Within a few days of each other, Queensland network operators Ergon Energy and Energex produced annual reports that gave nearly diametrically opposed views of the current state of the play in the electricity market and its future.
Both have been impacted by the proliferation of rooftop solar – both during the generous subsidies and since. But where Energex saw solar mostly as a threat to its business model, as increasing numbers of customers installed modules on their rooftops and consumed fewer electrons from its $10 billion poles and wires business, Ergon saw opportunity.
Or perhaps Ergon saw the inevitable – given that its $12 billion poles and wires business is one of the most far-flung in the world, and customers are already paid a subsidy of $850 each to keep prices down.
Ergon raised the possibility that customers with solar and batteries could serve themselves for less cost and without the grid. In reality, it will probably happen much earlier than that, particularly if the state subsidies are ended. That is why Ergon, like Vector in New Zealand, is less interested now in investing in traditional “poles and wires” and more interested in distributed generation and other “smart solutions” that herald the arrival of game-changing technologies.
The opposing positions of Energex and Ergon, despite their common shareholder is, in many people’s view, a perfect illustration of the sort of choices and challenges being thrust in front of utilities – network operators and generators – in Australia and across the world.
Solar, as UBS asserted earlier this year, is becoming a no-brainer for customers across the world, and as energy industry leaders such as Stephen Chu and Jon Wellingham have suggested in recent months, utilities will have no choice but to develop a new business model.
Citi recently analysed the state of play in a special report on utilities in the US. It noted that solar has become a polarising topic – some utilities were embracing the change, and some were trying to pretend it didn’t exist. But, as Citi noted, solar is here to stay and only just at the beginning of its growth cycle.
“The perception of solar as being inefficient and requiring material subsidies is no longer accurate,” Citi says, adding with a degree of understatement that this concept “is not being fully appreciated” by the utility sector.
“Solar is already competitive at a domestic level in many countries, and becoming increasingly so due to its extremely rapid “learning rates”,” Citi adds. “And, this is just the beginning. Solar’s technological nature means that it will keep getting cheaper as we begin to approach parity, while conventional fossil fuels are more likely to increase in production costs – this dynamic is not being fully appreciated in the power sector.”
By 2016, Citi says, solar will be “cutting it” in most parts of the world, stealing share of new electricity demand, stealing demand from previously installed generation, and doing most of it at the most valuable ‘peak’ part of the demand curve.
To what extent this will occur, however, may come as a shock to utilities and energy analysts.
In its new Energy Darwinism report released this week, Citi says the combination of solar, energy efficiency and new technologies could reduce the “addressable” market of utilities in developed countries by up to 50 per cent. Most utilities in Europe, the US and Australia have been experiencing falls in demand in the last few years, but most are assuming that this will rebound. Not so, says Citi.
Using Europe as an example, Citi says the potential for demand reduction is substantial and overall electricity consumption could decline by more than 20 per cent across Europe just through energy efficiency.
The move to more distributed energy and micro-generation will also take volume market share away from centralised generation and utilities. It notes that solar industry predictions – which may be conservative – that 15 per cent of European electricity demand will be covered by solar PV by 2030.
Citi says that adding other forms of distributed energy such as combined heat and power (CHP) means that the decentralised market could account for one third of the overall utility market in the next couple of decades.
Here’s how Citi says it could play out:
Distributed resources (solar, CHP, wind) both for households and industry could cover 30-40% of the eventual demand
Renewables (onshore wind, offshore wind, biomass,hydro) to constitute a big portion of centralised energy that could cover 30-40 per cent of eventual demand. (This is Europe, so in countries such as Australia and the US, utility-scale solar will play a more prominent role).
Conventional generation (nuclear, combined cycle gas and coal) to cover some of the base-load demand as well as provide back-up to the system, but covering as little as 20 per cent and a maximum of 40 per cent of eventual demand.
Citi says the pace of change may vary from country to country, depending on natural resources, economic activity and technology bias. But it notes that even France, currently served 75 per cent by nuclear, could have as little as 50 per cent centralised generation by 2025-2030. France has a lot of catching up to do in energy efficiency (its households use nearly 50 per cent more energy than German households, for instance), so rapid changes could take place in little more than a decade.
By 2025-30, Citi says, the end result will probably look “revolutionary” versus the utility model of 2000s. “Utilities in developed markets are .. likely to have to evolve into a new type of company,” it says.
It could, suggests Citi, result in a split between “centralised back-up” and localised grids – possible even at the level of multiple streets. The centralised companies may have to revert to what it calls the old regulated rate of return model (something that Australia is yet to evolve from). Read more about that here.
That may make it interesting for utility owners such as the Queensland government, which wants to merge Energex and Ergon and install a single management. It will be interesting to see which point of view has primacy when the entities are merged by the conservative government.
Which would it choose? Given the track record of the conservative government, and the stunning ignorance of some of its advisers, one fears that it will be Energex. Perhaps it won’t be because Ergon has seen the future and feels something should be done about it. Maybe the the official reason will because Ergon Energy CEO Ian McLeod channelled Bob Dylan without government authorisation.