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Biggest threat to utilities is not solar + storage, it’s their own greed

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There is no doubting that energy utilities are fully aware of the existential threat to their current business models presented by new technologies – solar and storage and smart software in particular.

That much we know, because they have spent so much time analysing the future and how it might affect the way they manage their affairs. But there is a far greater risk that dovetails with the threat of these new technologies – their own short-term greed.

This is nothing new. Every industry that has faced such momentous transition has faced the same issues. Just ask the print media. Just ask Kodak. Just ask the motor industry. Executives are driven by short-term profit incentives, few are prepared to cannibalise existing earnings in order to position their business for a different business model.

Now we see the utilities going through the same issues. They have assets – poles and wires that stretch across the country like no other network in the world – that are not easily replaced or substituted.

poles and wires

But they have a major problem: as the costs of new technologies fall dramatically, the cost of grid-based electricity is soaring in the opposite direction.

The determination of the network owners and fossil fuel generators to protect their short-term revenue targets is simply making the competition more inviting and giving good reason for customers to look at alternatives. It’s a train crash that is waiting to happen, and no one is too sure what to do about it.

The networks might be able to celebrate a significant victory over the Australian Energy Regulator, after spending millions of dollars in legal action challenging the regulator’s belated attempts to put a curb on their costs – in essence, you might say, to try to save them from themselves.

It’s hard to see how they can be saved from themselves. The recent partial sales of NSW networks – at a whopping 1.75 times the regulated asset base – suggests the new owners have every belief and expectation that they will get value for money, and they won’t let regulators and consumer groups get in their way.

The significance of the win over the AER means that those revenues are protected. At least for now. This adds to another significant recent regulatory win when they won the right to change the rules of the game and shift the basis of their revenue from a price cap to a revenue cap.

The price cap was convenient for the networks when demand was growing. When appliances became more energy efficient and rooftop solar clipped demand, they quickly pushed for a revenue cap – guaranteeing them a total revenue sum which they are authorised to recoup from however many consumers are left attached to the grid.

And therein lies the problem. As the costs of solar and storage continue to fall – and we have seen some dramatic falls in the last year alone, and an even more dramatic reduction this week in the US – the potential for them to lose consumers grows ever stronger.

Consider what SA Power Networks predicted just a few months ago –  that the combined cost of solar and storage for consumers would fall to just 15c/kWh within a few years. In many parts of Australia, that is equivalent to what consumers are charged for just the network component of the bill, let alone the surging cost of wholesale electricity and the retail margins.

Battery storage is going to become more prevalent very quickly. Morgan Stanley predicts a million homes with battery storage by 2020. BNEF predicts 40GW of distributed energy behind the meter by 2040. Even the networks themselves predict 80GW of local solar and 95GW of battery storage by 2050.

I am one of those early adopters. Even though I have only two small battery units, my use of grid based power has fallen to an average of less than 2kWh a day in summer, and around 6kWh in winter.

My 5kW solar system produces enough power over the year, although not necessarily at the right time. A bigger storage system, with the added security of a bigger solar array, would solve that issue.

I’ve no interest in doing that right now, despite the fact that my electricity bill is almost entirely made up by the cost of my connection, which in northern NSW is $1.50/day. In summer the amount of exports reduces my bill to near zero. In winter, the lower output means the bill is higher, but over the year my bill will be around $500 – the cost of my connection.

The batteries I have do not operate as a stand-alone power system, and I’m happy to be connected to the grid because it is a social good, and a pretty effective way of trading and sharing electricity. But the issue here is how much should the consumer pay for it? At what point does it cease to become economically attractive?

The threat of grid defection is underlined by the networks’ own research that shows half of all demand will be met by electricity that is distributed, or behind the meter. In other words, the power will lie in the hands of the consumer. This completely redefines the dynamics of the energy market and the role of the networks.

Their report on network transformation acknowledged the risk that 10 per cent of consumers could quit the grid – and it would likely be more – unless rules and regulations change. But do they have the right answer? Some analysts think not.

And it is not just the networks choosing short-term gain over long-term business strategy, and which pose a threat to the business models of all.

The main fossil fuel generators, most of whom double as retailers, are also maximising their revenues by using their market power to control supply and manipulate prices, all quite legally it would seem but at a cost to the consumer, as former CEFC chief Oliver Yates writes today.

Yates points out that the best option for the consumer is for the likes of the Victorian state government to accelerate the roll-out of their state based target and get their auctions done soon.

