Rooftop solar eats away at network business models | RenewEconomy

Rooftop solar eats away at network business models

Australian network operators say growing penetration of rooftop solar is cutting volumes, but its revenues are up because it can charge more to its customers. Can anyone see where this is headed? Network operators no longer have a licence to print money. Even market analysts have a sell recommendation.

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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.

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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.

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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.

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4 Comments
  1. Jason Dow 7 years ago

    The Idea that business runs electricity better than government has to be the stupidest idea of the last 30 years. No where is the community better served than having the publicly owned and operated networks, generation and distribution. The business code of ” voice heard in regulatory decisions” means the public and community’s self interest ( meaning the best options for everyone) will and should take a back seat to the profits of the company. This is obvious, the company needs to make a profit! But it drives this conflict of values and is predictable and completely unnecessary and should never have been allowed in the first place. I hope the continuing erosion of the business model reignites the debate about who is best to own and run large power systems that each and every person and business rely on to conduct their daily business.

    • Sean 7 years ago

      I’ll raise you one better.
      The idea that electricity should be sold as a replacement to social welfare.
      we pay HUGE prices per KW/H even though most of the cost is in the infrastructure, not the power itself. We cross subsidise the infrastructure with marginal use cost. This distorts the market, and provides perverse incentives to increase costs for the electricity retailer. Why then, is electricity priced predominantly on usage, not network access?

      Why is power not sold like fixed line phones? or cable tv?

      Most importantly, Why do governments act like it is the electricity company’s job to provide sustenance payments (in the form of subsidy of network costs)? Surely if the cost of being connected is ESSENTIAL to life, and if it is too expensive for the poor on their current rates of payment, it is the Government who needs to pay the extra.

  2. Chris Fraser 7 years ago

    If it can be argued that PV is not being artificially subsidised (and with multiplier reduced to 1:1 I believe it isn’t) then the networks should accept that PV will live and die on its own merit.

    Such is the case, why not embrace it ? Whether your reason for having PV is financial or environmental, or both, here is an open atmosphere of competition. PV is a right.

    Supposing that professional outfits like SP Ausnet can measure and understand the impact of PV, and lately storage, they can plan to benefit both themselves and consumers.

    Clearly, the shaving of the afternoon peak will permit a reduction in capacity investment. I still think that some regulators need to include PV in their capacity projections. Even if they halve the actual input from PV they could still reduce this investment.

    Then, somebody clever could calculate the necessary investment for generation in the evening. It can’t be that hard.

    • Sean 7 years ago

      Or let the constriction in supply be reflected in price, and hire no clever people at all!

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