Monday, April 25, 2022
WHY YOU CAN'T BUY CHEAPER SOLAR ENERGY FROM RETAILERS
Two recent big solar energy news are making Singaporeans wonder whether this renewable form of energy can bring our electricity cost down. I'm referring to the government's tender to have solar PV installations on rooftops of 8,000 HDB apartment buildings, and the 3GWp power to be imported from Australia, via the Darwin Grid and a 4,200 km undersea cable to Singapore.
As a consumer, you probably want to have a rough idea of how the solar energy cost is. There are 2 metrics that give a sense of the status - (a) the payback period, and (b) grid parity.
Both these metrics depend on various parameters and fluctuate widely depending on the country and the time of computation. The country factor calls into consideration the fuel composition of power generation (Singapore is 95% LNG). The time factor is the impact on the computation by fuel price and the capital cost. The volatility of gas price is well understood. PV panel prices have dropped by 86% in the last 8 years. A google search will throw up conflicting numbers. In other words, we need a computation based on Singapore situation and current gas and investment cost.
Solar pv system payback :
As a consumer, you probably want to have a rough idea of how the solar energy cost is. There are 2 metrics that give a sense of the status - (a) the payback period, and (b) grid parity.
Both these metrics depend on various parameters and fluctuate widely depending on the country and the time of computation. The country factor calls into consideration the fuel composition of power generation (Singapore is 95% LNG). The time factor is the impact on the computation by fuel price and the capital cost. The volatility of gas price is well understood. PV panel prices have dropped by 86% in the last 8 years. A google search will throw up conflicting numbers. In other words, we need a computation based on Singapore situation and current gas and investment cost.
Solar pv system payback :
The payback period is the time for a project to hit breakeven, or the time it takes to recover the cost of an investment. The Solar Research Institute of Singapore (Seris) computed a payback time of about 10 years for a 10 kWp pv system in 2019. With gas prices now double that of 2019, the payback time is obviously drastically shorter.
Solar pv system grid parity:
Solar pv system grid parity:
LCOE (levelized cost of energy) is a term which describes the cost of the power produced by a solar pv project over the warranted life of the system. The computation is complicated and based on some parameters and assumptions. This is not perfect science, but a good model for investment decision making.
Solar grid parity is where the LCOE has matched the USEP (uniform standard electricity price, ie the price of the generators for delivery to the SWEP - (Singapore wholesale electricity market). The Seris chart computed in 2019 shows that grid parity was reached in 2018. By 2019 there was in fact a wide gap between the cost of solar and gas produced electricity. Today, the actual gap between the USEP and the solar LCOE cost is much wider than the 2019 forecast given the price of gas has doubled.That means a new forecast will show the projected USEP line to much higher now.
Solar pv generation in Singapore:
Solar grid parity is where the LCOE has matched the USEP (uniform standard electricity price, ie the price of the generators for delivery to the SWEP - (Singapore wholesale electricity market). The Seris chart computed in 2019 shows that grid parity was reached in 2018. By 2019 there was in fact a wide gap between the cost of solar and gas produced electricity. Today, the actual gap between the USEP and the solar LCOE cost is much wider than the 2019 forecast given the price of gas has doubled.That means a new forecast will show the projected USEP line to much higher now.
Solar pv generation in Singapore:
As at Dec 2019 solar made up about 4.9% share of power generation capacity. There are 2 types of solar generators. Embeded generators are private assets which have their system connected to the power grid for additional supply and backup. They tap the power grid when there is no solar power generation, such as cloudy or rainy days, or after the sun sets. They do not sell back to the grid. IGS (Intermittent Generation Sources) are private assets which export their excess generation to the grid. The smaller installations of <10MWac register with SP Services and are credited for excess energy at the energy cost in the tariff. Bigger installations register as Market Participants and are paid at the nodal cost (explained below).
Is solar cheaper now?
