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Energex says rooftop solar is trashing its business model

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Queensland electricity network operator Energex has conceded that its century-old business model is under threat from the increased use of rooftop solar, and a growing interest among its 1.3 million consumers to produce and manage their own energy needs.

The concession was included in the state-owned company’s annual report released last week, which noted that despite the huge population growth in south-east Queensland, demand from residential customers fell 3.8 per cent in 2012/13 from a year earlier.

Over the past four years, Energex says residential demand has fallen 10.4 per cent in south-east Queensland, one of the areas with the highest penetration of rooftop solar in Australia.

Energex cited rooftop solar PV as the main factor for this reduced demand, along with milder winters and summers, and the use of more energy-efficient appliances. Non-residential energy grew by 1.1 per cent in the same period.

The network operator, which manages a $10 billion network, says the number of customers with solar PV has jumped from less than 2,000 in 2009 to more than 221,000 at the end of June, 2013. It made 74,000 new solar connections in the last financial year, and had 675MW of capacity as at June 30.

“The rapidly evolving energy industry, changing energy use patterns and rising electricity prices are resulting in a trend toward energy management options for customers,” the company says in its annual report.

“As energy management options such as smart appliances, energy management software, in-home generation and battery storage become more available and affordable, we expect to see a significant change in the way customers use energy and our network.

“This will have wide-ranging implications for the way the distribution network is planned, built and operated, as well as for our ongoing business sustainability.”

Quite right. This is not just a Queensland, or even an Australian, phenomenon. It is clear that the “democratisation” of energy via solar PV and other forms of distributed energy is a global phenomenon.

As we reported last month,  Jon Wellinghoff, the chairman of the Federal Energy Regulatory Commission (FERC), which regulates utilities in the US, said solar is growing so fast it will “overtake everything”, and that once storage is brought in to the equation it will be pretty much “game over” for traditional forms of generation.

The recently retired US Energy Secretary Stephen Chu, who also said that utilities would have to develop a new business model, one modeled around solar and storage, rather than the traditional model of centralised generation. “I’ve been telling them there’s another business model. It goes like this: We – the utility – would own the energy storage and the thing on the roof and the electronics. We’ll sell you the electricity.”

And as we noted in this piece earlier this year, the issues within Energex and rooftop solar are not technical ones, but economic ones.

But the senior executives at Energex may have recognised the challenge, but they are not yet ready to embrace the solution.

Chairman Shane Stone said in the annual report that Energex had and would cut its forecast capital expenditure in the past financial years and current financial year by around 15 per cent, but it would still amount to a total of $2.53 billion.

Stone conceded that this reduction would not lead to lower power bills, although it may help “lay the groundwork” for more affordable power ahead. But he says this will be “quite a challenge” because the company has invested so much money in its networks, it needs to get its returns back from the customers, even if they are using less energy.

“Changing consumer behaviour is continuing to have a detrimental effect on prices. Due to a combination of influences including the significant rise in prices in the last few years and the increasing use of solar energy, there is reduced consumption of electricity which in turn means the mostly fixed costs Energex faces have to be spread over a smaller chargeable base.”

This, indeed, is the dilemma for Energex and other network operators. While the local News Ltd newspaper took the Energex data and noted that all households are paying $32 a year to pay for the (now ceases) feed in tariffs for solar, every household was also slugged an extra $127 a year for additional network costs, which now account for around half of the average bill.

This causes a problem for Energex, because these extra costs must be borne by a shrinking number of consumers. It noted that many of its household customers were now “zero net energy” – yet were accessing electricity network services without contributing to network costs.

“This is a challenge to the traditional method of network cost,” it noted. If it simply responds by jacking up fixed prices, as has been mooted, and which took effect to some extent in the latest pricing determination, this simply gives customers added incentive to install solar and batteries.

“We are working with stakeholders on options to address the technical, cost and social issues associated with changing customer energy requirements and embedded generation. This includes monitoring customer trends and adopting appropriate strategies.”

It could also potential start to look at some of the benefits of distributed generation, as outlined by both the APVA and studies by the likes of the Institute for Sustainable Futures at UTS. In the end, though, the problem with costs – particularly given the continuing fall in solar and battery costs – means that the state government’s may have no alternative than to write down the value of their networks.

That may seem unpalatable – but given that they the governments of Queensland and Western Australia are subsidising electricity costs to the tune of $1 billion a year because of the cost of delivering coal-fired electricity to users – it may be their only option.

   

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  • Warwick

    It sounds like a good argument for a demand/capacity charge and removing the kWh charge. That way network bills are more equitable and based upon the network capacity utilised by consumers. Those who use the network more efficiently by changes in behaviour, energy storage or solar PV offsetting maximum demand will pay less and those who use it inefficiently such as air-conditioning will pay more.

    • Jeremy

      Please clarify – are you suggesting removing the kW.h charge entirely? This would mean that a typical residential electricity bill would only have a single line item – the demand/capacity charge?

      • Warwick

        Network costs are largely related to the capacity built to supply customers so fixed charges and a capacity charge are the most efficient and equitable way of charging for network provision. Removing the kWh charge would be a positive policy development.

        • Jeremy

          I understand and support the concept of replacing fixed network charges (e.g. 1 $/day) with a demand/capacity network charge (e.g. 10 c/day/kWp). However, I wasn’t sure if you talking about just the network charge part of the bill or instead were advocating for the complete removal of kW.h consumption charges from typical residential bills. Can you please clarify.

