Can energy utilities keep their customers, or will they flee the grid?

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Energy utilities have decided to take solar and storage seriously after all, and at least one is said to have a ‘plan B.’ This comes as new research says one-third of customers will switch suppliers, or leave the grid, as solar, batteries and EVs provide new options.

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Screen-Shot-2013-12-05-at-3.24.09-pm-150x150One of the great imponderables for the global electricity industry at the moment is to what extent they have a captive audience. For decades, most consumers have had no choice but to use electricity supplied through the grid, and were happy to do so.

But now that the cost of delivery of that electricity has risen so high, and cheaper alternatives are emerging, will the so-called “democratisation of energy” cause a fatal blow to the incumbent’s business model?

It is a question that is, or should, be occupying the minds of the executives of the trillion-dollar electricity business, and the shareholders whose investments they manage.

After downplaying the threat of solar for several years, and all but abandoning the business, the big three retailers – here and here – have just recently announced that they would re-engage with distributed energy, and the technologies that go with – solar, battery storage, electric vehicles, and smart software. Part of their fear, EnergyAustralia warned a few months ago, is that customers may flee the grid.

The push back into distributed generation and new technologies is at least a recognition that business as usual will not prevail, even with the repeal of the carbon price, the push to neuter the renewable energy target, and other regulatory and tariff changes that will make new competitors less attractive.

But all accounts, at least one of Australia’s leading electricity companies have quietly built “alternative” business models that are ready to deploy when the moment is right. But will that be too late? The experience of Kodak tells us that waiting to protect the revenues of the incumbent business model is a tricky and risky business. And there are many who feel that current utilities face the same outcome.

An interesting insight was given at a Bloomberg business summit las week in Sydney, where Grant King, the CEO of Australia’s biggest energy utility, Origin Energy, questioned the need for the renewable energy target, saying it was forcing renewable energy upon consumers, when it should be a matter of choice.

King argued that before the RET, many customers took up green energy and paid more for it. That had caused wind farms to be built. He also said while recent polls showed renewables got 80 per cent support from the community, only 7 per cent said they would pay more for them.

A subsequent panel discussion highlighted some of the conflicting views. Tony Wood, the head of energy at the Grattan Institute, a leading think tank, and incidentally an ex Origin executive, appeared to side with King.

Wood reflected a prevailing view in the utility industry that consumers were largely apathetic and would not bother changing retailers. It is a strange view to take in an industry that for the past few years has experienced churn rates of around 24-25%. Which is to say that every year, one in four customers is motivated to vote with their feet and switch suppliers.

Right now, it’s just a merry-go-round, which is bothersome but not really costly (in some states the discounts offered to such customers are subsidised by the rest, it is called retail head-room).

But what happens when new operators arrive with new technologies and different models.

Meg McDonald, the chief operating officer of the Clean Energy Finance Corporation, which is providing finance to companies approaching the market with new consumer models, such as leasing and power purchase agreements, says it is clear that consumers want greater certainty and great control over their choices.

“I was interested in Grant’s perception – that the portion of people willing to pay extra was only 7 per cent. I wasn’t surprised – I wouldn’t tell energy company that prepared to pay more.

“People come to expect that this technology provides a way of reducing rising energy costs. That is changing the consumer perception and is what is going to drive a lot of these business models.

“It will be same as mobile telephone – it will be driven by consumer choice. The moment that people want to have a given technology, because they can control it on an app on their telephone, for instance, it will spread like wildfire.”

Mark Twidell, the head of SMA Australia, the local subsidiary of the world’s biggest inverter company, said that operators that can offer consumers real choice would win out, and he noted that established US companies were coming to Australia with new business models such as leasing and power purchase agreements.

“In the long run, electricity from no moving parts seems to have a great appeal,” Twidell said. “It is distributed where you want it, and it is potentially the lowest cost of any other technologies … What consumers want is control of their destiny – and solar and storage offers that.”

A recent survey by management consulting firm Accenture suggested that Australian consumers were less likely to defect from energy utilities to, say, “big box” retailers, because they were happy with system reliability, despite the high price they pay.

Still, Australian consumers are “energy literate”, possibly because of the very high penetration of rooftop solar in households. One third of Australians are tech savvy, interested in environmental impact, interested in off grid because of the independence, it could offer, and interested in buying or paying a premium.

“It’s a great opportunity,” says Greg Guthridge, Accenture’s global head of utilities. “Ultimately as much as one third of Australian consumers could go off grid, or be partially off grid.”

Indeed, Accenture’s survey comes to pretty much the same conclusion as the CSIRO-led Future Grid report, which noted that 30 per cent of consumers could go off grid, and nearly on half of demand could be satisfied by on-site generation. The deciding factor on leaving the grid or not could depend on how the incumbents react, and how they price their offerings.

As Guthridge notes: “There is an open question about who is going to provide these services. It’s an opportunity for traditional or non traditional energy providers.”

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12 Comments
  1. Tj Andrew 5 years ago

    “What consumers want is control of their destiny – and solar and storage offers that.”– cannot agree with you more, Giles. As more and more people are informed about solar storage technology and how customers can have the choice, fleeing from the grid is to be expected.

  2. Chris Dalitz 5 years ago

    The theme of this years EECON in November is “Energy networks -evolutionary transformation or death spiral” – earlybird registrations close next week – so the electricity businesses are certainly aware of this issue.

