White Magic Investments - Submission to medium-scale solar discussion paper
1. INTRODUCTION
1. SUMMARY OF ISSUES CONFRONTING OUR CUSTOMERS IN THE SMALL GENERATOR SPACE (SGU'S)
1.1. DIFFICULTY MONETIZING THE PROJECTS
1.1.1. COMMERCIAL CUSTOMERS
1.1.2. COMMUNITY PROJECTS
2. SIGNIFICANT BARRIERS AFFECTING OUR PARTICULAR MARKET SEGMENT
2.1. INSUFFICIENT CLARITY AND MARKET POWER TO OWNERS OF SGU'S
3. OPPORTUNITIES FOR LOCAL MANUFACTURE
3.1. WHITE MAGIC'S SPECIALTY: TRACKED SOLAR
4. CORRECTING THE SOLCIAL INEQUALITY OF FEED IN TARRIFS
4.1. REMOVING THE CONNECTION BETWEEN LAND TITLE AND ARRAY OWNERSHIP.
4.2. MAKING A HIGH CAPACITY GRID TIE EASIER
5. WHAT IS MEDIUM SCALE SOLAR?
5.1. CURRENT DEFINITION
5.2. AUTHOR'S PROPOSED DEFINITION
6. CARE WITH SUBSIDIES AND GENERAL MARKET ISSUES
7. IMPORTANT INFORMATION
1. INTRODUCTION
White Magic Investments Pty Ltd is a Melbourne based company established in January 2007. It is a small business, specialising in all aspects of engineering consultation and development of Solar installations on behalf of other small businesses who may lack the expertise to specify, design, project manage and install larger "Small" Photovoltaic Systems, Photovoltaic products and Electrical Installations. We deal with engineering issues surrounding installations of 5kW to approximately 100kW. White Magic Investment employs Antony Howard, an engineer with a high level of expertise in all aspects of commercial renewable engineering solutions. Our commercial aim is to specialise in the sub 100kW SGU space.
Since operations began, White Magic Investments has successfully assisted companies to develop projects throughout Victoria for both specialist domestic and commercial customers. Through our clients, White Magic has been involved with engineering design leading to the installation of over 1MW of green electricity.
White Magic is an extremely outcome focussed consultancy, with the directors extremely passionate about renewables in general. Our philosophies have extended over into a desire to operate in the community space (at this stage a side project by Antony Howard due to the non commercial nature of the endeavour) whereby the knowledge existing within the engineering and solar community can be utilised for more than corporate economic gain.
Through our association of professionals and tradespeople, White Magic investments can deliver a concept to creation design and installation package, tailored to a particular need, either technical or financial from the smallest domestic grid tie, right through to dual axis tracked commercial solar fields.
White Magic is pleased to present our comments regarding the medium scale solar discussion occurring at this time.
Thank you for the opportunity to submit this information, and we sincerely look forward to answering any questions you may have regarding the details following.
1. SUMMARY OF ISSUES CONFRONTING OUR CUSTOMERS IN THE SMALL GENERATOR SPACE (SGU'S)
1.1. Difficulty monetizing the projects
The key issue arising for White Magic's clients at this time is the deployment of solar as a commercial, or semi commercial project that is required to fit into traditional payback/NPV analysis. The capital requirements associated with 100kW SGU's are in an appropriate range for end clients to consider them an appropriate use of funds, but often the payback period and lack of definitive rules/systems to provide a revenue stream against this investment makes them less attractive than other uses of funds unrelated to the production of renewable electricity.
1.1.1.Commercial Customers
In White Magic's experience, a sufficiently competitive revenue model for systems that are substantial enough to achieve an economy of scale without an upfront incentive such as a REC multiplier is paramount. Due to the high proportion of labour and roof-preparation costs as a percentage of the total installation this is unlikely to be achieved on a domestic installation model. This leaves the commercial sector ideally suited to deployment on many commercial premises due to the size of array required, capacity and financial capability.
As the domestic cut-off for sizing can be effectively considered 5kW (with much of the domestic sector installing 1.5kW "solar Credits" systems at this time) and very few domestic installations would exceed 25kW. The installations of sub 100kW as part of a commercial operation are a critical area of the market to incentivise for mass deployment. It is White Magic's opinion that a company who can make a sound business decision to install a 100kW SGU is likely to do so, irrespective of their core business, and this will drive the uptake of solar as a renewable energy source "en masse" and more effectively than for example a few "Solar Flagship" style installations (not withstanding the split between federal and state drivers for these very large projects).
1.1.2.Community Projects
Within the Community, there is a large desire to take action of the increased production of clean electricity. The DPI may at any time look at the research undertaken by White Magic Investments on this issue by contacting the Author.
The fundamental problem associated with community action is similar to the commercial sector, with a larger scope for decision making against competing economic interest for capital. This is driven by the requirement for a social and environmental dividend in addition to an economic dividend. For the community sector, it is the Author's opinion that whilst many are happy to forgo financial reward in order to achieve a larger proportion of renewables (The Author included) any official policy position should not be relying on this ethic within the community to bear the burden of sub standard economic returns on the back of a desire to achieve a social dividend.
