Making the case for 10-year renewable electricity tariffs

I want to coin a term…that’s how you make a name for yourself right? – “The Desperate Disruptors”.
These people have the right buzzwords in their twitter feed. They trade cryptos. Their answer to every challenge the energy market faces? Throw technology at it. Internet of things, blockchain, automation, peer-to-peer, all coming together in disruption cornucopia.
As the energy market transition picks up pace, the “desperate disruptors” smell opportunity. Times of change come with the chance to make a buck, and a name for yourself.
Call me a contrarian, but in this time of rapid change, there is a desperate need to slow down. Slow down the thinking, slow down the disrupting, so we can act in the best interests of the people. So we can create investment certainty. So we can create a clear pathway to 100 per cent renewable in a way that benefits us all.
How do we do this? With 10-year contracts for clean energy, and a new distribution price-setting cycle for residential customers. Let me explain.
To build new clean energy generation, you need buyers for your energy. Typically buyers are retailers, with generation portfolios of their own, shopping around for clean electrons because they are required to buy them, by law, and sometimes just because it’s cheap.
The energy market is shaped like an hour-glass. There’s lots of competition for bringing on new generation, but most energy is then bought and sold through a tight retail funnel controlled by the big three.
This energy trickles down through a thin patchwork of monopoly transmission and distribution lines, to consumers waiting patiently for the flow of electrons. This structure means that the market for clean energy is inherently constrained by retailers’ willingness and ability to buy and sell it.
However third parties can finance rooftop solar generation, and sign people up for long-term supply agreements, in a way that retailers can’t or don’t for large-scale generation.
Rooftop solar supply is relatively simple to forecast and price. In contrast, how could you create a 10-year contract for grid-based energy supply, when network prices beyond regulatory cycles are unknown? How would termination fees be set, without being seen to be unfair?
The rooftop solar and behind-the-meter storage market exists outside the constraints of the hour glass market structure.
For solar and storage customers, retailer-supplied energy might drop by 80-90 per cent or more. Revenue paid to the fixed line distribution and transmission monopolies by those customers also drops away – often by over 50 per cent.
This is what gets the desperate disruptors excited – they see cost-saving to the individual, but ignore the cost-shifting, as regulated monopolies claw back regulated returns from other customers.
Corporate PPAs are another version of this at a different scale, where large-scale generators contract directly with large customers using retail licence exemptions, signing them up for long-term contracts and locking in low energy supply prices, with network costs passed through.
But! There is a problem. Not everyone can get rooftop solar, not everyone can get battery storage, and only large energy users are trusted to sign 10-year deals for power, so we see the emergence of a two-tiered market.
In one tier, large energy users and solar and storage customers get long-term price certainty and cheaper clean energy.
In the second tier, customers are at the whim of the hourglass, where prices are being squeezed upwards to compensate for revenue and margins lost to solar and storage customers, where retailers can take advantage of “the lazy tax”, and where confusing and complicated tariff structures or temporary discounts lead to high bills.
The tension between these tiers cannot be bridged by technology.
When you have massive sunk costs in infrastructure, and a declining revenue base to pay for regulated monopoly assets that require fixed capital returns, those customers left to pay get squeezed financially.
It’s an uncomfortable truth rarely discussed by rooftop solar, peer-to-peer trading, or in-home battery storage advocates. Too often, the assumption is made that an electron not used on the network, is a dollar saved on network costs.
Among the noise around energy market disruption, pro-sumer markets and community energy, the central Victorian town of Newstead has bucked the trend.
Instead of fighting the incumbents, they have worked closely with distribution business Powercor to create a network tariff that better reflects its reality as an unconstrained network – a network where more energy can be consumed, with no new investment in distribution network infrastructure.
The distribution network tariff trial, commencing July 1, will see charges of $1/day, $2/kW/mth and $0c/kWh for consumption for those customers that opt in.
The tariff has multiple benefits such as putting rooftop solar and a front-of-meter solar farm on an equal commercial footing, and rewarding increased utilisation of the network with a lower effective c/kWh rate (think fuel switching from gas and wood to electricity).
All of a sudden, it is possible to build a solar farm embedded in the distribution network, where it is cheaper per kW than on rooftops, and share that generation among local consumers freely (0c/kWh on grid charges) while ensuring Powercor retains its regulated returns.
This means that collectively, Newstead can transition to renewable energy at the lowest possible cost for all locals, not just those with the right roof.
This opens the door to very low day time energy rates for all consumers, and the reversal of the old off-peak tariff structure – instead of making energy cheap overnight to keep the coal fires burning, energy becomes cheap during the day while the sun is shining.
Combined with battery storage in homes over time, it is an infrastructure and supply model fit for purpose and fit for the future, where batteries help match demand with supply at a local level, while ensuring redundancy in the event of power outages, regardless of where and how they occur in the grid.
There is just one problem.
Any investor in a local solar farm at Newstead needs investment certainty – they need to know there will be local buyers of their solar energy, at a price that makes the farm viable. The solar yield simply isn’t good enough to send it to the wholesale market; returns depend on local energy demand.
So where customers are unwilling or unable to invest in generation directly, how do you create certainty between solar investor, retailer and customer, when standard practice is for retailers to sign up customers for two-year contract terms? Where no contractual model exists for long-term retail supply via the grid to mum and dad customers?
If we want a fair, efficient, low-cost pathway to 100 per cent renewables, it is time to put front-of-meter renewables on a level footing with rooftop renewables.
If retailers and solar financiers can sign customers up to 10-year behind-the-meter PPAs, we need contractual models that enable those same customers to sign 10-year front-of-meter PPAs, including the network tariffs needed to underpin them.
Combining 10-year, front-of-meter solar farm PPAs, with the kind of network tariff we see being trialled in Newstead, albeit extended to 10 years, would unlock a wave of investment in decentralised renewables.
More importantly, it would be efficient investment in renewables with long-term price certainty created for all consumers, not just those with solar rooftops, opening the door to real energy price declines over time.
No blockchain. No hyper engaged consumers. Just a new contractual model within the incumbent system.
What outcomes are possible? Imagine this.
A retailer signs up customers to a 10-year contract for clean grid energy. With $0/kWh on the distribution network, they will be selling day time energy at 15c/kWh-18c/kWh depending on solar irradiance, making a margin on energy supply instead of bumping up fixed charges, and a commercial return on their solar farm investment.
They pass through savings from avoided churn and marketing costs, being $150/pa/customer. For low energy users, that’s a 15 per cent-plus discount each year without thinking.
After 10 years, the local solar farm is gifted to local customers, in the same way rooftop solar assets are. After 10 years, customers continue paying their $1/day, $2/kW/month network charges, give or take inflation, and a kWh charge for day time energy sufficient to cover operation and maintenance on the solar farm – safe to say less than 5c/kWh.
The balance of supply will come from batteries installed behind the meter, where they also help mitigate peak demand charges and provide continuity of supply through blackouts, or from the centralised renewable grid – let’s call it 8c/kWh.
In 10 years, your bill will have been cut in half, without requiring any capital outlay today or any new technologies, disruptive or otherwise.
Sounds like desperate disruption Nirvana? I don’t think so. Just slow thinking and common sense.
Tosh Szatow is Co-founder and Director at Energy for the People