Bleg on solar loans

I’m not an energy economist, and am currently a bit short on time, so I thought I’d outsource discussing the new Greens policy on solar.  As a matter of principle I see it as saying “consumers are credit constrained, the energy sector has issues of competition, and the installation capacity exists, given that government loans at a market interest rate (which we can quibble over) may help”.  I have no real problem with that, although I’d like to spend time with the details.

A few questions though:

  1. Why does the government think this will reduce competition?  I’m not quite sure what is being said?
  2. Paying it back through rates, when it is a central government scheme, seems inelegant.  Wouldn’t a more direct scheme where the government installs and then charges make sense.
  3. Given that, if solar is actually effective (hopefully it is getting there), why don’t we have someone in the market trying to lease panels – is the installation cost (given the capital) that much of a pain?
  4. The question of feed in tariff prices, and how that actually works with the grid, is a damned hard one.  Remember, people will be generating “excess power” at times of the day with low demand – the real big problem is storage!

In some ways this feels like a policy trying to “tick a lot of boxes” at once – perhaps the best option would be to deal with perceived competition issues directly, if they exist.  Credit constraints are an interesting one on a number of dimensions – I have some sympathy for the idea that lack of access to credit reduces opportunity, however how much of this is due to the fact that the type of lending is risky?

I’ll leave my mind open to be persuaded either way on this, but when Meridian says there are problems with it (when they are one of the key players trying to get solar power working in NZ at the household level), I am uncertain about the scheme itself.

Clint Smith discusses on Twitter.

  • John Small

    Good questions. I’ll start…

    #1. Makes no sense to me. Thousands of extra generators (albeit micro) would increase competition not reduce it.

    #2. Two thoughts. First, the policy as stated is more market friendly than yours – I could envisage dancing cossacks if they’d suggested government supply. Also, if you want the loan to attach to the property (to reduce install barriers for people who might be planning to shift house) then a rates uplift makes some sense.

    #3. Lack of any certainty over feed-in tariffs would be enough to scare most investors away. The terms Meridian offers are subject to change at 30days notice and have recently been made much less attractive.

    #4. Two separate issues in here? Tariff design doesn’t need to be terribly difficult, but it certainly could be made extremely difficult if one wanted to. Not sure about the battery issues.

    Just on Meridian, aren’t they severely conflicted here? I’d have thought anyone with big power stations would be quite threatened by lots of distributed generation.

    • http://tvhe.co.nz/ Matt Nolan

      Cool thanks.

      I’m glad you are also unsure about the competition thing, it is one of those occasions where I don’t really have much idea about what the comments meant!

      With the policy statement being more market friend, in both cases it is the government providing upfront capital – but I buy your point that in terms of “selling” the policy they will be treated differently. The thing with rates is that it involves a strange mix of central and local government coordination which I am uncertain exists :P

      The feed-in tariff business hurts my head – when we have a type of generation with extremely variable supply we have to think about who bears the risk. I have no doubt there has been heaps of work on this, as I say this isn’t my area and I’m just sort of interested in asking about it :)

      Storage is a big thing for me though. If we can get good storage, solar becomes a complete game changer. That is what the thermal plants in Germany are all about right?

      Good point on Meridian being conflicted, given it is competition for them – very true!

      • Adam Maynard

        Careful with the storage part; it can be a red herring for a grid based solution. If you have power that can be shut down quickly and restarted quickly on the grid i.e. Hydro or Gas then storage isn’t an issue. As the lowest short term cost solar would be the producer of first resort while the other providers shut down and wait till it became cost efficient for them to produce.

        Of course this relies on feed-in-tariffs otherwise there is no economic incentive for the household to provide power to the grid.There is Risk there but the idea is that the households are so spread that stochastically speaking they still provide the same total amount of power each day and can be relied on to do so; meaning generators and consumers still have a good idea of what to expect during the day. I am assuming by risk you mean risk to the stability of the grid rather than economic risk which is a different consideration.

        • wsd

          storage capacity isn’t an issue, perhaps, but not for the reason you suggest. Solar (or wind) can’t be used as base load at all, nor is it readily dispatchable. As such, generation must be redundant — with a kw of renewable matched by a spinning turbine (disconnected from the grid, but spinning) of equal potential at a coal plant.

          • http://tvhe.co.nz/ Matt Nolan

            This is true – however, I think you are both correct that it is not much of an issue when solar supply is “marginal”. If there is significant uptake, we are in a different world, I should have separated the two :)

        • http://tvhe.co.nz/ Matt Nolan

          For marginal additions of solar to the grid this is true, but if there is significant uptake then we need more backup capacity when a significant amount of power is generated through solar – that is why German roles the thermal plants as a form of storage.

