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Can Elon Musk’s battery storage plant smash Australia’s gas cartel?

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See also our Explainer: What Tesla’s batteries can and cannot do, including costs, specifications.

Elon Musk has made a habit, and many billions of dollars, out of being able to do what others say is impossible. He has proven you don’t have to be a government-owned space agency to deliver payloads into space. He was the first to show that you can build an electric vehicle with mass market appeal.

He’s got another couple of doubt-defying projects on his list too: sending humans to Mars is one. Finding a cure-all for South Australia’s electricity woes is another. Of primary concern to most energy users in Australia, though, is this question: Can Elon Musk break apart the gas cartel currently controlling electricity prices?

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There is no doubt now that wind and solar will provide the cheapest forms of new generation in the electricity market, but their ability to lower prices significantly is impacted because the bidding of wholesale prices is still controlled by the gas cartel.

These generators, because they are controllable and dispatchable, are able set the marginal price, and they have been ruthless in exploiting this market power. They have been accused by retailers, by networks and by politicians of manipulating those markets by deliberately withholding capacity and rebidding prices from low to high.

The addition of battery storage means that large-scale wind and solar farms now have that added capability of full dispatchability, and the addition of a new player or players will increase competition, because it needs only a few megawatts, in a system using thousands, to alter the price significantly.

That’s why Musk now has the opportunity to break open that cartel. The South Australian battery storage installation announced on Friday will quickly have an impact – around 70MW is assigned to what is known as the FCAS market, for grid stability, and another 30MW, with three hours storage, for the wholesale energy markets. (See our detailed explainer here).

That is going to give the main generators something to think about. Indeed, they’ve probably been thinking about this for some time now, which is why the massive electricity price rises pushed through to electricity consumers across the country last week may have the appearance of a massive own goal, but were probably more about their last opportunity to line their pockets.

Remember how Christoph Ostermann, the founder and CEO of Germany’s battery storage developer Sonnen, expressed his astonishment (and delight) that the utilities would push up prices just as he launched his own battery storage product to households, effectively offering free power, with a very low fee, once the cost of the battery storage purchased by the consumer is amortised.

“We’re going to put them out of business,” Osterman declared, saying the utilities will struggle with the concept of “free” electricity flowing from rooftop solar and storage devices. He said he couldn’t believe his luck when he saw utilities jack up prices by nearly 20 per cent in the same week as his product launch.

If the big utilities are worried, they are too busy making huge profits to show it. Over the past 12 months, they have engineered a massive transfer of wealth from consumers to their own shareholders – a transfer that is locked in the system for several years. They are making hay while the sun still shines. And how.

According to Morgan Stanley figures, the margins of AGL Energy alone will likely rise by some $600 million over the next three years because – barring a massive collapse in futures prices – it will take years for the current increases in the system to work their way through, thanks to hedging and customer contracts.

That boost to Ebitda (earnings before interest, depreciation and tax) could jump to more than $800 million if future prices jump another $10/MWh. Even if futures prices fell $10/MWh below current predictions, Morgan Stanley estimates AGL’s gain from the recent prices would still be around $300 million.

The Origin numbers are not far behind, and if EnergyAustralia are in the same ball park, and Snowy Hydro and others, then some $2 billion is being transferred from consumers to the big utilities.

That’s bad news for consumers, because those increases have not yet flowed through to their customer bills, despite the near 20 per cent increases in the past week.

More price rises will be repeated again next year, and maybe even the following year before it is shaken out of the system, and when the current boom in wind and solar comes on line, and more battery storage is added.

Many predict that these price rises will trigger an exodus of customers to the likes of Sonnen and other innovative providers, but even losing tens of thousands of customers will not outweigh the benefits gained by the big gen-tailers from the price hikes.

Brazenly, the big gen-tailers have blamed the bill shock on rises in wholesale prices.

But who is to blame for the rises in the wholesale market? According to major network operators and some small retailers, it is the generators themselves. Gas prices are also being blamed. And who is causing the rise in gas prices? Mostly the very same companies.

Anyone doubting the ability of the generators to control prices only has to look at developments in Queensland, where the energy minister Mark Bailey intervened to tell the government-owned generators to desist in their bidding practices.

