Here’s to a bright future for solar, without lavish and inefficient subsidies - Grattan Institute

Published by The Guardian, Friday 29 May

A new world of distributed electricity generation is emerging that will profoundly challenge the business models of generators, grid operators and retailers. In cities, consumers will draw less power from the centralised system as they generate and store their own. In rural areas, individuals, clusters of houses and even small towns may find it financially viable to disconnect from the grid.

But, critical policy reforms are urgently needed to support these changes, and we must learn from the expensive mistakes of the past. A new report for the Grattan Institute, Sundown, sunrise: how Australia can finally get solar right, identifies and quantifies these past mistakes and makes recommendations on what must be done to deliver electricity in a way that is fairer, cheaper and more sustainable.

Subsidies driven by the federal and state governments have made solar panels affordable for nearly 1.4m households. And, many of these consumers invested in solar panels to make a contribution to addressing climate change as well as to save money. The problem has been that the subsidies have been very high and paid for, not by governments, but by other consumers. There have been benefits in reduced electricity production from big fossil-fuel power stations and reduced greenhouse gases, but the benefits have been outweighed by the costs to the tune of almost $10bn.

There are three areas of key policy changes that will complement solar PV as its costs fall in the next few years so that it can compete without subsidies. First, network tariffs must be reformed so that households and small businesses have the incentive to use solar PV and storage to reduce peak demand and long-term costs. Second, regulations that are an effective barrier to the adoption of distributed generation rather than just building more grid must be changed to reflect the new technologies. And third, falling use of centralised power is likely to make some existing infrastructure redundant. Governments must decide now who will pay for these expensive asset write-downs when they are needed.

It is not surprising that supporters of solar PV have been concerned about the findings of our report that quantify the policy failings of the past. In this report’s criticism of poor government policies, they see a demonising of the technology itself. Giles Parkinson’s article in the Guardian on 25 May is one such concern. Several of the concerns are serious enough to justify a response.

In assessing both the benefits and costs of solar panels, our report compares these through to 2030. It is true that some panels will still be operating after 2030, although we have heard many stories of poorly-performing systems and I have had the personal experience of discarding some panels that were about 10 years old because they had badly deteriorated. Further, in our analysis, we discounted the value of future benefits at 5% which is very conservative and we assumed that all of these systems were perfectly maintained and in pristine operating condition for the whole period.

A benefit often attributed to both solar PV and wind power is that they can lower the wholesale price of electricity, to the benefit of consumers. Our report recognises this fact, but also recognised that the benefit to consumers comes at a cost to power generators. Some may demonise large power generators, but they remain a legitimate part of the Australian economy, and the net impact is zero. The environmental benefit of substituting fossil-fuel power with solar power is real and significant and we calculated that separately.

Justifying a subsidy for solar on the basis that there are other subsidies in Australia is hardly a justification. We specifically described the subsidy that prevents people in regional and remote areas seeing the real cost of alternative ways of delivering electricity. This creates a barrier to the adoption of distributed generation when it could be cheaper than the traditional centralised grid. We made recommendations to remove this barrier. In previous reports we also gave equal prominence to the subsidy to owners of large air conditioners (for example in Fair pricing for power).

One of the significant cross-subsidies for solar PV owners is created when the network businesses are able to recover from all consumers revenue lost when solar PV owners reduce their consumption but have relatively little impact on the peak demand that drives the size and cost of the network. In some cases, the businesses are able to adjust their unit prices every year, and in other states it is only every five years, but the result is the same – owners of solar PV systems, as with owners of large air conditioners, are not paying their fair share for the network. This $3.7bn cross-subsidy was calculated as the additional amount solar households would pay if they faced cost-reflective tariffs.

A second subsidy for solar PV is the payment under the federal government’s small-scale renewable energy scheme (SRES). We calculated the cost of the SRES using the market price, not higher prices that retailers have been allowed to charge in some states. If retailers have been able to charge consumers more than the actual cost of the subsidy, then this would increase, not decrease, the cross-subsidy (it would be a cross-subsidy from consumers to retailers, but mostly paid by those without solar).

In our report we describe the mixed evidence for direct benefits and costs that solar PV brings to electricity networks. Most data suggest that residential solar PV, the major focus of government in Australia, has little impact on reducing residential peak demand because the times of peak demand do not tend to coincide with substantial output from solar panels. A different picture emerges with commercial electricity consumers where demand more closely matches solar PV output, as our report describes.

We agree completely that the advent of affordable battery storage will change the game for electricity networks – chapter four of our report is all about that. There are many, sometimes complex, technical issues that will be both positive and negative for grid stability. These can and will be managed, although the network businesses are still coming to grips with all of those implications.

And we completely agree that PV with storage when combined with cost-reflective tariffs will have a big impact on peak demand and therefore on future grid investment. Indeed, non-PV households may even have an incentive to install batteries if tariffs are cost-reflective

The implications are significant for both generation and distribution. This does not mean that “the investment people have made in PV is soon to provide billions in benefits to all customers”. Battery storage is not yet economic, and we are not any better off today because we spent a lot solar in the past. Instead, as a price taker, we would have been better off waiting for solar to become economic as well.

Our analysis, rather than demonising solar, actually envisages a positive future for solar. Whether solar is ultimately the winner is a conclusion that remains premature.

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 in Australia will finally find its place in the sun.