pose considerable challenges and costs for the overall electricity system.

Source: Adjunct Professor Bill Grace (2014)

We need to find a way to moderate this ramping of power demand from the grid. In addition we also want to reduce the absolute height of the peak in demand which tends to occur around 7pm (or hour 19 in the chart above).

Batteries offer one solution. Another is to use an air-conditioner to pre-cool or pre-heat your home before you return from work (along with proper insulation of the house). Orienting solar panels to the west or even oversizing your solar system relative to the size of your inverter might also help.

If power tariffs are designed appropriately they should help to encourage such changes.

However, the redesign of power tariffs is not a straightforward exercise. There is large room for interpretation as to what is the best way to design tariffs that ensure consumers get a fair deal and the overall cost and reliability of the power system is optimised. 

Right now the whole process around the setting of power tariffs involves an overwhelming amount of information and complexity. Each network distributor (of which there are several across Australia) puts forward pricing plans to the regulator involving hundreds of pages and a range of different offers for different types of customers. Then layered on top of this is that there are several different retailers who may or may not pass through these pricing structures in their own offers.

This makes it rather difficult for those outside the power companies, who have other things to worry about, to keep tabs on what power companies are up to and whether power tariffs are fair and reasonable.

This became starkly apparent to me when I learnt that one Victorian distributor – Ausnet Services – has been offering a price premium for power exported by customers' own power systems for several years now, yet I knew nothing about it. Paul Szuster of energy analysts Carbon and Energy Markets sent through this chart showing that Ausnet offers a premium of 4 cents per kilowatt-hour for power exported over the summer period. I suspect very few power retailers, probably none, happen to pass through this premium to customers.

Source: Ausnet Services Tariff Schedules 2007 – 2015; CME Analysis

Four cents may seem like chicken feed relative a total grid charge of 25-40 cents per kilowatt-hour and not much to get excited about.

But firstly it illustrates an important precedent that network businesses can be prepared to pay a premium for customer generated power over and above the wholesale energy market value. One can argue further about whether this should be more than 4 cents and under what circumstances, but there is a case for customers to receive a premium for power they export at the same time they also pay a premium for power they import.

Secondly, as solar becomes quite cheap, a few cents a kilowatt-hour extra can make an important difference to economic attractiveness. Four cents on top of 6 cents from the retailer represents a 67% improvement for exported power. Yet most customers are missing out.

The clean energy sector will need to evolve in sophistication and increase its involvement in detailed energy market regulatory processes (not just climate change policy) if it is to avoid being blindsided by a move to new pricing structures.