  3. bill 5 years ago

    Grant King might be wrong about “green” power paying for wind farms. I did the numbers many years ago for WA’s SWIS and using the published numbers of customers and assuming various levels of take “green” power up, found … the income might just pay for the fence around the Albany Wind farm and its maintenance. The plant cost $45million.

  4. Rob G 5 years ago

    I am in no doubt whatsoever that our big three are headed for a large scale disruption. There are already other players emerging, like meridian, who don’t have that big company mentality. A kind of sleeping giant, blissful in their own false analysis. Grant is one of these. He sees the public heavily interested in renewables, but states that only 7% are prepared to enter that market at a higher cost. Here’s the thing, power will continue to increase in price and renewables will continue to fall. It’s no longer a matter of being prepared to pay more we are already at the tipping point the costs are the same – just look at powershop. The ‘Kodak’ moment will be quick and the big three will be scrabbling to hold their customer base. There won’t time to build for the new demand and they will quickly end up on the sidelines. My message to them is stop playing games and get building renewable energy before it is too late.

    • Jim Young 5 years ago

      The “Kodak” comments are especially meaningful to this former employee of a Kodak company, receiving part of my pension from the Pension Benefit Guarantee Corporation after they went bankrupt. I left earlier than I had to, moving on to something more sustainable.

      • Rob G 5 years ago

        I too have seen this part of the industry collapse first hand. I worked alongside film stripers who were like surgeons with scalpels. That industry died and now many of these people, that I know, work in Bunnings.

  5. GreenGenie 5 years ago

    From this article I don’t admire the predicament big coal and their lapdog power utilities are now rapidly facing nor the honest folks with energy sector jobs in rural Australia.

    I expect a painful and protracted labour as asset-stranding starts to take its toll with miners searching for more overseas contracts for thermal coal as local demand tapers and wholesale generators get their heads around asset write-downs.

    Also, I wouldn’t underestimate the cunning of the power utility companies to leverage their ownership of the network to keep distributed power and storage start-ups at bay while they negotiate with Govt. for the coming paradigm bailout.

    Ultimately and unfairly, the consumers who can’t afford to ‘throw the green switch’ will be the victims of this necessary transition, making for a perfect storm.

  6. Chris Fraser 5 years ago

    It’s not helpful thinking if incumbent retailers see renewable energy as a threat, as opposed to opportunity. Because of renewables’ tendency to reduce NEM spot prices, they automatically see it as a threat. They must be reactors rather than strategic planners.At the same time they appear not to be ‘getting’ the opportunity available through volume. In the 1930s the old Sydney County Council used to have shopfronts in local Council buildings to improve electricity’s public acceptance. They used to sell light bulbs, clothes irons, radios, water heating, they were hungry for ‘apps’ (not the word they would have used). Does it appear to any of them that efficient solid state electronics alone fuels the need for more electric energy ? Air source heat pumps give electric a four-fold advantage over gas and solid fuel appliances, and can be used for cooling as well.The price of petrol and diesel appears to be increasing, yet most of us insist on having personal transport for job convenience and lifestyle reasons. At the same time the local conventional motor industry is dying. Is that an opportunity right there ?If you put it all together, there needs to be somebody who can provide all kinds of services concerning the consumption – and thus supply – of efficient electric energy. But we’ll probably have to leave it to the ‘experts’ to decide exactly what that enterprise entails.

    • wideEyedPupil 5 years ago

      air source heat pumps can be as much as thirteen times more efficient to an existing ducted heating system the bze buildings plan research shows.

  7. suthnsun 5 years ago

    I used to think the toxicity and embodied emissions profiles of battery storage meant it was a very poor alternative to the grid, so grid participants should be encouraged to take up the challenge of delivering clean power cost effectively. Intransigence on their part and the arrival of very low toxicity and embodied emissions battery technology and inverter technoloy means it would now be possible to get a good environmental outcome by grid defection en masse and the world can’t afford to be deferring to them any longer..

  8. Rob G 5 years ago

    This is perfect example of unchecked capitalism, where a law allows a business charge the same amount to a declining customer base. We are already aware that those without solar are facing bigger bills (those with solar will still pay more for what the use from the grid, but it’s less than those without solar) . This kind of law has the potential to wreck the very business it hopes to protect. The irony of the situation is not lost on us. What we are seeing is self cannibalisation of a dirty business. Prices will get so out of hand that even the most reluctant person will be looking to install solar. Imagine, Andrew Bolt installing solar!

  9. Mags 5 years ago

    If the power companies had any vision, they would be working hard to encourage renewables, and a new system of delivery and a smart grid. It is entirely technically possible to have all this, abate emissions, and save a very great deal of money for consumers. Also, once we have electric cars (which are being taken up fast overseas), they become part of the mix as well. But it is complicated, as peak load will shift from mid arvo to evening when everyone plugs in their car. However, a smart grid could cope with all this and be heaps more efficient than we currently have, saving us all money. Car recharges would be automatically staggered and overnight.

    I have no sympathy for these utilities, they have bought this on themselves by not moving with the times, and worse, by ripping us all off with way too high prices. (I switched to Powershop 3 months ago and have saved about 50%, so the others are ripping you off, because they were assuming you had no choice, well you do).

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