Reform network rules to cut PV money waste

by Tony Wood

Published by Australian Financial Review, Sunday 24 May

About 1.4 million Australian households – one in six – have put solar panels on their homes since 2001. It is the largest take-up of photovoltaic (PV) solar systems of any country. And as a policy, it has been close to a fiasco.

Yet solar PV has a great future in Australia. An energy revolution is not far away. Technological change will make solar a major player in the power system, with a big role in cutting carbon emissions and energy costs for homes and businesses.

But for that to happen, we need to address the pricing and policy barriers that prevent solar PV from contributing efficiently and fairly to our electricity needs. And we must learn from the mistakes of the past.

Analysis for the Grattan Institute’s new report, Sundown, Sunrise: How Australia can finally get solar power right, shows that the cost of installing and maintaining solar panels since 2009 outweighs the benefits from avoided electricity use and emissions by more than $9 billion.

Worse yet, to pay for their investment, solar PV owners have received a subsidy from all other electricity users via feed-in tariffs and renewable energy certificates, to the tune of $10.3 billion.

A second subsidy, embedded in the structure of electricity network tariffs, is worth $3.7 billion. In total, households and businesses that have not installed solar PV will have spent more than $14 billion subsidising households that have.

We cannot blame solar PV owners, who understandably wanted to tackle climate change, depend less on the centralised grid and save money. But Australia could have found a far cheaper and fairer way to reduce emissions. Governments created a policy mess that should never be repeated.

Even after the closing of the feed-in tariff programs, installing solar PV still makes economic sense in all capital cities except Melbourne. That will change if prices that better reflect the cost of running the network come into force.

Networks’ costs are determined by the maximum load that has to be met, usually early evening in summer. Because their panels rarely generate much power at that time, solar PV owners put as much load on the network as everyone else – but are charged less because prices are based on the energy consumed and solar PV users consume less energy. Federal and state ministers have agreed to introduce a new kind of network tariff that will remove this subsidy. When they do, it will no longer be profitable in most states to put panels on the roof.

But good news is on the way. Falling costs and rapid progress in battery storage technology will transform the century-old centralised grid. Households will soon have a genuine incentive to install solar panels. Under new network tariffs, they can store the electricity they generate during the day and consume it in the evening when electricity prices are high.

Consumers with storage will be able to use the grid less at peak times. This will reduce load on the network and the need for costly new infrastructure. Building more infrastructure to meet growing peak demand has contributed greatly to price increases of the last five years.

But the widespread view that solar PV plus a battery will induce people to disconnect from the grid in large numbers is almost certainly incorrect. Both the cost of the battery and the size of the PV system required to maintain reliable power will deter nearly all urban households from going off-grid. The much feared death spiral – the end of the network through falling customer numbers – will not occur.

Nevertheless, the new world of distributed power will profoundly challenge the business models of generators and grid operators. In rural areas, individuals and communities may find it economic to disconnect from the grid. In cases where stand-alone grids already provide power, solar PV and storage will lower the cost of supply and reduce emissions from diesel generators.

Policy reform is urgently needed to support these changes. The regulation of networks must be tightened so that consumers do not pay for more surplus infrastructure. Policy barriers that prevent the adoption of low-cost distribution generation and competition among companies to supply power to customers in innovative ways must be removed.

These reforms and falling peak demand are likely to make some existing infrastructure redundant. Government must make brave decisions to determine who will pay for expensive asset write-downs when they are needed.

The journey to a new model of electricity delivery has begun. Already it has seen big mistakes and much waste. If we manage the transformation poorly, consumers will pay again. If we do it well, everyone can benefit from a more efficient, sustainable and affordable electricity system. Solar power will have finally found its place in the sun.