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How Horizon Power plans to remove world’s biggest fossil fuel subsidy

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The Australian government’s official position on fossil fuel subsidies is that it doesn’t pay any. Leaving aside the unmet environmental and climate costs of burning fossil fuels, or the diesel fuel rebate, you only have to travel to a remote or regional town in Australia to discover that this is not true.

Dozens of small towns and communities across Australia meet their electricity demands by burning diesel, at a horrendous cost that is subsidised by state governments.

sandstone

Take the former gold rush town of Sandstone in the West Australian mid west (pictured above) , as an example. About 670kms north of Perth, it used to cost $2/kWh to supply power to the community until recently. At Menzies, it still costs $1.65/kWh to supply power

Other regional towns source their power from coal-fired power station via poles and wires stretching across more than 1,000kms. Again, this is at horrendous cost – but it is nearly always subsidised by the state.

In most states this is an unseen cross-subsidy, but in Queensland and Western Australia, the cost is very visible – at more than $500 million each.

Indeed, Horizon Power, the state-owned utility that covers all but the south-west corner of the country’s biggest state, Western Australia, has the biggest subsidy of them all: not in total sums, because there is $500 billion of subsidies across the world, but in sheer scale and cost per customer.

Horizon’s 50,000 customer are spread across 2.3 million square kilometres – that’s one for every 53 square kilometres. All are guaranteed to pay no more than 26c/kWh charged in Perth.

That results in a subsidy to match its vast geography –  an average of $5,000 a year for every customer. That is a total of $250 million a year, and it’s a sum that CEO Frank Tudor intends to reduce to zero.

So far, he has already slashed around $100 million from the subsidy, bringing the average down to $3,000 per customer. Much of that has come from cost savings and efficiencies, and other business improvements, such as the use of smart metering to save on the costs of meter reads.

But lately the falling cost of solar and battery storage technologies is also making its presence felt. And it is that with these technologies that Tudor expects to rid the remaining subsidy, and to promote Horizon Power as the leading company for micro-grids around the world.

The 110kW solar farm installed at the Meekatharra power station.

The 110kW solar farm installed at the Meekatharra power station. Source: Horizon Power

This 110kW solar farm installed at the Meekatharra power station which is part of the Midwest project which has already saved  millions due to a new contract – and such projects have helped bring down the cost of electricity in Sandstone, mentioned above, to 96c/kWh, with further falls expected.

“I’d like to think that we can completely remove the subsidy, because the drive of technology will us to deliver electricity cost effectively to those communities,” Tudor tells RenewEconomy in an interview. “It could be 10 years, or it could be 20 years. The subsidy will be removed. It is just a question of time.”

Tudor expects Horizon to be something of a test case for the rest of Australia. While the CSIRO and the network owners lobby, ENA – expect more than half of all electricity to be supplied by distributed energy, and possibly one third of all customers to go off grid, Tudor expects Horizon to get there in half the time.

“When I look at the electricity industry, we are going to go through massive transformation …. every pice of infrastructure will be permeate with some sort of solar power. It will be a completely different approach (to energy).”

Already, the change is taking place. When severe bushfires took down much of the network around Esperance, Horizon didn’t rebuild the poles and wires to some customers, they installed solar and battery storage at a much lower cost.

In Carnarvon, two 1MWh batteries are being put in place to offset the use of fossil fuels at the Mungallah gas-fired power station. It will allow one generator to be switched off, rather than running as spinning reserve, and allow for more renewable energy to be integrated into the local micro-grid.

In Onslow, a town used as a base for the huge LNG projects, an even bigger transformation is taking place with a shift towards a renewable energy-focused micro-grid that will reduce the amount of fossil fuels by around 70 per cent.

It claims it will be the country’s largest solar and storage micro-grid, will include local energy trading and prepare for the introduction of electric vehicles.

“We think of this as a living laboratory,” Tudor says. We will trial different products and services and then deploy them across all systems.”

Horizon Power does have one significant advantage over other utilities – it is vertically integrated all the way through, which means it can extract the value of systems improvements as a network, or a generator, or a retailer, or a combination of all three.

