Do energy consumers want a smart grid, or no grid at all?

Robin Gudgel, the founder of Californian energy firm Midnite Solar, has been helping people provide their own electricity – mostly with renewable energy sources and batteries – for their homes and small businesses for several decades. His best customers have been “hippies growing pot”, leading alternative lifestyles out of reach of both authorities and utilities. But now it’s more of a mainstream trend – people living where the grid doesn’t reach, and some who want to look after themselves because they want to make a statement about their green credentials, or their independence.

“Very seldom do you get people who get mad as hell about electricity prices and go off grid.  It simply costs too much,” Gudgel told RenewEconomy during a recent visit to Australia. That may well be the case in mainland USA, where electricity prices are relatively benign. But in Hawaii, where electricity prices are three times higher, customers are getting as mad as hell and are reportedly leaving the grid in droves. So is the US military, which plans to take the K-Bay marine base north of Honolulu off grid by 2015, and install a 50MW biofuel plant (powered by papayas) at another army base. Energy independence is the big new strategic play of the US military brass. And it’s on the wish list of consumers.

Why does this matter to Australians? Well, it turns out that Hawaii and Australia have a lot in common. Both are islands, both have plenty of sun, and both have really high retail electricity prices – Hawaii because it relies on imported fuel and Australia because of its massive network infrastructure, much of which may be surplus to requirements – and both have falling energy demand. And both have energy companies warning about the “death spiral” of the utilities business – which is what is expected to happen when increasing numbers of consumers choose to either leave the grid, or significantly reduce the volume of electrons they draw from it because other technologies, such as solar PV, offer them a cheaper alternative. How regulators, utilities and consumers in those and other countries react to the challenge of dealing with the death spiral will shape the future of our energy systems.

In Australia,  Prime Minister Julia Gillard has now brought that issue to the political front page by focusing on the massive infrastructure costs and the apparent greed of the government-owned distributors. Like her sudden embrace of the carbon price, one senses that this is driven by political opportunism and need. Because it could have been made a long time before. But, like the carbon price, this can also pave the way for much needed reform. And Gillard made two key points – apart from drawing attention to the massive overspend on poles and wires – about the energy systems of the future in her speech on Tuesday.  One was about the introduction of smart technologies, and the other was about the power of choice. “People should be able to use what they want when they want it, and cut out expensive services they don’t need,” Gillard said.

Gillard is right. In many ways, the debate around our energy future is a repeat of the one held among the pioneers of the electricity industry more than a century ago.  Thomas Edison believed that electric generators should be located near where the power is needed (distributed generation), but his rivals George Westinghouse and Nikola Tesla pushed for large centralised generation facilities located far away from where the power is needed (central generation). As it turned out, economies of scale led to bigger, cheaper and more distant electric generators and larger and longer transmission lines, and the centralised model has held sway since.

But new technologies are now offering alternatives and distributed generation has become cost-competitive and reliable. The debate is rekindled and intensified because the centralised generation pushed by Westinghouse and Tesla now is in danger of being made redundant. The extent of which was highlighted by The Hawaiian Electric Co (HECO), which said in  a recent regulatory filing that “customer self generation” (i.e. solar PV or co-generation) and technological developments such as energy storage could cause its businesses to lose customers or render its operations obsolete. It said “cascading natural deregulation” meant that as the cost of renewable systems trend downward and electric rates go up. “Those who can leave the grid, will leave the grid, by building or installing on-site generation,” it said.

“The fixed costs associated with energy production, transmission and distribution will then have to be absorbed by the remaining (smaller) rate base,” it wrote. “Thus, those who remain will see their rates go up even more, causing more people to opt out of a centralized grid, driving the rates for those who remain even higher. Under this scenario, companies such as HECO would be sucked down into a bottomless vortex and ultimately fail as a viable investor-owned corporation.”

AGL Energy has painted a similar picture of a declining revenues and increased rates for those that remain, although it chose to cast its “death spiral” more in terms of the impact of the less wealth off, rather than the utilities themselves. But it’s how utilities and distributors respond to these threats that will influence the choices that customers make. Both HECO and AGL Energy have attempted to restrain the deployment of solar PV – AGL Energy by portraying its deployment as the province only of the wealthy, and successfully lobbying for tariffs to be cut, and HECO by imposing arbitrary capacity limits (Solar PV, though, accounts for 20 per cent of construction jobs in Hawaii). Utilities in Australia have adopted similar tactics, by either restricting the deployment of solar based on issues of network stability, or by recasting tariffs to be based on capacity rather than use.

The power of choice issue espoused by Gillard is a delicate one for the industry. AGL Energy’s response to the threat of natural deregulation is to push for government deregulation, particularly for time-of-use pricing, which it sees as a key reform to enable choice, and encourage the introduction of the smart appliances and smart meters. Some fear, though, that smart grids are simply a means to strengthen the centralised system through the use of two-way electricity flows, telecommunication systems and computers. The botched roll-out of smart meters in Victoria, where it became a cost burden rather than an avenue to cost savings, illustrates how a smart idea can be poorly implemented and badly sold.

Utilities know they have to persist, because a smart grid holds the key to their future. Origin Energy is getting a taste of how to combine the three of the ground-breaking technologies that will dominate electricity use in the future – electric vehicles, solar PV, and home displays. Reneweconomy understands that under its deal with Nissan Leaf, where Origin Energy is providing charge points, more than half of customers are taking up an option to include solar PV as part of the package. The next step is to provide contracts for the supply of electricity. This is where the industry must be headed – a change in the business model from just electricity supply to an electricity service, where the onus is on the utility to reduce its cost of supply. No one is sure how exactly this plays out – do the energy retailers win, or do the vendors of EVs, smart appliances or the providers of smart technology and communications win out. One thing is for sure – technology changes mean that consumers will certainly have the power of choice.

It should be remembered that Australia has a long tradition of off-grid usage. Most of our largest mines provide their own power. It costs them a bomb, but when mineral prices are high they don’t much care. Even until 2008, 70 per cent of Australia’s solar panels were deployed in off-grid, remote locations. Users had no other options. Now solar is offering not just a cheaper alternative to diesel power in remote locations, it is offering cheaper alternatives to power drawn from the socket in the main population centres, and the hamfisted attempts by distributors and retailers to limit the attractiveness of solar PV is making people as mad as hell. As CBD Solar’s Jeff Bye highlighted in this story – one of the most common inquiries the company receives is how to get off the grid.

It’s not that easy, because battery costs are not yet low enough. But commercial and industrial users are considering the same options. Grocon is refurbishing an historic building in central Sydney and it won’t be connected to the grid. The City of Sydney has drawn up plans to reduce its dependence on the grid by 70 per cent, through co-generation and tri-generation, and quietly dreams of severing the connection altogether. As Bye wrote: “The response from networks operators should be more collaborative and understanding of the market dynamics and accepting of the new role they will likely have to play. This will involve changes to the asset’s valuation and pricing regimes – no small thing – but in the end will deliver better outcomes for society, the environment and energy users.”

Unless the electricity industry, the regulators and the politicians get this right, we’ll all end up being as mad as hell, and exercising our power of choice. Technology will make that possible.