          It is true that, with low MC’s the solar will be utilised and other generators will come online during the day/season. However, this also implies that the impact of solar is smallest (to non-existent) during peak time – when demand is highest. As a result, the marginal benefit to solar power without storage is a lot smaller – for the same initial capital cost.

          WRT risk, I was meaning whoever takes the variability in prices – if we provide certainty with a feed in tariff in a market with a very variable price, we are shifting who bears the burden of this price variability. It is an interesting issue :)

      • OLO

        “Storage is a big thing for me though when looking at this whole issue. If we can get good storage, solar becomes a complete game changer. That is what the thermal plants in Germany are all about right?”

        What is it that you think is going on in Germany with storage? I’m not aware of them doing anything unusual in that regard.

        My reaction is that storage is -as Adam suggested- a red herring.

        • http://tvhe.co.nz/ Matt Nolan

          Thermal energy storage plants – it isn’t that Germany was unusual in using them, it is just that as part of their focus on increasing the proportion of energy associated with solar power the importance of having thermal energy storage was important.

          Given the large fixed costs of these plants, this can make the average unit cost of solar pretty high.

          It was in this context that significant uptake of solar becomes interesting – it is the point I elaborate on a little bit below.

          Key thing as well is that I’m interested and asking about it, if storage costs are not so prohibitive that is a piece of information I’m definitely interested in :)

          • OLO

            Sorry, still puzzled. I suspect this is just a jargon thing.

            By ‘thermal energy storage plants’, are you talking about http://en.wikipedia.org/wiki/Seasonal_thermal_energy_storage or maybe http://en.wikipedia.org/wiki/Solar_thermal_energy or maybe city-wide heating systems (as is being looked at for CHCH)? Or something else?

            • http://tvhe.co.nz/ Matt Nolan

              Along the line of the first indeed – it looks like the second link is a more general form.

              The key point is that periods of high demand on an energy system also tends to be points in time when supply from a solar system will be low. If solar is a large part of generation, this implies the need for significant back up capacity – or the acceptance of rationing through very high prices during winter, night time, etc.

              However, if the cost of storing (and the efficacy of transferring energy from different sources) through time was low then this wouldn’t matter as much.

              I just remember reading (it would have been over a year back) that current storage technology made solar not cost effective on a large scale (due to the requirements of needing backup storage).

              The water heating bit is a good example – water heating acts as a defacto form of storage, therefore it is an incredibly natural example of where solar seems like a choice idea.

              • OLO

                Thanks!

                I’m now quite confident in saying I think (like John) you’ve tied two unrelated issues together there: feed-in-tariffs and thermal storage. The former deals with the value of electricity to the market, the latter deals with technology that can indirectly reduce electrical demand.

                I think the feed-in-tariff issue is quite simple. The value to the market is reflected in spot price. So, solar generated electricity will be worth in the region of 7-8c/kWh. Some retailers choose to pay more than that. Some countries choose to artificially increase the buyback rate through a subsidy.

                If electricity storage (ie batteries) drops in price significantly, then this would improve the attractiveness of any home-based generation system. Or it might be that the battery justifies its presence on other grounds (ie electric vehicle) and could be used to help manage the peak demand of the household.

                If thermal storage methods improve, this should reduce electrical load by providing alternative means of heating a house or business. But there’s probably no need to put thermal storage on some pedestal here, as any energy efficiency activity has the same impact (eg LED lights, insulation, thermal mass in house construction).

                • http://tvhe.co.nz/ Matt Nolan

                  I agree – tbf, they were separate bullet points when I did the initial post :)

                  Storage is a big issue for me, in general, as it seems like it would change the perceived efficacy of different options – so I find it really exciting.

                  The feed-in-tariff issue is interesting in a number of quite different ways. However, without storage the variability of the prices will be greater which is interesting – who bears the risk in those ways etc etc!

    • Seamus Hogan

      I’ve been out of action for a couple of weeks and so only just seen this post. I mostly agree with John.
      1. Claims of reduced competition make no sense to me whatsoever.
      2. If the problem is lack of access to capital markets, attaching the repayment obligation to the house rather than the current owner makes sense, and as rates are the current area where an obligation attaches to the property it is the obvious place to levy the loan repayment.

      3. Investors will scared away either because they don’t think consumers will buy, or they think they will buy but not repay the loan. If they are not going to buy in the first place, the same problem would exist with the Green scheme. If the problem is that investors think that consumers will install the PV panels and then default on the loans because they don’t get the promised benefits from feeding in, then the Green policy would be predicated on taxing people to pay for a benefit that they were sold but which never eventuated. In any event, my understanding of current solar technology (which may change) is that the social benefits from feeding back in are pretty low, so if the desirability of uptake depends on certainty over feed-in tariffs, it is probably not a good policy.

