Originally published on RenewEconomy.
There is no doubting that energy utilities are fully aware of the existential threat to their current business models presented by new technologies – solar and storage and smart software in particular.
That much we know, because they have spent so much time analysing the future and how it might affect the way they manage their affairs. But there is a far greater risk that dovetails with the threat of these new technologies – their own short-term greed.
This is nothing new. Every industry that has faced such momentous transition has faced the same issues. Just ask the print media. Just ask Kodak. Just ask the motor industry. Executives are driven by short-term profit incentives, few are prepared to cannibalise existing earnings in order to position their business for a different business model.
Now we see the utilities going through the same issues. They have assets – poles and wires that stretch across the country like no other network in the world – that are not easily replaced or substituted.
But they have a major problem: as the costs of new technologies fall dramatically, the cost of grid-based electricity is soaring in the opposite direction.
The determination of the network owners and fossil fuel generators to protect their short-term revenue targets is simply making the competition more inviting and giving good reason for customers to look at alternatives. It’s a train crash that is waiting to happen, and no one is too sure what to do about it.
The networks might be able to celebrate a significant victory over the Australian Energy Regulator, after spending millions of dollars in legal action challenging the regulator’s belated attempts to put a curb on their costs – in essence, you might say, to try to save them from themselves.
It’s hard to see how they can be saved from themselves. The recent partial sales of NSW networks – at a whopping 1.75 times the regulated asset base – suggests the new owners have every belief and expectation that they will get value for money, and they won’t let regulators and consumer groups get in their way.
The significance of the win over the AER means that those revenues are protected. At least for now. This adds to another significant recent regulatory win when they won the right to change the rules of the game and shift the basis of their revenue from a price cap to a revenue cap.
The price cap was convenient for the networks when demand was growing. When appliances became more energy efficient and rooftop solar clipped demand, they quickly pushed for a revenue cap – guaranteeing them a total revenue sum which they are authorised to recoup from however many consumers are left attached to the grid.
And therein lies the problem. As the costs of solar and storage continue to fall – and we have seen some dramatic falls in the last year alone, and an even more dramatic reduction this week in the US – the potential for them to lose consumers grows ever stronger.
Consider what SA Power Networks predicted just a few months ago – that the combined cost of solar and storage for consumers would fall to just 15c/kWh within a few years. In many parts of Australia, that is equivalent to what consumers are charged for just the network component of the bill, let alone the surging cost of wholesale electricity and the retail margins.
Battery storage is going to become more prevalent very quickly. Morgan Stanley predicts a million homes with battery storage by 2020. BNEF predicts 40GW of distributed energy behind the meter by 2040. Even the networks themselves predict 80GW of local solar and 95GW of battery storage by 2050.
I am one of those early adopters. Even though I have only two small battery units, my use of grid based power has fallen to an average of less than 2kWh a day in summer, and around 6kWh in winter.
My 5kW solar system produces enough power over the year, although not necessarily at the right time. A bigger storage system, with the added security of a bigger solar array, would solve that issue.
I’ve no interest in doing that right now, despite the fact that my electricity bill is almost entirely made up by the cost of my connection, which in northern NSW is $1.50/day. In summer the amount of exports reduces my bill to near zero. In winter, the lower output means the bill is higher, but over the year my bill will be around $500 – the cost of my connection.
The batteries I have do not operate as a stand-alone power system, and I’m happy to be connected to the grid because it is a social good, and a pretty effective way of trading and sharing electricity. But the issue here is how much should the consumer pay for it? At what point does it cease to become economically attractive?
The threat of grid defection is underlined by the networks’ own research that shows half of all demand will be met by electricity that is distributed, or behind the meter. In other words, the power will lie in the hands of the consumer. This completely redefines the dynamics of the energy market and the role of the networks.
Their report on network transformation acknowledged the risk that 10 per cent of consumers could quit the grid – and it would likely be more – unless rules and regulations change. But do they have the right answer? Some analysts think not.
And it is not just the networks choosing short-term gain over long-term business strategy, and which pose a threat to the business models of all.
The main fossil fuel generators, most of whom double as retailers, are also maximising their revenues by using their market power to control supply and manipulate prices, all quite legally it would seem but at a cost to the consumer, as former CEFC chief Oliver Yates writes today.
Yates points out that the best option for the consumer is for the likes of the Victorian state government to accelerate the roll-out of their state based target and get their auctions done soon.
That will introduce more competition to the market, and lower prices – as ARENA boss Ivor Frischknecht underlined to the Senate this week – and which is reinforced by the stunning falls in the cost of solar and storage in the US.
The networks have been critical of the way that the generators have been manipulating the market and making some assets available, or not, at critical times.
What we are seeing here, as analyst Hugh Grant notes, is the start of a turf war between the networks and the generators over how best to serve this new market, a war that will invite opportunities for new entrants.
ITK analyst David Leitch today goes into forensic detail about what the AER ruling will mean for consumers. Basically, the networks have won the right to add 2 percentage points to the cost of debt borrowed to pay for network assets. Over time, it might average 1 per cent, but that still translates to $400 million a year, or $4 billion over a decade.
Grant, from consulting group ResponsAbility, says networks have a track-record of blatantly acting against consumers’ interests: exploiting their monopoly power to over-invest and pass the costs to consumers, stalling demand management responses, designing punitive tariffs and attacking the regulator’s efforts to benchmark them.
He says on average, Australian consumers are paying about twice as much for network charges as in the UK and about 2.5 times as much as the US.
“Yesterday’s Federal Court decision demonstrates how consumers are continuing to pay very dearly for the AER’s delays and failure to apply robust benchmarking to the networks,” Grant says.
“The AER’s existing incentive schemes have demonstrably failed to deliver more efficient capital and operating expenditure by the networks. Rather – they have simply resulted in the networks achieving extraordinary windfall profits from gaming the various schemes.”
And sometime soon, given the falling cost of solar and battery storage, and the increasing amount of smart software and controls, that is going to trigger what is known as the “death spiral” as more power is generated behind the meter and the burden of the networks’ excessive prices is placed on an increasingly smaller consumer base.
“The networks’ unsustainable prices need to be addressed – either voluntarily or by regulation – if we are to break the unsustainable spiral,” Grant says.
Reprinted with permission.
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