The value of grid connection to distributed generation customers


By Oakley Greenwood executive director Lance Hoch and principal consultant Rohan Harris

The number of rooftop PV systems installed in Australia has increased dramatically, from almost none in 2000 to more than 1.2 million by June this year. It’s a major change for the grid and prompting important questions by network operators.

PV systems now represent a total nameplate generation capacity of 3420MW and were estimated to have generated 3951GWh in 2013-14.

Looking forward, AEMO is forecasting further strong growth: by 2023-24 rooftop PV systems are expected to generate 14,114GWh, representing 7.5 per cent of the total electricity requirements of customers in the National Electricity Market.

The overwhelming majority of these rooftop PV systems have been installed on homes that continue to be connected to the grid. This connection provides significant value to the customer with a rooftop PV system, including:

Continuous supply: Customers receive a continuous supply of electricity made up of their own generation, with the grid available as back up whenever their own generation cannot provide all their electricity needs.

Market access: Customers can sell the excess power generated by the PV system to retailers at the feed-in tariff rate.

Start-up power, power balancing and power quality: The grid provides a number of virtually invisible services to customers. These include:

• The ability to provide large increases in the amount of electricity delivered in very short time periods. This is important because some consumer appliances such as air-conditioners can require significantly more power to start up than they do once they are running.

• A steady and even supply of electricity, which is required for appliances to operate properly and which could be difficult for a PV system to provide on its own because its output can drop quickly (even if only temporarily) due to passing clouds.

• A high level of power quality, which is important for certain home appliances, such as desktop computers.

All customers benefit from the continuous supply, start-up power, power balancing and power quality provided by the grid. Market access is an additional service that users of rooftop PV systems enjoy that is available to, but not used by, other customers. But customers with rooftop PV systems actually pay less for these network systems than other customers.

Oakley Greenwood quantified the value a grid connection provides to a typical residential customer in the western Sydney suburbs that uses a rooftop PV system. The key inputs to the analysis were as follows:

• The regulated retail tariff and the network tariff that were in place in the Endeavour Energy service area during the 2013-14 year.

• The annual consumption and half-hourly consumption profile of a typical residential customer that uses 5000kWhpa in the Endeavour Energy service area.

• The annual and half-hourly output of an average-sized rooftop PV system in New South Wales based on information from the Australian PV Institute website, which in combination with the half-hourly consumption profile of the typical residential customer suggested that:

– A typical rooftop PV system in the Endeavour Energy area will produce 3,742 kWh under average weather conditions.

– Of that, 2044kWh (about 55 per cent of the total output) will be used directly by the household, with the other 45 per cent (about 1698kWh) being exported back to the grid.

– As a result, about 2956kWh of the total 5000kWh consumed annually by the average residential customer in the Endeavour Energy area would still need to be supplied by the grid.

Combining this information with the relevant residential and network tariff information revealed this rooftop PV customer derives the following benefits from their grid connection:

• The ability to use their electric appliances even when the PV system is not generating electricity (such as at night), worth approximately $729 per year at 2013-14 retail electricity prices (calculated by multiplying the per-kWh price of electricity in the regulated tariff that was in place for the Endeavour Energy area in 2013-14 by the 2956kWh the PV customer still uses from the grid. (Note all dollar figures in this document are exclusive of GST).

• Sales of excess electricity generated by their PV system worth about $93 per year.

• Access to the in-rush energy required to start certain equipment such as air-conditioning. Without such a service from the grid the customer would either need to install sufficient onsite generation and storage or to downsize or forego the use of larger air-conditioning equipment.

• Avoidance of damage to their equipment provided by the grid’s ability to instantaneously balance the supply of electricity to the needs of the customer and to maintain a high level of power quality through frequency, voltage and harmonic distortion control. Figure 1 displays these values. It should also be noted this $822 value does not include either:

– The value of the in-rush energy capability provided by the grid or the grid’s ability to instantly top up the supply needed by the customer in the event that even very short reductions in the PV output occur due to short cloudy periods, or

– The fact the value to the customer to have electricity at night is likely to be higher than the actual cost of purchasing that electricity.

This typical rooftop PV user would pay $453 in his or her annual bill to the network (comprised of $131 in fixed charges and $322 in electricity consumption charges) for these services (this is based on the PV customer’s electricity consumption from the grid multiplied by Endeavour Energy’s first tier kWh price on its N70 tariff for 2014-15).

