My response to Grattan on solar PV

Crikey has published my reaction to the Grattan Institute’s Report on solar PV (over the fold). My summary

the headline finding of the Grattan Report is totally wrong, even ignoring all the criticisms that have been made of the analytical framework. The report should be retracted and rewritten.

The Grattan Institute’s Report on solar PV , written by Tony Wood and David Blowers, has received plenty of adverse reactions . That’s not surprising, considering its sensationalist presentation, tendentious arguments and dubious analysis; in all these respects it’s well below the standard I’d expect from Grattan.

I’m a little reluctant to pile on further, but I don’t think the criticisms I’ve seen have really focused on the fundamental problem in the Grattan analysis. Although the summary suggests the report is about subsidy schemes designed to promote renewable energy and particularly solar PV, this is highly misleading. The core of the Grattan analysis relates to the electricity distribution network. The analysis is both conceptually unsound and empirically weak.

The approach used in the Grattan report is to compare the cost of rooftop solar PV with that of (mainly) coal-fired electricity, adjusted for a carbon cost of $30/tonne. No allowance is made for distribution costs, and any difference is regarded as a subsidy. That’s defensible, though dubious, in relation to feed-in tariff schemes (all of which have now been closed), but the big numbers in the Grattan analysis come from applying the same analysis to self-generation. According to the report, someone who installs PV and uses the electricity themselves, saving the retail price (say 25c/kwh) is being subsidised by the amount of the difference between the retail price and the wholesale price of the electricity they would otherwise have bought (say 5c/kwh, for a subsidy of 20c/kwh).

This reasoning is bizarre, to put it mildly. Grattan’s reasoning is equally applicable (almost) every time you turn off an appliance or lightbulb: by saving 25c/kwh, you are robbing society of 20c.

The underlying argument is that electricity distribution charges are levied on a uniform basis per kwh, but the costs of the electricity distribution network depend, to a large extent on peak demand. This mispricing reflects the mess that was called ‘electricity market reform’, dating from the 1990s, and has nothing to do with solar PV or renewables. The real subsidy here is to airconditioning which produces a demand peak in the late afternoon and early evening. Stretching a bit further, you could say that electricity mispricing subsidises hot dinners and ‘Who Wants to be a Millionaire”, which produce electricity demand at or near the evening peak.

The Grattan argument is that consumers who reduce their electricity use at times other than the evening peak, for example by installing solar PV, or simply by being careful, are thereby shirking their obligation to fund the costs of meeting peak demand. Apparently, consumers are supposed to make decisions based on the prices that would prevail under ideal pricing rules, rather than those they actually face.

But, even granting all these assumptions, the Grattan analysis is both theoretically and empirically unsound. The errors are such as to make their estimated subsidy to solar worthless, even accepting their analytical framework.

The empirical error is to assume, on the basis of misleading and inadequate data, that solar PV makes no contribution to meeting peak demand. The data on which this assumption is based is derived from just five days, and one state: the second Tuesday in October, in South-East Queensland from 2009 to 2013. For this data set, they find increased use of solar power at midday, reducing demand, but no change in the peak demand, which occurred at 6pm, when most people are at home, settling down for dinner, and when airconditioning demand is strong.

This is a startlingly convenient choice of observation. It happens that sunset in Brisbane in early October takes place around 5:50 pm, just in time to rule out any contribution from solar PV. In choosing this date to request data from Energex, it may have escaped the Grattan team’s attention that;

* Brisbane is close to the easternmost point in Australia, implying an early sunset

* Brisbane is the most northerly state capital, implying less seasonal variation in daylight times

* Sunset is later in December than in October

* Queensland does not have daylight saving

If the Melbourne-based researchers had sought data from local sources, for December, they might well have found that the peak demand occurred well before sunset (8:40 pm).

It is, of course, true that, given the pricing distortions noted by Grattan, many solar panels are located suboptimally from a social viewpoint. But it is absurd to claim that this constitutes a subsidy.

Important though the empirical error is, it is less significant than the theoretical error. In treating the entire avoided wholesale cost as a subsidy, Grattan assume that the optimal distribution charge for off-peak use is zero, and that the entire charge should be imposed at peak usage times.

This is an elementary confusion of marginal and total effects. If such a policy were adopted, the distribution charge at the current peak time would have to be increased to something like$5/kwh. But of course, with such a pricing structure, the peak would turn into a trough, when only the most essential uses of electricity continued.