      4. I’m not sure that Meridian would be conflicted. Any increase in the capacity of wind and solar generation requires a higher option value for ancillary reserves to maintain frequency in the network. This is cheapest for hydro generators to supply, and so Meridian and Mighty Power are probably the ones who stand to benefit the most.

  • VMC

    Speaking as someone who has 2kw’s worth of solar panels on his roof and connects to Meridian
    - Meridian are the most micro-power generation friendly of any energy supplier, many cannot be bothered at all. So I think they are worth listening to.
    - I think the reduction in competition is a bit of a red herring, but to the extent that the policy might force energy companies to purchase from homeowners, this possibly prevents them buying from the lowest priced supplier and, therefore may take the edge off their competitiveness
    - I suspect the thinking behind paying it off the rates is that we are all in the business of paying regular amounts to our local council, if we own a house. And the purpose of this policy seems to be tying the solar panels to the home rather than the homeowner who first installed the panels.
    - I also think there are 2 other questions that should be asked – does it actually make financial sense for someone to do this, compared to the other things they might do if the govt suddenly gifted them $15000? In my own case, I had no mortgage, I did not fancy investing in finance companies and interest rates on deposits have been pretty low for 5/6 years, Even so, I think the panels were a marginal investment at best, and will be more marginal if future power price rises do not materialise. The second question would be, if we are to suddenly invest a lot of money in solar panels, is it best to do it piecemeal on 30,000 roofs, or would a large scale solar farm in the sunniest part of the country be better and feed into the grid. The answer is clearly, it would be more economical to build large solar farms – and the proposal to do so would make it easy to compare the cost of soalr against the cost of other generation types.

    • Adam Maynard

      Could you please provide your economic analysis for why large scale solar will be more economically efficient?

    • http://tvhe.co.nz/ Matt Nolan

      Heya VMC,

      1) Yeah, that is what I’ve heard from people as well.
      2) I see, so it is an issue with how the feed-in-tariff is set? I agree that it is a bit of a red herring :)
      3) Indeed, if local councils can keep the sum separate then it should be fine.
      4) Indeed, the feasibility is important – but I’m not sure we can clearly say large scale investment will be more cost effective. Definitely buy the idea of economies of scale, but once we have a lot of solar capacity the variability of supply combined with only expensive storage options (thermal) can really knock up the costs!

      • VMC

        There are a number of reasons why a solar farm will almost certainly be more cost-effective than putting panels on lots of roofs. Firstly there are economies of scale, as would apply to any large scale engineering project versus many smaller ones. A biggish cost of a solar installation is the inverter (which turns DC power to AC power that people can use). On house installations every house needs a smallish one. A solar farm needs far fewer big ones. Also important is that solar panels are very sensitive to the: the amount of light being received, the angle of inclination and the angle of orientation. Ideally, the maximise energy output all panels would be in the sunniest places in the country, pointing north/south and set at an angle of inclination depending on the latitude. These conditions can be arranged if we determine the site first, then build. But if we attach the solar panels to the house, then the house roof line determines the orientation and inclination and unless you build the house with these things in mind (especially orientation) you get sub-optimal results.

        • Seamus Hogan

          @VMC You are probably right, but a couple of points to consider on the other side. First of all the optimal angle and aspect of solar panels depends on the time of day and the time of year. Facing north with the optimal angle based on lattitude is the best compromise if the angle cannot change throughout the day and year, but this means that it is fairly flat optimisation with not too much lost by not having things positioned perfectly. A large solar farm may generate the electricity more cheaply in terms of the equipment, but the further out from use the farm is the more is lost in transmission, and the closer it is to city centres, the greater the cost of the land used for the farm. Except possibly for aesthetics, the opportunity cost of the land when using existing roofs is zero.

          • VMC

            Much you say here, I agree with. But, the types of panels used on roofs often behave rather badly when not optimised for their position. That is also an advantage of larger scale solar farms – modern ones use rotating/tilting panels during the day so that they are always doing their best. And while the cost of a roof is pretty much $0 as you say, there is more cost to installing on a roof compared to a ready made area. And many solar farms (because the panels are lifted off the ground) can have other uses such as animals grazing. http://www.solarpowerportal.co.uk/assets/images/Solar_sheep.jpeg

            • Seamus Hogan

              Wow, that raised solar farm is really cool! I confess that my information about flat optimisation was in the context of solar water heating not PV cells, which sound like they are more sensitive to position. I suspect that much of the private economic benefit of PV to consumers comes from an implicit externality that exists when consumers faced fixed-rate tariffs rather than the spot price: Marginal electricity generation has the highest social value in the winter months of dry years, but the benefit to consumers comes mostly during the sunny summer; when the opportunity cost of water in the hydro lakes is low or zero. Even without subsidies it is easy to imagine situations where solar generation could be individually beneficial to consumers but socially costly. And that is without even worrying about the carbon footprint from the production of the solar panels.

