A striking statistic made its way around Twitter today – Australia leads the world in domestic solar installations. According to the SMH, 392,500 homes switched on their solar panels for the first time in 2011, far more than acknowledged leaders in the field like Japan and Germany. In fact, according to the article, more solar capacity was installed in Australia than those two countries, though the total deployed in Australia is still less than in those countries.
The first thing you have to understand about solar panels is that demand for them is almost entirely a government creation. Solar panels make economic sense, even without government subsidy, in areas without a functioning electrical grid. But in virtually every part of the world where the grid has already been built, the unsubsidized cost of electricity from solar panels was more expensive than the cost of electricity from the electrical grid. Reducing the cost of solar systems to the point where this is no longer the case is a long-held dream, and as of 2012 it’s tantalizingly close. In fact, it’s already the case in Darwin if I’m doing my sums right.
But that’s the present and the future. The past decade has seen increasingly large deployments of panels that, from a narrowly economic perspective, didn’t make sense. Even from the perspective of CO2 emissions reduction, there were far cheaper methods available; shutting down coal-fired power and switching to gas makes far more short-term economic sense – as did deploying wind power.
However, solar power attracted political support in a lot of places. Some of those supporters sincerely believed – a position strongly doubted by a lot of “rationalists”, including myself – that solar panels could, with a bit of a push, supply a substantial part of our energy needs at an affordable price. These people – and in this I include the various national Green parties around the world – argued for specific subsidies for solar panels of various forms. The idea was that through this government-funded kickstarting, the magic of modern industrial capitalism would drive the costs down to the point where special subsidies would no longer be necessary. I doubt that the less enthusiastic supporters of industrial capitalism amongst the Greens would put it quite that way, but nevertheless that was pretty much the plan.
And along the way they managed to convince a much larger fraction of the population that solar panels were the answer to this global warming thing. Everybody loves solar panels. They don’t pollute at all – unless you happen to be near a poorly-run factory making them. They don’t make any noise. They don’t threaten orange-bellied parrots. And, while they’re visually inoffensive, they are visible. And thus, supporting the wide deployment of solar panels is the perfect way for a politician to signal that they’re serious about doing something about climate change, even if they aren’t.
Except, of course, for that cost thing. Solar cells in most of Australia remain a more costly way to cut greenhouse emissions than energy efficiency, mode switching to gas, or even wind power. So if you’re going to support their deployment, either a government reaches directly into consolidated revenue, or they mandate its cross-subsidy in some other manner.
Australia, like Germany, Japan, and California, has done this. But the key difference between us and the rest of the solar-supporting world is the way we chose to subsidize solar deployment.
I won’t claim to understand every detail of solar panel subsidies across the world, but in German I understand that they chose to do so by means of a flat feed-in tariff. For every kilowatt-hour of electricity generated by solar panels in Germany, you get paid a rate far in excess of the normal commercial rate for electricity. Crucially, at least as I understand it, it’s a flat rate – you sell 1 kwh or 1,000,000 kwh of solar electricity to the German grid, you get the same per-kilowatt price.
Consequently, the cheaper you can generate electricity from solar panels, the more financial sense it makes to do so. And, like in so many other things, economies of scale apply.
While solar panels are the most modular of energy sources, it is still much cheaper per kilowatt to install a factory roof’s worth of solar panels than a house roof’s worth. Installing the panels will be cheaper. Wiring them together will be cheaper. Converting the power back to grid voltage will be cheaper. How much cheaper? Unfortunately, SolarBuzz’s solar electricity index isn’t great for direct comparisons any more because their reference “residential system” now includes battery backup, which isn’t typically used in Australia. But even going from their model 500 kW peak “industrial” system to a 50 kW peak “commercial” system adds 4 cents per kWh to the cost of electricity generated.
Again, taking a narrow perspective, if the point of subsidizing solar panel deployment is purely to create a market for solar system providers to sell into, and let the market drive the costs down, the German approach of setting a flat rate and having aircraft hangers, sports stadia and factories covered in solar panels makes the most sense.
But Australian policies on subsidizing solar panels haven’t done that. We’ve done precisely the opposite. Federal government subsidies to the solar industry, either through the renewable energy target scheme, its successors, or through direct subsidy, have all been for small home systems that can’t even supply more than a fraction of a typical home’s needs. On top of that, the various state schemes for feed-in tariffs have generally offered much more generous rates for small domestic solar installations than larger ones.
Why? I think it’s pretty obvious. Solar panels are popular. Subsidizing small-scale deployments makes them visible throughout the community, maximizing the political return. Larger scale deployments, even if they would have delivered more spark for the buck, wouldn’t have resulted in happy panel owners and more broadly people looking at roofs and thinking the government is doing something.
2011 saw some specific factors pushing domestic solar installations. Globally, these schemes have been stunningly successful in helping to push down the cost of solar systems – though they were helped out more than a bit by China’s emergence as a low-cost global manufacturing superpower. Consequently, when you combine the old subsidy schemes with the new lower prices for panels, putting panels up starts to become the best lurk at the government’s expense since negative gearing. Governments around Australia are scrambling to wind back the subsidies – the federal government is cutting back the bonuses for installing solar, and the O’Farrell NSW government cut the New South Wales’ super-generous feed-in tariff in May 2011, closing the scheme to new entrants. You don’t think a few people rushed to ensure their solar system was installed to get the old rate, do you?
So that’s the history. What of the future? While the various Australian schemes to support solar panels have been less than optimally designed in terms of maximising the deployment of solar panels and minimizing the cost, they are what they are. We are approaching the point where solar panel deployment needs no additional help beyond the renewable energy target and the carbon price. In any case, we should continue to wind back subsidies specifically directed at subsidizing very small-scale domestic solar installations. A solar panel on a factory roof is just as good as one on a house roof, two on a factory is better than one on a house, and government policy should reflect that.