A couple of nasty figures have been produced in recent weeks that will give energy companies – retailers, generators and distributors – cause to reflect on how they will manage to satisfy their shareholders’ insatiable appetite for increased profits in coming years.
The figures were inter-related. The first lot were the updated demand forecasts issues by the Australian Energy Market Operators. Demand for 2012/13 is now likely to be nearly 10 per cent below where it was predicted just a year ago, and demand out to 2020 might be 30 per cent below the most optimistic predictions. For an industry that has relied on an unremitting correlation of electricity demand to GDP growth, this has been a shock to the system.
AEMO chief Matt Zema acknowledged the problems facing the industry as it tries to eke out more revenue in the face of declining demand. Essentially, he said in an interview with RenewEconomy, as demand falls and investment in fixed infrastructure increases, the cost per megawatt grows – creating a vicious circle, or what AGL Energy described in a document last week as the Energy Market Death Spiral.
Part of this reduction has been blamed on reduced manufacturing, and partly on reduced demand from households and business in response to surging electricity costs, and on the massive investment in infrastructure to cope with peak demand. But the most enduring, and growing factor, at least on the demand side, is the penetration of solar PV. And AEMO forecasts give little consolation to the established industry – the amount of solar PV in the Australian market is tipped to grow 10-fold over the next two decades, and its impact on revenue and profits for the incumbent generators, retailers and network operators will increase accordingly.
Private forecasts suggest that the growth of solar PV could be much greater than that recognised by AEMO. Yingli, the world’s largest solar PV manufacturer in 2012, has said that Australia could, in fact, become the first “mass market” for solar PV in the world – thanks to a combination of declining costs, rising grid prices, lots of sun and innovative financing models.
RenewEconomy has written before that the proliferation of solar PV in the mass market – reducing household energy costs and offering negative cost emissions abatement – has the potential to redefine the energy price debate, if the politicians could seize the moment. But they are under intense pressure from the industry, and all along the value chain from retailers to state government-owned distributors.
AGL Energy’s answer to the “death spiral” was to push for time-of-use tariffs to ease pressures on the disadvantaged – low income earners and pensioners – and to help reduce peak demand. “It is not about making the industry more profitable, it’s not about that at all,” AGL Energy senior economist and co-author of the report Paul Simshauser told Radio National’s Saturday Extra program on the weekend.
Most observers, however, could conclude that is exactly what it is about, and the industry can be expected (their shareholders will surely demand it) to fight not just for tariff changes outlined in the AGL document, but also to fight back against the incursion of solar PV. They might not be able to kill it, but by acting to reduce its attraction, they could rein in its growth.
Here are some tactics that are being suggested to deal with what AGL Energy managing director Michael Fraser described on the Radio National Breakfast program 10 days ago as the “infiltration” of solar PV and distributed energy. “It’s been a good thing,” Fraser said. “But we will have to watch that.”
Replace net metering with gross metering
There is talk that at least one utility is working on a proposal to push for gross tariffs to replace net tariffs. Gross tariffs were popular in some states at the height of the inflated feed-in tariffs, because householders received a premium price for every kW of solar they produced. With the winding back of feed-in tariffs, net metering has been introduced which allows households to use solar PV as a hedge against rising electricity prices, using the electricity they produce to reduce their requirements from the grid.
However, while this offers significant savings to householders, this cuts the retailers and the network operators out of the game, and net metering would become even more attractive under the time-of-use tariffs proposed by the likes of AGL Energy, because those tariffs (around 52c/kW or more) are introduced when solar PV is producing the most. By introducing gross metering, particularly at low tariffs, it effectively deprives the householder of the right to “self consume” because, for accounting purposes, the householder must export all electricity back to the grid and import all its use at a higher price. This reduces the hedge the householder has against rising grid prices, and the value of solar and ties the volume of energy consumed into the spread sheets of the retailers and network operators.
Tariff changes and expansion of demand tariffs
Several readers – small business and farmers – have complained of tariff changes in Queensland and elsewhere that impose a higher “demand” charge for connection to the grid, and lower per kWh tariffs – again reducing the attraction of solar PV for self consumers. Geoff Bragg from the Solar Energy Industry Association highlighted the issue in this analysis, pointing out that some utilities wanted to expand such a tariff to smaller commercial users and even residential users.