In the Author's opinion, this is akin to removing funding from a school, because they have used volunteer fundraising to raise money, and therefore do not require the funds that would have been otherwise allocated.
A community that is sufficiently motivated to organize and install a solar farm should not be financially penalized against a company who has decided that a use of (all factors being equal – non core internal Cap-Ex decision; renewable project vs non renewable project) capital for a directly competing project within their organization that does not contribute to a reduction in the environmental impact of that same use of capital should bear the financial opportunity cost.
2. SIGNIFICANT BARRIERS AFFECTING OUR PARTICULAR MARKET SEGMENT
2.1. Insufficient clarity and market power to owners of SGU's
Further to the points outlined in 1.1.1, there is significant difficulty in resolving the revenue model of an SGU.
For the purpose of discussion, a project is referred to on which White Magic Investments has been working on since December 2008. The project is for the Brown Brothers Milawa Vineyard. This example is highlighted with permission from the Senior Management.
Brown Brothers Milawa Vineyard wish to take action on reducing their carbon footprint, and as such have investigated both wind and Solar as a possible means of achieving a reduction in their Black Power Energy Load. White Magic approached Brown Brothers with the aim of supplying them a solution that fitted into their program, at a price that would prove economic (at an agreed level) based on their desired spend and available space.
Using the Fair Price feed in legislation as a guide, the project was priced, modeled and found to be acceptable. 99kW was agreed upon, and feasibility studies commenced. A key element of the project, however is that it is not a "behind meter" project, and the output of the installation would need to be monetized (either by credit transfer or use of cash payment) in order that the power generation could be applied to it's intended point of use, which is an unsuitable site for a solar array of 99kW.
The real world application of the fair price feed in tariff has to date effectively prevented Brown Brothers from gaining transferable credit on the meter through which the power is to be exported, and as the legislation stipulated that the electricity must be credited, but gives discretion to the electricity retailer as to the available uses of this credit. Under the current PPA framework the project has proven to date to be little more than a behind meter proposition with the capacity for "pseudo storage" using credits on exported electricity to re-import power at the given rate.
Without the ability to move electricity credit to it's required point of use, there is no incentive to install an array larger than is necessary to power the load behind a particular meter on a "total energy balance considered" capacity.
It is the Author's firm belief that to utilize the existing mechanisms, retailers must be obliged to act to accommodate at least some of the seller's interest on the fair price credits. Ideally this would mean a purchase of the electricity at a fair price (being the un-hedged business rate) as legislated for money, not non transferable credit.
This achieves two important things:
- The fair price feed in tariff is linked to the retail cost of electricity, and so considers efficient market forces in the economics of the installations, unlike a fixed feed in tariff that may become inappropriate with changing prices in a competitive solar development market.
- The fair price has a natural link to power price inflation, and as such prices renewable electricity from solar in present dollars removing any disparity between CPI inflation and Power Price inflation, of the monetary depreciation effects of a fixed feed in over a long term.
If Victoria were to legislate that the federal fair price feed in tariff provisions had mandatory monetization, we believe that many more of White Magic's clients could install solar in an economically justified manner. This would make solar a viable Cap-Ex competitor without many of the pitfalls of an upfront subsidy/rebate based system tied to peak capacity, not electrical performance.
The author also makes the above comment in a full understanding that the retailer is being asked to pay up to 400% more for the electricity through this arrangement when compared to NEM black power rates, but considers this an offset against the externalized costs of a source such as coal-fire power not considered in the electricity component of the charge. As the real cost of electricity in general increases, the disparity between electricity component and a fair price for SGU solar will more closely align.
3. OPPORTUNITIES FOR LOCAL MANUFACTURE
3.1. White Magic's Specialty: Tracked Solar
As an engineering based consultancy, White Magic has technical specialties within its niche market. Our specialty is tracked solar arrays. In the Southern states, a single axis tracking system increases output over the year by an average of 19%, with the CEC guidelines specifying an increase of up to 23% for tracked systems.
We have been unable to justify the spend on tracking for many of our clients of small arrays, due to the nature of the current incentives being tied to peak wattage, not daily output. In acting in our customer's best interests, we have on multiple occasions abandoned the concept of tracking in favour of extra panel, even when the overall output of the installation is likely to be inferior. Using current engineering skills in Victoria, the author believes that there is sufficient capability to drive economies of scale, both with White Magic's, and our competitors designs to ensure that the increased upfront cost of a tracked system is more than off-set by the output increase, irrespective of the upfront sale of REC's to reduce capital intensity.
Whilst it is unlikely Victorian industry will be able to become a competitive manufacture of PV material, or assembler of Panel, within the industry there is currently more than sufficient knowledge to ensure that Victoria has the knowledge base to produce world leading total system packages at all scales, from 5kW to the MW range.
