The Role of Distributed Energy: Can It Be a Marriage of Equals?

As an analyst, I often notice recurring themes that dominate discussions for prolonged periods. A few years ago, the focus was on grid-forming inverters, while two years ago, the spotlight was on the costs of wind energy. This year, one of the prevailing themes is the role of Distributed Energy Resources (DER). This analysis serves as an initial exploration rather than a comprehensive study, and my primary conclusion is that it remains unclear whether a new DER model will yield greater benefits than the current largely laissez-faire approach.

Initial Findings

• Australia is a leader in rooftop solar generation relative to its market size, though not by a significant margin.
• The integration of rooftop solar into the overall market is quite poor. There are two primary camps: one believes that rooftop solar should simply be a component of an integrated utility-based market, while the other argues that distributed energy should be the foundational element around which utility-scale generation is structured.

Despite the unplanned and largely unmanaged impact of rooftop solar on the National Electricity Market (NEM), it appears to be achieving positive outcomes. It is aiding in the gradual phasing out of coal generation, supplying energy for utility batteries to reduce peak prices, and offering consumers a counterbalance to major gentailers.

Current Dynamics of Rooftop Solar

Currently, rooftop solar production significantly exceeds the consumption of solar owners during midday hours. This surplus results in the export of excess energy to the grid, driving down midday prices and even leading to negative pricing in some areas during spring. This situation causes curtailment of certain utility generation and creates concerns about minimum demand for the Australian Energy Market Operator (AEMO). However, I believe this issue will diminish as the role of batteries in buffering demand grows.

Moreover, the rise of behind-the-meter solar means there is minimal growth in energy consumption through traditional wire and pole networks, as well as little to no growth in retail energy volumes for households. Consequently, household electrification is necessary for utility supply to maintain its status quo. However, most electrification will occur in vehicles, particularly in vehicle-to-grid (V2G) systems, which will further decrease grid capacity utilization.

The Pressure on Coal Generation

At present, rooftop solar puts downward pressure on prices throughout the day, raising questions about the viability of utility-scale solar development. Coal generation struggles to turn off during peak solar hours, resulting in financial losses for coal operators. However, coal generators recover their costs during the evening and overnight markets. As utility-scale batteries, especially those with longer durations, become more prevalent, coal generation will likely face increasing economic challenges.

The expected operational capacity of 20-30 gigawatt-hours (GWh) of batteries by the time the next Eraring closure date approaches will substantially increase midday demand. Nevertheless, these batteries will primarily discharge during the evening peak, continuing to inflict losses on coal generators during lunchtime while diminishing their peak revenues. It’s worth noting that as Eraring and Yallourn close, utility battery capacity is projected to grow more than fivefold compared to last year’s levels.

Rooftop Solar’s Impact on Pricing

According to Renewmap’s summary, by the end of January, we can already add 1.4 GW of new announcements, indicating ongoing growth in capacity. As a result, we see over 11 GW, potentially nearing 12 GW, along with approximately 27 GWh of capacity. Not all of this will be available in the energy market, but increased construction will lead to a larger share being utilized.

Using New South Wales (NSW) as an example, our analysis indicates that battery output could grow approximately twentyfold compared to the same period last year, yet we estimate that only half of the projected battery power will be used in any given half-hour. We anticipate that the growth in rooftop PV will adequately supply battery charging needs during midday. If utility solar continues to expand, we expect a net decrease in midday coal generation.

The implications are clear: batteries will create significant pressure on Snowy Hydro and gas producers in NSW, particularly during peak pricing hours from 5:30 PM to 7 PM. Consequently, we can draw a few conclusions:

• The economic outlook for Eraring is bleak, and management may favor closure.
• Under the current laissez-faire policy approach, rooftop solar will help lower prices and carbon emissions for consumers by providing energy that enables utility batteries to compete during peak demand periods.

Self-Sufficiency vs. Exporting Energy

Producing electricity close to where it is consumed intuitively seems more cost-effective. However, this is not universally true. Large coal generators have historically operated at lower costs compared to smaller generators, justifying the construction of transmission networks. The NEM evolved from local councils shutting down uneconomic generators and creating a state and then national electricity system. However, we may now be witnessing a shift back toward localized generation.

Currently, there is no definitive study comparing the costs of systems with numerous household batteries to those emphasizing utility batteries charged by exported rooftop solar. The Integrated System Plan (ISP) included considerable household storage in its 2022 version, but less so in 2024, without discussing the economics extensively. Complications arise from market power and competitiveness factors that are difficult to model.