That puts it ahead of other states, which are mostly split between network operators on one side, and retailers and generators on the other.

Tudor is in no doubt which part of the value stream will emerge as the most valuable – networks: because even in a micro-grid, consumers and generators need to be connected.

Tudor says that cost falls in solar and storage – the two key technologies for the Horizon area – will occur more rapidly than even those contemplated by the CSIRO modelling.

“We think we can do better than their cost curves,” he says. “We are heading to a highly distributed end state …. you can either defend against it, or embrace it, and deal with the regulatory and pricing issues.”

Tudor draws comparisons to what he is doing with the New York’s Reform the Energy Vision. You can hardly imagine two more contrasting geographies and population distribution, but Tudor says the approach is the same.

“Their regulatory approach is to use network to refresh infrastructure, allow customers to make a choice, and to encourage the development of micro-grids. Those individual micro-grids will look something like what Onslow will look like.”

And Tudor is confident that Horizon will develop IP that will be very valuable on the international stage.

“If you look at the one billion people across the world that do not have electricity, they are not going to be putting up poles and wires …. they are going to be looking at distributed energy and micro-grids.”

 

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  • john

    It would appear the reason that this approach can be carried out is because there is one company only to deal with from generation to retail customer.
    Cutting the subsidy to deliver the same cost of power to all customers will reap benefits for all tax payers in the state.
    Just how to implement this where there are different companies at each step of the way is going to prove difficult if not near impossible.

    • Chris Ford

      Yay for privatising each component eh?

      • john

        The problem in other states is that some aspects have been privatized.
        So this presents a situation where for instance the network provider expects to get their guaranteed return on investment.
        While in the short term it looked like a good idea to sell the assets the long term is cost to consumer, a bad outcome.

        • Patrick Comerford

          The law of un intended consequences. When making major critical decisions that effect our society as a whole it obviously pays to look beyond the next bend in the road. We are learning a hard lesson at the moment with the grid its ability to be fit for purpose and what shape it takes into the future. One thing is most definately for sure ( a lesson learned) ideology has absolutely no part to play in this process.

          • john

            Very true Patrick selling essential service provisions be it rail, road, airport, shipping port or in this case energy supply distribution and retail is a very poor outcome.
            At least in WA they have a possibility to mitigate the costs.

        • lin

          The citizens have been against privatisation of publicly owned assets in almost every instance. It has been forced on us against our will, for short term political gain/post-politics jobs for the boys/slavish adherence to neoliberal economic theory or whatever eyewash was pushed on us at the time. We said it was going to hurt us. We were right.

        • Chris Ford

          Just to be clear, that was a sarcastic “yay”.

          • MaxG

            I got it 🙂

    • juxx0r

      Like the solar power at meekatharra in the picture, built and run by Hybrid power, PPA to Contract power, then PPA to Horizon.

  • Ray Miller

    Last year I traveled across the many Australian deserts Australia and was greeted with a significant number of diesel gensets powering anything from road houses to communities. Some exceptions were large PV systems in Alice Springs and Uluru. I would hate to think what the total cost of the subsidies, the whole area being desert has excellent irradiation levels. Solar has been rolled out over a period of time but looks like the job should be finished ASAP.
    Congratulations to Horizon for their renewable efforts over a long period, with their learning set to payoff.
    And some very pointed lessons about the lack of vertical integration in the NEM and the resulting exclusions of the many opportunities for efficiencies.

  • stalga

    Taking some of the poles and wires out of play would likely lead to the biggest savings, maybe even greater reliability at the end of the grid. The King Island example shows what savings can be made by cutting diesel use. It’s obviously cost-effective.

    Almost all remote communities across all of Northern Australia use diesel generators and all have expensive freight costs. There is big money to be saved.

    If we subsidised some Australian solar panel manufacturers and the wind turbine factory (if it’s still operating), or stimulate solar and battery storage for remote areas, all involved save some money.