          • Warwick

            No, I’m not advocating free electricity and this article is about the Energex network.

            The network is a natural monopoly hence it is regulated…so network charges for capacity/demand and a fixed charge. This best reflects the cost of the network business i.e. the fixed charge represents the costs that are appropriate to everyone i.e. maintenance of the basic infrastructure, metering etc which don’t change much from customer to customer and a capacity/demand charge based on maximum demand (be it kW or kVA -although kVA is best but adds additional metering costs) which best reflects the capacity (and hence investment) required to serve the customer.

            Electricity (the kWh) should be supplied by a retailer where the customer can choose the best option for them.

          • Matthew Wright

            The portion of the kWh charge that is related to kVA (And the smart meters in Victoria can meter kVA) and the daily fixed charge, should together be shifted to a capacity charge. So you purchase 1kVA for $250 per year, 2kVA for $500 and 5kVA for $1250 (Which is where most people would go)

          • wideEyedPupil

            While a capacity charge is part of the answer its not that entire answer. If you don’t charge volume as well as flow capacity there’s less in the bill to create incentive for (sometimes expensive) efficiency measures and technologies in the home.

            If you aren’t charging volume in addition to capacity, what’s to stop me charging electric cars all day long for my neighborhood’s EV fleet and paying the same bill as my neighbor with a MacMansion and 6 ACs, 4 plasmas etc etc on the same priced 10kVA socket?

          • Matthew Wright

            I am arguing for volume and capacity charge. And to have the volume charge around 20c per kWh (what Australian’s were pay a few years ago).

            Warwick is not clear what he is advocating but I would assume he would be advocating along similar lines to what I’m advocating. Capacity only and no volume would be disastrous. However the current volume only with no capacity is also a disaster. More cost reflective pricing will help here.

          • wideEyedPupil

            Thanks for clearing that up!

    • Matthew Wright

      Exactly,

      I have previously written about pricing model based on capacity kVA charging where the amortised network cost is mostly shifted to a $250 per kW access.

      Where an average customer would buy 4 or 5kW of access. And a solar storage customer could reduce that to 1kVA if they thought that it was economic to do so.

      The rest is about write downs for the networks as written by Giles.

      My article on moving to capacity based charging (For the capacity component)

      http://zeroemissions.org.au/media/opinion/solution-barnett%E2%80%99s-unfair-fixed-charges-130826

      kWh should also have cost reflective charging and would be around 20c per kWh (what they were before the ridiculous hike in network charges that has seen consumer bills soaring).

  • Rob Campbell

    As I mentioned in the article I wrote a month ago
    http://reneweconomy.com.au/2013/how-to-sell-off-an-electricity-distribution-business-97553
    the traditional distributor business models are under real threat. The issue is however, they can do nothing but struggle to survive with the same structure that they have had for years. This means that they will resist change where they can, but ultimately cry foul and put their hands out and ask for compensation, (such as an increase in the access charge).It will take the politicians to create the right legislation for the distributors to rethink their business models. However the issue is at this point his there is nothing tried and proven that the risk averse pollie’s would put their names to. Necessity is the mother of invention, but rather than seeing distributor model reform as a necessity, it looks like we are going to wait, again for the rest of the world to lead and then, when we are in a mire of artificially imposed “costs”, we will then embrace change. Meanwhile the opportunity to provide real sustainable reductions in distributions costs is but a pipe dream.

  • Jeremy

    Why not allow both the distributor and home owner to profit from solar PV? Install a smart meter on every property and allow home owners to sell their excess to their neighbour. This would be a private contract, half way between the feed in tariff (8 c/kW.h) and the retail tariff (26 c/kW.h), allowing both parties to profit. The distributor would receive a fee (e.g. 2 c/kW.h) to transport the kW.h approximately 10 m down the cable and to provide interval data to each entity (home owner). This fee would be paid by the seller. Each home owner would define a “priority list” of suppliers, e.g. priority #1 is the neighbour with solar PV, priority #2 is the traditional retailer. From the perspective of the retailer, all they would see is lower sales – similar to if the home owner had installed insulation.

  • Hilton Fletcher

    Another network claiming that solar customers are accessing network services without contributing to network costs. That is a blatant lie. I am on the QLD 8c feed in tariff. I still have exactly the same charges and fees on my bill as I did before solar was installed. It now happens that I produce more energy than I consume and even selling it to my retailer at only 8c/kWh I am able to offset connection and metering charges. When I consume more than I produce (mainly evenings), I am charged the same rate per kwh as my neighbours (29c). My excess is sold to my neighbours for 29 cents. I still get charged the same fees and charges as I was paying pre-solar and I sell my excess energy for less than 1/3 of what it is resold for. Who is free-riding on whom?

  • Miles Harding

    Now we know what noises dinosaurs really made!

    I simply don’t buy the argument that it’s the fault of those greedy, self-centered PV customers ruining the cosy status quo. Smells like a scapegoat to me.

    A far more likely culprit are all those environmentally minded customers that bought huge zero-star houses and enormous air-conditioners to make their caverns livable. It is odd that the principal source of the demand that has spurred much of the gold plating of electricity networks is so consistently ignored.