Suns of anarchy

At the AFR Energy Summit held in October 2018 the Energy Security Board Chair Kerry Schott described the handling of growth in renewables in the grid as ‘anarchy’. Perhaps a bit dramatic, but this description highlights a real concern stemming from the now widely understood problem that it is not customers using power that present the greatest headache to reliable system planning, but those providing it. 

Much of it is provided through passive solar export schemes underpinned by the Small–scale Renewable Energy Scheme (SRES). In March this year the SRES came in for further criticism from the Australian Competition and Consumer Commission’s Chair Rod Sims.  Sims says that the SRES should be abolished as it has met its aims and is now an unfair program that burdens households without solar disproportionately, adding around $36 a year to household power bills. This number does not capture the other costs, like network augmentation.[1]

Despite the technical and economic concerns of senior bureaucrats, all sides of government support the continuation of the SRES until 2030. The Federal Energy Minister Angus Taylor has stated that the real cause of price rises in recent years has been the actions of the big energy companies.[2]  The Greens’ Ellen Sandell agrees, arguing that the subsidy paid via the Feed in Tariff is not high enough and further claiming the costs of the distribution system reflected in network tariffs is simply “a greedy mark-up that only serves to line the pockets of power companies”.[3] Notwithstanding these insights, the big energy companies are still concerned that policy about integrating large increases in solar into the grid that result from schemes like the SRES, whilst at the same time ensuring security and reliability of power supplies, is scant. 

To their credit, the distribution networks are working on adapting a grid that was never meant for two way energy flows. Open Energy Networks[4] is an Energy Networks Australia initiative in conjunction with the Australian Energy Market Operator (AEMO) that seeks to integrate solar and energy storage, along with other distributed generation and demand such as electric vehicles, into electricity networks. They have run a best practice stakeholder engagement program.  However any acknowledgement of the work of distribution networks in this regard appears to be grudging, with some even claiming that concerns about solar penetration are raised only because it threatens their business model.[5] This could be the case if networks are only being able to charge for inbound and not outbound on what is an energy transport service.  Or more accurately, not being able to manage traffic flows at all, and simply being required to build more capacity on less revenue. Contrary to the critics, the proposals now being pursued will entirely remove any suggestion that the networks have an incentive to resist solar.

Like transport services, pricing has got to be symmetrical. And like the transport service, where shifting from peak to off peak times creates a benefit, or where network support services can be provided, then there should be a reward for that.  No-one in industry is suggesting that customers should not be rewarded for supporting the network, or for the actual value of energy supplied into the grid. However unlike transport services, energy distribution has a legacy asymmetric rule that prevents that, and tariffs or prices that could provide a price signal to address export induced congestion are currently prohibited. At present, we can’t have a financial market to address small scale solar constraints because Clause 6.1.4 of the National Electricity (Economic Regulation of Distribution Services) Amendment Rules 2007 explicitly prevents electricity distribution network businesses from charging customers for the use of the system to export electricity.  Whilst this may sound odd, it wasn’t just made up; there was a considered NEM precedent.

Unlike end users, large generators do not pay to use the grid.  So  why should small customer generators in the household and business solar sector? It sounds fair.  But as the big grid moves to a larger number of relatively smaller and dispersed generators, there are calls for this to change as well. The Chairman of the AEMC recently set out that the first of their priorities now is to address generation access and transmission pricing.[6] This is because the sheer number of new generators coming on line and the lack of coordination between connecting generators and transmission businesses means generators are being built in places where there is not enough transmission infrastructure to get the generation to the market.[7] It’s not a dissimilar theme to the problem on distribution networks. So changes are forecast to the way transmission costs are allocated in any case. 

Getting back to the NEM precedent, the situation was never analogous. This is because in the current arrangements large generators don’t have firm access to the transmission network; they can be crowded out, or constrained off. And AEMO has a NEM wide dispatch engine to manage traffic and that means that if you’re a generator in a congested transmission area, you might not get on. It’s not up to the transmission network to keep building to make sure you can dispatch all of your output; transmission investment must first pass regulatory hurdles for efficient investment. 

So in this way they were never quite the same. Transmission networks don’t have to solve the problem of poorly located generation investment getting on to a crowded system, whereas in current arrangements, distribution networks do have to solve the problem. This is because there is no distribution system wide dispatch engine to manage traffic, and no investment (price) signal based on the augmentation cost[8] of dispatching the customer’s energy to the distribution network. 

In the absence of price signals, distribution networks have come to rely upon other mechanisms, mostly involving rationing, to keep their system operating reliably. This can be achieved either by limiting the size of systems they will approve, or as in the case of the ENA’s recently published connection guidelines, setting export limits and as such forcing consumers to use their own generation themselves. These rationing approaches do assist distribution networks with maintaining reliable operations. However they are unpopular with consumers, and generate many calls to retailers from consumers who have installed solar to complain that they are not getting the revenues they believed they would from Feed in Tariffs, as they are unable to export during peak times. This is a feature of use that is not widely explained to consumers by those who provide and install their solar panels. Similar complaints are also raised with Ombudsmen Schemes. It’s hard to know if more information on this possibility would have assisted people with their investment decisions on solar panels, or made a difference to solar saturation levels. It also would have begged questions about firm access to the distribution networks for early adopters. But it should at least be considered.

In comparison to such harsh regulatory rules such as rationing, or first mover advantage, pricing signals are more economically efficient.[9] How such signals are actually delivered also requires further consideration.[10] 

So what do those big energy companies with their claimed “greedy mark-ups” actually want? Rather than being a threat to their current business models, Distributed Energy Resources such as solar represent great opportunity and energy businesses are evolving with that.  These energy businesses want to see networks recover efficient costs, reflected in the changing nature of the grid to accommodate two way traffic and the challenges that poses; and with due consideration given to the societal benefits that flow from grid investment. They also want the enablement of Distributed Energy Resources (like household solar and battery) that doesn’t unfairly discriminate, through subsidies or regulation, against those either not participating (or unable to participate) as household generators. And they believe that this is not inconsistent with the government’s pricing policy objective of lower household bills; though the preference is that this is achieved through competition in generation and retailing. 

In the absence of these, the forecast anarchy may just be the outcome.

[1] For example, the AER allowed Energex $25 million to invest in monitoring and remedying issues caused by high levels of solar PV generation in its Final Decision: Energex determination 2015−16 to 2019−20, Attachment 6 − Capital expenditure, October 2015.

[2] https://www.smh.com.au/business/consumer-affairs/accc-calls-for-an-end-to-rooftop-solar-subsidies-20190329-p518xt.html

[3] Ellen Sandell is the state MP for Melbourne and Victorian Greens spokesperson for climate and energy.https://www.smh.com.au/opinion/the-great-solar-power-scam-20170207-gu7j7o.html

[4] Open Energy Networks seeks to integrate solar and energy storage into electricity networks in ways that help ensure quality and reliability of supply and lower household power bills.  See https://www.energynetworks.com.au/joint-energy-networks-australia-and-australian-energy-market-operator-aemo-project

[5] https://www.abc.net.au/news/2018-10-11/electricity-distributors-warn-excess-solar-could-damage-grid/10365622

[6] Australian Energy Week, AEMC Chairman’s address, 12 June 2019

[7] Ibid

[8] There is of course an investment signal from subsidies and feed in tariffs.

[9] A financial market to address small scale solar constraints necessary to address this is currently prohibited because of Clause 6.1.4.

[10] To date cost reflective pricing could be reasonably described as a policy failure.  However we do need to address this.  See also https://www.energycouncil.com.au/analysis/cost-reflective-pricing-not-so-simple-in-practice/