Battery storage is challenging the very structure of Australia’s energy market

One thing we can expect as the energy world transitions away from a centralised and largely fossil fuelled grid to a renewable and distributed market is that it will look very different from what we have now.

But what exactly will it look like? Opinions range, and it will differ from country to country, depending not only on their unique renewable and storage resources, but also their market structures, and policy and regulatory settings.

Australia is a fascinating case study because it has perhaps the most enviable resources and geography for the switch to renewables and has been a world leader in battery storage.

But its rigid regulatory structure – and the strict divide between the regulated monopolies (networks), and the (supposedly) competitive generation and retailing components – is being put to the test by new technologies, particularly battery storage, that are blurring the boundaries between networks, generation and even retailing.

Battery storage is doing this because it can, at once, do many things. Its “value stack” straddles the divide between regulated and contestable markets. It can deliver network style services, store and then sell power, and be located in customer premises. So how do the regulatory bodies decide who gets to own, operate and profit from this new technology?

It’s a terribly important consideration. Australia made its choices about market structures decades ago, and “ring fenced” the various structures to ensure they couldn’t stray into each other’s territory. But it has been apparent for some years that this arrangement will struggle with the technology changes that are upon us.

The Australian energy market has two clearly distinct functions – generation and network delivery. The job of retailing, the right to package up the monthly or quarterly bills, often into a form that makes it impossible for anyone to understand, fell to the generation side of the equation, with a few notable exceptions in regional areas.

Networks, by and large, were not to be seen consorting with customers, despite the fact that it was their poles and wires that delivered the electricity. This was for fear that their monopolistic powers could be parlayed into unfair competition to the retailers.

Now the regulators are realising that this arrangement might not work any more, and are looking at relaxing the rules. And the traditional generators and retailers, and particularly the big “gentailers” that combine the two, are both terrified and appalled because they see their traditional business models disintegrating before their eyes. Their last recourse – as they try and figure out how best to re-imagine their business – is to man the regulatory barricades.

But it may be a lost cause.

Take, for instance, a street light in a remote area, or a single water bore, as cited in a new discussion paper issued by the Australian Enegy Regulator. The network owner may know that the cost of delivering grid power is ridiculously expensive because of the distance and the cost of maintenance.

Until recently, the networks have had no choice but to deliver that power through the grid, even if it cost more, and that’s one of the reasons Australian electricity prices are so expensive.

A new rule on stand alone power systems (SAPS) now allows networks to make the sensible decision to remove the poles and wires and service the pump, or the street light, or an isolated farm, or even a remote community, with a mix of solar, and battery storage, and maybe some diesel back up, which ends up being cleaner, cheaper and more reliable.

But even these new rules require the network to seek an “exemption” if it doesn’t want someone else to come in and do the generation, which in the case of the street light might be a single solar panel, or in the case of a farm or a small community, anything between 10kW and 100kW or even more of solar, plus the batteries.

So now the regulators are working out whether these exemptions should be automatic and, if so, to what extent and to what size. There are tens of thousands of individual customers, and hundreds of communities, and who knows how many remote lights and water bores that would likely be better served with stand alone systems which would help lower costs for everyone.

You can see why the current crop of big generators and retailers are nervous. But the issue goes deeper than that. It now extends to basically every battery that is installed by a network, or possibly any battery installed anywhere in the grid.

That’s because of the ability of battery storage to straddle both network services and generation. In one milli-second they are providing critical grid services, the next they are storing excess wind and solar power, or injecting power back into the grid. It is becoming increasingly obvious that they are well suited to removing the need for adding network infrastructure, or replacing it entirely. Who gets to own and operate them?

Until now, various players have had to dance around the questions, using complex ownership structures and leasing arrangements. But it is clear it is not tenable over the long term, particularly as the value stack of the batteries grows.

The regulator is wrestling with this question, whether to relax the ring fencing guidelines and to allow network operators to use batteries not just for grid services, but also “contestable” services such as storage.

Networks have gotten around ring-fencing in some situations by creating new “arms length” subsidiaries that are not supposed to benefit from the financial strength of their monopolistic parents. But the joke, and it may be apocryphal, is that a “ring fenced” entity is mostly about having different coloured hard hats and hi-viz vests. Even the regulator admits that staff are often common to both entities.

“If we grant a waiver that allows a DNSP (distributed network service provider) to offer services other than distribution services, we lose some transparency provided through legal separation of a DNSP from an affiliated entity and our ability to verify whether a cross-subsidy exists is compromised,” the AER writes in a new discussion paper.

The AER acknowledges that network operators may be best positioned to facilitate the use of network-located batteries due to their knowledge and understanding of network needs, compared to third-party non-network option providers.

But it is also concerned about the risk of cross-subsidies.

“There is no obvious or straightforward method for allocating the cost of a storage device across different uses, in particular regulated and unregulated uses. Storage can provide network and non-network market services simultaneously, or switch the services it provides within milliseconds.

“Moreover, the split of network and market services provided by a storage device could change substantially over time. This also creates a risk that customers of the regulated network may cross-subsidise provision of unregulated storage services by an NSP. For example, an NSP might initially purchase a battery with an intended use of 80 per cent network use and 20 per cent other uses. Over time these shares might change resulting in a cross subsidy, because the share of the initial cost recovered from network customers does not change.”

It is also concerned that third parties would be dissuaded from investing in battery storage if they think that they can’t compete with networks in terms of knowledge of strategic locations and usage data.

“So far we have not received waiver applications to use storage devices to provide electricity services in a contestable market on an ongoing basis, however we anticipate this will not always be the case,” it writes. “We therefore need to consider our approach to weighing the benefits and harms and if or how any potential harms might be minimised.”

It’s going to be a fascinating and important debate. The technology change is upon us, and has so far danced around the policy makers who have been unable or unwilling to keep up. But there will soon come a point when deployment is stalled by regulatory artifices.

Western Australia is fortunate. Unburdened by the regulatory complexities of Australia’s NEM, it has allowed its network operator Western Power to get on with the job, taking customers off the grid and providing them with stand alone systems where money is saved and reliability improved, and installing “community” batteries across the network that provides a common resource for nearby customers and strengthens the grid.

But for Australia’s main grid, the regulators that have been given the hospital pass of unscrambling the egg of Australia’s impossibly complex energy rules, and remove the artificial barriers at the same time as protecting consumers. It might be the hardest job of the lot. Building big batteries is apparently relatively straight forward. Deciding who should own and operate them  is not.