In general, residential batteries in Australia tend to be more expensive than utility batteries, while EV batteries are even less costly. However, there are instances where residential batteries are being sold below utility battery prices. As a broad generalization, household batteries, such as the Tesla Powerwall, have a duration of about 2.3 hours when discharged at maximum inverter capacity. I have long maintained that a distributed energy system would enhance grid resilience, enabling individual or small units to operate independently.

Trials and Models

Australia is recognized for having a thin transmission network. In Victoria, single-wire earth return (SWER) transmission has been linked to bushfires. In Western Australia, the high costs of maintaining transmission have led to the development of islanding models, where most electricity is generated by solar and batteries, with backup diesel generation. Overall, I believe that a distributed system comprising solar and batteries across the grid is both technically feasible and potentially beneficial to communities.

There are increasing examples of standalone grids, and as transmission costs rise and solar and battery prices decrease, the economics of such systems continue to improve. Notable instances include Norfolk Island and Yackandandah, which are geographically based microgrids, alongside market-based trials across the NEM.

Australia: A Global Leader in Rooftop Solar

To provide context, I utilized data from the International Energy Agency (IEA) to identify the top ten countries for cumulative installed behind-the-meter capacity as of the end of 2023. Australia leads the pack when measuring rooftop solar output as a percentage of total generation, narrowly surpassing Germany. However, I believe the estimates for rooftop capacity factors in Claude’s data may be somewhat inflated. The capacity factors stem primarily from an irradiance map created by Claude but have been cross-checked against other sources.

What stands out is Poland’s impressive progress, contrasted with India’s disappointing performance. It remains a mystery how India can expect to advance without leveraging its natural advantages. Overall, Australia is a global leader in behind-the-meter solar when assessing total energy output against total demand, with Germany closely following, primarily due to its less favorable irradiance.

Rooftop PV and Grid Demand

In Queensland, rooftop solar meets up to 35% of grid demand during the summer months. The wholesale market reflects this dynamic, with midday prices gravitating towards zero as solar generation peaks, followed by a surge in profits during evening hours once solar production declines. This environment creates a substantial incentive for utility-scale batteries, explaining the current wave of installations.

A two-hour duration battery in Queensland, if operated with perfect foresight, could have achieved a price spread (sell price minus buy price) exceeding $500/MWh over the past year. While competition will likely reduce these spreads as more batteries come online, the expectation remains that rooftop supply will keep charging costs low for the foreseeable future. Every coal unit closure necessitates an additional 400-600 MW of battery capacity during peak evening hours. With the closure of Eraring, over 2000 MW of new battery capacity will be required just to meet average evening demand.

For consumers to benefit from utility batteries and the resultant price competition, maintaining low charging costs through surplus power generation during midday hours seems advantageous. Conversely, policies that restrict exports through network tariffs and low feed-in tariffs may hinder progress.

Consumer Perspective on Rooftop Solar

The economics of rooftop solar remain relatively appealing in Australia, with the outcome heavily influenced by the self-consumption rate—the share of energy generated that is used by the household rather than exported back to the grid. For a straightforward solar system without batteries, the internal rate of return (IRR) stands around 16% under reasonable assumptions for a typical family home, translating to a payback period of approximately six years. The greater the proportion of energy consumed behind the meter, the higher the IRR.

In NSW, for example, the average installed cost of solar is approximately AUD 0.89 per watt, factoring in subsidies. Higher-quality systems average around AUD 1.1 per watt. While solar systems are inflexible, consumers can add value by shifting consumption behind the meter—such as charging electric vehicles at home or running air conditioning during solar hours to store cool air for later use.

The reality is that solar panels represent a sound investment, effectively stabilizing a significant portion of electricity prices for consumers over the long term, which encourages continued installation at consistent rates. However, this dynamic tends to shift more of the grid costs onto households without solar. The capital invested in the grid must be recouped, and maintenance costs remain.

Household Batteries: A Price Challenge

The prevailing hope is that household batteries will experience the same price reductions that solar panels and EV batteries have undergone. However, over the past 15 years, battery prices have seen minimal change, despite improvements in functionality. In contrast, car battery pack prices have halved between 2017 and 2024 and are approximately one-sixth the cost of household batteries in Australia.

While factors such as AC/DC conversion and installation costs play a role, they do not fully account for the significant price discrepancy. Some suggest that the window for household batteries may close as vehicle-to-grid systems take precedence. Nonetheless, the potential for new concepts is on the horizon, with price remaining the main barrier for household batteries.

