Is local electricity cheaper?

Is local electricity cheaper? I believe it is, and I believe we need to price the system to move it toward this outcome.

I’ve written about this topic before – Here and Here, so let’s explore.

We have huge centralised systems. In part to exploit the economies of scale. In part because our energy sources have traditionally been concentrated.

We are entering an era of decentralised energy. Sunshine is available everywhere. Wind has been exploited at scales of 50-500MW – still more dispersed than the past model of 4 x 200MW generators all in a single power station.

Tackling climate change is an urgent need so I am not even going to discuss it. I’ll assume 100% renewable energy is the future and show that we can get there cheaply. Let’s get the price signals right, in order to do this faster than we currently imagine.

Lets consider three main price components of our energy.

  1. Generating the energy,
  2. moving it around the system in time (eg storage) and space, and
  3. providing enough backup to have a resilient, reliable supply

The fourth biggest asset in our system is energy efficiency and flexible load, opportunities that the end user has to contribute to reducing the overall cost of the system. (see, for example, Europe’s ‘Efficiency First’ strategy). We have yet to exploit this effectively. I haven’t included it in the costs because we should be able to deliver it tenaciously in a cost-neutral manner (ie with good paybacks and positive cost/benefits)

We also have a system that is capital cost/infrastructure heavy, and becoming more so. About 50% of our costs tied up in assets we have already paid for. So using existing assets might be cheaper than changing our patterns of use in the short term, but we want to design a system that directs new investment into the fleet of assets we want for the future, not more of the traditional, relatively-expensive stuff.

The three price components are interrelated. If I generate locally, I don’t need to move the energy as far. If I have storage to better match supply and demand, it can also provide backup services etc. For now, lets assume that each component is about a third of our costs.

I’ve played with the numbers and come up with the following comparison:

price stack comparison

Generation: Rooftop solar is competitive in cost with the average wholesale market price and large scale renewable energy, located at the best solar or wind resource, is the cheapest of all. Using our rooftops has the added benefit of not using land that might have alternative uses and value. The lowest possible generation costs would come from cheap renewables that can be used instantly and locally. The ‘cheap’ system worth moving toward has diverse cheap sources, many of which are local. And flexible loads that are turning on when there is surplus – surplus generation needs to be well priced, well forecast and well managed for optimal use.

Network and Storage: Our distribution network is priced the same for all regions, despite the fact that significantly more assets are supplied regionally. This is known as postage stamp pricing. It is priced by energy consumption (kWh) so the increasing numbers of solar owners are reducing their network contribution.

The economic case for building transmission assets, by contrast, is developed based on the price differential that can be exploited between regions and the additional capacity benefit. As local energy sources are developed, the investment decisions of 70% of the distribution assets can move to this economic rationale. For much of high voltage system above 11kV there may be a case for no new investment.

The ‘cheap’ system to move toward will be shared local distribution and storage to best utilise local assets plus a thinning high voltage mesh to interconnect regions.

Backup: We have long known that in places with no network, a diesel generator and a fuel tank provide cheap backup. The capital lying idle is cheap, the operating costs are expensive but you only do it when needed and for your essentials. Every system has a failure point and we often build in additional assets to counter for this. Our network will out-compete batteries for some time to come but anyone at the end of an unreliable long network will know that battery + network or genset + network is already a better solution than relying on network alone. We overbuild this backup capacity because the network provides all or nothing. The cheapest future option will be less reliable network supplemented with local supplies and storage sized for high priority loads only.

Local Economy: The electricity system doesn’t value the benefit that can flow to local economies. Enova estimates that is can keep 25% of the money spent on electricity within the local area by being a community owned electricity retailer. Indeed, the move toward rooftop solar has put money back into householder pockets to be spent locally instead of flowing to the shareholders of utilities. The value of local ownership, local installation, generating local jobs and skills, plus additional economic value by relentlessly pursuing energy efficiency and making our loads more flexible all contribute to a local economy.

Fairness: Two sections of our communities are particularly vulnerable to price hikes. Our lowest income quintile and our energy intensive industries.

We need our energy intensive industries as job providers. Small business like food and drink production and manufacturing can spend over 10% of turnover on energy. Industrial scale processing and mining have similar factors for energy intensity. Increasingly energy prices is on the radar of the Board. These businesses have a challenge to adapt to the future and be the first to put their hands up for our cheapest surplus energy.

People on low incomes suffer disproportionately. They are more often renters and the house they live in may be an energy guzzler. They often have health needs and higher than average energy consumption. They don’t have solar. I have collated some of the data in my Renewables for All posts. Since our energy supply is increasingly capital intensive, I am attracted to the idea that we could have fixed tariffs for some people. For example, the book Scarcity shows that you would do better for someone in difficult financial circumstances if they had the option of regular manageable payments and the ability to build up an emergency fund if the cost was a little higher than needed. The challenge would be to design this so the provider was incentivised to kit such households out with cheap rooftop solar, energy efficiency and flexible load management so that the fixed cost was as low as possible over the long term.

Local priorities, governance: The final advantage of local energy is the ability for communities to agree their own priorities and costs, to control the transition of the system and to chase local opportunities. Many of the community energy initiatives around Australia demonstrate how different local priorities can be and the effort communities are prepared to go to.

The Way Forward

What does pricing look like to deliver us a cheaper, more reliable and fairer system?

Congestion pricing tells us we need a ramping price mechanism to usefully incentivise many people to move behaviour throughout the peak and shoulder cost periods. This might apply at the other end of the price scale for surplus energy too.

Behaviour change experience shows that only some people will engage with the data challenge and after developing a few heuristics will move to a set and forget regime.

In pricing debates, the need to provide consumers with simple options is emphasised repeatedly.

Smart home technology is bringing the capacity for control and monitoring down to a cheap and accessible scale. Some of the technology companies in this space emphasise that customers want to retain control.

New technologies open the way for new business models and therefore different pricing mechanisms.

Much work has been done by the regulators, AEMO and others on tariff options but the incentive to deliver value to consumers is stymied by the market structure. Pricing needs to consider  the consumer perspective and alternatives. It needs to see the whole retail/generation/network costs, the cost of network upgrades and connections and the additional costs of energy assets behind the customer meter.

I propose that the energy sector needs to run a co-design process that pushes the boundary on how we think about energy charging for now, for our transition pathway and for our 100% renewable energy future.


About Heather

I am an energy and climate change specialist with a background in industrial energy efficiency and climate change policy.
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4 Responses to Is local electricity cheaper?

  1. Pingback: Could we make electricity free? | changing weather by Heather Smith

  2. Pingback: Pricing the Electricity Network | changing weather by Heather Smith

  3. Pingback: Energy, South Australia, 2018 | changing weather by Heather Smith

  4. Pingback: The case for community energy | changing weather by Heather Smith

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