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WA grid may become first big victim of “death spiral”

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The chances of the West Australian electricity grid becoming the first to fall victim to the so-called “death spiral” for utilities appears to have increased after it was revealed this week that the gap between the cost to generate, transmit and sell electricity and the charge to consumer has widened.

The “death spiral” is a term coined by utilities in an attempt to defend their business models against the rise of the “pro-sumer”, customers who are no longer just buying energy but who are sourcing cheaper electricity from their own generation, usually rooftop solar, and cutting demand from the grid.

swisThe WA grid, however, has helped create its own death spiral because it has never recovered the cost of its largely fossil-fuel fired electricity from the consumer. The costs keep rising, and now it has emerged that electricity demand has fallen so low that the major utilities may be forced to pay for fossil-fuel generation they will never use.

It is hard to imagine a more unsustainable situation, and it is quite possible that the WA grid is the most at risk in the developed world from the emergence of cheaper solar and storage solutions.

Synergy, the WA Government-owned electricity and gas retailer that has just been merged with the government owned generator Verve Energy, revealed this week that the gap between consumer bills and the cost of delivery through the grid had blown out to nearly $500 million in the 2013 fiscal year.

This is despite the fact that residential power prices have risen 70 per cent since the Barnett government came to power in 2008. Synergy told the Upper House financial estimates committee that consumer bills would have needed to increase by another one third in 2012-13 to match the cost of production.

Synergy CFO Karl Matacz told the committee that solar panel installations, which have grown from zero to 130,000 in just five years, continue to grow at a rate of more than 2,000 a month, despite the removal of feed in tariffs. Indeed, the company’s annual report released late last year put the rate of solar installations at 2,600 a month, or more than 31,000 a year.

What this shows is that rooftop solar PV is becoming a “no-brainer” for households in the state. The question is whether it becomes a “no-brainer” for the utilities, and the government owners, and whether they can see how they can adjust their business models to suit.

The new CEO of Synergy, Jason Waters, was asked by committee chairman Ken Travers to what extent the merged utility was vulnerable to a “death spiral” scenario.

“I don’t have an answer to that question until we get the ability to properly consolidate this business,” The West Australian newspaper quoted Waters as saying. Waters noted that the merger had only been completed at the end of 2013. He was previously head of Verve.

“Before I make any comments about death spirals or those kind of terms that you’ve bandied around, we’ve got to unpack this business and get a handle on our own cost position and to work out what efficiencies we can bring to bear in light of the merger structure.”

The former CEO Trevor James noted in the most recent annual report that the fall in consumption and the (related) uptake of rooftop solar has created a “step change” in the energy industry.

More than one in ten households in WA had installed rooftop solar, and – coincidentally – the average household electricity consumption has fallen 10 per cent in just the last two years to 5,531kWh.

“It is a clear signal that we need to adjust our business model to account for lower energy sales,” James wrote at the time.  “It’s a very new but very real impact to our business and has highlighted our need to be flexible and contemporary in our response to market changes.

“Customers are doing more than simply buying energy; they are seeking our advice and practical guidance on managing their energy consumption and how to reduce their costs of production.”

As the company’s chairman Michael Smith warned in the annual report, the profliferation of solar and th smarter use of energy by its customers mans that th utility is now facing a situation it could have barely believed. “We have experienced what we previously considered hard to imagine: an actual fall in sales,” he wrote.

So much so, Smith added, that the company was now close to its “take or pay obligations on the supply side..” What that means is that if consumption falls much further, the utility will be forced to pay for generation that it does not use.

If the WA government was to lift the consumer price to reflect the actual cost of generation and delivery, this would put the retail price at close to 40c/kWh. That compares to around 15c/kWh for rooftop solar PV. The difference  provides an awful lot of room for alternatives such as storage, and even micro-grids to fill the gap.

It is clear what the end-game is, what is not clear – for Synergy and other utilities around the world (see our Hawaii story for another illustration) is how to get there.

It is for that reason that the decisions  made in WA will be watched with great interest.

 

 

 

 

 

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  • Chris Fraser

    Could they use an aluminium smelter ?