“Anyone who currently installs solar as a small commercial user on a tariff in the range of 20 to 40c/kWh would be in for a rude shock if their tariff was switched to a 5 to 10c/kWh charge plus large standing charges or peak KVA penalties. The savings from slowing the meter down would be decimated,” he wrote. “Imagine if this same argument were moved across to the residential sector. Our customers might find themselves paying 8c/kWh plus $7 a day to be connected to the network or peak demand penalties perhaps? Supplying their own kWhs with solar wouldn’t make sense …. the future of the Australia PV industry could be in the balance.”
Retrospective tariff changes
The NSW Coalition government tried it on last year, before being forced to back down. However, one unremarked-upon part of the new Queensland package, which includes the slashing of the net feed-in tariff from 44c to 8c, and then to nil from 2014, is the change in rules to rental properties and properties that are sold. Anyone changing the name of an account – either through the sale of a property, or because of a different tenant – will lose their right to the 44c/kW tariff and will be switched over the 8c/kWh tariff. (It probably should be noted that most retailers and network operators in Queensland are government owned).
Generators in Germany and Italy, the world’s two largest solar PV markets in 2011, were pushing for the deployment of solar PV to be capped to protect their earnings. In Germany, a cap of 3 to 3.5GW was contemplated. But the solar PV industry is now a powerful voice in Germany and, with the support of state governments, the federal government backed down. It has now announced that once solar PV deployment reaches 52GW (double its level of the end of 2011), then subsidies will end. Some experts think that will occur by 2015. German policy makers are now seeking to design a new system. Italy was put under pressure by its dominant utility, Enel, which complained of major losses in generation profits from the merit order effect. Italy cut its subsidies, but actually increased its target for renewables.
These are similar to an absolute cap. They are decisions by distributors to ban the installation of new rooftop solar PV, as has happened in WA, or to limit their size, as has happened in Queensland. The recent report by the CSIRO, however, suggests that distributors are not trying very hard, and/or are using solar as a scape-goat to hide other issues. The CSIRO report concluded that at current levels of around 10 per cent penetration there would be no problems for network operators. Indeed, even at 40 per cent, there should be little difficulty, although some weak, rural grids would need to address some issues, but these were considered manageable.
Changing renewable energy targets
The Renewable Energy Target is considered untouchable because it has bipartisan support, but both Labor (in Victoria) and the Coalition (Howard Government) have form in back-tracking on announced renewable targets. The same forces that won changes then are busy behind the scenes now, and are planning to put immense pressure on the Climate Change Authority when it conducts its review this year.
A change to the large-scale renewable target would limit the growth opportunities for both wind farms and utility-scale solar. A change to the small-scale technology target is also mooted. Although the multiplier is due to wind back to one in July, 2013 – would the government contemplate scrapping renewable energy certificates for small-scale deployment?
Planning restrictions: bury solar in red tape.
This has worked effectively to suppress the wind industry in Australia, mostly through the introduction of planning regulations that vastly restrict the opportunities for large wind farms. With distributed solar PV, that would be harder to control, but authorities could always try to bury the product in red tape. Barry Cinnamon, the CEO of Westinghouse Solar, now owned by Australia’s CBD Energy, wrote in Forbes last week that the cost of rooftop solar in the US was twice that of Germany because of the amount of paperwork and red tape that installers had to go through. And produced this graph to illustrate his point.
“Even though solar panel costs are about the same, in almost every other category German costs are lower,” Cinnamon wrote. “In Germany, the residential solar industry has no red tape, there is a highly‐tuned supply chain to get equipment to customer job sites, installers get projects completed in a day, permitting is virtually automatic, costs to acquire a customer are very low and overhead is negligible.
“In Germany, you don’t need permission to connect to the utility, you don’t need a building permit, you don’t need any inspections and you don’t need financing (it’s automatic with a German bank). When rooftop solar was in its infancy, some of these regulations made sense. Now that rooftop solar is standardised, simpler, and safer – and the panels are much cheaper – this paperwork is unnecessary. This red tape is holding back the industry from creating even more jobs, driving innovation and building true energy security for our nation.”
Giles Parkinson is a journalist of 30 years experience, a former Business Editor and Deputy Editor of the Financial Review, a columnist for The Bulletin magazine and The Australian, and the former editor of Climate Spectator.