Milne: Regulatory fiat last refuge for incumbent utilities

Greens Leader Christine Milne has told the incumbent electricity industry what it knows, but it doesn’t like to hear –  its business model is changing irrevocably, and the only hindrance to that change is the ability of those incumbents to protect themselves with regulatory barriers.

In a stunning speech at Smart Grid Australia conference at Parliament House in Canberra on Wednesday, Milne said battery storage is set to become the most disruptive of all technologies to centralised electricity networks.

“Battery storage will be what mobile phones were for our telephone exchanges,” she said.

“The choice for law and policy makers is whether to usher in and prepare for these technological changes or resist them for as long as vainly possible so that incumbent industries can squeeze out as much profit as they can before consumers snip the wire and leave energy network companies and their assets stranded.”

The disruption to existing utility models seems to be apparent to everyone, but it’s impossible to find many senior executives in the Australian utility industry, or in the mainstream parties to admit it. Some have, such as Queensland’s Ergon Energy, and Energex.

But Milne’s comments are not part of “green” subset of ideas. US Energy Secretary Ernest Monitz said overnight that battery storage advances is challenging the 100-year-old monopoly utility business model because an increasing number of customers are reducing their dependence on the grid, turning to solar panels and battery storage as a way to reduce their bills.

“Storage is a huge deal,” Moniz told Bloomberg in an interview. “It’s pretty dramatic. They (battery technologies) are growing very, very fast.” Moniz’ predecessor Stephen Chu has said the same thing, as has the head of the energy regulator in the US, and the respective heads of the largest generation companies and utilities.

In Australia, however, the Abbott government – through its energy white paper – and many of the state governments, are acting as though nothing will change or challenge the primacy of centralised generation. Of course, the state governments have reason to think this way because they own the assets, and sit as regulator, owner and price setter. The Abbott administration is simply guided by ignorance and ideology.

Milne’s speech focuses on the on the opportunities raised by rooftop solar, battery storage, and even going off the grid  – behaviour that will ultimately be determined by the response of the incumbents and the regulators.

It is an excellent speech. It appears that Milne is the only federal leader that seems to have a grip on the technology and business developments. Even the ministers – at state and federal level with the honourable exception of Simon Corbell – don’t appear to have a clue.

So here it is in full:

Smart grids and renewable energy have already won. It is just a matter of how long the current beneficiaries of our electricity system can successfully resist the inevitable.

Cast your mind back just five years when battery storage technologies were a fringe possibility while clean coal was supposed to be just around the corner. Time has turned these anticipations upside down. Last week, the coal mining industry abandoned its voluntary levy to support R&D on low-emissions coal.[1] The industry finally realised that its window of opportunity has been shut for a long-time. Only Martin Ferguson (Peter Reith’s new best friend) still holds out hope.

Meanwhile, its clean energy competitors have been making technological advances in leaps and bounds where battery storage is set to become the most disruptive of all technologies to centralised electricity networks. Battery storage will be what mobile phones were for our telephone exchanges.

The choice for law and policy makers is whether to usher in and prepare for these technological changes or resist them for as long as vainly possible so that incumbent industries can squeeze out as much profit as they can before consumers snip the wire and leave energy network companies and their assets stranded.

This will be the main theme of this talk, how law-makers and the electricity businesses themselves are behaving right now, at the beginning stage of this energy revolution as an indication of how we might collectively shape the energy infrastructure that is central to the future prosperity of our national economy.

(Part 1 outlines what the future energy grid will look like, part 2 outlines the main obstacles to it happening, part 3 is on what the audience can do to help change the system).

1.1 THE FUTURE OF THE GRID

What we all know is that massive change in the electricity grid is inevitable, the only question left to examine is how we want it to look and operate. What is clear is that we cannot just dump wind and solar on top of business as usual – if we want maximum efficiency, the entire distribution system must transform.

The grid is slowly becoming smarter, consumers of electricity are becoming producers of electricity, soon most of us will no longer be passive recipients, but we will actively control when and how we use or export our energy either from inside our house or by setting it remotely.

Electrons will no longer have to travel 200 kilometres from a central generator, but with residential and commercial dwellings turning into mini-generating plants, we can end up purchasing electrons from a neighbour or the corner shop which is producing more than it needs at that point in time. In turn we can sell our electrons back to them when they need it and we don’t.