    • RobS
      • adam

        Wow that was interesting.

        Be good to see more of the financials e.g., where 15-120k a day increased revenue came from.

        Also, how does a company forecast outputs and revenue if they’re production is linked to utility demand response and can’t be forecast (well?).

        I thought that was one of biggest downsides for demand side mgt is you take another layer of control from a business which becomes too hard.

        • RobS

          Aluminium smelters are well placed for demand management because of the enormous thermal mass in play and the huge amounts of power they consume. You can ramp up and down the power being put into the pots by a substantial degree over the course of seconds to minutes and the line simply barely notice the change. Yet a gas turbine power plant that could provide 70Mw of instantaneous load following control would cost ~$65 million dollars and still have fuel and maintenance costs on top of that, that is a pretty major financial incentive to voluntarily hand over a degree of control over the pot lines power input. instantaneous load following is a highly valuable commodity for a utility and they pay top dollar for anyone who can supply that service. In terms of forecasting outputs and revenues, as a new service it will take some time to become proficient at forecasting the exact effects however it shouldn’t be hard to design he terms of the contract to ensure a significant net return to the smelter operator.

      • JonathanMaddox

        Inspired by that thought, Donald Sadoway considered the idea of a reversible aluminium smelter. Turns out that’s not quite possible, but it did lead to this … http://www.ambri.com/

  • Peter Grant

    What a joke from Mike Smith – there is nothing ‘cost reflective’ about the WA electricity market. The various players would do well to ween themselves from this figleaf that has covered massive cross subsidies, imprudent network investment and steep price rises in recent years.

    Some of the most distorting WA subsidies include:
    The Tarriff Equalisation Contribution (TEC) paid by customers connected in the SWIS Southwest Interconnected System) to those in remote areas through the application of a uniform uncapped tarriff, provides uncapped consumption subsisdies of up to many thousands of dollars to some of the wealthiest postcode in Australia (in the Pilbara).

    Cross subsidies within the SWIS are also massive.

    As has been covered extensively on Renew Economy the uncapped uniform (A1) residential tariff provides a general subsidy from frugal and low energy users to those who are wasteful and have high peak loads.

    The current pole replacement program is unique to WA and represents the particular folly of policy makers rushing in. The massive cost of wholesale replacement of hardwood poles by treated poles in the SWIS, is a classic example of paying for yesterdays problem tomorrow. The poles were replaced in the name of safety following a series of poletop fires and an auditor generals report

    The political response to an Auditor generals enquiry was myopic, resulting in a scapegoating of the Western Power CEO and a wholesale pole replacement program as the ‘solution’. The replacement program seem to be the kind of debacle that one would expect from a politicised and rushed initiative. Not only have perfectly serviceable poles been replaced, but the funds were not able to be considered to impliment technically superior solutions (such as co-payments for undergraounding, or remote area power).

    The program has also seen many poles reinforced with steel supports one month only to then be replaced a few months later.

    Similarly to other States energy policy development is deeply conflicted in WA. Following the demise of the WACOSS utilities advocacy program this year (Public Utilities Office (PUO) funded) there is no publicly supported consumer advocacy in Western Australia. Everyone gets a say in WA – except the consumer.

    Moreover, there is opacity about the take up of rooftop PV, with the PUO in ongoing denial about both the elasticity of demand for grid electricity and the magnitude of potential cost drivers for rooftop PV.

  • barrie harrop

    ” distributed energy” is coming and expect the grid in the near future will be just a back up.

  • MrMauricio

    With a leader like Barnett dont expect any forward looking policy-just an attempt to penalize those who are leading towards the future. Just a head in the sand denial mentality which will cost the state dearly in the long run.

    • Crama

      It is always a head scratcher for me as to why voters keep electing such knuckle draggers like this Barnett. I guess they’re fearful of change.

  • Alen

    solar PV just makes too much sense in Australia and the population has finally realised this. Don’t whine and blame the consumers for making smart and logical choices, instead be part of this change and incorporate new technologies to ‘keep up’ with modern times. Archaic networks that rely on centralised power generation are not sustainable, as evidence shows, so invest in concepts such as smart grids that utilise decentralised production and use many of the new technologies out there. Aiming to prevent change is and will never be a good business strategy, keep up or get left behind and go broke.