As these system concepts are usually inappropriate for the Domestic sector, there is unlikely to be a move to develop this expertise and economy of scale whilst installation under "normal" parameters remains focussed around the 1.5kW Solar Credits systems.
4. CORRECTING THE SOLCIAL INEQUALITY OF FEED IN TARRIFS
The Victorian Solar industry is currently focused around the small renewable generator deployment usually associated with Domestic installation of solar PV. This is currently geared towards sub 5kW installations, with most government assistance being available to householders and businesses wishing to deploy 1.5kW or under systems under the solar credits scheme. There are multiple functional barriers to accessing this scheme, limiting the access by many Victorians to participate in the uptake of Solar
4.1. Removing the connection between land title and array ownership.
Under a model of community owned solar farms, it is possible that the title over sub array capacity within a solar park could be treated in the same manner as a domestic installation. This would remove the barriers to entry for residents of apartments, rental tenants and people who have an unsuitable site for a Solar Array. Using the concept of Credit transfer, the electricity generated by the array could be applied to the usage of the domestic site under a modified premium feed in tariff to reflect the gross nature of solar farm production. The Nett tariff could also be applied by use of smart metering at both the solar site and the household.
It is the Author's belief that the economy of scale available using a dedicated solar installation, rather than lots of small domestic arrays would drive the overall cost down per watt hour, increasing the competiveness of the technology when compared to coal, wind or hydro without many of the environmental issues surrounding the aforementioned technologies.
4.2. Making a high capacity grid tie easier
One of the technical issues surrounding the deployment of medium scale solar is the connection to the grid. Community members within a concept group considering a solar farm do not often have the expertise to solve this connection problem, and the cost of consultants and infrastructure can be prohibitive in ensuring economic deployment of community solar farms in community spaces.
When a community group is genuinely attempting to engage in a triple bottom line project for the benefit of the local community, rather than an investor group simply looking to maximize returns, it is the author's belief that the role of government should involve assistance with these real issues that decentralizing the generation system in the state will confront.
This may be as simple as a small body dedicated to the liaison between Networks and community groups to ensure that information and assistance is accessible for determination of feasibility prior to the community investing excessive time and money in a feasibility. At this time, the author is not aware of the availability of such a central information point, however has had significant experience dealing with these issues directly with carriers.
5. WHAT IS MEDIUM SCALE SOLAR?
5.1. Current Definition
Currently, the Author of this document has no knowledge of an official "medium scale" solar definition. It is widely accepted that medium scale fits in between the domestic sector and the large-scale sector that encompasses projects such as the Mildura site.
5.2. Author's Proposed Definition
The author would consider a medium scale installation to be one that falls above a consumer/discretionary spending decision to install, is subject to economic analysis and a quantifiable return, and is achievable by small companies or groups of people who would otherwise be able to spend the money on short term Cap-Ex/Retail investments.
To this end, I believe that a medium scale solar installation is in the 50kW to 1MW range. Reporting the opinion of associates, a 100kW single installation is considered "large" by electrician background installers, who are often ill-equipped to deal with the engineering requirements of such a specification.
Within the above assertion, White Magic believes there is a sub definition required of "small to medium", which would ideally encompass 20kW to 100kW arrays, larger than a domestic install, yet not large enough to be outside a standard consideration for a business customer or community group. Medium would then become 100kW to (say) 5MW.
6. CARE WITH SUBSIDIES AND GENERAL MARKET ISSUES
Whilst it is important to consider the economic climate for solar as an unviable proposition without the use of incentives, It is important to consider the experiences of the past both in Victoria through the previous scheme of the $8000 Solar Rebate and some of the feed in tariff schemes as seen overseas.
Acknowledging that it is not in White Magic's commercial interest to discuss issues leading to a less profitable economic environment, it is important to consider the efficient benchmarking of solar installations against all energy generation methods and market forces.
During the time of the $8000 rebate, for example, 1kW solar systems could be procured for as little as $999 total cost to customer. Not only did this mask the real cost of solar electricity, it encouraged a "low hanging fruit" mentality within industry that concentrated on individual near term economic outcomes, not long term infrastructure outcomes to spread and secure a multi technology approach to providing a renewable future for the portion of the Victorian Electricity Supply above the base load.
A similar experience has been seen in Europe when the feed in tariffs were developed under a set of solar pricing assumptions that did not foresee the drastic reduction in PV prices, resulting in an over inflated solar sector, perhaps at the expense of other complimentary technologies that may help achieve a more secure renewable energy supply as a whole.
Whilst the Author firmly believes that Solar PV must be given a stable set of parameters in which to operate, it would be disheartening to see this being achieved at the expense of good long term design and installation in the medium scale sector in favour of "fast money".
7. IMPORTANT INFORMATION
This information is the opinion of the Author, Antony Howard and the company under his effective control, White Magic Investments Pty Ltd. It is in no way intended to reflect the opinion of The Clients of White Magic Investments.
All Commercial Examples have been used with the relevant Client's permission.