A more reasonable assumption would be that the peak charge should be something like double the current value. Assuming that the peak charge applied to 10 per cent of total usage, that would permit a reduction of 10 per cent in charges at other times, or around 2c/kwh. But with that pricing structure in place, the social value of solar PV would be around 23c/kwh, at least four times the value imputed by Grattan. Recalculated on that basis, the alleged subsidy would disappear almost completely.

To sum up, the headline finding of the Grattan Report is totally wrong, even ignoring all the criticisms that have been made of the analytical framework. The report should be retracted and rewritten.

fn1. This is way below most economic estimates of the social cost of CO2 emissions. The credibility of the report isn’t helped by the citation of the Warburton Committee as an authority.

71 thoughts on “My response to Grattan on solar PV

  1. @Hermit

    I should point out that since I had solar pV and solar hot water (evacuated tube) installed in 2012, I have been astonished at how good and effective solar power is, especially in Brisbane’s climate. Now, this statement requires some qualifications about the finances and economics of solar power but no qualifications about the pure physical effectiveness of solar power except for the storage issue.

    The storage issue should not be looked at in isolation (no pun intended). For houses already connected to the grid, the grid essentially functions as a giant battery. It is not a free service. People pay for the connection. For houses not connected to the grid, battery storage or generator backup is necessary. As technology and economics change, battery storage might soon become a better solution cost-wise than a generator.

    For sure, solar pV on suburban houses might prove to be a detour in our energy journey. It might turn out that solar concentrating thermal power stations with molten salt heat storage, being a macro solution, will prove more cost-effective. However, with all current renewable technologies there is no doubt that solar power and wind power (mainly) can supply 100% of Australia’s stationary electricity needs.

    Looking at current stats tells us nothing about future possibilities in this arena. It’s like looking at the first automobile on the road and saying “Look at the stats. It will never replace all the horses.”

    There is no doubt in my mind now that a grid can run on 100% renewables and that load management and 24 hour power will be achieved with a combination of technologies and techniques.

    In the long run, good economics (without subsidies but with negative externality costs imposed) will determine the micro-generation / macro-generation mix just as it will determine the micro-storage / macro-storage mix. I don’t think we have to worry about this issue from the technical end (economics and technology). It will sort itself out with technology progress and good economics. What we have to worry about is the political issue of removing the massive subsidies to fossil fuels and then imposing genuine negative externality costs on fossil fuels. This task is still not achieved and yet renewables are already showing they can win even when the playing field is tilted heavily against them. This gives me hope.

    Final note for Hermit:

    Living off-grid has a long and venerable history. My aunt and uncle’s farmhouse in the Wide Bay District circa late 1950s – early 1960s had a 36V DC electrical system and they used appliances and lights designed to run on that power. A lead-acid battery bank was recharged by a diesel generator. When my aunt wanted to use the washing-machine, the generator had to be started as the batteries alone could not run the washing machine without being rapidly depleted. Of course, they had a wood stove.

  2. @Hermit

    I also predict “there will be no utility ‘death spiral’”. But why do you think “that leaves us with coal and gas (plants) making 87% of our electricity”?

    Why do you think for example that CSP (Concentrated Solar Power) stations with molten salt heat storage will not replace coal fired power stations? I predict large utility power will remain and it will come from solar and wind power. Indeed, it is already happening.

    “CSP is being widely commercialized and the CSP market has seen about 740 megawatt (MW) of generating capacity added between 2007 and the end of 2010. More than half of this (about 478 MW) was installed during 2010, bringing the global total to 1095 MW. Spain added 400 MW in 2010, taking the global lead with a total of 632 MW, while the US ended the year with 509 MW after adding 78 MW, including two fossil–CSP hybrid plants.[4] The Middle East is also ramping up their plans to install CSP based projects and as a part of that Plan, Shams-I the largest CSP Project in the world has been installed in Abu Dhabi, by Masdar.[5]

    CSP growth is expected to continue at a fast pace. As of January 2014, Spain had a total capacity of 2,300 MW making this country the world leader in CSP. Interest is also notable in North Africa and the Middle East, as well as India and China. The global market has been dominated by parabolic-trough plants, which account for 90% of CSP plants.[4]” – Wikipedia.

    The physics and economics of these plants are working now. All that remains to be done is the physical build-out.

    “Renewable energy in Spain represented 42.8% of total energy generation in 2014. Overall 27.4% of Spain’s electricity was generated from wind and solar in 2014” – Wikipedia.

