Giles Parkinson is a keen, if perhaps partisan, observer of the energy and climate change world, especially with regard to Australia. (Australia is, in many ways, the canary in the coal mine for the United States.) He receives copies of research reports from leading companies all over the world. He recently used a research report by Macquarie for a blog post: Macquarie says rooftop solar juggernaut is unstoppable. This report focuses on rooftop solar in Germany, but the implications translate to much of the developed world.
According to the Macquarie report, as reported by Mr. Parkinson, the two key drivers of the cost-effectiveness of rooftop solar in Germany are the drop in solar costs and the rise in retail prices.
“Macquarie notes that wholesale prices in Germany have fallen 29 per cent over the last five years, while retail prices have risen 31 per cent – both movements at least partly due to the impact of renewables. But those movements pale in comparison with the dramatic fall in the cost of rooftop solar PV.”
We know all the reasons solar costs have fallen and continue fall. Wholesale prices have dropped in Germany predominantly because of a huge increase in renewable capacity that has essentially zero variable costs (wind and solar). This capacity has been added to the bottom of the dispatch stack, effectively squeezing out higher variable cost units that set the wholesale market price as well as removing all surplus pricing capability from the suppliers.
But the real driver is the increase in retail prices, which now makes self-consumed solar power cost-effective with grid-supplied retail energy, i.e., grid parity. How did that happen?
In a nutshell, Germany decided to recover the cost of its subsidies for renewable power in a per kWh charge. There are an infinite number of ways they could have changed prices to consumers to recover the subsidy costs, with some more reflective of how the costs were incurred than others. However, it seems as if they did not fully take into account the effect of consumer behavior.
Imagine the following scenario. Over the next five years there are truly dramatic reductions in solar cost per kWh from huge increases in efficiency and huge decreases in manufacturing costs. It becomes possible to install solar in Germany for 0.08 euro/kWh in south facing systems, and 0.12/kWh in east and west facing systems.
Retail costs are higher than 0.30 euro/kWh, so every unshaded building, literally, has solar panels on its roof. Utility sales fall by 20% and retail prices rise to more than 0.40 euro/kWh. Thousands of households that installed solar under the 20 year feed in tariffs, where they sell all their power to the utility and buy all their power from the utility, find their economics of solar have turned upside down. Those late to the solar party have extremely low bills because they consume most of the power they produce instead of buying it from the utility (onsite self-consumption).
The payments to the self-consumers for excess production fall to almost zero because they have been forced to go to real time pricing and there is a massive excess on sunny days. Retail prices continue to rise to support the distribution systems, so much so that it becomes very cost-effective to have a bank of lead-acid batteries to store your excess generation and use it later rather than sell it back for nothing and pay high prices for the night-time / cloudy days you need the grid.
This is all clearly inefficient economically, but distorted price signals lead individuals to do distorted things. And when the price signals change radically in a short period of time as a result of government fiat, it causes huge societal disruption. That is why it is critical, when the government sets prices, that they take into account the effects the prices will have on individual behavior.
So, what should Germany do? At the very least, they need to price the cost of the grid (distribution and, to the extent it is relevant, transmission) based on incremental costs. In the short-run, the simplest way would be to have a grid connection fee, ideally based on your usage at the time of system peak with adequate information regarding when peaks are likely to occur, or, more simply, a per month fee to be connected to the grid. Energy costs should be based purely on real time energy costs in as small increments as the market operates. (For example, Australia has 5 minute prices that top $13,000 AUD / MWh, but abutting prices are far lower, but still not cheap.)
Customers do not want this, and that is where the free market comes in. Independent retailers could offer a wealth of products with lots of different features to take on the complexity and make things simpler for consumers. Excluding outages, batteries would not require huge storage amounts, but would instead be optimized for expected durations of price spikes and be connected to price streams from the wholesale market. (Note: If I were a generator, I would have jet turbines installed with a price bid just below the current levelized cost of battery storage so I could clean up on cloudy, cold days and hot summer nights (sounds like a movie . . .).)
In summary, neither the government nor the entrenched market participants can overcome radical changes in cost structures driven by technology. They can build their bulwarks against change, but once the economics become sufficiently attractive, they will crumble like a seawall against a storm tide. We have seen this horror movie before in several jurisdictions with regard to telecommunications and a fundamental change in underlying costs (computer switches, fiber optics). Where the government sets prices, it is imperative that it understands, and considers, the effects because the waste can be huge, as well as the political backlash. Unless, of course, as a government, we are only interested in the here and now and next election . . .