Big utilities charge into distributed energy, one step at a time

This will not be a “Big Bang” event like that of their European and north American peers, E.ON, and NRG. But Origin Energy and AGL Energy, the largest electricity utilities in Australia, have seen the future, and decided it is in distributed energy. And they are determined to embrace it, albeit in their own good time.

AGL Energy this week became the first of the big energy retailers in Australia to publicly launch its new zero-down rooftop solar product, a power purchase agreement that will see AGL own the panels, and customers pay for the output.

AGL Energy was the first only because Origin has chosen to fly under the radar. In the past few months, it has been trialling a similar product with family and friends, and last week quietly opened it up to the public.

Both utilities are taking a softly, softly approach. AGL says its Solar Smart Plan of will be “limited volume” in NSW and South Australia. Origin is also starting slowly. The reason appears to be this: distributed energy works against the very model that has dominated their industry for a century. Getting the balance right will be critical for the future of both companies, and many others.

Marc England, who heads the New Energy and strategy division at AGL, which will encompass rooftop solar, battery storage, electric vehicles, and home energy management systems, says this is a different type of service.

“It is different to just being a centralised grid provider,” England tells RenewEconomy in an interview.

So have the big utilites come late to the market? “Everyone would say we are late into the market. We’ve made no claims otherwise, but we are getting serious about it now. It’s important we do it right,” England says

And how quickly will this transition occur? “It is a gradual change. It is dramatic in many respects. It will evolve in the next 5, 10, 15 years.”

And so, what wins out in the end, decentralised or distributed generation? “We think the future is both,” England says.  “It will not be one or the other. But there is a definite shift towards more distributed form of generation and management of energy at home.”

It is the scale and speed of this transition that is the subject of great debate. E.ON thinks it is happening so quickly it is ready to jettison its centralised, fossil fuel assets. NRG in the US also thinks it is happening quickly. So do the myriad small players, and not so small solar giants like SunEdison, SunPower and even Google that are entering this market.

AGL Energy is betting it is progressive, and that the vast majority of customers remain “fully on the grid”. As we reported last November, when England made his first big presentation, AGL Energy expects one-third of customers to go either off the grid, or through battery storage, partly off the grid, by 2030.

But the remainder will stay, England believes, due to a combination of demographic, housing and technology factors.

“While some people will want to go off grid for various reasons, that will not be right answer for everyone,” England says. “Having back up from grid, to be able to export to the grid, to share energy in the future, in different models, that will be important.”

Still, even if England recognises that the big utilities have been late to solar, and are now targeting the “family market” that hasn’t been able to afford the upfront payments, he wants to ensure that AGL is at the front end of the storage revolution, as we report here in our story about AGL offering battery storage to customers before the end of the year.

“We are going to continue to innovate our business model, to learn as we go to try new things. We need to learn to create value for shareholders in a slightly different way. The PPA product is one step along that journey.”

Over at Origin Energy, the company is also recognising that distributed generation is the future. CEO Grant King said last week there could be 20GW of rooftop solar in the country by 2030, a number that would turn the current dynamics of the energy industry upside down. And storage, electric vehicles and smart management systems will also follow.

But is there a role for gentailers like Origin and AGL in such a future? If the likes of Ron Stobbe, the head of SA Power Networks, the monopoly network operator in South Australia, are right, then a future of decentralised generation will leave room for networks, but not much room for centralised generators and retailers.

That’s because centralised generation will be gradually phased out as up to 50 per cent of power is sourced locally. And the retailers will need to find Something To Do, apart from just packaging up bills. Hence the push into the ownership of solar and storage, and maybe even electric vehicles down the track. Although not everyone thinks that PPAs are good for consumers.

Origin might be better placed among the gentailers because it is less exposed on the generation side, reasoning it is a better bet to buy some of its electricity on the wholesale market, where prices have been at record lows, than it is to own the assets. That means it has less of a generation portfolio to protect against the incursions of decentralised energy. It now seems to be a deliberate strategy by King.

Last week, RenewEconomy interviewed Frank Calabria, the head of Origin’s energy markets division, and Phil Mackey, who has been brought in to head the newly established New Energy division, and lead the solar strategy.

“We are rebuilding the solar business, renewing the focus around it and looking at the business models of the future,” Calabria says.

One of these is pay as you go method implicit in the PPA strategy. Origin has a partial payment system as well.

Adds Mackey: “We’re interested in solar as a distributed energy source, whether in residential or commercial space. We prefer the model where we own the systems and sell the electricity. That’s because it is closer to our current existence as an energy retailer, and it avoids a race to the bottom on price and quality.”

The question for both companies is can they keep pace? And can they rely on their “brand” power retaining consumers when greater choice is available?

Right now, they are taking it slowly. “We are just assuring ourselves of our ability to sell the product,” Mackey says. “We are reluctant to dive into the market until we are sure that customers will be delighted by the product.”

But they don’t have that much time. “It is going to evolve,” Calabria says. “It will be a relatively fast evolution.” Particularly when it comes down to storage, and the options that that creates for consumers.

“It is a fast moving space. We are watching it closely. It (the storage market) is clearly moving rapidly globally. It is early days , and we are looking at it as part of the mix. How that works out is too early to say, but it could be that it could occur faster than you think.”