The mathematics clearly favour the solar option now. But if you are rushing out to get your own PV panels installed, just remember the system requires huge footprints because the efficiency rate is very low (15%-20%). Efficiency measures how much of the amount of sunlight captured that is converted to energy. You will require more panels than your roof space allows. Your downside risk is asset obsolescence. Panel costs are still on the down trend, and there seems to be breakout technology that promises improvements in efficiencies, some say up to 50%. The mathematics stands unless oil price plummets in the future.
Or you can go for a PPA (power purchase agreement) with an intermittent generation provider.
Whether your own installation, or a PPA, both will still require on-grid purchases for extra power and backup. Bear in mind this will be with SP services at tariff. If retail rates become competitive again, you will miss out on this.
IGS Retailers' green plans will always be higher than brown plans:
What about the rest of us who do not have a roof, nor a heavy consumption for a PPA? If you want solar, IGS retailers offer solar (green) plans. But here's the rub. The green plans of IGS retailers are always higher than their brown plans. Unfortunately, due to current high gas price situation, not all retailers are putting their rates on their websites. Here's how it looks :
Current tariff is $0.2794/kWh (all rates exclude GST).
Sembcorp - Brown 12 mth @ $0.2793/kWh : 100% Solar 12 mth @ $0.31.66/kWh
Sunseap - Brown - no quotes : 100% Solar 6 mth @ $0.4200/kWh
Just Electric - No quotes
Cleantech - No quotes
If solar is now so much cheaper than brown energy, why aren't retailers pricing green plans lower? To understand this, you need to known how solar pv generators are paid and the marketing pyschology of the retailers.
Brown power, ie from fossil fuel plants, supply to the SWEM is on auction basis every 30 minutes. All plants despatched will be paid at the same highest offer price accepted at the auction. To this price is added an additional cost, depending on where the plants are connected to the node into the grid. The nodal price is the auction price (common to all plants) plus the nodal cost (differentiated). The weighted average of the nodal price is the USEP.
IGS Market Participants export their excess to the grid and are paid at the nodal price. The parity chart above shows the wide gap between solar LCOE and USEP, indicating huge profit potentials. This is a 2019 computation. With gas prices now doubled, the USEP line should be much higher, indicating an even high solar power profitability. So why aren't Sunseap and Sembawang pricing their green plans lower?
All retailers purchase electricity from the SWEM at wholesale spot price, which is the USEP + a small market administrative fee. They sell competitively to consumers at a wholesale price + margin formula. For green plans, retailers currently are theoretically able to sell anywhere between the wholesale price and their LCOE. The retail side may make a loss, but on consolidated basis, the solar company can still make a net gross profit. But there is no reason to price green plans lower if they can sell at market prices. Electricity produced has to be consumed immediately, thus it is a market where supply = demand. Selling below wholesale price means incurring an opportunity cost at consolidated level.
The only reason the retailers may sell green plans below market price is if they want to build market share. Obviously this means they need to cap it at their output level. At the moment, solar energy composition of the SWEM by Market Participants is only a tiny fraction. So market capture by selling green plans low is not an available strategy.
On the contrary, green plans are priced higher as a premium product. Purchasers of green energy are those committed to doing their small part to save the Earth, and corporations adopting social responsibility policies that incorporate sustainability plans. The additional cost of green energy is valued as having promotional trade offs.
Green plans from non-IGS Retailers :
These are retailers who have no production of any solar power. I do not know which non-IGS retailers are selling green plans now. Iswitch, which has since excited the market, used to sell green plans. The underlying mechanism of buying/selling green energy is the use of REC (renewable energy certificates). Non-IGS retailers purchase these RECs so they can package their sales as green energy. (Carbon credit trading requires an entire blog. More on this in a future blog). The point here is these non-IGS retailers purchase from the SWEM at spot wholesale prices. They have the same price constraints as IGS retailers. Their green plans will also always be more costly than brown plans.
Rounding off on a negative note - bottom line is, don't expect to buy cheaper solar power from the grid under the present system.
Is solar cheaper now?
