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Published on November 14th, 2013 | by Giles Parkinson

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IEA Sides With Utilities On ‘Free-riding’ Rooftop Solar PV

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November 14th, 2013 by
 

Originally published on RenewEconomy

The  International Energy Agency is likely to upset the growing global solar PV industry, after questioning the value of residential solar PV, and accusing it of becoming a “free-rider” on networks that could lead to increased costs for other consumers.

In its World Energy Outlook 2013 report released overnight, the IEA says many parties suggest that the dramatic fall in the cost of solar PV in recent years means that it has – or is fast becoming – competitive with electricity generated from fossil fuels.

It says these arguments are based on the concept of “grid parity”. (Actually, it is probably more accurate to say they are based on “socket parity”).

But, the IEA asks, is grid parity the right criterion to measure the full competitiveness  of residential PV, after which it can survive without the need for subsidies? The IEA says no – at least not for those who remain connected to the grid.

The  IEA sides with arguments put forward by utilities, in Australia and elsewhere (and this shouldn’t be surprising given the list of peer reviewers of the document, it’s hard to find a renewable energy representative amongst them) that solar PV effectively allows households with rooftop installation to get a “free ride” on the grid by not making their contribution to grid costs.

From a system perspective, the IEA argues, that the money invested in grids – construction, maintenance etc, needs to be recovered. And it seems to indicate it should. And it says that when allowance is made for these costs, the cost of generation from solar PV systems would have to fall below grid parity to become competitive.

It gives the following example illustrated in the graph below.

Household A does not install solar PV, pays $300 per year in fixed charges (assuming all fixed costs are passed through) and another $400 per year for the 4MWh it consumes, to give an average retail price of $175MWh.

Household B installs a solar PV system which produces 1.6MWh for consumption on site, for a total cost of $280 (equal to 1.6MWh $175MWh). It additionally purchases 2.4MWh from the grid at cost of $540 per year (which includes the fixed charges of $300 plus energy consumed). Which, the IEA says to rousing applause from utilities, means that the solar PV household ends up paying more than Household A, despite installing solar and consuming less from the grid.

So, the IEA argues, the cost of the PV system would have to drop to $160 (1.6MWh $100MWh), well below some current notions of grid parity, for it to make economic sense, as is illustrated in Household C. This, says the IEA, is equal to the variable cost that the PV system is displacing.

The IEA further argues that any electricity exported back into the grid should get no more than the prevailing wholesale price otherwise it would “benefit from windfall profits”.

It is harder to imagine a more simplistic approach to the solar PV issue. It takes no account of the potential deferall of grid expenditure, its impact on sidelining fossil fuel generation, and numerous other benefits. The solar industry will be howling in protest, and so should households.

iea-solar

Household A does not install solar PV, pays $300 per year in fixed charges (assuming all fixed costs are passed through) and another $400 per year for the 4MWh it consumes, to give an average retail price of $175MWh.

Household B installs a solar PV system which produces 1.6MWh for consumption on site, for a total cost of $280 (equal to 1.6MWh $175MWh). It additionally purchases 2.4MWh from the grid at cost of $540 per year (which includes the fixed charges of $300 plus energy consumed). Which, the IEA says to rousing applause from utilities, means that the solar PV household ends up paying more than Household A, despite installing solar and consuming less from the grid.

So, the IEA argues, the cost of the PV system would have to drop to $160 (1.6MWh $100MWh), well below some current notions of grid parity, for it to make economic sense, as is illustrated in Household C. This, says the IEA, is equal to the variable cost that the PV system is displacing.

The IEA further argues that any electricity exported back into the grid should get no more than the prevailing wholesale price otherwise it would “benefit from windfall profits”.

Because of this, the IEA says solar households could be benefiting from a “free-rider” effect, and suggests that a better measure would be “cost parity” which includes the value of the grid. It even recommends differentiated tariffs to ensure that costs are recovered.

It is harder to imagine a more simplistic approach to the solar PV issue. It takes no account of the potential deferral of grid expenditure, its impact on sidelining fossil fuel generation, and numerous other benefits, or even of the reality that grid operators have over-capitalised on their networks, and should not be rewarded for their greed.

The solar industry will be howling in protest, and so should households. The irony is that the cost of solar is heading down below $100/MWh anyway. It seems that this is more of a delaying tactic than a solution.

