Simon Mackenzie is the CEO of Vector Ltd, a listed New Zealand utility that operates the monopoly distribution network in Auckland, New Zealand’s largest city (Population 1 million).
Earlier this year, Vector rolled out a solar battery leasing package that offered rooftop solar, lithium-ion batteries and control devices – at no extra cost to consumers. Vector intends to expand that rollout to other homes and commercial businesses.
Simon Mackenzie says the electricity industry is facing a new economic reality, but many operators are holding to the traditional view and sinking “dumb capital” into legacy assets – and passing on the cost to consumers.
Vector also operates a gas distribution and transmission networks in New Zealand, and has invested in telecommunications, smart meters (it has the largest rollout in New Zealand), wind farms and solar.
RenewEconomy interviewed Simon Mackenzie by phone this week. The story can be found here. This is a (lightly) edited transcript of the interview, which we found to be the most interesting and one of the most uplifting of any interview that we have done to date.
RenewEconomy: Earlier this year you were talking about a new economic reality for the electricity industry, and you were suggesting that the relationship between the utility and the customer is changing quite rapidly.
Simon Mackenzie: Totally. Yes. I think the issue is, jut to be blunt, I think there are a lot of utility operators who are stuck in the old paradigm. That it is of remote generation brought to the market by transmission, connected in by distribution and it’s a one way flow. The way we look at it is that consumers now expect, from a lifestyle perspective, 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.
The other leap in the journey is that we have a focus on what’s going on in the new technology markets, the manufacturing side in China and Asia, and the technology development side in north America, and we look at how we can adapt that to our network and customer choice, as opposed to the traditional approach in the energy industry, who are not adapting to the fundamental change that is occurring.
RE: Why aren’t they adapting?
SM: I think that their business models are built on the old paradigm of the industry. I don’t think they are customer focused. They might talk it, but I don’t think they are. And I think that a lot of who they supply are still in that head space. If you look into the emerging markets, the growth markets in Asia and India, you are seeing a lot of leapfrogging in technology because they are building new and expanding and so they are taking different approaches. We see that is where we have to have our thinking.
RE: The old paradigm seemed to be centred around just producing more, building more, encouraging more consumption. The modern paradigm seems to demand how to manage less growth and smarter use.
SM: Our research shows that around 80% of people 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 this we are at the point of going through a new world order.
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. 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.
The network is still needed to move energy around the network – but the way we look at battery and control is to smooth those peaks, the consumers use it when they get up in the morning and they get home at night and smooth that with the technology so that the sun is producing energy during the day, store that in the battery, release it into the home at night, take the peaks away and that removes a lot of that dumb capital as the technology advances.
It is a transition of how we integrate the home and the network, it is much deeper than used to be the case. The boundary (between utilities and consumers) used to be at the road, now I think you have to look right into the home and understand the interface between both sides.
RE: Until now the industry has never entered the home. It has just strung a wire to the front door and left it at that.
SM: I think the issue is that a lot of the industry used to think that we have done you a favour because we put a cable to the front door, you should be happy. That’s the way they think.
RE: But how do you make money by producing or consuming less. In the US there is talk that networks will just function as a back-up battery.
SM: I think there are two aspects. Again, this is a transitionary issue – there is still the need for a network. So the first objective is not to sink dumb capital into the ground with the legacy business model, or thinking that there will be more and more growth and that the peaks will always be there.
The second side is that network is required to move energy around. So sizing it right for the way in which the market is evolving is critical. And for the financial perspective – yes, we still have a network, we are potentially re-allocating capital from the traditional network investment where there is excess capacity, into providing consumers with options on how they self-generate, which is accessing a new revenue stream for us in the business.
RE: So you are crossing that line between distributor and retailer?
SM: I would say it’s basically providing energy solutions to the customers. I’ve got it on the home myself, and I look at my own solar battery and LED solution in my home, and 40 per cent of the energy is provided by myself. It is changing that remote, large-scale generation, wholesale market transition model. Transmission used to be seen as the centre of the industry, now it is just moving back to being a big battery from the outside. The future will be based on what is happening in the home.
RE: So tell me more about this solar leasing package, where you are offering people to put not just solar panels, but batteries into their home. What are you aiming to achieve?
SM: First some context for New Zealand, where there is no government subsidies for solar. What we looked at is that we see the cost curves of solar and batteries coming down. So we need to understand how we can provide a solution into this market. It is a combination of network benefits and customer benefits.
What we’ve observed in other markets is that the collateral damage that occurs with solar without batteries is the massive peaks that come back into the distribution network, that either constrain the ability to connect solar, or create the need for further investment in the network. Which in essence is just replicating same problem that occurred in the reverse direction. So we said that we need to link batteries with solar, provide that as solution. Batteries form part of the network side of equation, and the solar forms more of the customer side of the equation. The battery is basically that extension from the traditional network deeper into the home.
RE: So presumably that given the current cost of solar and battery, the leasing arrangement that you did was reasonably heavily subsidized by yourselves just as a trial.