That will introduce more competition to the market, and lower prices – as ARENA boss Ivor Frischknecht underlined to the Senate this week – and which is reinforced by the stunning falls in the cost of solar and storage in the US.

The networks have been critical of the way that the generators have been manipulating the market and making some assets available, or not, at critical times.

What we are seeing here, as analyst Hugh Grant notes, is the start of a turf war between the networks and the generators over how best to serve this new market, a war that will invite opportunities for new entrants.

ITK analyst David Leitch today goes into forensic detail about what the AER ruling will mean for consumers. Basically, the networks have won the right to add 2 percentage points to the cost of debt borrowed to pay for network assets. Over time, it might average 1 per cent, but that still translates to $400 million a year, or $4 billion over a decade.

Grant, from consulting group ResponsAbility,  says networks have a track-record of blatantly acting against consumers’ interests: exploiting their monopoly power to over-invest and pass the costs to consumers, stalling demand management responses, designing punitive tariffs and attacking the regulator’s efforts to benchmark them.

He says on average, Australian consumers are paying about twice as much for network charges as in the UK and about 2.5 times as much as the US.

“Yesterday’s Federal Court decision demonstrates how consumers are continuing to pay very dearly for the AER’s delays and failure to apply robust benchmarking to the networks,” Grant says.

“The AER’s existing incentive schemes have demonstrably failed to deliver more efficient capital and operating expenditure by the networks. Rather – they have simply resulted in the networks achieving extraordinary windfall profits from gaming the various schemes.”

And sometime soon, given the falling cost of solar and battery storage, and the increasing amount of smart software and controls, that is going to trigger what is known as the “death spiral” as more power is generated behind the meter and the burden of the networks’ excessive prices is placed on an increasingly smaller consumer base.

“The networks’ unsustainable prices need to be addressed – either voluntarily or by regulation – if we are to break the unsustainable spiral,” Grant says.  

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  • David leitch

    Care is requiredl comparing overseas networks with those in Australia. Even with in Melbourne there are big differences between the networks. For instance the Citipowers prices are much lower than those of Powercorp even though they have the same owner. Citipower is an innercity network with with lots of electricity consumption per km of cable. Powercorp is more rural.

    The AER trys to do a total factor productivity analysis but that’s not so easy, as the courts have just told them.

  • Tom

    Interesting problem – I’ve got no idea what the solution is. Maybe the same as the toll roads – the current owners go broke, some new owner buys the poles and wires from the carcass of the old company for 1/3 the price, and now the reduced revenue represents a reasonable return on capital for the reduced purchase value.

    Regulated revenue is crazy – at some stage this is going to equate to 50 cents/KWh for retail users for transmission costs alone. Consumers will twig and there will be a revolt. It will become the Number 1 election issue and whichever party promises to change it will win the election.

    By the way Giles: “Battery storage is going to become more prevalent very quickly. Morgan Stanley predicts a million homes with battery storage by 2020. BNEF predicts 40GW of distributed energy behind the meter by 2040. Even the networks themselves predict 80GW of local solar and 95GW of battery storage by 2050.” Come on – energy is measured in GWh, not GW. I expect that from the MSM, but you’re better than that.

    • Here we go again. Take the issue up with the CSIRO and the networks, and BNEF, and the AEMO, and the Victorian government and the south australian government. When they provide GW or MW rather than MWh or GWh, then that’s what we use. We don’t know how many MWh or GWh until we know what technology we using. And we can’t make up the number for them.

      • Tom

        Apologies.

        Does this mean that when I read “BNEF predicts 40GW of distributed energy behind the meter by 2040” I should interpret that as “an unknown amount of GWh of energy stored behind the meter, but enough inverters to produce 40GW of power from these batteries for an unknown period of time”?

        If this is indeed the case, then BNEF has still incorrectly labelled those 40GW as “energy” rather than “power”.

        • With the BNEF you can conclude that it is distributed energy, i.e. solar. I can’t find their numbers for storage right now. the world apologises if you are unhappy with the description of distributed energy. The CSIRA/networks numbers were expressed in GW in their report, and i really don’t care whether you want to call it energy or power, and I’m ready to concede that you are the cleverest person on this forum, as measured by both MW and MWh.

          • Tom

            LOL – thanks.

            I’m not the cleverest person on the forum – otherwise I wouldn’t have to read it. I learn a lot from your articles and with a bit of a screening process I learn a lot from the comments.

            Thanks for a great website.