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About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • Van-Otto

    This is concern me, I recall an Australian saying that solar powered home that have the grid style connection are free loading on the network last year. One of the thing said, was that solar power on the network was carbon loading power stations costing other power network users without solar to pay.

    I agree with the International Energy Agency that people are free riding that why there needs to be a carbon base loading factor applied to solar powered home on the network.

  • shecky vegas

    So, the answer apparently is to go off-grid and tell the utlities to suck it.

  • Will E

    stop burning your dollars on fossil. be it utility, be it gas
    put solar for your own production, and make money with it
    buy an EV, heat the house with a heat pump, go all electric.
    and use your own electricity production.
    make a lot of money for yourself
    easy to do, easy to pay.

    • Fact

      I dont know about that easy to do part- at least in Upstate NY

  • Brian Wark

    Simplify the system, move to a system where the grid operator charges a monthly fee for grid connection. Residential or Commercial. That way the grid operator will be able to support the grid, and will get behind wind and solar, since they actually lower demand on there equipment. Now we have a system that would be equivalent to the phone company charging for every word you speak. This actually would be great for grid operator’s that are concerned about their future, and they would have a more steady, predictable stream of revenue, which their bond holders would love. Why does a grid operator get more money when I crank my air conditioner, and none when I am gone for the weekend. They did no extra work, no different in their costs.

    • Bob_Wallace

      Yep. Split grid operation and electricity sales into separate companies. Make the grid company-neutral so that any provider who complies with regulations can sell to end users.

      Establish a fair price for each kWh shipped on the grid. Those that use it the most can pay the most. Being a monopoly grid prices will need to be set by a government agency.

      Electricity sellers can set their rates based on their costs and bill accordingly. That will create incentives to provide electricity at the lowest possible price.

      • mike_dyke

        I like the idea of splitting grid operation and electricity sales and would like to take the concept one stage further – the “establish a fair price” should be based on time of availability of that kWh. i.e. I want to sell the next kWh of electricity which I produce to the market, then I can either take the current price or put it into my own storage facility for later selling at a better price.

  • JamesWimberley

    How does the IEA get to the €300 a year in fixed costs, 43% of the total bill of the non-solar household? What solar PV owners should reasonably pay is their share of the cost of the grid, plus maintaining backup capacity. What they should not have to pay for is the fixed costs of the dinosaur capacity they are making obsolete. Coal = bad investment = take the loss.

  • Joe Morinville

    IEA neglects to give value to the time in which the solar is produced, its offset of needed grid expansion by reducing demand, its offset of maintenance costs and the compounded value of distributed generation.

    Solar produces most of its power during grid Peak hours which cost the utility more than triple off peak power costs. This cost is reflected in all rates for all rate classes. Specifically in residential rates this cost is spread over all kWh charges levied on the consumer giving them a blended flat rate in most cases which is much higher than true off peak costs. When Solar offsets this higher cost by pushing power back into the grid at peak times, the utility needs to purchase or produce less expensive energy during this peak period which is a net benefit to the utility and indirectly to the solar producers neighbors if the utility passes on the savings.

    Since the solar producer offsets their own power and provides peak demand load shedding for the utility, the need for power plant expansion, power line and transformer upgrades is diminished proportionally to the increase in distributed solar generation. This is clearly evidenced in the mature German solar market.

    The utility saves money by not needing to expand generation capacity or distribution volume and any ongoing maintenance of these assets.

    Since distributed solar is consumed on site, 1kWh is consumed for each kWh generated. When the utility generates power miles away from the source of consumption, more than half of the power is lost to the inefficiencies of the grid itself meaning the utility must generate 2-4kWh for each kWh consumed. Distributed solar has a multiplying effect on utility generation reduction.

    I am more than a little disappointed in the sliver of data that the IEA used to make this erroneous point. It is woefully uninformed makes assumptions using a sliver of available data, all of which points to their premise. The whole picture tells a very different story…the real story. Solar is a net savings to the utility.

    • Bob_Wallace

      Good points but this one – ” more than half of the power is lost to the inefficiencies of the grid” – is very incorrect.

      US grid losses are more in the 7% range and falling.

      eta: Grid losses in some countries can be high. India suffers a lot of electricity theft, for example.

  • mike_dyke

    Their figures are probably correct for the first year, but what happens over the next few years? Household B doesn’t need to spend anything on their solar PV so make a massive saving.

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