1.2 GETTING OFF-GRID

The CSIRO’s recent ‘future grid forum’ brought together 120 representatives of industry, community and government to inform and inspire the national conversation about where our electricity grids are heading. One of the 2050 scenarios that was put forward was the ‘leaving the grid scenario’.

The combination of energy efficiency with solar panels (with poor feed-in tariff rates) and energy storage will make it so financially advantageous to leave the grid that the forum anticipated 1 in every 3 houses will have completely disconnected from the grid by 2050. They also modelled that this change would result in a share of income spent on electricity bills at 2.3%, down from 2.5% currently.[2]

The future grid forum’s prediction was for getting off the grid to be economically viable around 2030-2040. This seems very reasonable but also quite conservative as 2020-30 is now appearing a realistic possibility. Around the world, markets are desperate for this technology; individuals want to take advantage of it and more importantly, developing countries will be able to pull themselves into energy security without the cumbersome and expensive poles and wires being erected across the landscape.

These big markets require high levels of production which drives costs down. We all saw how the plummeting costs of solar panels has thrown out expected forecasts right across the electricity market and also for fossil fuel generator’s profits. The same plummeting costs of battery – in combination with solar – is already happening faster than expected and uptake rates are already rising. But the effect of disruption to established systems will be far more significant that what rooftop PV has already achieved.

With such dramatic change comes powerful resistance.

2.1 THE OBSTACLES TO A SMART GRID

These images of the future grid are not a far-off vision. What all these possibilities have in common is a diminishing role for distribution companies in the supply and monitoring of electricity.

These businesses must know that the writing is on the wall, but their commercial behaviour is more bullish as a result. $42 billion has been allotted for investment in network assets from 2010-15 even as electricity demand is falling.[3] The Australian Energy Market Commission projection that network investment will increase by $240 billion by 2030 highlights the potential cost of business-as-usual.[4] This behaviour is just pushing consumers away faster and stronger in what they have coined “the death spiral”.

The rapid expansion of distribution assets has shot up power bills and will further prompt people to get off the grid which means that the monopoly distribution companies cannot extract their expected rents from them. If this starts to happen en masse – as it surely will –  there are only a few options as to how they can respond. Distribution companies can recoup more money off less people, charge people for leaving the grid or write down the asset values of the distribution companies.

A cynic will immediately cross off the last option as possible, especially when state-owned distribution companies are being fattened up for privatisation or are being relied upon to deliver ever-growing dividend streams for state treasuries. So that leaves either charging a shrinking pool of customers more money or implementing an exit fee – The Greens will fiercely oppose any contemplation of these options. The distribution companies over-invested and like all businesses, they should wear the consequences of their decisions, just because their investment environment is currently a very safe one.

Turning now to the challenge that new technologies will face in taking on the powers that monopoly distribution companies enjoy.

2.2 MONOPOLY ON THE GRID

Going back to first principles, the motivation of distribution companies is at odds with the motivation of consumers. Distribution businesses earn a set rate of return on their regulated asset base – the more they build, the higher their profits and the higher our bills. The rapid expansion of air conditioners across Australian properties was a blessing for distribution businesses who were able to expand their asset base to meet those 40 hours of peak demand each year.

But then along came wind and rooftop solar which has put a halt on any further expansion plans by shaving off the peaks. Despite stories concocted on cherry picked data in The Australian,[5] renewables have dulled the extremes of peak demand in the recent south-eastern heatwave, particularly when compared to the loads required in the 2009 heatwaves.

Meridian Energy commissioned SKM to do a study on wind’s impact during the heatwave showed that wholesale prices were reduced by 40% (on a consumption weighted average basis) during the heatwave.[6] It also showed that it was fossil fuel generators that were unreliable with 3 generators going off line during the heat wave (Loy Yang A3; Loy Yang B1 and Torrens Island B3.

So renewables have piqued the ire of the monopolists. The catch is that distribution generation and utility scale generators require the approval of the monopolists to be connected to the grid to sell their produce to the market.

Distribution businesses have never previously needed to be equipped to frequently connect third parties to disparate parts of the grid. It costs them money to investigate options, it is in their interests to delay and frustrate applicants and even if an invoice is produced, it is a mystery as to what costs have gone in to produce that amount and there is no ability to require the distribution company to justify its costs.

