Distributed generation technologies, load management systems and storage are providing households and businesses electricity supply choices that are disrupting the industry.
With the cost of PV arrays having fallen to well below grid parity, and many bullish on battery technologies’ ability to follow suit, the West Australian Independent Market Operator (IMO) says that these technologies are creating a new benchmark for utilities. IMO CEO Allan Dawson said that up until this point consumers didn’t have the ability choose between viable electricity supply alternatives, but that is rapidly changing.
“I think they [distributed technologies] will in effect be what distribution, transmission and generation will be benchmarked against,” Dawson (pictured) told RenewEconomy in an interview. “In jurisdictions that have volumetric tariff bases like WA, those regions are going to be exposed to the death spiral concept, simply because there will be less load to cover the fixed costs of the system.”
The WA electricity market is currently under review, in the light of subsidies to the recently remerged generator and retailer Synergy’s annual subsidies of around $500 million per year. The WA Minister for Energy Mike Nahan’s Department has confirmed that this subsidy is after all revenues from Synergy and grid operator Western Power are taken into account.
The WA grid faces unique pressures – (See our story, WA grid may become first big victim of “death spiral”) – due to the level of government subsidy, rising fossil fuel costs, ageing infrastructure, and the popularity of solar PV, even after the removal of most solar incentives.
The IMO’s Dawson cautions that while a death spiral for the state government-owned Synergy is an extreme outcome, the volumetric tariff structure coupled with a “world class” solar resource is making the environment a challenging one for policy makers to get retail mark structure right.
“It is more likely to be the death by a thousand cuts in that slowly but surely load shrinks and fixed costs continue to mount – particularly in the network environment,” said Dawson. “That’s the other thing that is a key issue here, we have significant investment in our networks going at the moment and those fixed prices are continuing to increase.”
Adrian Kemp, an energy consultant with NERA Consulting, chaired a panel on which the IMO’s Dawson sat at the recent 8th Power and Gas Conference in Perth. Kemp said that while disruption is too strong a word for the changes currently underway in the electricity sector, there is a high level of uncertainty in electricity markets right around Australia.
“We’ve just seen such a seismic shift in how people use and consume electricity,” said Kemp, “and as a consequence that is impacting on the economics of supplying electricity.” He added that electricity market participants are awake to these changes.
“There is dramatic awareness because it is hitting their bottom line. What we’ve seen in changes in the load profiles, in particular of network businesses, and that means that they are thinking very carefully about how they structure their tariffs and how they plan their investments in order to make sure they meet the network reliability requirements at least cost.”
In this environment, incumbent utilities and grid operators – while widely and sometimes understandably criticised by renewable energy proponents – are facing somewhat of a Catch-22. Dawson explained that the requirement to supply electricity on a reliable basis may lead to cost structures making some incumbent’s assets unable to compete.
“The reality is that network assets aren’t going to be the only stranded assets, there is going to be some conventional generation that is going to be stranded as well. If the network doesn’t continue to build and maintain its asset base and the lights go out, then the utility will be blamed for not maintaining it. If the load shrinks to a level that makes it uneconomic to recover fixed costs, then they are going to be blamed for over investing and having stranded assets.”
The IMO’s 10-year electricity demand forecasts have been criticised for leading to the installed capacity oversupply situation now facing the WA electricity market. The WA Minister for Energy’s department calculates that there is a 40% oversupply, even considering WA’s “peaky” electricity demand.
Electricity demand in WA has levelled off as opposed to declining in recent years, as it has in parts of the NEM and as demonstrated best in South Australia, it still fails to meet the projections made by the IMO. This overcapacity proving costly to consumers and the WA government under the state’s capacity market mechanism.
“From an IMO perspective our 10-year load forecast is one of the hardest things we do, simply because everything is changing so much,” said Dawson. “To be fair to policy makers and the planners in Western Power and Synergy, it’s a pretty hard environment to get it right.”
The WA electricity market review will deliver its findings later this year.