    It makes no political sense to argue against manufacturing subsidies when they have occurred in the recent past. Consumer subsidies seem permissible, the solar panel scheme has run for years now and also the insulation scheme, but not commercial beyond ARENA. Using money from the Northern Development Fund for coal will not change things for most in Northern Australia but renewables will, with lower infrastructure and operating costs. Again the argument is compelling.

    We also have the proposed subsidies for “clean coal” in general and CCS, which don’t make sense economically any more. These technologies may have a place on a smaller scale as backup for a few decades, but who knows how fast the new technologies are evolving at present.

    There’s at least a billion a year to be saved within 6-7 years, or sooner. There is no longer any common sense arguments, let alone political reasons against accelerating the transition. The government continues an agenda that now has no defensible grounds.

    • wideEyedPupil

      It could be argued that rooftopPV FiTs and RECs (small scale certificates) are not subsidies but payment for deferred grid expansion services. Where as fossil subsidies should be negative to cover all the external costs to society and the environment/climate.

  • Ren Stimpy

    There’s 3 and a half deserts of solar space still available on the rooftops of the buildings in our urbanised areas. FYI. No space or expansion cost.

    • Mike A

      Costs a lot more to put solar on rooftops than in dedicated solar farm utility sized. Have only not done the latter because politicians are uniformed and waste our money. Add to that the credits at much higher rates than we are charged (26c kWhr) and the huge credit towards capital cost and the government and therefore we, would be doing better putting funds into straight PV or CSP especially with storage like in Spain and Morocco.

      • Ren Stimpy

        I disagree. I think it would cost a lot less to distribute solar and storage scattered and broadly, just like alveoli in lungs. How much does long range heavy trunk distribution of electricity add to the cost? Do some more calcs and get back to me.

        • Dan Neumann

          Why don’t you do the calculations?

          Generally, across much of the developed world, the benefit from aggregate solar generation (in the form of utility scale systems) far outweighs the savings associated with distributed generation. This is simply due to the fact that the BoS (balance of system) costs are by far the largest cost contribution of small scales projects. These can in turn be greatly reduced by by combining into a large project, aka ultility scale projects.

          Now, there are different motivations behind these different instillations which means it is not a like for like comparison. Distributed generation merely has to beat the local retail price over the lifetime of the project, whereas ultility scale must compete with wholesale costs.

          In an idealised scenario the retail rate would merely represent the wholesale cost plus any associated costs for the energy to be delivered. However, this is not the case in most markets, largely due to cross subsidies or outdated costing methodologies and this difference is what distributed generation exploits. Currently distributed generation is not “better”, but it does exploit poor business models to make it viable.

          What will be interesting is the tipping point between costs of local generation + storage, compared to centralised generation + transmission, and that is the essence of this article, In parts of the world (Australia in particular) it is already far cheaper to build local micro-grids, but over time this will expand to less extreme rural situations and so far greater market penetration. What will the world look like if it is cheaper to have a local grid for virtually every town?

          Apologies for the monologue, it is an interesting topic though and will develop greatly in the years to come.

          All the best,

          Dan

          • Ren Stimpy

            Why don’t you do the calculations Dan, and let me know your numbers?

        • Mike A

          No efficiency of scale. From a business point of view installing 6,000 panels on 500 hundreds houses is a lot more expensive than in a field cleared and set up as a solar farm. Then there is the fact that Tesla batteries cost more than ten times what utility solar energy storage costs. Morocco has solar plus storage at 17 cents kWh. Even Elon Musk would not say he could do the storage part to compete with that. I’m in utility sized solar.

          • Ren Stimpy

            With just panels I would agree, but with panels plus storage the more finely distributed they are the better, because then the transmission network (the highest cost in the system) can be minimised.

            Also applies to reliability – when those 6000 panels are in one location it depends on one network line, but if they are finely distributed some sections of storage can go out most leaving others on-line – and more importantly the individual houses can power themselves for a time while their network is out.

  • Chris Fraser

    I knew about some of the WA retail subsidies but that was nothing like this. We now know exactly what to do if another Gold mine town pops up !