Queensland has gone from rivalling South Australia, with the highest wholesale prices of this financial year (and 2015/16), to having the lowest – almost 40 per cent below their levels of March and 30 per cent below other states. A new study suggests they have pocketed an extra $1.5 billion from their bidding practices.

It is clear that the generators are now under attack from the small retailers, the networks, and the politicians. And they are subject to an investigation from the Australian Competition and Consumer Commission. Pretty soon, the theory goes, they will also be under attack from their own customers, whose pockets they are emptying.

Already round 1.7 million homes have rooftop solar, and that number is being added to at record rates. Alternative business models like Sonnen’s will make it easier for consumers to go elsewhere.

Businesses are also adding rooftop solar at unprecedented rates across the country, and the big energy users are also turning to renewables and storage to duck the bill shock imposed by the generators.

So perhaps this is not a massive own goal after all. The utilities, seeing the plunging cost of wind and solar and battery storage, and the inevitable assault on their business models, have decided to go out with a bang, with one very big bite of the cherry before they have to go through the hassle of re-inventing themselves.

Ironically, by pushing up prices and lining their pockets at the expense of the consumers, the transition will be accelerated – although given the regulatory influence they hold, and their past ability to fight against carbon pricing, renewable targets, energy efficiency and demand management, the transition will get messy.

It will happen.

Australian consumers, as Bruce Mountain reveals, are paying a ridiculous price for grid power: combined with fixed network costs, the price of a kilowatt of electricity is not 30c/kWh, as many assume.

That’s expensive enough, but the real cost is closer to 40c/kWh, about the same cost as burning diesel in a genset – there can be no more damning statistic than that on the failure of Australia’s coal-based electricity grid.

It’s not just the consumers that are suffering. The bidding practices and wholesale price surge is making life difficult for the smaller retail players without their own generators. The competition is being swamped.

The likes of Enova and Energy Locals, new community-based companies have so far laid barely a scratch on the big boys.  “They can just get away with it because they can. Nothing else has changed in the market,” says Steve Harris, the founding CEO of Enova, who retired this week.

The alternative for small retailers is to invest in their own generation, which is what Enova is doing with its own customers. It will be renewable and it will be storage. But it won’t be 500MW power stations; it will be lots of 5kW power stations with battery storage – like sonnen’s and Tesla’s (and some large arrays).

The more renewables that are built, the less reliant the companies are on wholesale prices. Bit by bit, they will eat away at the margins of the big players. And once the current high prices have worked their way through the system, then the business models will really be under pressure.

Some, though, are not quite finished and want to come back for more.

The fossil fuel mining lobby – and their proxies in the Coalition and the Murdoch media – are pushing for yet more coal-fired generators; they want restrictions on renewable energy, and are fighting against rule changes that would reduce their ability to manipulate the market.

The former Coalition energy minister, Ian Macfarlane, now lobbyist for the fossil fuel industry in Queensland as head of the Queensland Resources Council, wants not just one but three new coal-fired generators to be built over the next decade as old generators retire.

He warned this week of power outages and industry shut-downs unless two or three new coal generators were built, and ensured a “smooth” (read drawn-out) transition to renewables that was not hijacked by foreign-funded greenie extremists.

Macfarlane wants the share of renewable energy to be restricted to around 35 per cent. Given that the likes of the CSIRO and others think that half of all generation will come “behind the meter” from rooftop solar, Macfarlane is effectively arguing for a cap on rooftop solar.

And yet Macfarlane, the Murdoch media reports, has solar scattered across the roof of his Toowoomba home. Does this suggest that solar is good enough for him but not for the all the public? To borrow a phrase from Marie Antoinette when the Bourbon dynasty’s business model was coming to an end: “Let them eat coal.”

The profits may be growing, but the revolution is nigh.  

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  • Craig Allen

    This is a great proof of concept, however with it’s peak output being 10% of the wind farm it’s attached to I can’t see how it can in itself make much of a difference to the system as a whole. I assume that the idea is that once its running it will demonstrate that it batteries are both technically and financially sound, thereby paving the way for it’s own expansion and for others to be built. How much MW/MWh will actually be needed to have a significant effect on prices and grid stability in South Australia? It seems to me that the riskiest thing about the project is having an outage occur during summer after the system is installed and the the nonrenewables crowd then being able to point at the battery solved nothing. I worry that all hyperbole about Elon Musk solving South Australia’s energy problems with this project makes it and the SA government vulnerable to such criticism.

