Five things we learned … about energy market death spirals

Who knew that the first weeks of the carbon price would be this entertaining? A bakery chief resigning after urging his franchisees to post coalition propaganda in shop windows and blame the carbon tax and its impact on electricity costs for a stunning rise in the cost of sticky buns. The Labor Right chose the occasion to decide that the next best thing to attacking rival factions is to attack the people that keep them in power. The radio shock jocks have been absolutely compelling. No time to tune into Radio National. Stand-up comedy is rarely this good.

But amid the stunts and the tales of outrageous misfortune over the new carbon price, it’s become increasingly clear that one of the most stunning changes in a major industry is taking shape right before our eyes. It’s about the provision of electricity. We are on the cusp of one of the most dramatic industry upheavals since Kodak stared at digital technology and blinked, and newspapers editors were shown an i-pad and returned to their cross-words.

The Australian Energy Market Operator set the ball in motion two weeks ago with its updated energy forecasts, noting a “game-changing” fall in demand.  AGL Energy made it clear what the industry thought about this when it published its study on the “energy market death spiral.”

Fixed line telcos across the world know all about this. In energy, it’s actually got surprisingly little to do with climate change and carbon policies, although the extent of those will hasten and shape the transformation. The challenges and opportunities arise a from a mixture of falling demand, the emergence of solar PV as a mass market product, the gold plating of networks by greedy state governments, and the introduction of disruptive technologies such as storage. One aspect is wonderfully chronicled by Mike Sandiford today, this story highlights the case of the disappearing peaks, and a sign of the future is illustrated by Infigen Energy’s announcement that it is building the first solar PV/Battery storage hybrid plant that is connected to the National Electricity Market. It is small but it could have a profound impact on the NEM.

The path of least resistance

Make no mistake, this is a serious issue confronting the energy industry and there are billions at stake. It is one thing to see the present and imagine the future, but it’s harder to navigate the best path forward. This is the challenge facing the energy industry and policy makers. The utilities have responded by doing what the French would do, screaming “sauve qui peut”, which can be roughly translated into “every man for himself”, or ‘save what you can”. Or, if you’re having trouble changing with the game, at least try and change the rules, or not change them as the case may be.

The network operators have been stubbornly resisting anything that can resemble energy efficiency or demand management initiatives, or a curb on their profligate spending. Among the utilities, Origin Energy re-launched its attack on the renewable energy target, in an attempt to protect its gas-fired generators, and other planned investments. AGL Energy turned its focus on time-of-use pricing. All drew a chorus of support from vested interests.

Origin Energy’s problem is that it has invested heavily in recent years in gas plants, reasoning (not unreasonably) that a fuel that is cleaner than the coal-fired generation that currently dominates the Australian grid would be a sensible move.

But gas has found itself squeezed out by a limp carbon policy and falling energy demand. Its 630MW Darling Downs combined cycle gas fired generator, for instance, the cleanest baseload generator in the country, is running at less than half capacity just two years after it was built. It is more or less functioning as an intermediate or peaking plant, and that is not why Origin Energy spent $1 billion on its construction.

Two things can solve the problem – lifting the carbon price to $50 or $60/tonne of Co2 to squeeze out coal, or delaying or diluting the renewable energy target to squeeze out wind and solar. One glance at Australia’s political elite, and of its media, quickly informed Origin Energy of the path of least resistance. And so it has attacked the RET.

It’s a matter of timing

AGL Energy opposes diluting the RET, arguing it would be disastrous for renewables, but its economists were expressing great concern about the plight of low income families in the face of an onslaught of electricity price rises, and used this as an argument to urge caution about energy efficiency policies and for the introduction of smart metres and time of use pricing – a little more upfront pain for long term gain.

Of course, AGL Energy could try and address this issue through other means, such as using the strength of its balance sheet and help introduce its customers to solar leases and other financing options currently all the rage in the US. That way, for no upfront cost, struggling households could have modules installed on their roof, reducing the size of their bills and the amount of electricity that they would need to buy from AGL Energy. Ooops! That might just add to the death spiral. Best put them on a time-of-use metre then, so they can do their washing at midnight.

There’s light at the end of the tunnel

But bringing the debate back to energy and climate, the news has actually been quite good. This graph from consulting firm Pitt & Sherry below illustrates Australia’s falling demand, and its even greater fall in energy emissions. And this is before the carbon price was introduced.