Electricity Suppliers Look To EVs To Save Their Business Models

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This article was first published on RenewEconomy.
By Giles Parkinson

The twice-yearly meetings of CEOs from the major electricity suppliers in Australia has become something of an institution for the industry leaders. They are for a specifically designed as a private forum to raise issues of concern to the industry. In the past, issues such as renewable energy targets, the carbon price, network upgrades have been the focus of attention. In last month’s meeting in Sydney, however, it was about something more fundamental: the very future of their businesses.

Business models for electricity generators and network operators have been largely untroubled for generations. But here in Australia, and across the globe, they are being challenged by new technologies that take the power (quite literally) of the market out of their hands, and into those of their customers – a trend driven by the plunging cost of solar PV and a whole series of “enablers” such as storage, smart meters and other technologies.

This is being celebrated in many quarters as the “democratisation of energy”. Needless, to say, for the oligarchs that have dominated the industry for decades, it spells nothing but trouble. In Germany, Macquarie Group thinks that the electricity system as it is currently constructed is already “kaput”, and that the impact of rooftop solar is “unstoppable” in several European countries, with major implications for incumbent utilities. UBS , Deutsche and JP Morgan agree that solar PV has become a “no brainer” for customers, even in Europe.

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In the US, as Duke Energy (the largest utility) and NRG (the largest generator) both agree, a solar revolution is already at hand. “Consumers are realising they don’t need the power industry at all,” said David Crane, the head of NRG.

Curiously, in Australia, with the highest penetration of rooftop solar in the world – more than one million houses now have solar PV – you don’t hear the incumbent network operators heralding such a revolution, but they are no less obsessed about the potential outcome.

And, as David Roberts from Grist wrote the other day, the challenge of having to reshape their business models has, if you’ll excuse another pun, come as a shock to the system.

“Remember … that these utilities are not Google or Facebook,” Roberts wrote in one of a series of articles that are recommended reading. “They are not accustomed to a state of constant market turmoil and reinvention.

“This is a venerable old boys network, working very comfortably within a business model that has been around, virtually unchanged, for a century. A friggin’ century, more or less without innovation, and now they’re supposed to scramble and be all hip and new-age? Unlikely.”

But that is the challenge at hand. The issues canvassed at last month’s meeting of the old boys’ network in Australia included what many agree is a vicious circle. The networks that they have been encouraged to supersize in the last few years are losing what had been considered to be a “given” in the industry – ever increasing demand, and a dependable rise in revenues.

That has come as a result of a troika of new influences – declining manufacturing capacity, the impact of energy efficiency schemes, and the ability of households to produce some of their own electricity requirements from rooftop solar systems.

Add to this a new phenomenon – the “inelasticity” of rising electricity bills. It was generally believed that people would continue consuming and paying, even with rising bills. But now the customers have an option not to. And while the process of super-sizing the electricity grid has made contributed to a near doubling in electricity prices, the cost of solar PV has fallen by more than 80 per cent.

There is now clearly a cheaper alternative for homeowners with suitable rooftops – as are other options such as investments in technologies such as energy efficient appliances and lighting. As even the US Edison Electricity Institute, a trade grouping of US utilities, noted last week in an echo of Crane’s warning, customers are realising that they may not need the grid any more, or at most as a back-up. This, it says, will cause “irreparable damages to revenues and (the ) growth prospects” of utilities.

What are the networks to do? They complain that the solar PV is eating out revenue during the day but not solving the capacity problems of the evening peaks.

That particular problem may be solved by another technology that is following closely on the heals of solar PV – battery storage. This is considered by some in the solar industry to be the “holy grail” (it used to be socker parity, but we’re past that now). But even if it removes much of the evening peaks, and the need for bigger networks in the future, it doesn’t necessarily help the networks address their major current problem, which is ensuring they get revenue from network investments already made.

As more and more households and businesses turn to solar, and progressively storage, the more revenue networks will need to source from fixed charges and from their remaining clients. This is known as the “death spiral”. The more utilities appear to declare war on their customers, and seek to make solar unattractive by increases in fixed charges, and raising tariffs, and regulatory barriers, the more battery storage and distributed energy seems appealing. The more utilities feel they are competing against their customers, the quicker they will become estranged.

The only reasonable option seems to be to encourage people to consume more. Mandating them to turn on more air conditioning, or re-install wasteful appliances, obviously won’t work. Time to think of something new.

That option could be electric vehicles. EVs are starting to make inroads into the market, inspired by “first users” and those with the money to indulge, and utilities are only playing around at the edges. Encouraging their use – as EV costs inevitably fall – will not just increase demand on the electricity grid, snapping the death spiral scenario and reassuring investors, but could also present socially attractive options such as providing an accelerated and clearer path to a smarter energy system, and reduce Australia’s expensive reliance on imported and dirty fossil fuels. That can then be presented as a hedge against the rising cost of diesel and petrol, and turn the closure of refineries in Australia into a virtue rather than a regret.

But even if, as Roberts suggested, the utilities and the old boys network that currently run them can’t suddenly become hip, they will need to become fleet of foot, or at least of mind.

Greg Gutheridge, a US-based energy industry specialist from consulting firm Accenture, says electricity networks have a lot to learn from the experience of the telecommunications industry, which has gone through its own massive transition from fixed line telephone to a mobile product. They, too, found a new product that protected their revenues in the form of data. Customers now spend significantly more on telecommunications products than they ever did in the past.

“They are an interesting bellwether for utilities,” says Gutheridge.

“We are just not quite sure how quickly how some of these distributed or disruptive technologies will enter the market,” he says. But new technologies could impact 20-30 per cent of their market, and there will be new competition from the modern telcos that see opportunities in the home energy market.

One of biggest trends in US is utilities getting stuck between really big communications companies such as Verizons, Vodafone, Comcast and ADT, who see huge in home energy management as a viable way to use their bundles services and products.

“If we assume (the electric vehicle market) does pick up, then we can expect new infrastructure providers coming into the market – auto manufacturers, office services company, especially for EV,” Gutheridge says. “Retailers and network companies will have to rethink a number of things. They will be less in competition with each other and more in competition with these other providers.

“If we assume (the electric vehicle market) does pick up, then we can expect new infrastructure providers coming into the market – auto manufacturers, office services company, especially for EV. Retailers and network companies will have to rethink a number of things.”

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Giles Parkinson

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.

Giles Parkinson has 596 posts and counting. See all posts by Giles Parkinson