Electricity death spiral hits WA

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By Leith van Onselen

The electricity “death spiral” has, for a long time, been a key risk facing electricity generators/distributors globally.

The “death spiral” arises when demand for power declines, due in part to customers taking up solar, leading to higher prices to cover fixed network costs. That is, the more people that take-up solar power, the faster decline in electricity demand, and the more fixed costs must be spread over a smaller volume of electricity, raising costs for everyone else.

The death spiral has drawn further into view with ABC News reporting that booming demand for household solar power could soon drive electricity network costs skywards:

The uptake of rooftop solar in WA has grown at a rate of almost 20 per cent in recent years as households have moved to reduce their power prices.

That in turn has upset the state’s electricity market, which is heavily tied to fossil fuels.

Report author Bill Grace from the University of Western Australia said the nation’s energy regulator — the Australian Energy Market Operator (AEMO) — had greatly underestimated the future uptake of renewable energy.

He said that would result in higher power prices for consumers.

“With the current scenario, over the next 20 years we’re talking about significant increases in tariffs — 50 per cent perhaps,” Professor Grace said.

“To try and protect this legacy, coal-fired generation units will just keep prices high, and will also waste power people have purchased solar panels to produce.

“As there is more private solar produced, the network has to generate less electricity, but because a lot of the costs in the system are fixed, the unit cost — that is the cost per unit of energy — can only rise”…

“The impact will be felt by about 2025, when there will be so much solar energy being exported from private houses that it will start to impact on the generation on the network, particularly coal-fired generation or baseload power,” he said.

“The private solar from houses and businesses exported onto that network effectively reduces the demand below the level that baseload coal can operate”…

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The emergence of home battery storage by the likes of Tesla and Zen Energy exacerbate risks to traditional electricity generators. This is because home battery packs enable solar users to store surplus electricity during the day for use at night, potentially enabling them to disconnect from the grid entirely.

While the emergence of home battery storage and alternative energy sources is great news for the environment, it does raise a big dilemma for regulators and social equity.

That is, the wealthy are most likely to install solar and battery storage, since they can afford the large upfront costs. This leaves poorer households and renters facing potentially huge rises in their power bills as fixed network costs are spread across a diminishing pool of customers.

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Even so, Australia cannot escape the revolutionary technological change hitting the electricity sector, which offers significant efficiency benefits but also a huge conundrum for power suppliers and regulators alike.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.