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Can utilities adapt quick enough to save their business model?

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At the launch of the CSIRO’s Future Grid Forum in Sydney last Friday, a senior executive from one of Australia’s major network operators had a confession to make: He had a solar PV array on the rooftop of his house. And he felt terribly guilty about it, because he thought he was sponging off other network users.

It’s a thought that is surprisingly common.  Grant King, the CEO of Origin Energy,  told RenewEconomy in August that solar was “free-riding” on the grid, because solar PV users were not paying their share of network costs.

It is, of course, the sort of accusation that is levelled by incumbents of all industries whenever a disruptive technology emerges – be it in telecommunications, media, or even photography.

A grid. Are electricity incumbents just a bunch of squares, or can they adapt?

A grid. Are electricity incumbents just a bunch of squares, or can they adapt?

In the case of the electricity industry, decades of regulated returns and government fiat has encouraged the incumbents to think they have the right to extract from the consumer pre-determined returns from all the investments they have made – no matter how rash, foolhardy or un-necessary those investments have proven to be.

Around the same time as King was making his comments, Jon Wellinghof, the chairman of the Federal Energy Regulatory Commission (FERC), which regulates utilities in the US market, warned that solar and storage would soon “overtake everything” and mean pretty much “game over” for the traditional business model of utilities and generation companies. The electricity market would finally shake its feudal-style domination and become a consumer-driven market.

In Australia, utilities by and large don’t want to buy this argument. They couch their anguish about sunken costs in the form of concern for the less fortunate. If too many “rich people” take up rooftop solar, or even battery storage, and are not penalised for doing so, the argument goes, then the burden of the network and other costs will fall on others – either low income households, renters, or apartment dwellers.

It’s a neat attempt to shift responsibility, but it is absolute poppycock. The “less fortunate” have already embraced solar PV in greater numbers than the “rich”. Solar leasing – with zero down payments and immediate bill reductions – will make solar PV even more accessible and attractive, this is just a matter of financiers becoming more comfortable with the product.

Other financing products will emerge. Macquarie Group has just invested nearly $200 million to install solar at zero down cost in a public housing project in the UK, and there is no reason to think that this won’t follow in Australia (which actually has sunshine). The Australian Renewable Energy Agency is doing important work in finding solutions for those living in rented accommodation or apartments. Dozens of community groups are emerging across Australia to provide households and individual the opportunity to do what the energy utilities are failing to do – and accelerate the transition to clean energy.

The incumbents seem to have an unofficial two-pronged strategy to protect their current business models – one is to rely on the “apathy” of the consumer, and the other on regulatory protection. Both, however, are based on historical assumptions. One quarter of households change their electricity supplier each year, and up to one fifth have already put solar on their roof. These are not acts of an apathetic customer base, but a disgruntled one. Moreover, the regulators are (finally) showing signs that they understand that what is going on terms of pricing, and come to the conclusion that the current rate of investment in centralised generation and infrastructure is unsustainable, and they appear interested in finding a solution.

What’s at stake was made abundantly clear by the conclusions of the Future Grid report, which mapped out for scenarios for the future of the electricity industry in Australia out to 2050. The document noted that if network operators and other utilities can adapt quick enough, get the pricing right, get on top of consumer services and new technologies, and offer a value added service rather than a centralised, take-it-or-leave it offering, then they will simply lose their business.

If they don’t get this right – particularly in the pricing – and they are more concerned about the returns on past investments, then the customer will simply look after themselves. The customers will have the technologies to do just this, and some smart operators will move in to package it up for them, should some be as apathetic as the utilities presume.

Interestingly, the Future Grid document suggested that the best way to avoid these scenarios would be to accelerate the move to large scale renewable generation. If consumers are getting clean energy from the grid, then perhaps they will not feel so encouraged to generate their own clean electricity.

But right now, the network operators, the generators, and the retailers are doing everything they can to slow down the uptake of large scale renewables, by having the renewable energy target diluted or removed, and by encouraging the federal government to ditch the Clean Energy Finance Corp and strip ARENA of funding.

Indeed, so much government policy making – at state and federal level – is designed with little else in mind than to protect the interests of the incumbents – from ditching the carbon price, reviewing the RET, ditching the CEFC, stripping ARENA, going slow on energy efficiency, changing tariffs, or dumping demand management mechanisms. They are all based on short term considerations.

I was cleaning out my office this weekend and came across a document called the Queensland Renewable Energy Plan. It was dated June, 2009. By 2020, it boldly predicted, the state aimed to have 40MW of solar PV installed. In less than 12 months, it already had three times that amount, and now that state has more than 1,000MW of solar PV. An equivalent amount of fossil fuel generation in that same state lies closed or mothballed, and plans for yet more put on hold.

Even in May, 2011, another document – called the Queensland Energy Management Plan, predicted that peak demand in the state would double by the end of the decade. It now seems clear that peak demand will likely fall, but network operators still use that document to demand consumers pay – not just for the $15 billion of investment built on the basis of faulty predictions – but for a regulated return for the lifetime of those assets.

Now, at the end of 2013, the network operators and generation companies are displaying a similarly blinkered view of battery storage.  ”There is a long way to go before they disconnect,” said Origin Energy’s Phil Craig on Friday. But there is every reason to believe that battery storage will exhibit as rapid an uptake as solar PV.

In Australia, some “off-grid” systems are about to be offered to suburban households for little more than $30,000, one for the “early adopters” but not completely out of the ball-park. In the US, SolarCity has struck a deal to use the battery storage systems of EV maker Tesla to provide storage for households, and are providing the first leasing contracts to take households “off-grid”. The Chinese corporate giant BYD intends to use batteries from the electric vehicles it produces in home storage, bringing down the costs substantially.