In order to have access to a level of electricity supply similar to that enjoyed by the average customer in the Endeavour Energy service area, a customer that wanted to use a PV system without a connection to the grid would need to install:

• A  PV system of at least 4kW in capacity with sufficient battery storage to allow enough electricity to be (a) generated in the day and (b) stored in order to provide the electricity needed after the sun goes down and during cloudy periods, and

• A petrol or diesel generator to provide electricity during extended cloudy periods and in the event the PV system needs maintenance or repair.

The cost of such a system for a family of four including two school age children that uses about 5000kWh a year for heating, lighting, refrigeration and other appliances, but that has gas water heating and cooking would be about $56,000 inclusive of GST and after all applicable renewable energy credits are taken into account. It would also require some annual costs for maintenance.

Rooftop PV systems also have impacts on the grid. Two of the most important are:

• They can reduce peak demand on the grid, which can delay and/or reduce the need for capital expenditure by the grid and therefore exert downward pressure on grid costs and the network prices that need to be charged to customers in order to recover those costs.

• They reduce electricity consumption supplied by the grid. Given network revenue is primarily recovered through charges on consumption, this puts upward pressure on the per kilowatt hour (kWh) price the grid charges its customers.

Where the fall in revenue recovered from customers with rooftop PV systems is greater than the reduction in future capital costs, rooftop PV system will have a net upward pressure on network prices.

To the extent this upward pressure results in a higher price for each kWh of electricity consumed, the annual bill of an average residential customer without a rooftop PV system will go up more than the bill of an average customer with a rooftop PV system, simply because the latter will consume less electricity than the former. This essentially constitutes a cross-subsidy from non-PV customers to customers with rooftop PV systems.

On the other hand, If the reduction in future capital costs is greater than the fall in revenue recovered from customers with rooftop PV systems, the use of the rooftop PV system would exert a downward pressure on network prices, which would benefit all customers of the grid.

Analysis of these impacts in the Endeavour Energy service area indicates that use of a rooftop PV system will:

• reduce the network component of the bill of the average residential electricity customer in the Endeavour Energy distribution system that uses a typical rooftop PV system by approximately $223 per year (calculated by multiplying the 2044 kWh in reduced grid-supplied electricity due to the PV system multiplied by Endeavour Energy; variable charge for electricity consumption of 10.8934 cents per kWh);

• reduce the future annual capital expenditure requirements of the grid by approximately $125 per year (made up of a fall in distribution network costs of approximately $109, and transmission network costs of approximately $16 per year, based on the published long-run marginal costs of Endeavour Energy and TransGrid); and

• Thereby result in an annual cross-subsidy from non-rooftop PV residential customers to each customer with a rooftop PV system of about $98.

Figure 2 displays these values. The calculation of the cross-subsidy discussed above was undertaken assuming peak demand on the grid occurs at 4:30pm Eastern Standard Time. However, the level of the subsidy is very sensitive to the actual time of grid peak demand. For example, if the time of peak demand were 5:30pm instead of 4:30pm, the cross-subsidy would increase substantially – from $98 to $163 per annum. This is because the benefits received by the network business would be are smaller, due to the fact the PV system produces much less energy at 5:30pm than it does at 4:30pm (if the time of peak demand

was earlier, the impact of the PV system would produce more energy and its impact on peak demand would be greater and the cross-subsidy smaller – and it is also the case different parts of a network will likely experience peak demand at different times. However, where PV systems are installed in significant numbers they tend to push the time of peak demand on the local network later in the day).

However, because the PV system generates the same amount of electricity regardless of when peak demand occurs, and because customers are charged based on their total consumption and not when that consumption occurs, the fall in the revenue from customers with rooftop PV systems that needs to be recovered through higher charges remains the same regardless of when peak demand occurs.

An additional complicating factor is there may already be sufficient capacity in the network. In such a case, the network will not experience an actual reduction in capital expenditure in that year. More generally, therefore, the actual value of the cross subsidy will change over time as the balance of the supply and demand of network capacity in the local area changes in time.

These findings indicate the current reliance on revenue recovery through charges on energy consumption increases the financial attractiveness of rooftop PV systems. It also results in potential cross-subsidies when that take-up occurs, and thereby feeds the risk of a so-called ‘death spiral’.

More specifically, this form of pricing provides a poor signal to customers of both:

• The factors that drive the cost of grid services, and

• The value a connection to the grid provides.

Given this, it would seem worthwhile to consider alternative pricing structures that better reflect the cost incurred by the network in serving the customer. This would encourage more economically efficient investment decisions – that is, decisions that would reduce or avoid cross-subsidies between customers and reduce long-term costs for all consumers.

This article is an except from a report to be published by the Energy Networks Association (

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