HOW much would you pay to avoid another $250 a year hike in your electricity bill? Does $15 a year sound like too much to reduce that risk?
We've heard a lot lately about rising electricity prices. That's understandable. The average household bill is $700 a year more than it was five years ago (see Figure 1). For most people, that $700 isn't going to break the bank. Yet it is enough to focus short political attention spans.
The biggest culprit for the price hike is spending on electricity poles and wires. By 2015, network charges will have added almost twice as much to your bill as the carbon price and Renewable Energy Target put together. Governments have a plan to fix this. It may work, if consumers can be persuaded to shift their electricity use to avoid times of peak demand.
However, what about other risks to our electricity price security? We rely heavily on coal and gas fuels. What happens if fuel prices rise? What happens when drought forces water-cooled power plants to slow down or even shut altogether?
A new report from the Centre for Policy Development puts some numbers on these risks. Gas prices on the east coast have recently doubled, and may treble by 2015. That will flow through to wholesale electricity prices.
Coal prices are more likely to go down than up. However, in 2007 wholesale electricity prices jumped to five times previous levels as severe drought reduced electricity supplies from coal plants and others which rely on water resources.
Looking forward, these risks could add up to $250 a year to the average household bill. That's about the same as the jump in network charges over the last five years. By comparison, the Renewable Energy Target is projected to add $15 a year to the average household electricity bill between 2013 and 2031.
While such price spikes are not likely every year, risks may increase if fossil fuels continue to dominate our electricity supplies. Gas prices on the east coast are linked to volatile international fuel prices, as local buyers now compete with exports. Climate change increases the risk of drought and high temperatures. By 2040, we may see twice as many years with exceptionally low rainfall, covering twice as large an area.
Renewable energy alternatives can reduce these price risks, and provide reliable electricity supplies. Established technologies like wind and solar photovoltaic power have no fuel costs, or need for cooling. Some newer technologies, like concentrating solar thermal power, can use cooling air rather than water.
Experience in South Australia shows that large amounts of renewable electricity can be managed reliably, if interconnected to adjacent power systems. In the long term, with lots of renewable electricity we may pay higher peak prices to ensure reliability. However, this would be offset by lower electricity prices when the sun is shining and the wind is blowing.
One million Australian households have already invested in rooftop solar to insure themselves against these risks. Two million, or one in five households, are likely to by 2020. Solar costs plunged 85% over the past four years, even without considering government support. Over its lifetime, a rooftop solar system now provides electricity cheaper than the Australian retail price.
Rooftop solar benefits all electricity customers, not only those with solar panels. By increasing supply diversity, it reduces the risk of price spikes due to gas prices and drought. As with all renewable energy, rooftop solar lowers wholesale electricity prices. It can also reduce summer peak electricity demand, which may lead to more productive use of the existing poles and wires. In some places it may also defer or avoid network investment.
Looking to the longer term, rooftop solar could make up roughly 15-25% of a 100% renewable electricity system. This is likely to mean investment in a more flexible electricity grid is needed. While we don't know what this will cost, we do know that rooftop solar consumers are more actively engaged in managing their electricity demand than others. This may be critical to minimising network costs if climate change leads to more extreme heatwaves and peak demand from air conditioners.
However, consistent policy reform is needed to provide a level playing field for rooftop solar, and other new technologies. For example, in 2012-13, effective support for existing coal fired electricity was $3.6 billion, more than double the support given to renewable energy.
Rooftop solar will play a key role in Australia's transition to a clean, affordable and reliable electricity system. The public debate needs to consider the risks of not embracing this shift.
Associate, Business School at University of Technology, Sydney