The network operators, retailers, and generators do not have two decades to prepare and adapt, as the Future grid forum suggests. They have just a few years. They need to stop feeling guilty about their solar panels, and act before their customers take their business away from them.

 

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  • Keith

    Hi Giles
    I think that was 1000MW solar (not 1000GW), but thanks for the great story.

    Is there any evidence that anyone in Government (State and Federal) is reading any of this? I suspect you can add governments to the endangered species list if they don’t address the obvious.

    I remain hopeful that even Tony Abbott will realise by July 2014 he mustn’t stop pricing carbon and trying to dismantle everything. If he doesn’t the government will be like the network operators, but his stage is not only the Australian community but also the world.

    • MoreBikesPlease

      There are lots of cross-subsidies on the grid.

      Perhaps a farmer at the end of a costly SWER line feel guilty about “sponging” off other users?

      How about a family with whole-house aircon blasting at peak times?

      The solar subsidy has already been addressed by cutting feed-in tariffs. Nowadays rooftop solar installations are subsidising other electricity consumers by pushing down wholesale prices and delaying transmission upgrades.

      • MrMauricio

        Agree with you-solar owners pay their daily network connection fee the same as anyone else!!It costs the network$7500 for every aircon installed! Is this executive guilty for keeping peak power costs lower for everyone else on the grid through his solar panels which generate most during peak hours?Is he feeling guilty about saving tonnes of CO2 from being emitted and contributing to the menace of Global Warming?Is he guilty about feeding excess power to his neighbour and saving “network and transmission losses?Guilty????Give me a break!!!

    • Giles

      HI Keith. Yes, lots of evidence that politicians, advisors and other policy makers read this. I think the CSIRO report is actually a good sign that what’s at stake is being absorbed, even if the pace if not being appreciated. The fact that some of those involved are also on the Energy white paper advisory panel is also a good sign. But let’s not expect miracles from the government.

  • suthnsun

    “One quarter of households change electricity supplier each year”
    I am amazed that the churn rate is this high – it implies to me that around 50% of electricity customers will look seriously at any proposal presented to them to take storage and solar and disconnect. Once someone packages it in a marketable form there will be a wholesale move away from the grid, this will take the residential and commercial market by storm.
    Environmentally it’s a disaster waiting to happen but looks unavoidable. (mine to battery up front emissions and toxicity will take a long time to pay back for non-aggregated supply and demand.)

    Personally I hope they (electricity industry) see sense and get on board with consumer focussed marketing of low cost renewables and aggregated storage.

    On the other hand, in the long term, suburbs without poles and wires and clean silent solar powered light electric vehicles sounds quite romantic.

  • sean

    I am very surprised that the energy companies see salvation in residential demand.

    Australia has incredibly low density, perfect for solar. Why do they choose not to fight where they have the advantage, supplying industrial customers with large amounts of power.

  • Zvyozdochka

    Are there any more gullible US-utility companies that want to buy what will be stranded state-owned utility assets? Qld and WA especially? Don’t resist the sell-off Qld or WA people. Get the money quick.

  • Diego Matter

    Giles, and everyone else for that matter.

    Could you please stop giving these tips away for free. Why is everyone concerned about the incumbents demise? I would say they truly deserve it for being asleep for so long. They are not forced to see the future and to adapt. They just have to play in the market and survive or drown.

  • biroses

    The debate needs to shift to the question ‘ who are the (electricity) consumers and what do they want?’ Here in WA it’s about 30% residential and 25 % commmercial, the rest big industry. It’s impossible to get exact figures but that’s derived from Western Power revenue data.

    Giles, your case applies to residential and to a lesser extent commercial – small consumers dispersed on the distribution grid. But in WA at least 40% of SWIS electricity goes to big industries – like bauxite and mineral sands mines and processing plants – who want electricity 24 hours a day. They want it cheap and are used to having it that way (I estimate 6- 10 c/ kWh delivered to their plant, but it’s a secret – ‘commercial in confidence’) They don’t want to pay 20c plus for renewables with battery storage. That’s why the BCA (made up of the CEO’s of these big resource industries) are so desperate to remove the C price and keep their electricity cheap – at our expense. And that’s why the WA Govt are so desperate to protect their coal fired power stations that were funded by taxpayers in the past. (the NEM states are a similar story).

    Yes we small electricity consumers are currently subsidizing big resources industries with chap bulk amounts of electricity. The Coalition are funded by these same industries and that’s why they want to remove the C price; it hasn’t affected voters (small scale consumers). The miners and processors know that their alternative for big loads of 24 hr electricity is self generation using diesel and gas at a price of 15- 30 c/ kWh, or horror of horrors renewables, also in that price range. Unsurprisingly they would prefer 6-10c from Govt – delivered coal.

    When will we see and article about this Giles?

    • Giles

      Soon. It’s an important point. Same problem in so many countries.

      • Zvyozdochka

        Giles, the solution is these industries building high efficiency renewable plant for themselves that is excess to their requirements, selling their excess, trading in time-of-day solar or wind at what will be falling future prices. It’s being done in Germany now. A concerted effort in CSP w/storage by INDUSTRY would solve their energy supply problems. I’ve had these discussions with big miners – they understand they COULD get together and do it themselves, creating a new generation industry for themselves, but would need help in distribution (which we already pay for).

        Any company relying on the current fossil fuel generation prices (especially gas) is screwed. They aren’t by-the-way, but can’t see the wood for the trees on alternatives.