Solar's death spiral

Early voting in the Western Australian (WA) state election started this week, with the volume of policy announcements – almost all of which involve significant spending commitments, as has become an all-too frequent occurrence during recent state elections – ratcheting up to another level.

But there was one in particular that stood out to me—the governing Labor Party's promise to subsidise home batteries:

"Beginning on 1 July 2025, one-off rebates of up to $5,000 for Synergy customers and up to $7,500 for Horizon Power customers will be available, with value to be determined by the size of the battery.

To be eligible, batteries purchased must meet Australian and local grid standards and can include existing recognised brands as well as locally manufactured batteries.
...
The scheme will be complemented by a no-interest loan program, with many households expected to be able to access both."

The immediate effect of this announcement, given that Labor is almost certain to win the election, was to undermine the very industry it was trying to support:

"Solar panel and battery installers have welcomed the subsidy but say the announcement that the scheme would not begin until July 1 has thrown the sector into chaos.

They expect to have little to no business for the next four months if Labor wins the election and customers wait until the rebate is available.

'A lot of people may leave the industry before the rebates come on board because there's no business in solar until those rebates actually happen,' Chris Dodd from electrical and solar wholesaler Lawrence and Dodd told ABC Radio Perth."

I hope Premier Cook has a plan in place to deal with that unintended consequence – four months is a long time to go without revenue! But that's not what I wanted to discuss today.

A solar-heavy grid needs storage

WA has the highest rate of rooftop solar in the country (perhaps the world), which was driven in no small part by previous government policies:

"The history of solar rebates in Australia traces back to May 2007 when John Howard introduced mainstream solar rebates. At that time, a 1.5-kilowatt system cost around $12,000, but with Howard's $8,000 rebate for every household, it brought the cost down to approximately $4,000. This sparked a boom in the solar industry, making solar systems more accessible to households."

That subsidy, combined with the WA government's generous feed-in tariff of an initial 40 cents per kWh exported to the grid, saw demand for home solar photovoltaic (PV) systems surge. Today, nearly 40% of WA households and businesses have rooftop solar PV systems, leading to the infamous duck curve:

All that rooftop solar generates energy at the same time, creating two issues. First, the midday excess disrupts traditional power plants' frequency and voltage, as they weren't designed to ramp up or down quickly. Second, evening demand peaks precisely when solar output fades.

Unlike the rest of Australia, WA's geographic isolation means it doesn't have the luxury of other states to prop it up during these tough times. So, it needs to find a solution, and one option is to install a bunch of batteries to shift the curve.

Batteries to the rescue

If you were going to subsidise home batteries, then a no-interest loan program is probably a decent complement, assuming it can also be used for solar (it wasn't specified). That's because most households with solar panels are relatively well-off, so if you're just subsidising batteries then it becomes quite a regressive policy – not a good look for the "Labor" party!

Alas, the scheme also includes a bit of industrial policy that will create a few highly-paid union jobs and one day may produce a few very expensive batteries (WA's huge resources sector competes for the same labour, making domestic manufacturing problematic to say the least):

"[A] re-elected Cook Labor Government will also fund a $50 million Battery Manufacturing Program of direct grants and low-interest loans."

But let's put those issues aside for now and focus only on the batteries.

Initially, getting batteries installed everywhere there's solar will indeed take the strain off the grid. People can store whatever power they're not using during the middle of the day, and then use it or pump it back in when it's needed.

That's certainly a better approach than the current policy of curtailing excess solar generation remotely—a very wasteful measure!

But batteries alone won't solve the problem; you also need effective pricing. And the good news is that the WA government has finally (as of 2024) started using them, with peak-time feed-in rates now fixed at a rate five times higher than off-peak rates.

The next step would be to make those rates dynamic, so households and businesses have an incentive to speculate—i.e. to invest in generation and storage capacity so that they can profit during periods when there has been little sun for several days.

