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Battery storage (3): Addressing a major competition failure

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Ed: On Tuesday, in the second of our series on battery storage, this lengthy comment from Rob Campbell, the head of Vulcan Energy, captured out attention. We thought it was worth running as a separate article, to give attention that the issues he raises deserve.

“Competition is a great thing; it reduces consumer prices by encouraging business to be more efficient and innovative. There are hundreds of examples of prices driven by competition for the consumer dollar. Then there are great competition failures.

Most have been brought about by deregulation.

Example 1. Fixed wire telephony.

The concept of competition in fixed-wire telephony in Australia completely ignored the geographical range of our population, offering “billing rights” to all comers and then allowing duplicate infrastructure to be built only stalled advancement in Australia’s infrastructure. Without the advent of cellular technology, telephony would be priced well above where it is now. Mobile phones have disguised the flop that fixed line “competition” was.

Example 2. Pay TV

The outrage caused by the rollout of pay TV cabling through our suburbs, and the fact that most of this multi-billion dollar investment sits idle, again shows a failure to address the geographic realities. Foxtel now will install a satellite dish on the roof of a premise, rather than spend the money to run a co-ax to the street to pick up an existing connection point put there at great expense. If the amount of money Telstra(Foxtel) and Optus spent on this duplicate infrastructure was spent on one quality installation, we would be half way to the National Broadband Network (NBN) already.

Example 3. Electricity, the flop (or the biggest con).

“If we open up billing rights to all comers, the amount it costs to produce a bill and collect the money you owe will come down.” And “By connecting the eastern states with bits of wire, generators can compete to sell their electricity into the big market and this will force prices down.” Those are the lines we were spun at the time.

Two things have happened since this scheme came into play. Retailers’ margin (billings rights) costs have tripled to support business models that were never going to breed competition. The other most significant transpiration is that the national electricity market called for uniform reliability standards. This exposed, allegedly, huge deficiencies in the quality of our aging distribution networks. The result meant that competition policy had the exact opposite effect on consumer costs.

Distributors, mostly government-owned, have been gouging huge amounts of money from consumers to carry out “urgent and pre-emptive works”, to meet growing demand and increased reliability imposts. The chorus continues as the distributors, now corporatised, provide these services under a profit generating model, conveniently delivering hundreds of millions of dollars in profits to their owners, in the main state governments or investors with government-guaranteed returns. Faced with competition from renewables, the distributors are stuck in a situation where the reasons to spend have been substantially reduced, and with the advent of storage, the real possibility of having to shrink the network is unavoidable.

By embracing storage can distributors still generate profits?

The value proposition for storage at a residential level is tantalisingly close, without one cent of subsidy from the distributors, who stand to gain considerably from the mass rollout of residential storage. The commonly reported demand impact of a residential air-conditioner is a cost to the distributor of $3-5000.00. Whether this is true or not, who has the knowledge to question it?

Why, then, can this situation not work in the reverse? If a residential customer installed battery storage which could directly reduce peak demand by 3 kilowatts, would that not have a $3-5000.00 benefit to the distributor? If so, why would the distributor not want to subsidise the installation of storage into every household in the country? Distributors allocate a demand average of 4-5 kilowatts per home when calculating the size of a distribution network. Integrated and reliable storage can reduce this to 1.5-2.5 kilowatts, half (or more than half) of what they need today. If 51 per cent of our bill is devoted to these costs, and we all pay for our own storage, we could expect our energy costs to drop by at least 25 per cent.

If we have solar to charge our batteries, we could all go virtually “off-grid,” using the network only on the rare occasion where our demand exceeds the capabilities of our storage or inverter. But how does the distributor make money out of reducing the size of the network? Based on publicly available information in Queensland, the amount of money expended on capital works on whole of network is $2.7 billion, with $1.05 billion spent annually on maintenance.If the distributors in Queensland were to subsidise residential storage to 200,000 homes per year at a cost of $600 million the net effect per year in reduced demand on the network amounts to 600MW, next year 1200MW, 1800MW and so on.

Queensland’s maximum demand sits at approximately 7000MW, with a base to peak variation of approximately 3000MW. This means that in a period of five years, the demand profile for Queensland could be a flat line at 4000MW. The ability to reduce baseload of 4000MW by at least 1000MW is easily achieved.

In theory, that is $2.1 billion in capital expenditure no longer required per annum. Even if this figure were to be halved there still remains a large amount of potential “profit” for the network owners.

Storage does not have to be confined only to Solar PV, or in fact single dwelling homes. The case for storage in apartments and similar situations is equally relevant where a power is available a suitable off-peak discount for charging of the storage units.

The ability for a distribution entity to generate profits while subsidising the rollout of residential storage is in plain sight. By the very nature of the model, the benefits for all involved can only increase, giving scope for reductions over successive years in overall electricity prices.”  

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  • Chris Fraser

    I appreciate the idea of subsidising batteries, but i can’t get over the not little obstacle of legislated return on network investments, which puts the better plan at risk. Let’s get some thinking politicians together in the States and remove these evil money-making schemes.

    • taiyoo

      That’s an interesting point that is being used more and more often to justify anti-competitive behaviour from utilities in loading up network charge components to reduce the cost savings of solar power. It is argued utility investments are built around meeting peak demand and solar “doesn’t reduce peak demand” so changing tariff structures to reduce the savings consumers can achieve from solar is justified to preserve utility returns. Now we are hearing that even though energy storage “can” reduce peak demand (I definitely don’t agree that solar doesn’t, hence “”) consumers shouldn’t be allowed to benefit because utilities still need to make their returns.
      Utilities made their investment decisions based on a range of factors including flawed demand forecasts. Why are they protected from suffering losses incurred by poor decision making? Why are their profits and business models immune from competition and advances in technology?