SM: No, it wasn’t heavily subsidized. It was just by recognizing 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 customer, as well as the customer from an affordability perspective paying an upfront cost.
That’s how we’ve approached it. It’s not the only model because there are areas, more remote areas where the economics will change because the network benefits may not be the same. But from a trial perspective this is one of the most feasible models now, and becoming more feasible because we have seen the cost of lithium-ion batteries reduced by 50 per cent in the last 6-12 months, and the cost curves of solar continue to go down, but not as steeply, but lithium-ion batteries are starting to reduce on price, and the economics of those two combined are competing with grid. Grid parity is coming closer as we speak.
RE: A lot of people would say that solar is expensive, that batteries are expensive. They look at the cost, but not the value which you seem to identify.
SM: Yes. What you hear there is what is very much the traditional thinking and legacy industry perspective. You can buy a car for $30,000, but some people choose to pay more, get a BMW for $100,000. What we are finding from our research is that yes, there is a layer focused around the economics, but there is also a layer around wanting to be feeling lie they are contributing to sustainability, to be green, for their kids, it very much identifies about the demographics of people buying into this. The decision is not only about the cost. That for me is a really important context. Because that is quite a shift from what used to happen in traditional infrastructure thinking.
RE: Because that thinking now is around death spirals, and that seems to be their only response.
RE: And the view (from utilities in Australia) is that people are quite bored by electricity, despite the fact that we have massive churn rates. I wonder if New Zealanders are more progressive than Australians?
SM: (Much background laughter in his office) I think the question is being asked. There is no doubt that there is a layer that are grudge purchases. But you have got to think that customers are sophisticated, and it doesn’t take them long to join the dots and think, hang on a minute, I’ve got a choice here regards my banking, my telco, my internet, why can’t I have the same thing in the energy space.
When those choices are put in front of them, they become more educated, and what we found from the trial is that with very little marketing – we wanted 50 people, but we got an order of magnitude more people expressing interest. From my own perspective, my wife – who is not high on the technology interest ladder – talked to her friends, and two of them are signing up it. This is a big change from where a lot of utilities had previously thought, there is much more customer engagement.
RE: So what is the next step?
SM: Basically, looking at how to take it to another level. We will be also looking at how we could split this type of solution up – we could provide battery and control to people who have already got solar, and vice versa. We will obviously look to expand it, and push the market. We have to make sure about the quality and integrity of the product, so it will be a managed – but aggressive – push to get these devices out there.
RE: So will it end up with most houses having solar and battery storage?
SM: Look, I think that will be some time out in the future. I should say that we are also looking at a larger solar battery solution for the commercial market – not just residential. In Auckland, with our expected significant population growth – we see up to 45 per cent of new homes looking at this type of solution. It’s going to be a reasonably high percentage, and I think retrofitting will follow a curve that is a bit hard to predict at the moment, there is a dependency on what happens with energy prices, but the flip side is that the falling cost curve of these technologies could put penetration at well over 30 per cent.
RE: So how does the industry cope with those sort of penetration levels of a new technology that changes the nature of the industry?
SM: At Vector, we’ve been in this different mindset for about 10 years. It started with taking a more customer-centric view, recognizing that the telecommunications convergence with IP networks, and consumers was relevant, we saw fibre to network, we rolled out smart metering for example. The Industry has to cope by either adapting and modifying its business models, or they will be in the death spiral.
But, we also think that the distribution network still has a vital role to play in moving energy around the urban environments. What that means is for the transmission and generation traditional markets is that they are likely to get a lot more intermittent and the complexity is going to get higher for them. So the centre of influence is moving back into the home and the consumer, and away from an engineering, planning perspective. 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.
RE: In Australia there seems to be a lot of protection from regulators, and the number one strategy seems to be to reinforce that protection, and their revenue pool with higher fixed charges.
SM: I think it is fair to say it is a difficult challenge for regulators to look forward and balance the customer needs. We encourage our regulator to look at what this change means and how do you incentivise this rather than disincentivise. Some of the regulatory models incentivise just the traditional model which perpetuates that problem. So I think that regulatory regimes do have to move much more to an innovative regime that matches where these trends are going. But to be fair, I do think there is a role to play from network perspective for fixed charges, but that has to be counterbalanced with ensuring that the fixed charges are not linked to the gold plating of networks.
RE: Have you had much interest in your approach from Australian network operators?
SM: Yep, we have. There have been a few interested, trying to understand what we are doing and why, and interest in some other technology that we have put out there such as our outage App, so customers, operators and the media can see where outages are.
RE: Have you got any offers to take your vision and become CEO of any network operators in Australia?
SM: Ha ha. If you want to be an agent for me, that’s cool.
RE: No really, we’d like you to be CEO of all of them!
(Actually, we didn’t say that last line, but we wish we had. It occurred to us that with a change of attitude at the network level in Australia, the cost saving for consumers of having people like Simon Mackenzie run our networks could run into the billions, let alone the efficiency and environmental benefits).