              • VMC

                And one of the mysteries for me is why the greens would not have advocated solar hot water rather than PV. Solar hot water has so many positives I think: its cheaper, not nearly so sensitive to weather and installation factors, the hot water can be stored for when it is needed, and it still works OK in winter. And (speaking as someone who has both) its much better value for money. I also wonder if the Greens are not appealing to a sort of “pride in ownership” factor – the feelgood factor of owning one’s own electrical generation. (I notice the Greens are not so keen on this when its suggested people purchase a hydro power station or two though!) On their web site there are many people who who have ‘liked’ the policy and added a remark that they look forward to going off the grid. (Which suggests its also a policy that appeals to the uninformed). Lastly, I wonder if there is some appeal to being just that more independent of the big power companies and their ability to hike prices. I think some of us are prepared to pay more for something knowing that the long term price we pay is fixed and settled, rather than pay less now knowing that we might be subject to random price rises.

  • deepred

    The Govt’s criticism of the solar plan is a bit rich, given it had no qualms about guaranteeing MediaWorks’ debts. To further rub it in, Prostetnic Vogon Joyce was a founding director of the company’s RadioWorks division in the first place.

    • http://tvhe.co.nz/ Matt Nolan

      I’ll be honest that I haven’t really understood the government’s critique directly yet – but I’m also sure that it is best for us all to have a bit of a think before we can tell exactly whether the policy is good or not. Hence the bleg :)

  • electricboots

    Vector are leasing (and extensively subsidising) solar panels in their SunGenie pilot program. It’s $35k worth of solar panels and batteries, leased to the customer for a fixed period on a $2K downpayment and $74 a month. The customer gets a 10kWh battery so they get to use nearly all of the power generated, and have a massive whole-house uninterruptable power supply. Vector get a highly-controllable load that they can disconnect from the mains at peak times, so they save money too. With only modest electricity price inflation customers should be in profit in five years or so. The price of this sort of system will continue to plunge with falling battery, panel and controller prices.

    • http://tvhe.co.nz/ Matt Nolan

      That would be cool if it can be sustained on a larger scale (I’ve heard of these schemes in Nelson and Kaitaia) – however that then begs the question of why we would need government intervention ;)

  • OLO

    Solar PV and electric vehicles could be two disruptive technologies for electricity networks. If more of them (there is only one at the moment) move to peak-demand based charges (reflected the fixed cost nature of their business and the marginal cost of new capex), then this will shatter the economics of anyone who has built solar PV (under this policy or not).

    In other words, they could find themselves paying far more in fixed costs to the networks because their solar PV does nothing to reduce their winter night-time peak demand.

  • OLO

    I was hoping someone can help me better assess the arguments about whether this is a subsidy.

    Bridges says: “I have news for the Greens – if it’s a lower interest rate than normal, it must involve a government subsidy,” he said. “And if it makes the cost of solar power cheaper for families than existing power options it also must involve a subsidy.”

    Norman says: “there was no subsidy, because the loans would be repaid with interest determined by the Crown’s cost of borrowing.”

    Isn’t Bridges right? Surely the local councils are taking on extra credit risk here (and admin costs)? Central government might be guaranteed a balanced budget, but they’ve just shifted the cost to local govt?

    • Seamus Hogan

      It depends. If the government has access to lower borrowing costs because its probability of default is low, and if it can, pass on that low rate to consumers without there being additional transactions costs from acting as an intermediary, and if can avoid charging consumers the risk premium that they would normally have been charged because, as the tax collector, it can write the rules to be the first creditor to be paid if the borrower goes bankrupt, and if it would actually be prepared to be a hard-line debt collector should the need arise, and if (the biggest if), the advantage it gets from being able to guarantee repayment has its effect purely from eliminating moral hazard by buyers and not by imposing costs on other creditors who are moved further down the pecking order in the case of bankruptcy, then Norman would be right. To the extent that some of the if are not true, then there would be some element of a subsidy, but probably not as much as the full difference between the government cost of capital and retail borrowing rates would suggest.

      • OLO

        Thanks!