          • mick

            gday giles you do excellent work no question I think we all agree tech is mature and in place but policy is broken I’m an old sa shearer working in wa I believe we are past the point of polite dialogue is there anyone having a shot at adani over here in wa if not I’m happy to head north or both can someone give me contact info cheers by the by if anyone is speaking to philantopists id suggest a fighting fund for the people who are shortly going to be going through the court process cheers

        • Shane White

          You’re correct Tom. If someone states “40GW of distributed energy” then you cannot derive anything from it. Their statement’s nonsensical, ambiguous and hopefully just a typo. I wouldn’t try to interpret it any other way. Better off asking them for a correction.

          For the record, energy is a quantity (measured in Watt-hours or Joules) and power is a rate of energy production or consumption (measured in Watts or Joules/second).

          1Wh = 1J/sec*3600secs = 3600J (a quantity)
          1W = 1J/sec (a rate)

          As for predicting what’s what in 2040, gawd. Look at the rate of climate change in the natural world and consider our global politics. I’m simply hoping we’ll still have toilet paper.

      • Ian

        Giles, can I make a suggestion, when quoting the wrong units just put (sic) after the Numbers. ie: networks predict 95GW storage (sic). (Sic =sic erat scriptum). Then poor guys like Tom won’t have to get their beer in a froth. Sorry Tom.

        • MaxG

          What is usually done … no, what used to be done… 🙂

  • Mark Roest

    Is anyone modeling what will happen when the levelized cost of storage drops below 2 cents per kWh — and just keeps falling, year by year?

    • Miles Harding

      I suspect that it won’t cause a modal change, such as most customers going off-grid.

      It’s possibly beyond storage to solve the winter trough, no matter how cheap. Daily cycles are relatively easy to buffer, but seasonal cycles are a much larger scale of problem. No matter how cheap, the batteries tie up materials, so there may be limit to how many can be made.

      What I could see happen, particualry with really good building and process design and capacity to defer or curtail would be that the super-cheap battery would be able to accomodate cycles in the order of a few weeks, reducing the number of on-grid events to a few per year.

      At this stage, the grid becomes a battery charger and much more expensive and local energy supply options would be cost effective.

      • MaxG

        Industry writes the code… fast and cheap — a profit-maximisation issue.
        I am building a passive house, a 25th of standard energy consumption or 4% compared to a standard house. The problem: no ‘standard’ Aussie understands how to run this house; e.g. keep windows shut in winter/summer. Whatever I explain is not understood by most. 🙁
        Point being: building practice will not change. Builders don’t want it, and customers do not demand it (because most do not understand it).

        • Miles Harding

          This makes our task of educating the public all the more challenging. Leading by example is a great way to do this.

  • Miles Harding

    How things have changed in a few short years.

    Heading off this existential threat is easy, at least in concept:

    The utilities simply have to realise that they exist to serve their customers, both industrial and household and that the ‘Customer’ isn’t some bovine source of revenue that exists to be milked.

    What do to?
    Publish all the secret agreements.
    Open your books so we can see where you really are.
    Fall on your own swords if you have been greedy jerks.
    Rapidly reform the business model to one that engages with the customer as a key actor in the solution.
    Inform the customers such all can see the dimension of the predicament and participate in the solution.

  • Guy

    Living in the UK in the 80’s I can still remember the fervor with which utilities were being privatized and the promises of choice and savings that accompanied the process. I think now is a reasonable point in time for the governments / society to ask if the promised benefits have been delivered and will continue to be delivered.
    From where I now live in northern New South Wales the answer would seem to be a resounding no.
    My solution is for the government (probably have to be socialist) to re-nationalise the whole thing, pick it up lock, stock and barrel and bring it into the 21st century.
    It seems to me to be the only way we can stop the grid (which I believe in the right form at the right price to consumers is a good thing) becoming a great big stranded orphan asset which charges extortionate amounts to those without the resources to look elsewhere.

    • Barri Mundee

      I agree. The economic ideology of neoliberalism (aka economic rationalism) is the culprit as it contends that “governments should steer, not row”. The whole argument is based on a narrow (profit-oriented) criteria of efficiency rather than what is the best outcome in terms of service, price and affordability for everyone.

      • Joe

        Here in Sydney, NSW our State COALition government is whooping it up after flogging off “Our” poles & wires. The big jump in retail electricity prices is just around the corner and us consumers will be up in arms when the next bills arrive. Privatisation is a massive fail everywhere you look…QANTAS, Telstra, Commonwealth Bank, Electricity to name a few. Yes, the electricity utilities are guilty but add our COALition governments Federal and State who are even worse. Since when did governments have the right to flog off public assets built and paid for by the citizenry for the greater common good.Those public assets are meant to be held in trust by Government on behalf of the citizenry. The term “common good” means nothing to politicians anymore.

