Power to the people

Regular Mule contributor, James Glover, returns to the blog today to share his reflections on solar power.

I have been investigating solar power for years and finally bit the bullet and signed up for a system. A 4.5kW system cost me $8,500, after receiving the Government rebate (about $3,000). I’ve been meaning to write about my adventures in solar for a while now. It started because of a strange fact I discovered about 4 years ago. Even though the cost of solar cells has been dropping dramatically in the last 4 years (it’s gone down about 75%) the payback time has stayed steady at about 5-10 years. The payback time is based on what you save by not paying your power bills plus what you earn by selling electricity back into the grid. The peak time for solar generation is 10am-2pm while the peak time for domestic use is in the morning and evening outside these times.

The answer to my conundrum is that while the cost of solar cells has been steadily dropping so has the feedback tariff. When the feedback tariff was 60c per kWh, the excess power created during the day paid for the disparity in the price of the power consumed in the evening. In Victoria the feed in tariff has dropped to about 8c. In order to have a net zero cost of solar it is necessary to have an even bigger system as peak power cost is about 32c per kWh. A particularly good website I found for all things solar is SolarQuotes.  I thoroughly recommend it as has lots of info on solar power as well as cost benefit analysis. They recommended two solar companies in my area, both of who were very good.

From a financial point of view it makes sense that power companies would buy solar power at a lower rate than they would provide it‑it’s called the bid/offer spread and is how most companies make money. The cost of producing power is about 5c so it is still cheaper for them to produce and sell the power themselves than buy it from solar power generators.

There is a twist to this tale however. Electricity generators are monopolies and so left to their own devices would naturally gouge buyers. When the state governments privatised electricity generation they set up supervisory boards to ensure the companies made reasonable, but not immodest profits. In the absence of a competitive market one way to do this is on a “cost plus” basis: set the profit at say 10% above cost of electricity generation. It seemed reasonable until power companies found a way to game this system. If they increased the cost of providing electricity then they increase their profits.

But surely, you say, the costs of generating electricity are based on market forces for the raw materials plus the cost of running the plant? One way is to spend much more on investment than is actually necessary. And the electricity companies did this beautifully. They convinced the state government oversight bodies that not only was electricity consumption forecast to rise well above GDP growth but that existing infrastructure needed to be “gold plated”: improved to reduce the probability of a widespread failure. A combination of inflated growth predictions (and hence building new plants) and gold plating is the real reason electricity prices have risen 20% year on year over the last few years. Yes, the carbon tax has had a small effect as a one-off increase. The Coalition (now the Government) exploited this in the run up to the election, although I am pretty sure this not was the real reason the Labor government lost office.

If you take solar power growth into consideration then electricity generation from traditional sources such as coal and hydro is expected to fall, not rise. Gold plating (soon to include actual gold power lines…I think I am joking) is now seen for what it is and is being reined in.

One of things I have always wondered is why someone doesn’t set up a virtual power company which buys solar power and sells it to distributors? Turns out they already exist. The thing which swung me to the solar provider I chose (the price was identical to the others) was that they could hook me into just such a company.  Sunpower is a US company which has set up in Australia to do just this. Currently their feed in tariffs are higher (guaranteed 20c for 2 years as opposed to 8c for coal generating providers) though I have no expectation they will remain this high. Australian Diamond Energy is another example of a virtual power company. Diamond Energy buys green power from retail solar producers (i.e. you and me) as well as independent wind farms. They also invest in their own larger scale solar and wind farms. Market forces will dictate the future price and I am happy to offset the environmental cost of running my air conditioning at full bore over summer.

In the US they already have communities which set up solar farms to provide their bulk electricity and sell their excess to the grid. Old style electricity companies have resorted to making claims that there are problems with solar electricity, either because it’s at the wrong time of the day or because old style inverters produce modified sine waves from direct current rather than pure sine waves and some electrical appliances don’t operate as well with these modified sine waves. Increasingly though inverters are of the pure sine wave type anyway. While there is some truth to their arguments, it is worth remembering that power companies would prefer that there was no solar at all. They have an axe to grind, their arguments are designed to limit the onward march of solar, or totally compensate them for lost revenue which will achieve the same aim through higher solar costs or lower feedback tariffs.

Another example of why traditional power companies are increasingly out of touch is smart meters. Solar power companies, monitor power usage through smart meters and solar panel output monitoring.They then provide feedback directly to your table or smart phone, and also work to help users optimise their power usage and minimise costs. Traditional power companies see smart meters as purely a way to save on meter reader costs, they have no interest in reducing users’ power consumption.

It seems that in Australia, the “sunburnt country” we have missed a few tricks. The dinosaur coal-based power companies are fighting a rearguard action, trying to get governments to lower the feed-in tariff further or let them charge solar customers a fixed fee to cover their “costs”. I think they are on the wrong side of history. A consumer group Solar Citizens has already been effective in reminding governments that over 1m households have solar power. I think that 1m is a tipping point.

There are about 8m households in Australia. At a cost of about $5,000 we could make each a net producer of electricity for $40bn.  About the cost of the NBN. A new national Snowy River Scheme!

Power to the people. From the people. For the people.

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3 thoughts on “Power to the people

  1. Ken

    The problem with small scale solar is that it is the most expensive way of generating electricity. The government basically was paying a price that is much higher than what it cost to produce electricity using coal. Part of this is due to the way costs occur in traditional systems. The cost of delivering electricity to a premises is roughly one third to each of generation equipment, generation and distribution. Now regularly produce some electricity and feed it into the grid, you save the power companies some cost of generation but the capital costs of generation and transmission are still there, so electricity is available if you come home after dark and want to cook and warm your house. If the power companies don’t take this into account when calculating power costs then this is passed onto everyone else.

  2. Zebra

    Ken, I kind of agree but soon it will be a moot point. Coal generators keep making arguments based on the status quo but the times they are a changing, rapidly. Battery systems that enable solar generators to store excess electricity during the day and use it at night or early morning currently cost around $12,000 (on my latest quote) which has come down from just $20,000 a few years ago (solarqoutes.com from 2011). If they reach as low as $2,000 I am guessing many domestic solar producers will switch off the grid altogether. I know I will. Decreasing the feed in tariff may be fairer, even though it makes grid connected solar less economic, but off grid solar more viable. Once solar people go off grid then the non-solar customers will be bear an increasing fraction of infrastructure costs.

  3. Zebra

    Here is a recent article
    It shows that the penetration of solar pv has doubled in the last 3 years from 7.5% to 15%. This is in the face of reduced feed in tariffs and subsidies. By raising electricity prices so much in the last 3 years for gold plating and unnecessary infrastructure investment the fossil fuel industry has cut its own throat. When people consider the economics of solar they don’t just take into account the current price but future prices based on current trends. Even with the removal of the subsidy (admittedly worth $2-3000 per system) it is estimate that the payback time will only increase from 5 to 7 years. 5 years ago it was 10 years so this won’t stop solar take up.

    I have to admit the government is probably right (purely from an economic point of view) to remove all solar subsidies and allow feed in tariffs to reduce to 8c pkw as in Victoria. Once that doesn’t prevent solar take up I wonder that the fossil fuel industry will think up next to try and prevent their industry death spiral? Probably the introduction of increased fixed line charges – mine is currently $350 a year so don’t believe the lie that solar users aren’t paying a reasonable rate for fixed line access.

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