  • humanitarian solar

    What’s the reason Onslow is planned for cutting fossil fuels 70% rather than closer to 100%?

    • hydrophilia

      You’ve heard of the Pareto Principle? It applies to many things and, in this case, the last bit of FF displacement would probably cost far more than the first main mass.

      • humanitarian solar

        Yes agreed the solar and wind may need to upsized disproportionately to offset the same power use in winter, although it’s still going to be cheaper than diesel. Onslow is apparently setting the future benchmark. The technology must be proven in an effective case study to add confidence to a new paradigm. The main issue needing to be addressed among politicians and mainstream media, is now a cultural tipping point not a technology or cost tipping point. To do that, the technology must be driven to it’s final demonstrated conclusion to eliminate diesel from remote grids. Setting the goal will ensure focused well thought out planning of renewable generators.

        • solarguy

          HS, Even in a 100% scenario, it is prudent to have a back up system until things can be repaired or replaced. If diesel is already there it’s cheaper to leave it there.

      • humanitarian solar

        Onslow is a great opportunity to demonstrate diesel isnt needed in remote communities nor is there a transitional role for gas.

  • EdBCN

    The money to be made here is in developing the network that allows everybody to trade on the network and that accurately values generation,storage, demand response, etc. So that people can make informed choices about time-of-day use, or added cost for higher reliability. There are a lot of issues and opportunities in these sorts of distributed systems that haven’t been developed and fully explored yet. Becoming the worlds expert in putting together these sorts of very complex systems would be a very profitable expertise. Horizon Power should look at this as a free $250 million a year R&D funding to develop their systems. Then get out of the generating business and sell their systems globally. They should set up an office in Silicon Valley for networks and systems knowledge.

    • juxx0r

      Really? These guys buy power for 4-6c/kWh, sell it for 24c/kWh plus network fees that take it above 30c/kWh for most people and are still subsidising the electricity. Some might say that they couldn’t organise a drinking session at a pub.

      Combine that with solar power prices of about 3c/kWh and battery prices of about 12c/kWh and diesel prices of about 22c/kWh all of which are cheaper than the sales price and most would be better to look after themselves.

      • Mike A

        Agree we really have not been doing well.
        Dubai has just dedicated itself to solar 75% and its first completed 200MW of PV is costing them less than USD3 cents kWh for 25 years. India has just done some major solar developments at USD7 cents kWh. All of them were via dedication to efficient large scale and had international tenders from very experienced companies. When have we ever had any solar project go out to tender internationally and why not? Please note that some of the early stage providers are making a fortune because there is no proper competitive process and this will get worse as projects get bigger and more important.

  • humanitarian solar

    On a parallel topic, in the emerging natural disaster with cyclone Debbie, the cyclone is hanging about off the Queensland coast longer than anticipated. The power outages have begun with presently 23,000 properties losing power between the Whitsundays and Mackay.

  • Mike A

    You don’t need to have subsidies for solar or wind they are very economic. We should be putting more out to international tender. Look at the prices of large solar in the Middle East and India they kill ours. The same for wind energy around the world.

    • Mike Shackleton

      Solar is always going to be more expensive in Australia than those countries due to our higher cost of labour. We already would be putting the supply of the components out to international tender.

      • Mike A

        Yes agreed but … We would not put the whole thing out to international tender for the best design and best experience and best price for what reason?
        Yes they have some low costs in India and the UAE but everybody in the industry knows the winning tenders have a low margin too because the tenders were very competitive and under a very efficient process.
        One company has set up systems up in over 20 countries, why would not want them to participate? I know from seeing who is diving into renewables at this early stage in the country, that there are big companies looking to dominate and make high margins. As somebody who has put out international tenders before, in a world of rapidly changing tech you want the latest and the greatest and you get the best price. Just like it is better to have power supply provided by one company you want to have the system built by one company not have public servants doing things for the first time!

      • Mike A

        Sure but it’s less than 3 cents KWhr in the UAE. Plenty of room to move against everything except wind
        If you actually look at the maths of an energy project the finance cost is more significant.