    • Chris Fraser

      Giles touched on this some time ago. Many networks are State owned so the return goes to them … For the moment. His solution was to write the networks down. Good – then nobody will buy them for the asking price and a state sponsored designer can design them the way we need to.

      I’m not really a wannabe off-gridder (one who generates and stores their own to allow them to disconnect). I hope a smart grid will be a significant part of our standard of living and allow efficient use of storages. It’s just that I fear network owners have not got the new paradigm yet.

  • Roy Ramage

    I have seen the future and it is domestic storage. Well said Rob Campbell. The status quo energy companies will hate you.

  • dwj

    Unless I am mistaken, Vulcan Energy are sellers of storage systems. This should have been disclosed for obvious reasons.
    We all know that distribution and transmission systems have been overbuilt in QLD and NSW in recent years. With over capacity in these systems and with declining demand, there is no need for additional expenditure to reduce loadings. The capital splurge can be largely eliminated by just stopping the over building. Even if you could “flat line” demand with distributed storage (which you could not) it would save nothing.

    • Rob Campbell

      This being a forum driven by the industry, I would not consider that disclosure would be necessary, as the agenda is clear. We have not and will not mention our brand and we are making our comments for the benefit of the industry and public generally. Your criticisms may be valid in other circumstances and I’m sure that there are plenty of people in more mainstream businesses and government who deserve your scorn more. I have made bold statements in my journal, but can assure you that it comes from passionate research and more importantly hands on experience. I would prefer you on our side, what would it take?

      • dwj

        Rob, I am not criticising your original comment post but when it is presented as an article it is appropriate to include such disclosure.
        I am supportive of rooftop PV and many other renewables initiatives but I don’t think distributed storage is wise. In any event, uptake of electric vehicles will eventually serve the function of flattening demand. It would be much better for the community to encourage EVs.

  • Matt Robinson

    I don’t see how you come to the conclusion that electricity distributors’ grid maintenance costs will drop at all. I notice you have declined to speculate on that amount, and with good reason – the maintenance costs of the grid will not appreciably fall.

    Interesting that you choose to say ‘virtually “off-grid”‘. The important word here is ‘virtually’. The fact remains that every household and business premises will still need to be connected. That means all the poles, wires, substations, transformers, interconnectors and meters will remain and will need to be maintained. You’ve not provided a case that disputes this.

    An interesting thing happened here in Queensland as a result of the solar uptake by households. It resulted in the retirement of 1.5GW of coal-based generation capacity because peaks were flattened out sufficiently that it was no longer profitable to keep it idling online. However, we still had occasional peaks that went much higher than the new lower level of idling reserves, so the generation utilities turned to highly expensive gas turbines to meet that demand. Result? Prices at the meter had to go up.

    The more distributed generation capacity we have, the less idling reserve is available. So we all end up paying more when we experience the inevitable peaks exceeding reserve capacity. Household storage is not the answer.

    • Giles

      Wrong on so many fronts Matt. Peak has declined dramatically in Qld in winter and summer, thanks mostly to solar PV. http://reneweconomy.com.au/wp-content/uploads/2013/05/energex-consumption.png . Gas fired leakers have always been used to meet the top peaks, but their use has declined. Around one quarter of the network is built to accommodate 36 hours of peaks. Complete waste of money. Networks will have no choice but to write down value of networks because of that. Too many coal fired power stations were built which are not needed, wholesale prices are falling, see AEMC report and todays story on AGL.

      • Matt Robinson

        Very pretty graph. Here’s another pretty graph (on this link http://www.couriermail.com.au/news/queensland/price-surges-spark-debate/story-e6freoof-1226551533389) that says different. It shows importantly that we peaked above capacity three times in the first 10 days of this year.

        SEQ is just one part of Queensland. I’m talking about the whole.

        The linked story is more about being ripped off by deliberate removal of peak capacity, but it makes my point on peak electricity usage.

        The network has to cover peaks. There is no choice in the matter – except if you are happy with random blackouts.

        I take your point on peaks dropping. Whether it’s entirely due to solar uptake, who can really say?

        Who’s to say that with other changes such as the removal of the carbon tax, or a resurrection of manufacturing (!?), or any number of other factors, peak demand won’t go up? I’m betting it will, over the medium to long term.

        • Giles

          That article you reference simply reveals a stunning lack of understanding about how the electricity market works. No grid operator or network operator in their right minds would deliberately install enough baseload to cover peak demand. The costs would be enormous. That is what peakers are for – to cater for the peaks. The market is designed that way. What are baseload generators going to do when demand is less than peak. Those Qld generators were not “deliberately moved” to take out peak capacity, they wre taken out because there was not enough baseload demand.

          • Matt Robinson

            Seems to me you’re just debating semantics. I presume you’re referring to my phrase ‘The network has to cover peaks’, and reading it to mean the grid has to provide baseload to cover peak demand. That wasn’t my intent.

            With regard to your comment on QLD generators, the very point of the Courier Mail article is that people are suspicious that the baseload removal was more about pushing up prices (and therefore revenue) than following any demand metric.

            In any case, my point still stands: You’ve provided a graph that suggests peak load is diminishing, which may be true for SEQ in the short term, and I’ve provided two graphs and a report from the national regulator disputing your data over the medium to long term and over a broader area.

            If you would care to reconcile the difference without resorting to further personal attacks, let me know.

          • Giles

            I guess the difference between the graph i produced and the ones you produced is that one is based on actual data and the other on predictions. And four years ago, the regulator predicted 10% growth in demand and yet it has fallen 10 per cent. Peak demand is also well below where it was predicted, so it is quite likely that future projections will also be well below, particularly with the generators getting a better understanding of the growth of rooftop solar.