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When will it be cost effective for consumers to disconnect from central grids for distributed generation in Australia?

Humphreys, Ben (2013) When will it be cost effective for consumers to disconnect from central grids for distributed generation in Australia? Masters by Coursework thesis, Murdoch University.

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Rapid and significant reductions in the costs of solar photovoltaic technology and considerable rises in grid electricity prices have prompted the question: When will it be cost effective for consumers to disconnect from central grids for distributed generation in Australia?

This report seeks to give insight into this question by comparing standalone solar PV and storage system levelised cost forecasts to centralised grid electricity price forecasts. The report also, based on literature research, discusses the impacts and issues associated with increased distributed generation in general on the current electricity market and incumbent utilities.

The future costs of Photovoltaic (PV) with storage systems were forecast using single factor experience curves. The Homer energy modelling software was then used to optimise the systems and calculate the levelised cost of electricity (LCOE) for each scenario. Future electricity prices were estimated based on data from AEMOc (2012). The analysis treats the two as independent variables; therefore, it does not account for interrelationships that exist in reality. Consequently, the results are best viewed as a range of possible outcomes that, given the breadth of the range covered, are likely to include the actual outcome.

The analysis focuses on small consumers such as residential, and small to medium businesses, because it was thought that this consumer group was most likely to have premises suitable for a PV system that met most of their electricity consumption. This consumer group consumes a significant amount of Australia’s total electricity: estimated at between 30 and 50 percent based on data from IEA (2012) and AEMO (2010).

The analysis considered multiple scenarios: grid electricity against standalone PV with storage, and grid electricity against 50 percent and 75 percent PV penetration levels. All scenarios considered low electricity price states with an average price of $0.30/kWh and high price states with an average price of $0.40/kWh.

The analysis revealed that solar PV with storage could be competitive with the grid in supplying 50 to 75 percent of a small consumer’s electricity demand within the short term (<5 years), and on a standalone basis in the medium term (<10 years). It is expected that this will lead to reduced demand for grid electricity, falling revenues for incumbent utilities and, therefore, a negative impact on their profitability. As a result of falling demand, network service providers will likely need to raise per unit charges in order to recover the revenue required to meet their regulated return on asset base. This will drive electricity prices higher, thus increasing the competitiveness of distributed generation (DG), and other technologies such as energy efficiency and energy management for that matter. In turn, consumers’ demand for grid electricity will reduce, and the uptake of DG will increase, which will reduce the networks’ ability to recover revenue further. Because of falling demand, generators face lower wholesale prices, compressed margins, and the risk of stranded assets. This scenario of falling demand and rising prices is commonly referred in the literature as the ‘death spiral’ (Kind, 2013; Nelson & Simshauser, 2012; Newbury, 2013; Severance, 2011).

A review of literature identified DG as being potentially disruptive to the existing electricity market. Based on case studies of disruptive technologies in other industries, DG can be expected to cause significant market changes and create significant risks for incumbents, especially those in monopoly situations. Interview based research in Australia and Germany suggests that most incumbent electricity utilities are not well prepared to handle competition from DG, are slow in realising the threat to their business model, and are failing to see the market opportunities.

Government intervention is likely given the significant amount of recent government and industry reports on the topic; this will influence the uptake of DG technologies, and subsequently the time it will take for them to become competitive at high penetration levels or on a standalone basis. Some recommended changes such as removal of price regulation, time of use pricing, demand pricing, and integrated network planning that includes DG would tend to increase the uptake of DG technologies, subsequently driving down DG costs faster. However, other recommended changes such as high fixed charges, additional fixed charges specifically for PV owners, and penetration limitations by network service providers would act to slow the uptake and cost reductions of DG. While intervention is likely, what intervention is difficult to say with confidence at this point in time given that the recent change of Federal Government has put in doubt the relevance of existing government literature on the topic. In addition, the crowded energy policy space often changes policy significantly between white/inquiry paper and enactment.

Publication Type: Thesis (Masters by Coursework)
Murdoch Affiliation: School of Engineering and Energy
Notes: PEC624 Masters of Science in Renewable Energy Dissertation
Supervisor: McHugh, Adam
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