Contrary to popular opinion, such speculation actually reduces volatility because it adds liquidity to the market; in the context of energy, it creates the incentive to generate or import from the grid when prices are low (helping to support transmission costs and legacy generators). It also supports the grid when prices are high, as that's when speculators are most likely to sell any stored energy, pushing prices back down.

Let me give you an example. Under the current WA feed-in scheme, you—as a generator of solar power with battery storage—are indifferent as to whether you export your power today, tomorrow, or a week from now. As long as it's between 3–9pm, you get your 10c per kWh.

But say there's a large low pressure system on the horizon and you suspect that the sun won't be shining all that much for a few days. If WA had a dynamic feed-in rate, prices would quickly rise when the front hit, reflecting the scarcity of energy. Perhaps you could get 30c, 50c, or in extreme scenarios more than a dollar or more per kWh. Not only would that possibility create the incentive for some households to conserve power ahead of time, it would also lead others to consider the weather forecast in the first place, rather than just blindly clipping their 10c ticket each day.

Prices are a powerful tool, and the WA government should consider implementing dynamic pricing to prevent a potential consequence of this new battery scheme before it's too late: the dreaded solar 'death spiral'.

Should I stay or should I go?

There's no question that a battery subsidy will improve the functionality of WA's grid, as it currently exists. I'm not going to get into the details of the incidence of the scheme, or whether it would pass a cost benefit analysis that considers alternative policies. All I'll say is that, at least in the short-run, the primary beneficiaries are likely Chinese battery manufacturers, households once the batteries are paid off, and then the state's grid security.

The grid benefits the least because a similar outcome could have been achieved using only prices: dynamically altering the feed-in tariff to reflect scarcity would immediately change both behaviour and the economics of home batteries, without the need for a $387 million subsidy that could have been better spent elsewhere.

So, this scheme is best thought of as a tax and transfer program, rather than anything to do with grid security. But it will soon be here, and it will have consequences for the grid:

"The adoption of cheaper, cleaner solar power is a welcome development. At the same time, however, it leads to a vicious cycle. The costs of running the grid and paying for coal power fall on fewer people, who then have more reason to opt out, undermining the economics of the whole enterprise."

That "vicious cycle" is known as the solar death spiral, which begins when the cost of rooftop solar + storage (e.g. batteries) starts to rival grid power:

"As grid power costs rise and self-generation costs fall, a tipping point will arrive – within a decade, some analysts are predicting – at which time, it will become economically advantageous for millions of Americans to generate their own power. The 'death spiral' for utilities occurs because the more people self-generate, the more utilities will be forced to seek rate increases on a shrinking rate base… thus driving even more customers off the grid."

If you subsidise batteries and effectively reduce the upfront costs and payback periods of defecting from the grid, two things will happen.

In the short-run, it will ease the pressure on the grid during 'normal' times as the few people with batteries use the grid as a backup instead of disconnecting entirely. Those semi-defectors are able to free ride on the rest of the state, using their own generation most of the time and only pulling from the grid when needed, at prices below what it costs to service their infrequent use.

In the longer-run, it risks bringing forward grid defection. A 2024 paper published in Solar Energy found that defection was a serious risk in "solar-rich locations that have high electric rates", but governments should not try to "discourage on-grid PV systems" – e.g. with higher fixed fees, or the WA government's current policy of forcibly switching people's solar off – as that will only "unintentionally incentivise grid defection".

Basically, the old monopoly economies-of-scale utility model is becoming less relevant because of competition. Not from a rival network of duplicative wires, but from innovation in the form of solar and battery storage.

Thankfully, there's a way out. The solution isn't to fight or block what is quickly becoming a contestable market, but to "design rate structures to encourage solar producers to remain on the grid to prevent utility death spirals", i.e. offer them attractive feed-in rates when it's most needed.

As is so often the case, the cure for high prices is high prices—but first you need to set them free! Let's hope the state government gets the memo, because WA's energy future hinges on pairing this battery subsidy with dynamic pricing to avert the 'death spiral' before too many people choose to defect.

Have a great day.