        • Calamity_Jean

          “The term “common good” means nothing to politicians anymore.”

          We need new politicians.

    • Rod

      Here in South Australia the answer would also be a resounding “no”.
      Whatever we got from the sale of ETSA (regardless of the perceived imperative) we have now lost in the explosion in energy prices and the subsequent loss of manufacturing and the associated jobs.
      Hopefully the SA government’s decision to own and run a generating asset will be a catalyst for others.

  • Chris Fraser

    The outstanding matter that we still have to face is that a major monopoly provider has been leased out (probably with a view to sell outright, pending some opportunistic political situation).How could a conscious politician, let alone a consumer, ever tolerate the idea that leasing/selling an asset like that is good value for any consumer, that is, us ? Wouldn’t it good to allow consumers to have a debate and a vote, to ensure the outcomes are properly understood and the majority agree ?In addition, it might be useful to arrange for some consumer advocacy to be represented during strategic grid design discussion. Did we really want to augment centralised generation capacities, or become more distributed ? What about staying flexible, incorporating emerging technologies, allowing them to plug-in to the system, rather than making the grid a closed-off playground for profit maximisation for a few ? Yeah I guessed not. Naturally, the arrogance of this legislative class are fearful of the answer, and wish to decide based on how they can personally benefit.How could we not know that AER would have to defend the public interest against that of a private equity business, who’ve had their investment returns previously guaranteed by a specific legislation, and whose court actions have already been blessed by that arrogant megalomanic ruling class ?

    • Rebecca

      Chris Fraser, Sounds like all of us are over the decisions made by Politicians. Your points flexible, incorporating emerging technologies. Think that maybe thinking outside the box, which they are not capable of. More likely self centred, self interest, greed and much more. They are career politicians, we need much better. We have people in our communities who are much smarter, more concerned & capable of thinking outside that box.

  • Rebecca

    Congratulations Giles pleased someone is speaking up. I am in Q.L.D and believe I have no option but to go with my provider. I am very pleased to have six solar panels & wish I had more. What bugs me is people’s belief that I am responsible for their high power bill. From my search on the Internet it seems our Electricity is charged by the last & highest commodity to come onto the market that being gas. If this is correct then I can only agree with you greed.

    • john

      Just tell them you saved them money.
      Refer them to the REC Inquire, which found you did.

      • Rebecca

        john, Thank you for the advice.

  • john

    As i see the problem from the generators and distributors point of view, once a user of power can produce power for their own needs it presents a problem in 2 areas.
    As a generator once there are a lot of users with their system producing power for day time use which results in the duck curve of energy demand against the previous bell curve they { the generators } loose that area where they could gain high prices for generation.
    Now the market has moved to a duck curve the peak is later in the day and now there is this second problem users storage.
    As more users of the connection utilize storage even the peak of the duck curve will go down, this presents a huge problem for the generators.
    So the generators are loosing those high peak few days where they could make enough to be profitable for a year.
    Now to the transmission companies because of the lower amount of power being carried they have a problem with a dwindling payment situation.
    The generators are going to be in hard pressed to make a profit when the high demand days are lower and the transmission companies are getting squeezed because less power is being carried.
    So what is the solution for these companies often the same company?
    Because most have been privatized one could say ” you purchased the asset live with it”, however there are some end users who need the asset.
    In fact this is one area where privatization has proved to be an extremely dumb idea because the supply of an [ essential service ], should not have been privatized in the first place.
    Perhaps what will be put in place is a essential service fee for the availability of supply of power.
    In the situation where there is private ownership of the transmission and generation I do not think this is tenable.
    In the situation where it is government owned I feel there will not be an essential service fee put in place.

    To understand [essential service] look at policing, roads, rail, postal service, or water for instance.
    Once air ports, sea ports were also regarded as an essential service and I would say everyone knows how much it now costs to go park at an air port.
    So this proved to be an extremely dumb idea.

    However we a stuck with this situation where good governance has to be put in place to ensure that the present cost structure for transmission of power and delivery to a consumer has to be fair and equitable.

    Frankly I feel unless a fair and equitable cost structure is put in place there are going to be a very large number of consumers who just disconnect resulting in very real social problem as the cost structure is concentrated on fewer users.

