Transformation in Australia’s electricity sector – power to the people
November 2015 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES
Financier Worldwide Magazine
The majority of Australia’s electricity generation and distribution systems were built last century, at a time when the delivery of energy services was still considered a core responsibility of government and prudent energy policy meant supporting large capital investments in system capacity to underpin the needs of the future consumers.
Today, much of that physical energy infrastructure remains in use, but the economic landscape in which it operates has dramatically changed.
The joint forces of technological advancement, decarbonisation of the economy, and a private sector approach to capital investments are putting enormous pressure both on the physical operation of grids and also on the traditional utilities which generate, transport and sell electricity.
Australia is moving from a quite centralised electricity market structure where large base load generators supply most of the electricity needed and spikes in demand are able to be met by a few fast ramping peaking plants, to a more decentralised and dynamic structure. We are likely to see a market involving many more participants and one in which consumers of electricity will have much greater control over how and when they use electricity and what they pay for it.
This article considers some of the major trends reshaping Australia’s electricity sector.
But first, a little history
Following the first municipal supply of electric street lighting in the country town of Tamworth, New South Wales, in 1888, the provision of electricity services in Australia was largely undertaken by state and municipal governments for over 100 years.
Responding to a federal government push for competition policy reforms in the 1990s, the state governments disaggregated their state owned electricity utilities into separate generation, transmission, distribution and retail business units. Several states then moved forward with privatisation. While often generating much needed cash flow, privatisation remains electorally risky in Australia and not all state governments have gone down that track.
Australia’s electricity sector currently comprises a mix of state and privately owned utilities, often competing against one another. A wholesale National Electricity Market (NEM) operates in the eastern states, under the oversight of a national energy regulator and a separate market operator. Market participants trade electricity in the NEM but also manage their price exposure via a separate financial (hedge) market.
Strains on the grid – the rise and rise of solar PV
After a century of growth in demand on the nation’s main electrical grid, in 2009 Australia’s grid demand growth decoupled from growth in GDP for the first time, and grid demand began to stagnate.
Although several factors are at play in slowing grid demand, including the closure of manufacturing plant, the growth in solar PV (predominantly small scale rooftop units) has been the most notable. In 2012, 70 percent of all new installed generation capacity in Australia was solar PV.
Growth in solar PV occurred initially in response to several quite generous government incentive schemes. These schemes proved more popular than governments anticipated and some had to be truncated because they became a financial burden. Nevertheless, the genie was out of the bottle.
Faced with rising grid based electricity prices, Australians embraced solar PV, even without incentive schemes. In some areas of the state of Queensland, rooftop solar PV is said to have reached penetration levels of one in four houses.
Bloomberg New Energy Finance research predicts that solar generation in Australia will increase from 4 percent of total installed capacity in 2012 to 38 percent in 2040 (New Energy Outlook 2015). Over the same period, installed fossil fuel generation capacity is predicted to decrease from 79 percent of total installed capacity to 15 percent.
The Australian Energy Market Operator (AEMO) forecasts in its 2015 National Electricity Forecasting Report that the household market for solar PV will grow at rate of around 600-700MW a year. The commercial market is also expected to grow strongly. It currently accounts for only 10 percent of all solar PV installations but is expected to increase to 25 percent.
AEMO also predicts in the report that the growing uptake of rooftop solar will reduce grid demand in the state of South Australia on certain occasions to zero by 2023 and that by 2024/25 zero grid demand in South Australia could last for several hours at a time during the middle of the day.
But therein lies the rub with solar PV – it only generates during sunlight hours, with peak output occurring in the middle of the day. The peak times for grid consumption (domestic) are early morning and early evening, when solar PV output is low.
The arrival of battery storage
Long dismissed as an uneconomic technology, 2015 saw the arrival of battery storage units in Australia on a commercial basis. Tesla, Samsung, LG and Panasonic are all testing the Australian market.
