Residential solar options remain a compelling investment prospect for savers, and they are continuing to pick up pace alongside the rise in large-scale renewables.
A key dynamic driving energy markets across the world over the coming decades will be the increasing cost-competitiveness of renewable energy technologies compared to conventional generation.
In certain circumstances parity has already been reached.1 Locally, we’re in the midst of a boom in large-scale renewable projects, with Australia currently leading the world in the installation of new generation capacity.2
These are welcome developments for the climate, but the key driver behind this expansion is cost, not carbon emissions. As solar and wind continue to become cheaper and more efficient, and investors respond in kind, what will this mean for the future of small-scale residential solar photovoltaic (PV) systems?
According to the clean energy regulator, more than 2.2 million Australian homes installed solar PV systems between 2001 and 2019, with 175,991 having already been installed this year.3 Last month rooftop solar generated 7% of power on the National Electricity Market, up from 0.05% a decade ago.4
Residential solar has been a remarkable success story in Australia. It is contributing in a significant way to mitigating carbon emissions from electricity generation, and at the same time allowing millions of Australians to reduce their electricity bills. And despite the more recent success of utility-scale renewable generation, there is every indication that this is a success story that will continue for many years to come, regardless of the effect of the expansion in large-scale renewables on electricity supply.
Wholesale prices will continue to defy gravity
It’s exciting to enter a future where large-scale renewables outcompete fossil fuels, and astonishing to think that we already live in a time where the wholesale spot price for electricity might fall to zero. Unfortunately, Australia doesn’t yet have the grid-level storage capacity to adequately distribute supply outside of the times when the sun is shining and the wind is blowing, and as the lights go on across our cities we have to fall back on a smaller baseload of hydro, coal and gas. Not to mention that contracts entered into by retailers with generators largely insulate consumers’ power bills from the benefits of cheap electricity during these daily peaks, regardless of what the spot price says.
As a result, the additional capacity from large-scale renewables projects won’t necessarily mean a proportionate reduction in the wholesale component of household energy costs. Even if increased generation does have a dampening effect on wholesale prices over the next few years, other factors such as demand and the price of coal and gas may tip the scale in the other direction. In addition, movements in wholesale price are only half the story.
The hidden costs in your power bill
According to the Australian Energy Market Commission, wholesale prices in 2017-18 only accounted for 33% to 57% of a consumer’s electricity bill. Network costs, which account for another 30% to 50%, are expected to hold steady or increase in coming years, and environmental policy costs (3% to 14%) are also expected to rise.
Network costs refer to the cost of upgrading and maintaining the distribution networks, and in 2017 the ACCC found that they were largely responsible for increases in residential electricity bills over the preceding decade. These additional costs aren’t likely to diminish any time soon, and neither is the retail margin which consumers must pay on top of the entire cost base.
The bottom line is that even in a situation in which wholesale prices were declining significantly (and they’re not), consumers still face a hefty burden at billing time which can largely be alleviated with a rooftop solar PV.
An improving outlook on both sides of the balance sheet
The compelling rationale for investing in residential solar PV doesn’t only stem from the likelihood that electricity prices will remain high into the future; the cost of residential PV generation is projected to fall by up to 35% over the next five years5 and the efficiency with which they are able to capture energy from the sun continues to increase in tandem.6
However, to minimise the impact of daily price fluctuations on the value generated by a system, it needs sufficient battery capacity. This ensures that the customer is able to self-consume when they need to and not rely on the grid, as well as allowing the system to feed surplus electricity back into the system when tariffs are high. Luckily for consumers, the cost of battery storage has diminished recently as well and appears set to continue on its downward trajectory.7
As a final note, it is worth remembering that rebates provided by the Commonwealth and some states serve to make residential solar PV an even more attractive proposition than would otherwise be the case.
Despite the recent rise of utility-scale renewable energy in Australia, the economic rationale that led to the installation of millions of solar PV systems across the country’s rooftops remains intact. According to a joint study commissioned by the CSIRO and Energy Networks Australia, between 30% and 45% of Australia’s future energy generation will be customer-owned8, and most of these will be solar. With the benefits of ever-more efficient solar cells and increasingly cost-effective battery storage, the owners of those systems will continue to benefit from protection against rising energy costs, the peace of mind that comes with self-sufficiency, and the knowledge that their investment is helping the planet tackle the looming challenge of climate change.
Subscribe below to Sustainable Investment Insights to receive my latest articlesEmily Woodland, Co-Head of Sustainable Investment
1Lazard (2019), Lazard’s levelized cost of energy, Version 13.0 November 2019
2Australian Renewable Energy Agency (2019), Australian renewables growing at record rates, August 2019
3Australian Government (2019), Postcode data for small-scale installations, Clean Energy Regulator October 2019
5International Energy Agency (2019), Global solar PV market set for spectacular growth over next 5 years, October 2019
6Chandler D. (2019), Even short-lived solar panels can be economically viable, Massachusetts institute of Technology September 2019
7International Renewable Energy Agency (2017), Electricity storage and renewables: Costs and markets to 2030, October 2017
8Energy Networks Australia/CSIRO (2017), Electricity network transformation roadmap: final report, April 2017
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