Dinosaurs don’t dance, or why storage will not be the light at the end of the tunnel for networks

Last week I took part in an Oxford-style debate as part of the Australian Energy Storage conference, where myself and two industry colleagues argued that energy storage would NOT be the light at the end of the tunnel for electricity network operators.

This post is a summary of our arguments, which we presented with success to claim victory in the debate.

Sadly for electricity network operators, dinosaurs don't dance (Photo: https://www.flickr.com/photos/jasminel/8140833334/)

Sadly for electricity network operators, dinosaurs don’t dance (Photo: Uncommon Jasmine)

Our overarching argument was “DINOSAURS DON’T DANCE“, which we evidenced as follows:

NETWORKS ARE REGULATED BUSINESSES UNUSED TO CHANGE OR INNOVATION

  • FACT – network business model matured in the first half of the 20th century (= before TV)
  • PRECEDENT – telco, airline businesses are unrecognizable from before deregulation in the ‘70s
  • FACT – transfer of capital expenditure/benefits realisation to customer runs completely counter to network business model/culture
  • FACT – Australian governments currently own around 75% of electricity network assets in the NEM, and a greater share for Aust as a whole
  • FACT – in 2008/9, R&D undertaken by electricity networks across Aust was less than 1% of the value added, or about the same as the log sawmilling and timber dressing industry

NETWORKS HAVE INSUFFICIENT INCENTIVES UNDER THE CURRENT MARKET STRUCTURE AND RULES

  • FACT – networks are unable to capture all the benefits and are unable to collaborate
  • FACT – network incentives will have to go via the retailers, who own the customer relationship
  • FACT – continued shift to self-generation will most heavily impact networks
  • FACT – both the networks and the AER base their revenue-cap calculations on projections of future demand, which draw heavily on historical data at the expense of future technologies such as storage (which may reduce demand forecasts)
  • FACT – networks are incentivized to avoid risk and by extension new technology
  • FACT – RWE/Germany business model had to break before they adopted the “Future Utility” model, which is less profitable than the old model
  • QUOTE – “rate-of-return regulations … create incentives for inefficiency by encouraging cost padding”, Productivity Commission inquiry into Electricity Network Regulatory Frameworks, 2013
  • QUOTE – “If the regulator cannot obtain sufficiently reliable information on a business’s costs … it may be possible for the business to game the regulatory process by presenting information that leads to a high revenue allowance”, Productivity Commission inquiry into Electricity Network Regulatory Frameworks, 2013
  • QUOTE – “using past information to set future targets reduces the incentives of a firm to lower costs since it knows that it will decrease its revenue in the future”, Productivity Commission inquiry into Electricity Network Regulatory Frameworks, 2013
  • QUOTE – “Regulators do not have complete information about businesses’ actual costs, expenditures, demand and service quality, but they need to make judgments about what the ‘efficient’ cost might be and how long it should take a business to close any efficiency gap”, Productivity Commission inquiry into Electricity Network Regulatory Frameworks, 2013
  • QUOTE – “Regulators therefore face a trade-off in trying to create incentives for utilities to behave efficiently, while ensuring that customers share in benefits from efficiency gains”, Productivity Commission inquiry into Electricity Network Regulatory Frameworks, 2013
  • QUOTE – “if a network operates in a low risk way, and as a result, they can access lower cost financing, they can keep the difference between the actual WACC and the regulatory WACC”, Productivity Commission inquiry into Electricity Network Regulatory Frameworks, 2013
  • QUOTE – “When a business is faced with a choice between network investment and a DSP project and both have the same potential for earned returns, the business is likely to go with the “easier” network investment option”, AEMC Power of Choice, Dec 2014

NETWORKS ARE UNABLE TO IMPLEMENT NON-NETWORK SOLUTIONS

  • FACT – benefits are fragmented across networks, retailers and customers
  • FACT – networks have no direct relationship with the customer (what about commercial/industrial?)
  • FACT – customers have a low level of awareness of their network operator (looking for the stat, but I heard it was less than 10%)
  • FACT – electricity providers are trusted by only 54% of households in Australia compared to the global average of 68% (CSIRO, July 2013)
  • FACT – financials for customer implementation will tip at the same time as for networks (particularly in the absence of FiTs/introd’n of connection fees)
  • FACT – Ergon Energy, one of the networks most affected by solar PV adoption, have submitted only two applications for exemption from ring-fencing against ownership of solar assets during the current 5 year regulatory period, and one of these was for their own offices
  • FACT – Vector experience proves that storage implement results in reduced revenue/kWh; Vector have yet to face up to any competition, and once this happens they’ll evolve into a completely different business from a network operator
  • QUOTE – “any individual business user has relatively little capacity to negotiate from a position of power with network businesses”, Productivity Commission inquiry into Electricity Network Regulatory Frameworks, 2013
  • FACT – the Distribution Annual Planning review process requires networks to have regard for Non-Network Alternatives, including those proposed by non-network providers
  • QUOTE – “Capital investment and technology is now flowing downstream into the customer installations”, Ian McLeod, CEO – Ergon Energy, Annual Report 2012-13

STORAGE TECHNOLOGY COSTS AND RISKS ARE NOT REDUCING AS QUICKLY AS THE NETWORK BUSINESS MODEL IS BEING DISRUPTED

  • FACT – networks inability to force change in compensation for PV uptake will require them to downsize and become customer solution enablers
  • QUOTE – “When investors realize that a business model has been stung by systemic disruptive forces, they likely will retreat”, Edison Electric Institute, January 2013
  • FACT – from 2008 to 2013, the top 20 EU utilities lost half a trillion euros from their share value
  • QUOTE – “In their current state, utilities cannot finance Europe’s hoped-for clean-energy system”, The Economist, 12th October 2013
Your author accompanied by other members of the Aust Storage Conf 2014 debate (Photo: EcoGeneration)

Your author accompanied by other members of the Aust Storage Conf 2014 debate

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s