The mathematics clearly favour the solar option now. But if you are rushing out to get your own PV panels installed, just remember the system requires huge footprints because the efficiency rate is very low (15%-20%). Efficiency measures how much of the amount of sunlight captured that is converted to energy. You will require more panels than your roof space allows. Your downside risk is asset obsolescence. Panel costs are still on the down trend, and there seems to be breakout technology that promises improvements in efficiencies, some say up to 50%. The mathematics stands unless oil price plummets in the future.
Or you can go for a PPA (power purchase agreement) with an intermittent generation provider.
Whether your own installation, or a PPA, both will still require on-grid purchases for extra power and backup. Bear in mind this will be with SP services at tariff. If retail rates become competitive again, you will miss out on this.
IGS Retailers' green plans will always be higher than brown plans:
What about the rest of us who do not have a roof, nor a heavy consumption for a PPA? If you want solar, IGS retailers offer solar (green) plans. But here's the rub. The green plans of IGS retailers are always higher than their brown plans. Unfortunately, due to current high gas price situation, not all retailers are putting their rates on their websites. Here's how it looks :
Current tariff is $0.2794/kWh (all rates exclude GST).
Sembcorp - Brown 12 mth @ $0.2793/kWh : 100% Solar 12 mth @ $0.31.66/kWh
Sunseap - Brown - no quotes : 100% Solar 6 mth @ $0.4200/kWh
Just Electric - No quotes
Cleantech - No quotes
If solar is now so much cheaper than brown energy, why aren't retailers pricing green plans lower? To understand this, you need to known how solar pv generators are paid and the marketing pyschology of the retailers.
Brown power, ie from fossil fuel plants, supply to the SWEM is on auction basis every 30 minutes. All plants despatched will be paid at the same highest offer price accepted at the auction. To this price is added an additional cost, depending on where the plants are connected to the node into the grid. The nodal price is the auction price (common to all plants) plus the nodal cost (differentiated). The weighted average of the nodal price is the USEP.
IGS Market Participants export their excess to the grid and are paid at the nodal price. The parity chart above shows the wide gap between solar LCOE and USEP, indicating huge profit potentials. This is a 2019 computation. With gas prices now doubled, the USEP line should be much higher, indicating an even high solar power profitability. So why aren't Sunseap and Sembawang pricing their green plans lower?
All retailers purchase electricity from the SWEM at wholesale spot price, which is the USEP + a small market administrative fee. They sell competitively to consumers at a wholesale price + margin formula. For green plans, retailers currently are theoretically able to sell anywhere between the wholesale price and their LCOE. The retail side may make a loss, but on consolidated basis, the solar company can still make a net gross profit. But there is no reason to price green plans lower if they can sell at market prices. Electricity produced has to be consumed immediately, thus it is a market where supply = demand. Selling below wholesale price means incurring an opportunity cost at consolidated level.
The only reason the retailers may sell green plans below market price is if they want to build market share. Obviously this means they need to cap it at their output level. At the moment, solar energy composition of the SWEM by Market Participants is only a tiny fraction. So market capture by selling green plans low is not an available strategy.
On the contrary, green plans are priced higher as a premium product. Purchasers of green energy are those committed to doing their small part to save the Earth, and corporations adopting social responsibility policies that incorporate sustainability plans. The additional cost of green energy is valued as having promotional trade offs.
Green plans from non-IGS Retailers :
These are retailers who have no production of any solar power. I do not know which non-IGS retailers are selling green plans now. Iswitch, which has since excited the market, used to sell green plans. The underlying mechanism of buying/selling green energy is the use of REC (renewable energy certificates). Non-IGS retailers purchase these RECs so they can package their sales as green energy. (Carbon credit trading requires an entire blog. More on this in a future blog). The point here is these non-IGS retailers purchase from the SWEM at spot wholesale prices. They have the same price constraints as IGS retailers. Their green plans will also always be more costly than brown plans.
Rounding off on a negative note - bottom line is, don't expect to buy cheaper solar power from the grid under the present system.
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