Western Power sale: microgrid opportunities, structural challenges

The proposed part-privatisation Western Power could result an accelerated roll out of microgrids and distributed generation in regional areas. It is also likely to leave the of WA grid operator in a difficult position when it comes to adapting to rapidly changing market dynamics, as distributed generation and storage becomes the new normal.

The West Australian government went public with its plan to sell 51% of Western Power yesterday, in a move it hopes will raise $11 billion for the state’s coffers. However, the deal is far from done with the Liberal-National coalition state government having to take the proposal to voters in the state election in March 2017.

In an attempt to win voter approval for the plan, the WA government has made a commitment that electricity price increases will not result from the partial sale. This could be achieved by keeping tight pricing regulations in place.

While this may be a popular move, the tightly regulated utility would be left unable to raise prices to response to shifting market dynamics. This would leave the grid operator hamstrung and likely reduce the value of Western Power as an asset.

“The market is going to have to appraise the ability of the utility to be agile and to adapt to the coming technologies,” notes WA-based Ray Wills, managing director Future Smart Strategies.

Equally, if Western Power was allowed the flexibility to carry out significant reforms and adjust pricing structures, it would likely conflict with the government’s commitment that price hikes will not occur.

For renewable energy and battery storage providers, the partial sale could result in increased investment in edge of grid generation and storage solutions. The state government has indicated that it intends to allocate part of the proceeds from the sale to improve the reliability of supply at the edge of the grid.

“For West Australians living at the end of long feeder lines, this additional investment in edge-of-grid electricity solutions, including microgrids, will make a huge difference in their lives, while also ensuring we remain at the forefront of technological advances,” said Nationals WA leader Brendon Grylls.

WA opposition leader Mark McGowan said that Labor would, “make this a major issue in the lead-up to the next election.”

“If you lose $550 million-plus in revenue, in dividends and tax-equivalent payments to the people of the state, the money has to made up somewhere,” McGowan added, referring to Western Power’s annual profits.

Whether the 51% sale, in its current form, will raise the $11 billion target is uncertain. A Chamber of Commerce and Industry WA report concluded that the full sale of Western Power could reap between $12 billion and $16 billion.

In an attempt to address some misapprehensions regarding the foreign ownership of infrastructure assets, the WA government has proposed listing 51% of Western Power’s stock on the ASX.

The proposal is that Australian superannuation funds would be able to purchase 31% of issued shares, with 20% reserved for so-called “mum and dad investors”. The state government would remain the largest single shareholder.

If the value of Western Power shares drop as distributed generation and storage leave grid assets stranded or if major electricity price hikes occur, mums and dads could be left footing the bill.