  • john

    Part of this story is about the dispatch bidding time.
    If it is good enough for the USA to use the 5 minute rule how come it is 30 minutes here in Au?
    Answer because it allows the gaming of the wholesale dispatch price of power.
    As to networks that were privatized with a guaranteed 10% return on capital expend we wind up with some $52 billion expend with the attendant cost flow on effects.
    Every RWRNJ’s has the same message which is ” Only coal based generation can deliver affordable dependable power ”
    Affordable as in at a higher cost than any Renewable source.
    Dependable yes pretty well true at times of low temperature and low demand.
    Integrated distributed RE together with storage will in the end deliver the best outcome.

    • Brunel

      The times should be in UTC for greater clarity. There is no such thing as NEM time.

      • Michael Murray

        Surely 1 minute is 1 minute ?

        • Brunel

          There is a very silly invention called Daylight Savings Time.

          6 AM UTC is 6 AM regardless of where you are – in a space station or in a submarine or in my house.

          • Michael Murray

            Sorry I don’t understand. The comment you replied to you only mentioned “5 minute” and “30 minutes” nothing about Daylight Savings Time ????

    • trackdaze

      The RWNJ message kind off breaks down when the closure of hazelwood suggests its more expensive to run than a billion dollar write off.

  • Brunel

    Batteries should be able to kill peaking gas power stations.

    And UHVDC will help to kill off more fossil fuel power stations.

    • Peter F

      UHVDC is not needed Australia can generate all the renewables it needs within 200km of the load

      • Brunel

        At what cost though?

        Making electrons is cheaper than storing electrons .

        The sun sets in Perth 2 hours after Sydney so solar panels in WA can power Sydney after sunset via a UHVDC transmission line. And the reverse can be true in the morning.

        Solar panels in NSW can power Perth before the sun comes up over Perth.

        • Ian

          What do you estimate the cost to be of a UHVDC connection between Perth and Sydney? The line would need to carry about 1 or 2 GW each way. Would this be aerial on poles or underground? Would putting a similar length underwater UHVDC through to NewZealand not do the same thing then the Kiwis can share the costs.

          • Brunel

            It would be overground from WA to NSW.

            There is already an AC link from QLD to SA via Vic – that should be upgraded to UHVDC.

        • Alastair Leith

          “Making electrons is cheaper than storing electrons .”

          That’s a generalisation without enough points of qualification to give it any meaning.

          • Brunel

            What is the cost of storing electrons then.

          • Alastair Leith

            It’s not costs that need to be compared, it’s value.

          • Brunel

            Off grid = solar + storage. The cost of storage at home is, pessimistically, 34c/kWh according to SolarQuotes but maybe 20c/kWh.

            At large scale, say 129 MWh, it is a lot less. Maybe 10-15c/kWh. Which is still a lot more than the cost of making electrons via large scale solar (sub 10c/kWh).

            All figures in AUD.

  • Awesome Article!

  • juxx0r

    Yes Elon can, not with this latest jobbie, but with say 600MW of solar and 2.5GWh of batteries to take out the late afternoon/evening peak. And if I had $1.5B that’s exactly what I’d do for shits and giggles

    • Peter F

      Prices are set at the margin. Victoria’s prices should have risen 8% or so with the removal of Hazelwood but increasing market power has enabled the generators to double the price. Conversely if Tract goes ahead not only with their wind farm but another 50MW of storage they can bid $55+collect the REC and not only make very good money but force power prices down.
      I agree that one 100MW plant is not enough but adding Lyons proposed storage in SA and Victoria plus another 200-300MW in Victoria will do a pretty good job of knocking out a lot of the $300+ events

      • juxx0r

        I look at lyons capex numbers and wonder. Surely they can do better than $2/W solar. I know of solar going in at $1/W.

        • Alastair Leith

          Single axis-tracking at $1/W?

          • juxx0r

            Yes. In WA.

  • bedlambay

    The ugly face of capitalism. Team Turnbull are all piss and wind about controlling gas prices. AGL and co should be put up before the ACCC.

    • Alastair Leith

      ACCC has so far said it’s all okay, cabals are only bad when they say they are bad. Apparently another investigation going on, hopefully this enquiries analysts can read reports from the Melbourne Energy Institute and others detailing the evidence price fixing.

