SP Ausnet, one of the few listed energy network operators in Australia, has given a small but revelatory insight into how rooftop solar and changing consumer patterns are turning the business of delivering electricity on its head.
The Victorian-based company, majority-owned by Singapore interests, has three main businesses: a state-wide network transmission business, an electricity distribution division based in the eastern part of the state, and a gas distribution business.
It’s the electricity distribution business that we’re interested in. Increases in costs of distribution have been behind the bulk of electricity price rises in recent years, leading to accusation that the industry has been “gold-plating” the network; based on the fact the network operators receive regulated returns on their investment – so the more they invest, the more they earn.
That was all good while demand was increasing, as everyone supposed it would. But SP Ausnet’s results for 2013 show how the game is starting to change. Over the last five years its electricity distribution business has grown its customer base by around 8 per cent, as this first graph shows. That is to be expected given the population and economic growth.
The problem for SP Ausnet, and other network operators, generators and retailers, is highlighted in the next graph: while the number of consumers for the distribution business has increased, the amount they are consuming has fallen – a lot. As this graph shows, volumes of electricity consumed fell 1.2 per cent in the latest period, despite a colder winter and a warmer summer than the year before, and are 4.7 per cent below the 2009 figures.
Why is this? SP Ausnet is in no doubt, saying in its earning statement that the fall is driven “predominantly due to greater solar penetration and weaker economic activity impacting industrial and commercial demand.” You could also thrown in the impact of the state’s energy efficiency schemes, and the impact of more efficient appliances.
But rooftop solar PV is the biggest ticket item. SP Ausnet says the penetration of solar among its 658,461 customers has risen to 8 per cent from 5 per cent just in the past year – and that is in one of the least rich solar regions in the country.
But here’s the real problem. SP Ausnet didn’t suffer so much in its overall results because, despite the falling volumes, its revenues actually showed “strong growth” – they were up 9.1 per cent for this division in the past year, and have jumped 36 per cent over the last five years even as volumes declined – because the regulated prices (the amount it was allowed to charge each customer) rose sharply.
You can see where this is going, can’t you. As network prices surge, rooftop solar PV prices are falling even more dramatically in the other direction. As the Edison Electric Institute and leading US utilities have pointed out this year, customers now have the option of sourcing electricity from their own resources at a cheaper cost, and will be tempted to use the grid only as a backup. This, of course, is a major threat to their business model. It’s what AGL Energy, and Hawaii’s network operator have both described as the “death spiral.”
For the moment, the likes of SP Ausnet are protected by regulatory pricing. But it’s not clear how long that will last, or offer them the same degree of comfort. SP Ausnet, in its own outlook, states its biggest challenges are dealing with the “changing energy environment” and changing “customer behaviour”, and making sure its voice is heard in regulatory decisions.
Meanwhile, it is vigorously pursuing opportunities in the “non regulated” market – such as high voltage lines for the state’s desalination plant, and connections to Macarthur wind farm, the state’s largest. And it will also be busily figuring out how it fits into the new “distributed” model of electricity delivery, which in the future will rely as much or even more on rooftop solar, battery storage, fuel cells and electric vehicles than it does on its 49,512km of poles and wires.
But while the EEI in the US noted that investors had been largely ignoring these trends, despite their grave implications for the industry, market analysts in Australia are starting to get cautious.
Deutsche Bank this week slapped a sell recommendation on SP Ausnet, noting that the market had not understood the risks to the business – principally the likelihood that regulatory returns from its transmission networks were likely to fall significantly in the next regulatory reset, and that it faces funding pressure from its ability to use cash flow to support its dividend payments and re-invest in capital expenditure. “We do not believe these risks are adequately captured in the current share price,” the analysts noted.
It’s not quite a revolution, but the trend is clear: The energy game is changing and running an electricity network will not be the licence to print money that it once was.