    • Mike A

      In SEN (sustainable energy now) in WA we have modelled leaving the grid and sadly due to a period of a few weeks in winter when sun doesn’t not shine and the size of the energy in that time you would need far too much battery to survive. People need to be realistic about power generation and the real dependency on that connection.

  • Ian

    The missing piece in the viable alternative to grid connection is the standby electricity supply. If there is no competition to this technology then you can expect the current collusion of network operators and gauging of prices. We need that last link or that last reliability mile. It seems to me that most expense and effort and the most opportunity for utilities to rort the system is the few times when the supply of electricity is threatened. During storms, inclement weather, unscheduled generator outages, unusual demand peaks, that sort of thing.

    How can we install distributed standby generating capacity?

    Giles comments that his solar and storage system takes care of most of his electricity demand but he is happy to stay connected to the grid at a cost of $500 a year -which is very nearly the cost of the grid connection. Although not stated, my guess that this connection is desirable for its reliability factor.

    Ways to manage this standby requirement for an off grid system would be:
    1. Categorise loads according to importance and choose to use electricity sparingly during lean-generating periods.
    2. Over-design storage to handle more than one day of “emergency-mode” energy use.
    3. Install some sort of standby generator
    4. Have an informal connection to the grid through an EV

    Every one has heard of plug-in vehicles, but there is a concept of plug-out vehicles.

    Very simply put, plug-out means a vehicle having the ability to supply electricity to the home solar-plus-storage system. EV’s can do this, but so too could PHEV and ICE vehicles. Using an ICE to supply electricity seems anathema but consider the large power plants that even the smallest cars have sitting under-utilised. A Mazda 3 has a 112KW power plant, there are 16 million cars in Australia that’s a potential combined generating capacity of 1 800GW of standby capacity. A truly fearsome threat to the business model of belligerent utilities, and an amazing resource for the times when the nation’s renewables resources are compromised.

    • Chris Fraser

      3 days emergency load storage would be a reasonable minimum. These loads could include the fridge, freezer, light circuits, electronics, washing machine, in my humble view. Not sure about the EV loads, perhaps enough to forage at the shops and return … say about 4 kWh per trip. The Rainbow Power Company even suggested 5 days storage to be quite self dependent.

      • solarguy

        Chris, 3 days of full load battery storage for off grid use is reasonable enough, depending on how big your daily load is, that could be quite expensive if the load is say 20kwh/day. That’s $48k, just for batteries, but that’s assuming no PV output, when in reality there will be some, even on overcast and rainy days.
        Better to oversize the PV and go lighter on the storage, a much cheaper and better solution. Keep in mind that NO off grid set up should be without a back up genset to supply loads and charge batteries, simply because equipment can fail.

        • Chris Fraser

          We have got our emergency consumption down to 5 kWh/day. But there’s no indulgent usage like old stereos, plasma TVs, aircon, electric heat cooking (hello propane camp stove). No hot water, so after a day no showers, so we couldn’t have visitors …The three day provisioning was deduced as minimum target storage volume given the insolation expected on the oversized PV after a disruptive weather event. Correct it also provides some of that daily PV generation directly for consumption by appliances rather than sending to chemical energy storage.

          • solarguy

            Thanks for the reply Chris, sounds like you do it tuff at times. When hot water runs out, camping gas HW heaters are a cheap way out. You may want to add more PV to look after your batteries if their lead acid.
            Tell me, what do you use to supply HW currently?

          • Chris Fraser

            Oh I don’t have batteries … I was only taking meter readings for a couple of days consuming energy on only the basics, and turning off everything else. That was to help me work out a ‘three day storage’ hypothetical. Due to my cushy lifestyle, I had to turn the HW electric boost back on after for showers after complaints from the wife.

          • solarguy

            Well there you go, I came up with the wrong conclusions.

          • Ian

            My point above is all about this ” doing it tough” time period. You could rough-it for a few days or you could find ways to “glamp” through with imaginative solutions. Don’t settle for frontiersman toughness, survive in style.

  • John Herbst

    Hi Giles, great article. My sole point of contention is that the Price Cap is not any better than the Revenue Cap. It determines who takes the risk, with more risk to the Network under the Price Cap. However, since the risk component can be gamed to become “guaranteed reward” for networks, it has turned into a source of windfall profits for some networks in recent years. This danger makes me prefer a Rev Cap, which at least caps the damages.

  • Marathon-Youth

    The greatest revolution in energy is to make each person energy independent.
    we have the technology for that.