    I assume the difference above is mostly from hydro power.

    Please tell me how these numbers are not significant. Please tell me how other overall sunny countries like Australia or the USA cannot manage a performance like this if poor old recessionary Spain can manage it? I think your assessments are based on early 1990s data. You need to read up on recent rapid developments.

  3. Hermit, because the 7 kilowatt-hour Tesla Powerwall can give a better return than the sharemarket average to households with time of use tariffs and high electricity consumption in the late afternoon and evening in New South Wales and Western Australia, I think the take up of the Tesla Powerwall and other home and business energy storage systems that are comparible on price and reliability will be very rapid. It will only take 1% of household having 7 kilowatt-hours of storage to have a major effect on electricity markets. Their combined output could be well over 0.2 of a gigawatt during periods of peak demand and since they are very well suited to providing ancillary services it would be enough to greatly reduce the amount fossil fuels burned to provide spinning reserve.

  4. @Ikonoclast

    [Renewable energy in Spain represented 42.8% of total energy generation in 2014. Overall 27.4% of Spain’s electricity was generated from wind and solar in 2014? – Wikipedia.

    I assume the difference above is mostly from hydro power.]

    This link

    cites 21.1% to wind, 21% to nuclear. Solar PV was tracking around 3.3%.

    Renewables (solar PV, solar thermal and wind) accounted for 49% of new capacity in 2013.

  5. @Fran Barlow

    Hang on Fran, nuclear is not renewable if that is what you are claiming or implying somehow.

    The numbers are unequivocal and the statement is unequivocal.

    “Renewable energy in Spain represented 42.8% of total (electrical) energy generation in 2014.” – Wikipedia.

    I think your post is muddying the waters rather badly.

    In 2013, renewable sources provided 42.2% of Spain’s electrical power broken up as follows;

    Wind 21.2%
    Hydro 14.2%
    Solar pV 3.1%
    Thermal 2.0 %
    Solar Thermal 1.75%

    For comparison, nuclear (from NON-renewable fission) delivered 21.2%.

    As I say, I think your post muddies the waters badly.

  6. RB for home batteries to reduce peak grid generation somehow the system must take energy from battery owners (at the ‘right’ price) and send it to others. That will require smart inverters which do exist notably in Hawaii. It would reduce overall grid demand if homeowners powered their own aircons or heaters at night. Since Australia uses 249,000/365 = 682 Gwh per day or 28.4 GW continuous average power consumption I think the storage requirement must be large. That’s to ride through multi day wind lulls and solar grey-outs not just for transient ancillary services.

    If we could replace coal and gas baseload we could perhaps eliminate 150 Mt of our 536 Mt net emissions. That would be the biggest single emissions saving.

  7. @Hermit

    As I have already noted, a really smart total energy system for our country will not have much requirement for electricity to be used at night for heaters or air-conditioners. The smarter and cheaper way to go will be to use thermal ballast as heat storage or “cold” storage.

    Solar energy by day is used to heat or cool the house including heating or cooling the thermal ballast. The thermal ballast then keeps the house comfortably warm or cool all night (depending on the season). It’s worth noting that the entire interior of the house (including the air) in a well-insulated and well-sealed house is thermal ballast and humidity control ballast anyway. Some additional thermal ballast might need to be added either in design and construction or even by retro-fitting. This can take the form of stones, blocks, tiles or finned or corrugated water tanks for example.

    What I am trying to show here is that battery (chemical potential) energy storage is not the only option. At the same time, battery storage will be useful for certain purposes and certain situations.

    The thing to get one’s mind around is the fact that there are many complementary solutions for renewable generation and energy storage which can completely solve the intermittency problems of solar and wind power generation in particular. All energy for domestic use (for example) does not have to be made as electricity and stored in batteries as chemical potential when not used immediately.

    The premise of your argument seems to be that there is no way around needing electrical energy at night for heating and cooling residences. This simply is not the case. Even ruling out fossil fuel heating (oil and coal heating at the premises for example) this is still not the case. Thermal ballast “powered” by solar and wind power will be a large part of the solution in this area.

  8. Hermit, if people have home energy storage they will use it and this will reduce peak grid demand whether or not they export electricity to the grid from their batteries. (If you think about it you’ll realise that people will store solar electricity during the day and draw on it in the evening instead of using grid electricity and this will reduce the peak.)