In July 2015, major retailer AGL announced it would offer 7.2kWh battery storage systems at less than $10,000 each.
According to Moody’s Investor Services, battery prices in the US have dropped about 50 percent in the last five years and, if the decline continues, Moody’s predicts commercial and industrial adoption could be economical in the US within three to five years.
Battery storage can assist with smoothing solar PV output and can also help integrate other intermittent renewable generation into the grid, as well as providing ancillary services for the grid. It can also be used for ‘peak shaving’, where users charge their battery at night and use the stored power to satisfy a portion of their peak power demands at other times.
Flexible capacity and demand side management
Rising grid prices and changes to laws regulating on-sale of electricity by landlords and other non-utilities are also likely to trigger activity at the consumer end.
Commercial landlords are likely to install solar plant on their properties and sell that electricity to tenants, in a move away from the traditional model of landlords sourcing electricity from utilities and taking a margin on the on-sale.
A range of ‘smart’ technology applications have developed which allow end users to monitor their electricity use in real time and predict and manage anticipated spikes in demand or price by either winding back non-essential consumption or ramping up on-site generation.
Bloomberg New Energy Finance predicts more than 50 percent of Australia’s generating capacity will be located “behind the meter” by 2040.
Significantly, this generation capacity will not be restricted to own-use. It will be possible for end users to offer their generation capacity into the market if economic conditions are such that supplying the market is more lucrative than using the electricity themselves. While it won’t be practical for many end users to do this on an extended basis, it’s quite possible that end users will be able to drop load or send their onsite generation out into the market for brief periods to take advantage of market conditions.
Fuel switching and electric vehicles
At the same time as they are contemplating the impact of solar PV on grid demand, network operators are also mindful that, if renewable generation costs fall far enough, this will provide incentives for fuel switching from diesel and gas, to electricity.
Electric vehicles are a wildcard for grid operation. Electric cars have been around for a while, but recent media reports suggest that traditional car manufacturers are in a race with Apple and Google to take them mainstream.
The implications would be significant for electricity grids, both in terms of operational capacity and also peak demand periods. Imagine what happens if everyone arrives home at 6pm and plugs in their car.
Reform of transmission and distribution tariff structures
The growth in embedded generation is already putting pressure on the operation of Australia’s electricity grids. The grids were not physically designed to cope with embedded and intermittent generation. Similarly, grid tariff structures largely reflect the old electricity flow model where consumers took all of their electricity from the grid all of the time.
While the topic is sensitive given consumer (and consequently political) concern over rises in network tariffs, it is hard to see that an overhaul of network tariff structures can be avoided.
Utilities will face additional costs modifying their grids and operational procedures to cope with the changes in electricity generation and demand. Some utilities also take the view that grid connected customers who do not have solar PV are subsidising those who do.
The trick will be finding an adequate balance between volumetric electricity charges and fixed charges, to ensure the ongoing stability of and investment in the grid while still providing a price signal for end users to conserve consumption and consider alternate generation sources.
Uncertain times for utilities
The capacity of rooftop solar and battery storage on Australian homes and businesses is expected to overtake that of coal fired generation within the next decade.
The implications of this for the current suite of base load and peaking generators are, as yet, unclear.
Some operators of base load coal fired plant believe that the impact will be felt hardest by owners of gas fired peaking plants, hit by the dual blows of high domestic gas prices and declining demand for peaking plant as end users take a more active role in managing their own peak demands.
Yet if grid demand starts dipping to zero in daylight hours and spiking in the evening, it is the base load generators who will feel the impact.
What is clear though is that uptake for these new technologies is driven by payback periods and market penetration, creating dynamics that are very different from those driving traditional large scale investments in a centralised electricity system.
The great electricity policy challenge for governments in the next decade will be addressing network stability, grid investment and the risk of stranded assets.
Allison Warburton is a partner at Minter Ellison. She can be contacted on +61 7 3119 6209 or by email: firstname.lastname@example.org.
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