Former Economics Editor of the NZ Herald

Brian Fallow: Time to get smart about solar

Better pricing would help us harness the sun
Illustration / Anna Crichton
Illustration / Anna Crichton

• 8281 Residential solar power connections at the end of 2015
• 77 per cent annual increase in the number of connections

The number of New Zealand households generating their own electricity from the sun climbed 77 per cent to nearly 8300 last year, the Electricity Authority reports.

Modelling by Concept Consulting has concluded that solar photovoltaic (PV) generation will be cost-effective for about 40 per cent of households in 10 years.

That is partly based on the expectation that the cost of PV panels will continue to decline, but crucially, it also depends on the fact that current retail pricing structures mean electricity is under-priced at times of the day and times of the year when it is expensive to generate and distribute. Those are the times when households with solar PV are most likely to be drawing on grid-supplied power.

The risk is that more and more people who can afford to install solar power will be subsidised by poorer households who can't. That would be inefficient and unfair.

Defenders of solar respond by arguing that the answer is to foster the uptake of technology and tariff structures that would deliver cost-reflective pricing and then let the market decide. The Electricity Authority is consulting on the issue.

A report, The Economics of Load Deflection by the prestigious Rocky Mountain Institute (RMI) in the United States, says the electricity system is at a fork in the road.

In one direction is a future of the kind the Concept report warns of, where there is a misalignment between what makes economic sense for consumers contemplating investing in solar on the one hand, and what makes sense for the country as a whole, given network costs and the likelihood that other renewables such as geothermal and wind are expected to offer cheaper increments to national generating capacity.

In one direction, the RMI report says, "an upward price spiral based on stranded assets serving a diminishing load will make solar-plus-battery adoption increasingly attractive for customers who can, and lead to untenably high pricing for customers who remain on the grid, including low- and fixed-income customers who would bear a disproportionate burden of escalated retail electricity pricing."

In that future there is excess investment on both sides of the meter.

Down the other path, the RMI argues, are "pricing structures, business models and regulatory environments in which distributed energy resources such as such as solar PV and batteries can potentially lower system-wide costs, while contributing to the foundation of a reliable, resilient, affordable, low-carbon grid in which consumers are empowered with choice."

That option -- the smart grid -- sounds good, doesn't it? The challenge is how to get there from here, and who pays the fare.

The Concept report argues that as things stand, the value for consumers in generating their own power is about twice the actual or social value of PV-generated power.

The key reason is that the variable part of standard residential power bills contributes to the recovery of three main costs: generation (energy), network (lines) and retail operating costs (such as metering and billing).

By reducing their demand for grid-supplied power, solar consumers reduce their contribution to the recovery of these costs but they reduce only the generation or energy portion of the costs they actually incur and that may be less than half the total.

A high proportion of electricity network costs is driven by the capacity needed to meet peak demand, typically on cold winter evenings when solar makes little or no contribution to supply.

The problem is that to date few, if any, lines companies have established effective pricing regimes that take advantage of new technology like smart meters.

But under current practice, when a consumer's contribution to recovery of that network cost is based on the volume of power they buy, regardless of when they consume it, a solar consumer's contribution will be inefficiently low.

The Electricity Authority argues that the way lines company recover their costs should encourage consumers to do things that reduce network costs, like drawing electricity for the household from battery storage during times when the network is congested, or recharging electric vehicles in off-peak periods like the middle of the night.

Conversely, pricing should discourage over-investment in solar panels if that increases the price of electricity for other consumers.

Current, volume-based pricing does not do that, the authority says.

For PV supplier Solarcity, all this smacks of incumbent generator/retailers and monopoly lines companies protecting their business models in the face of disruptive technological change.

It disputes the contention that solar is only an option for wealthier households. It offers a business model where the company owns and maintains the solar panels and sells the power to the households on whose roofs they are installed, so the capital cost is not a barrier to uptake.

It also argues that in much of the country, getting the angle of the panel right can substantially reduce seasonal variation in how much power it generates.

Solarcity accepts that lines companies have to build enough capacity to meet maximum demand and that this is costly.

However it says smart meters, -- which record not only how much power is used, but when -- make possible new charging regimes that could accurately pass on the cost of supplying electricity from the network to households, so they can choose how they use electricity.

"The problem is that to date few, if any, lines companies have established effective pricing regimes that take advantage of new technology like smart meters," says Solarcity chief executive Andrew Booth.

The Electricity Authority reports that last year another 130,000 smart meters were installed in the residential sector, so that 71 per cent of residential consumes now have one.

Maybe it is time to start putting them to use.

- NZ Herald

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Former Economics Editor of the NZ Herald

Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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