    The Tesla Powerwall comes with software from Reposit that allows it to sell electricity to the grid when the price is high and buy it when the price is low or negative. This could be moderately profitable for early adopters as sometimes the grid is willing to pay over $13 a kilowatt-hour for electricity. However, as more energy storage is installed opportunities for arbitage will decrease, although accelerated closure of fossil fuel generating capacity could offset this somewhat.

  9. @Ikonoclast
    You have to convince Joe Public this is the way to go. So far the main group to shun summer air conditioning are the Coober Pedy opal miners with their dugouts. I suggest that even after some efficiency measures we’ll need more electricity not less for several reasons. Gas will be priced too high for heating and cooking, both at home and commercially. The gas replacement will mainly induction cookers and heat pumps for water and air. When electric cars go prime time most homes might need an overnight topup of say 10 kwh for 40 km driving. We have 18m cars perhaps half could be replaced by EVs. That could eventually add 25% to residential electricity demand.

    Then there’s our 1.6% annual population growth. Each new Aussie will need 2-3 Mwh of electricity each year just at home. I also speculate that if a 47C week on the east coast takes out scores of seniors we will get a Brit style heating allowance except it will be for air conditioning. What we’re seeing now is a reduction in electricity demand but an increase in coal burning. At some point that will have to reverse.

  10. I do not believe the report will damage the Grattan Institute’s credibility as it really doesn’t have any anyway.

    Take their argument to it conclusion and it is a bit like saying that anyone who does not use a car is being subsidized to the extent that roads are being built and they don’t use them except to walk or cycle on for which they are not charged. A total absurdity.

    As someone who manages a general medial practice, I look forward to the day when it will be acceptable to charge every patient a monthly “facility fee” for providing the health infrastructure and an off peak and peak fee for seeing a doctor. Actually, with regard to the latter I shall give it serious thought.

  11. > You have to convince Joe Public this is the way to go.

    Nothing to do with you, of course.

    [the words you say reflect the thoughts you think: even if you lie, the lies you tell are shaped by your actual thoughts, not the ones that you want people to think you have. By-and-large people understand themselves less well than they are understood by others.]

  12. Ikon uses daytime PV to cool his house in hot weather. I retreat to a cellar. Neither of us are using the mainly coal and gas fired grid which goes into overdrive in summer.

  13. @Hermit

    Indeed, and by retreating to a cellar in Coober Pedy you are using the exact principles that I mention and that all passive design experts advocate, namely insulation and thermal ballast.

    Going below ground is a good idea if the “building” costs do not become excessive. I can see more underground or semi-underground houses being built in future in Australia to escape extreme heat and bush-fires as such events will increase with global warming.

    I will post more on this topic later.

  14. Some wag over at suggested that the folks in Coober Pedy should go in for geothermal rather than solar, since they’ve done most of the necessary digging already. 😉

  15. I’m quite pleased with my underground lair that cost me about $3k at mates rates when others spend over $20k. Not only does it have ethernet cable but coaxial should I want to watch telly. To use a laptop on the (surface) solar charged battery a simple dashboard converter 12v to 21.5v works perfectly. The main thing is drainage and water proofing. While always cool inside the negative is lack of windows to see what’s going on eg approaching smoke for which I listen to ABC FM.

  16. I retreat to a cellar.

    Exactly. “You have to convince Joe Public this is the way to go.”, my emphasis: doesn’t even occur to you that there’s anything you could/should be doing.

    There’s a word for this sort of attitude, and the word is “selfish”.

  17. @Collin Street

    I disagree. “Be the change that you wish to see in the world.” – Mohandas Karamchand Gandhi.

    Hermit is being the change. Hermit, by his reports, is doing a lot of work to ensure he has a low carbon footprint. Some of us still worry about his support for nuclear power and try to argue him out of that… but that’s another issue.

  18. The worst thing about the Gratton report was its treatment of sunk costs. The grid is sunk. It should be ignored from all the cost benefit analysis.

    The argument that solar panels should be forced to pay for the grid because otherwise the price will increase and drive others out of the market is also false. The regulator sets the price maximum not the minimum. If the energy companies want to be so stupid then they are well within their rights to drive themselves into bankruptcy, but the marginal costs of sustaining the network is very low. The capital charge is the bulk of the cost and the capital charge is a sunk cost.

    The argument that consumers should pay for the obsolete network because otherwise it will increase the risk premium is also stupid. It will only increase the risk premium on industries that rely on pork barreling to sustain a profit, not the general risk premium.

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