New Zealand electricity network operator Vector intends to broaden the rollout of its solar storage package for homes, saying it is clear that rapid developments in costs and technologies mean the nature of the electricity market is changing – and utilities needed to adapt, or face oblivion.
In an exclusive – and remarkable – interview with RenewEconomy, Vector CEO Simon Mackenzie says the success of the solar storage leasing package offered by the company earlier this year is confirmation of a fundamental change in the electricity industry. (You can read full interview here)
So much so, Vector is to expand its solar battery lease offering to larger scale commercial businesses. He expects up to half of all new homes, and a third of consumers overall, to generate, store, and manage their own electricity.
Not surprisingly, Mackenzie speaks of a “new economic reality,” which means that the core of the industry is moving from centralised generation and transmission networks to the consumer. But he says most network operators simply refuse to accept this.
“To be blunt, I think there are a lot of utility operators who are stuck in the old paradigm; that it is a remote generation brought to the market by transmission, connected in by distribution and it’s a one way flow,” Mackenzie says.
“The way we look at it is that consumers now expect … to have the utilities services delivered to them the same as they have banking services, telecommunication or any other type of services, so that they are accessible. They want choice, they want information, they want to choose whether they want to manage it themselves or have it managed for them.”
Vector attracted huge interest earlier this year when it rolled out a leasing option that combined rooftop solar and battery storage and control devices. We wrote about it in June and it has been one of the most read stories of the year.
The Vector offering was for a 3kW solar PV array (Trina), an inverter (Schneider) and a 10.7kWh lithium-ion (Kokam). It will allow householders to use all the electricity produced on their rooftop, provide for nearly half of their total consumption and smooth out the peaks.
Vector offered a $NZ1,999 up-front payment, and leasing options over 12 years that meant that the entire package would amount to a reduction in the household’s electricity bills.
Most readers assumed that the offering was heavily subsidised by Vector, given current estimates of the cost of the various technologies – particularly battery storage. Mackenzie says it wasn’t.
First of all, he notes, there has been no government subsidy for rooftop solar in New Zealand, which is why there are comparatively few rooftop systems, even in a (relatively) sunny city such as Auckland. But when Vector did its calculations, it took into account the network benefits of the installation, rather than just the cost of technology.
“No, it wasn’t heavily subsidised,” Mackenzie says. “It was just by recognising the network benefits from a regulatory perspective on asset deferral and capital and how that fits with network control, as opposed to trying to load it all on to the customers, as well as the customer, from an affordability perspective, paying an upfront cost.”
This is important because it goes to the two schools of thought about the economics of battery storage. As we highlighted in this article, the cost of battery storage does not (yet) make sense if a consumer bears all the cost. But as we highlighted here, it does make sense if the network benefits are brought into account – and if those benefits are shared between network and consumer.
Mackenzie says that it is clear that the electricity supply industry is moving into the home, and away from the centralised, engineering-on-a-massive scale, planning perspective.
This is the aspect that Mackenzie says utilities don’t get. He says many think they have “done their customers a favour,” simply by stringing a cable to their premises.
“I think that their business models are built on the old paradigm. I don’t think they are customer focused. If you don’t embrace the technology and the consumer space, you will be either substituted by other operators that are in that space, or your business will fade off and become much more intermittent and volatile.”
Mackenzie expects the cost of solar PV will continue to fall – although not as rapidly as the last few years, and the cost of lithium-ion batteries has dropped 50 per cent in the last year, and will continue to fall rapidly. “The economics of those two combined are competing with grid. Grid parity is coming closer as we speak.”
That means that transmission and large generation, which used to be seen as the centre of the industry, is now just moving back to being a “big battery from the outside. The future will be based on what is happening inside the home.”
Mackenzie has solar storage, and LED lights, on and in his home, and it provides 40 per cent of all his home’s energy needs. He expects around one-third of all existing houses in Auckland could have such installations, and nearly half of all new houses. Businesses will also take it up.
The contrast with the attitude in Australia – at least at the top level of network and retail operators – is astounding. While utilities and retailers in Australia assume that households are “bored” by electricity, Vector’s own research suggests that up to 80 per cent of consumers are engaged and motivated, and are actively managing costs, and looking at how they can be more efficient.
“We are seeing different pricing structures, but that is probably not as important as seeing choices in technologies and solutions. So how I see it is that we are at the point of going to a new world order.”
Mackenzie speaks of providing “energy solutions” to the customers – a theme notably taken up by SunPower, when it was discussing its plans with RenewEconomy last month. The attraction to the network operator, such as Vector, is finding the value in the middle, getting revenue from those services, and saving money by reducing the dependence on centralised generation.
“The historic model used to be investing in assets in the ground that were going to be around for 50 years. Now, we are seeing people with solutions that are embedded in their own properties,” he says. “They can manage their own demand, they can manage their energy. So how do we enable their choice, because we can see an opportunity for a revenue stream – largely as a substitute for buying remote generation from the grid.
“By providing that utility through information and control, we can look to add value in that space. Equally importantly, nothing could be worse from a risk perspective than continuing with the same legacy assets, burying cable in the ground. That’s dead capital, or dumb capital. The new technology and devices enable the deferral of capital expenditure – for how long who knows, but probably for a long period of time.”
However, Mackenzie says networks are justified in imposing some sort of fixed charge on consumers to reflect the value of the infrastructure and the service it delivers. “But, that has to be counterbalanced with ensuring that the fixed charges are not linked to the gold plating of networks,” he said.
Most people would agree – whether those fixed charges are represented as a simple fee for access, or represent the “thickness” of the wire – the amount a house can draw down at peak times, as Dane Muldoon suggests in another of our recent series on battery storage.
But because gold plating has already occurred in Australia – and according to Chris Dunstan of the Institute for Sustainable Futures, it is still occurring – perhaps the only palatable solution for consumers is for those networks to take a write-down of those assets.
You can read the full interview with Simon Mackenzie here. It’s compulsory reading – for consumers, energy advocates, policy makers and utilities. And most particularly for the utility owners responsible for the caliber of executives making decisions about the future of their businesses.