  • CoreyAnder

    Once upon a time electricity production and supply seemed like it was most efficiently run as a large public natural monopoly. However, the risks of resource depletion, affordability, climate change and alternative generation technologies undermining that business model needed to be fully appreciated and planned for early in order to maintain a cost effective supply.

    The shareholders of these natural monopolies have to suffer the consequences if their business executives stuff up. For the public monopolies if the executives fail to plan for change the citizens will have to pay the price of redundant infrastructure etc. For the private businesses the shareholders will rightly have their investment devalued.

    Politicians now have to reassess where the best interests of their supporters lay – in the emerging cleaner cheaper technologies that help to empower individuals or the expensive dirty old technologies that are killing our future.

    Surely, a no brainer – unless you and your mates are the private shareholders.

    • Chris M

      Once upon a time, the horse drawn carriage was the most used way to travel to the train station for interstate travel.

  • Michel Syna Rahme

    Dear Australian utilities.

    I’m going to sleep soon, and be rest assured, the AC is off, and all power switches will be switched off at the wall. Tomorrow when I’m at work, no power will be used and you won’t be making any money from me tomorrow because the solar system will cover the power used by my efficient fridge. Ask yourself Mr Utility, what can Tony Abbott, and Colin Barnett, and Campbell Newman, and Barry O’Farrell, and Ted Ballilieu do about that?

    You and your cohorts want to support a campaign of propaganda and misinformation do you, and spit in the faces of our good scientists? Do you think we will forget this? Do you think filling our crappy commercial tv stations with American violence, and terrorist infatuations, and right wing fluff will distract Australians? Ha ha yea good on ya – you are a minority betting on ideology against a majority within the grassroots movement only really interested in the facts!

    • Robert Johnston

      Michael, I support your sentiment 100% – but don’t be naïve. What they can do is slug you $2k/y to connect to the network for when its overcast, your battery has packed it in or you need it because its a heatwave and you want to run your AC – independent of the amount of energy or time you use it – and if you decide to go totally off grid they can still decide to slug you anyway in the same way that in NSW for example water utilities charge a compulsory “availability” charge for their network – whether you connect to it or not. The challenge for consumers is to make the government understand that these options are not acceptable and for consumers and utilities to find a solution together rather than the us versus them self interest mentality that currently prevails. As much as I personally think networks are a bunch of antiquated fossils who can’t see the future due to an unwillingness to accept the status quo cannot continue, the reality is that without a network in some shape or form consumers will pay more for electricity or have to make do with a less reliable supply. Personally, I can probably live with a less reliable supply – to an extent, but many will not.

      • Michel Syna Rahme

        “The challenge for consumers is to make the government understand that these options are not acceptable”. Yep!

        I think it is naive of retailers and some civilians to think this outdated “business as usual” model will continue, as I think its a little naive to think the retailers want to sit in a circle of love and work together instead of chasing profits for their unethical shareholders! Wake up friend, it is us vs them otherwise what pressure will they have to change.

        If you can live with a little less reliable supply, as I and many others, that’s a good start. But “less reliable” may not be necessary – what is necessary is a complete overhaul of how the grid is managed and developed from here – and that includes new retail providers offering different ways of doing things, and also communities coming together and combining resources, buying back grids, creating micro grids of their own etc. For the moment we must endure this slow transition, but this slow transition, I have a hunch, can and will turn at some point into a rapid transition – exactly what the fossil retailers are worried about. So no, in my own little way I will not stop pushing, neither will you I hope also.

  • Martin

    “the gap between consumer bills and the cost of delivery through the grid had blown out to nearly $500 million in the 2013 fiscal year”

    That seems to be only part of the story. These $500 million are more than offset by the almost $1.3 billion that the WA government earns from its public corporations. Or, to give an even completer picture, a total of $937 million of what they call water and electricity tariff “subsidies” against a contribution to the budget through water and electricity bills of $1,267 million. In other words, a net tax of $330 million.