It is essential to ensure that residential electrical systems are adequate. For instance, in my network area, Ausgrid assesses a household’s maximum export capacity based on the solar output and the maximum AC power from the battery, which may necessitate three-phase power. However, once the setup is complete, your EV charger can operate at 11 kW. The key point is that household batteries have yet to be deemed attractive enough to boost installation rates significantly. Increased competition is necessary, potentially bolstered by government incentives or the entry of a determined battery manufacturer.

Emerging Competitors in Battery Market

Currently, Tesla’s Powerwall is regarded as the market leader, establishing the industry price point. However, numerous residential batteries are available at significantly lower prices. For instance, the ESY Sunhome has a retail price of AUD 4,900 for a 10 kWh model, translating to about half the installed price of a Powerwall at around AUD 500 per kWh. This battery has received favorable reviews and comes with a solid warranty, assuming the manufacturer remains operational.

At the ESY price point, battery economics align well with solar economics, and I believe that if this price became the standard in the industry, household battery sales would surge. The ESY battery is warranted for 60% of its capacity after 10 years.

In a rough demonstration of the economics, I made several optimistic and conservative assumptions, including full utilization of a 10 kWh battery over ten years, replacement of battery modules over a 25-year lifespan, and ignoring round trip efficiency calculations. Assuming a flat avoided price of AUD 0.32 per kWh, even with conservative estimates, adding a battery becomes an attractive proposition for those with solar panels. An IRR of 17% is competitive with traditional investment avenues like bonds and stocks.

In my view, with minimal policy shifts or a focused advertising campaign, a market could be cultivated where households eagerly invest in batteries. Most households still lack time-of-use meters, as the previous framework required customers to request them. Outside Victoria, many meters remain fixed-rate. However, a recent rule published by the AEMC mandates retailers to expedite the deployment of smart meters, with the program expected to conclude by 2030. This development is a positive step forward.

Retail Tariffs and Market Structure

At this stage, I find myself questioning the effectiveness of deregulation. The market continues to be dominated by large gentailers, and there has been little significant change in the market shares of the top players in recent years. Second-tier retailers often lack a dominant strategy and carry additional risks for households, especially since they often purchase energy from competing gentailers.

Moreover, there seems to be little volume growth in the household sector from the perspective of gentailers, as market share is increasingly cannibalized by rooftop solar and batteries. This shift toward self-sufficiency counteracts any gross consumption increase stemming from household electrification and the adoption of electric vehicles.

Gentailers typically aim to simplify retail tariffs. Currently, large gentailers have little incentive to promote time-of-use or demand tariffs, opting instead for straightforward plans. When customers seek quotes from providers, they are presented with multiple fixed-rate options without clear distinctions between time-of-use or fixed plans.

The strategy employed by major gentailers is to maintain simplicity, minimizing customer confusion while preserving market share. Despite the availability of innovative products like Virtual Power Plants (VPPs), they represent a small segment of the market. Smaller retailers have a more diverse range of plans but currently account for approximately 25% of the market. As a result, the market structure has stabilized with gradual erosion of market share by major players.

The Online Quoting Process

From my observations, when obtaining an online quote from one of the large gentailers, the first step involves checking the existing tariff plan for the household. If the household is on a flat rate, they will only be presented with flat-rate options, and the same applies to time-of-use plans. For those on a flat rate tariff seeking better deals, they might be entirely unaware of the possibility of switching to a time-of-use tariff, requiring a call to the customer service center for more information.

This lack of transparency could lead customers to remain on less favorable plans. Additionally, customers on fixed-rate tariffs are at risk of being transitioned to demand tariffs without fully understanding the implications, potentially incurring higher costs during peak demand periods.

Conclusion

The complexities of the electricity market continue to evolve, influenced by the growth of distributed energy resources and the ongoing transition towards renewable energy. As we navigate this landscape, it is crucial to balance consumer interests with the economic realities of energy production and distribution. The future of energy markets will depend on how well we can integrate new technologies, encourage competition, and create policies that reflect the changing dynamics of energy consumption and generation.

David Leitch is a regular contributor to Renew Economy and co-host of the weekly Energy Insiders Podcast. He is the principal at ITK, specializing in analysis of electricity, gas, and decarbonization, drawing from over 33 years of experience in stockbroking research and analysis for firms such as UBS and JPMorgan.