  • Robin_Harrison

    Like an incandescent light globe just before it blows.
    There’s a new mantra in town. Clean and cheap or dirty and expensive.

  • Ian

    If renewables are to be restricted to 35% of total generating capacity, then the incumbents should be incouraged to build three large coal fired plants, as long as these bid into a fair market, and as long as the extra 35% renewables can proceed construction at the same time as the new coal fired generators. All new generators should be carbon neutral perhaps by requiring the new coal plants to install CCS. Government funding for these projects should only occur when there is a budget surplus.

    • Carl Raymond S

      Nonsense. We’re heading for 100% RE. Clean and cheap, not dirty and expensive. CCS failed dismally.

    • Mike Shackleton

      CCS has been shown to be a spectacular failure elsewhere. The CCS plant that everyone points to in Texas ran about 400% over budget and still doesn’t work. They just canned it. It also had a willing buyer for the CO2 it produced (Greenhouse district located nearby) so it was an exercise in monetising a waste product, not an exercise in waste separation and storage.
      The rules of thermodynamics make it insane. You need to add at least 30% generating capacity to the power plant to separate the CO2 from the exhaust stream and liquefy it. Then you need to have suitable geology nearby to store it.
      The true beneficiary of this enterprise are the coal mines supplying the power plants. Digging up 30% more coal to generate the same amount of power.

      • Calamity_Jean

        Mississippi, not Texas. Other than that, you’re totally correct, especially:

        “The rules of thermodynamics make it insane.”

  • Chris O’Neill

    For an article that starts with a big headline asking about the effect of Musk’s battery, it spends precious few words actually considering that question.

  • Darrell Anthony

    Sounds like greed, irresponsibility, and capitalism on both sides of the equation. Everyone was driven by renewable energy wonders. They just kept building wind turbine farms and solar farms till they crashed right through the grid stability wall. Giving perfect opportunity for thermal generators and politicians to set new regulations in place in favor of non renewables. I keep hearing, all it would take is a few megawatts of storage to of kept this from happening. Now everyone is paying for the wall of science grid stability that was broken and shattered. So why wasn’t storage added to prevent this in the first place.

    • nakedChimp

      Cause the market rules didn’t favor it.
      It made no economic sense to put that storage there.

      The market rules favored ff plants to milk the electricity use for whatever they could get from him…

    • Calamity_Jean

      “So why wasn’t storage added to prevent this in the first place.”

      Until recently it was too expensive. Battery prices have fallen significantly in just the last year.

  • solarguy

    McFarlane and his mates can go and jump. Some years ago as I was rubbing my hands together making money from the 60cent FIT, I thought what will I do with the proceeds. I could buy a new car perhaps, alas no, I hatched a better plan and told the good news to the menopausal CEO and the glint in her eye was gold. The plan was to use the FIT credit to invest in (1) An energy efficientcy program, our old fridge was consuming up to 3kwh/ day, that was replaced with the same sized Electrolux 520lt (900wh/day)

    (2) Install energy efficient split AC’s and leave the energy sucking ducted AC as dead plant.

    (3) Install more PV to bring it up to 9.3kw and install a 6.5kw hybrid/off grid inverter, a 968Ah battery bank so we could go off grid if the greedy utility became too greedy.

    The icing on the cake was when stage 3 was complete and up and running, the NSW government asked IPART to increase the measly 6 cent FIT to double that. Orgasmic baby, now I will pay no power bills for the year mostly. In fact they will be paying me mostly.

    I just love turning the table!

  • Joe

    I love it how Sonnen have come into the energy space with their batteries and with the ‘SonnenFlat’ idea. This is really going to stir up the existing retailers. They will be scrambling to implement barriers just like ‘Standards Australia’ with this stupid idea of cages and bunkers for home battery installs. ‘SonnenFlat’ still relies on being connected to the Grid and I would not be surprised to see a two tiered Daily Supply Charge…the low rate for non- SonnenFlat customers and the “rip-off” rate for the SonnenFlat participants.

  • Ruben

    I’m assuming MWh, not MW! Otherwise the 30MW would chew up 90MWh of the total battery, given its three hours storage, and there would only be 10MWh for the 70MW part left, which would make it an unlikely 7C.

    “around 70MW is assigned to what is known as the FCAS market, for grid stability, and another 30MW, with three hours storage,”