    But who are we to question the financial insights of the Barnett government? A government that somehow managed to lose its AAA credit rating during the recent mining boom.

  • Martin

    “We have experienced what we previously considered hard to imagine: an actual fall in sales,”

    On what grounds do these people earn their enormous salaries?

    Surely, by now they could have come up with a plan that combines more renewables, more energy efficiency and a higher demand for electricity. Electrification of transport and selling electricity to the NEM at peak times (through a HVDC line) could be two elements of such a plan.

  • JonathanMaddox

    Utilities did not coin the term “death spiral” to describe what distributed generation could do to them. Here it is, being used in 1985, to describe what a utility did to itself when it jacked up rates to pay for a nuclear power plant (in the context where consumers, or at least municipalities, had the choice to switch to other suppliers):

    http://articles.chicagotribune.com/1985-09-18/news/8503030272_1_braidwood-edison-rate-base

    • JonathanMaddox

      Essentially this “death spiral” describes any situation of overinvestment. Here, both distributed generation (capital investment on the part of consumers, this is genuinely new) and the failure to anticipate reduction in consumer demand as a response to increasing prices, have contributed to excessive grid investment on the part of the utilities. They’ve made an honest mistake and must learn from it — and pay for it themselves.

    • Giles

      Ha. Now that is interesting. Well, they certainly dusted off the term for solar? Agree with the idea that they should pay for it themselves.

  • don anderson

    This is such a classic case of game breaking technology coming to town for Synergy. And it will get worse now that it is also a no-brainer for commercial customers with a range of funding options available at little or no cost. Synergy is a vital player in the current regulatory environment the quicker Synergy embraces the new technology the better it will be for everyone but a cultural shift from
    the current siege mentality will be required.

  • don anderson

    Robert, Storage technology has come a long way and if the utilities seriously think they can charge high fixed prices then people will just go off grid because it will be cheaper in the long run. This will accelerate the death spiral which is what the article was all about. Make no mistake this is happening now. I am currently installing solar + batteries for people living in the middle of towns with a perfectly adequate electricity supply who are sick of Synergy and Western Power. Until Synergy engage with their customers the death spiral will only accelerate.

    • Alen

      Plug-in vehicles whose batteries can be used to feed electricity at night time into the home are already developed. E.g. University of technology Sydney (Szencorp funded) has created a PHEV able to achieve just this here in Australia. Further there are now inverters with in-built storage , such as the new SMA sunnyboy with 2kW storage. My point is, there are growing options for storage and they are only getting cheaper, so if utilities don’t start thinking in a progressive way they’ll find themselves with a lowering customer base. And lifting prices to recoup costs from those unable to purchase battery storage, will lead to a massive backlash from the public. Just look at Ukraine, Egypt or Thailand to get an idea of what an unhappy population can do.

  • Colin Spencer

    There are serious concerns for generating and distributing organisations since full privatisation of the Victorian system. It is fair to assume that retailers of electricity are OK with customers producing solar, but the distributors have a difficult task convincing their generator supplier that there is a big drop in peak load demand because about a million private solar installations are performing so well on those hot summer days when all of the air conditioners are on. My electricity supplier is Momentum, which is owned by Tasmania’s Hydro Power outfit. They will lose most of my $1500 quarterly electricity payment due to the contribution kicking in since December 2013. The next bill should be interesting. I understand that SP Ausnet pay 8 cents per kw/hr which we send back through the smart meter. No doubt that is sold to retailers for at least 16 cents, then retailed for at least 28 cents. Looks good for all concerned, but the big guys who have to sell all of the generation from the big coal generators in Latrobe Valley and those who have to maintain the HT network delivering to the sub-stations, are showing signs of distress. There appears to be enough panic to have federal politicians worried at the moment. Renewable energy, specifically privately owned solar systems have been so popular that the subsidised uptake has produced a result that has shocked a lot of people. I’m glad I got in before they reacted, although it would be nice to get more than 8 cents for excess kw/hrs.