Energy Made Clean are a Western Australian company developing a pipeline of large scale solar projects since 2009. They approached the distributer, Western Power who advised them of various connection points so Energy Made Clean acquired those recommended sites next to substations, attracted equity and finance to make the projects happen and are ready to sign a Power Purchase Agreement once the connection approval has been obtained. Their application was submitted in 2012 and they were recently informed by Western Power that a connection will occur after 2018 because they have been placed in a new queue system.

Meanwhile in Victoria, Greens MP Greg Barber raised the issue in State Parliament late last year, citing 22 instances in western Victoria where the local distributor Powercorp had either rejected outright applications by homes and rural businesses to install solar, or had forced the array to be downsized. He cited an application for a 30kW system was approved only for 15 kW, an 8kW proposal was refused in total, another 8kW array was downsized to 3kW, and a 6kW proposal was downsized to1.5 kW.

There are no appeal rights and depending on the state regulatory framework, the state Minister is the gatekeeper of information, as Greg Barber said: “The Liberals seem to love red tape when it gets in the road of renewable energy development.”

3.1 WHAT NEEDS TO CHANGE

To usher in this inevitable change, increase efficiency and productivity while reducing the emissions created by transmission losses and centralised power, there needs to be a wholesale re-write of the National Electricity Market Rules and state legislation that regulates these monopolies to ensure they are open and transparent about dealing with their competitors.

They should be required to openly publish the points on the network where there are constraints and where there is capacity and be required to establish dedicated connectivity teams with transparent and appealable processes. As the Greens argued in our parliamentary review of electricity prices:

“The business models of the networks needs to be re-cast so they are no longer engines of energy growth but providers of energy services. Regulatory arrangements should focus on rewarding businesses for supplying services, focusing on providing returns for valued services and not for the number of assets built.

Reforming the regulations and incentives of the NEM, complemented by reforms outside the NEM, could re-direct billions of dollars of investment from fuelling more energy consumption into building a ‘smart grid’, financing energy efficiency, demand management and renewable energy and lowering electricity bills.”[7]

The real crux in this problem is that State governments through CoAG are responsible for changing the NEM rules, but they are the direct beneficiaries of the current order. As Fairfax journalist Michael West documented:

As electricity prices have doggedly marched higher since 2009, so have dividends to the states. Last year the NSW government booked $1.36 billion in profit from electricity distribution and transmission. That was up from $771 million the year before. The Queensland government’s take meanwhile has risen from $602 million to $795 million. The irony is that during this time, less energy was actually delivered in NSW. In Queensland consumption was flat. Consumers paid more for less in Victoria.[8]

This presents real problems, if the states want to privatise their networks, an efficient change of NEM rules would reduce their sale price. If they wanted to hold on to them, the returns to state treasuries would not keep climbing as they have been if they agreed to rewrite the rules.

3 WHERE TO NOW?

While many in the room may have made submissions and will be waiting eagerly for the government’s Energy White Paper, don’t expect too much forward-looking vision on the future of the grid. Its preoccupation will be in trying to sustain ever-higher levels of fossil-fuel exports and slowing down the deployment of clean energy which is destroying the viability of incumbent generator’s business models.

The real opportunity will lie in the government’s ‘root and branch’ competition law review which will examine, among other things whether “the operations and processes of regulatory agencies are transparent, efficient, subject to appropriate external scrutiny and provide reasonable regulatory certainty.”

A draft terms of reference was sent to the States and it is being finalised now. Submissions will soon be sought and it is really important that all those working in this industry use this opportunity to break open the uncompetitive structures of these distribution monopolies.

If the distribution companies were not so comfortable in their current position, they would be investing in these emerging systems that are going to transform electricity delivery to households and businesses, but the fear that they will cannibalise their old business model will stop them, just like it did Kodak when the digital cameras they invented were emerging to displace film. If distributers don’t aggressively get behind these inevitable changes, their entire business will be swept aside.

What we have to ensure is that if they refuse to change their business behaviour and the regulatory authorities and state governments refuse to change the NEM rules to align with these emerging changes – consumers aren’t left carrying the bucket, but stubborn distribution companies and state governments are.