The power industry disrupted
Richard McIndoe takes on energy bigwigs and argues the case for disruptive technologies in this opinion piece.
Here’s an angle on an old joke. Unfortunately, if you just received your electricity bill you may not find it so funny…
Three inventors walk into a bar. The first, Alexander Graham Bell, asks if he could borrow a phone to call his wife. The barman hands over his new iPhone. Mr Bell thanks him, places his glass on the device and asks again for a telephone. Thomas Watson, legendary president of IBM, studies the young students opposite, all working on their PCs. He ponders his heroic prediction in 1943 that there would be a world market for maybe five computers. Amazing to find them all in the same bar. What are the chances!
Meanwhile Thomas Edison sits back, basking in the glow from one of his light bulbs overhead. He looks out of the window at the transmission lines stretching far away to the big smoke stacks on the horizon and contemplates how very little has altered in his world. But that’s all about to change.
The fact is, there really isn’t a great difference now in the way we generate and transmit electricity from 75 years ago. The industry was developed on the fuel resources of the Hunter and Latrobe Valleys, with a backbone of high voltage transmission delivering electricity to customers in the cities and towns across New South Wales and Victoria. Enhanced in the postwar years by the massive and impressive engineering around the Snowy Mountains hydroelectric scheme, this industry structure has persisted for decades. This model is finally facing unprecedented disruption, however, with a combination of changes brought about by new technology, changing customer habits and changing politics.
The customer of the 21st century demands greater empowerment, greater convenience and greater choice in all aspects of their life. From Uber taxis to iPhones, data storage to online dating, technology is responding to the customer needs and delivering ever-greater choice. Yet as far as our most basic need for electricity is concerned, the customer still has very little real choice. Yes, we are bombarded daily with a new offer from another energy retailer, but don’t be fooled by that hard sell and complicated bill. There is very little differentiation across the industry.
Fundamentally, we are still buying the same product from the same central generation and over the same distribution network that we always did. And the vast majority of us are still receiving an ever-increasing bill every three months via Australia Post or in our email inboxes.
The delivery of electricity is a ‘cosy monopoly’ under which the customer has very little choice and which has continued to expand due to a forecast demand growth that simply never occurred. There is no reason for the industry to want to change. In fact, the recent comment from an electricity network CEO that customers seeking to move off-grid to avoid ever-higher electricity costs were “greedy and selfish” rather said it all.
One of the problems of monopoly suppliers with no competitive threat is that the incentive to adopt new technology is low. More effort is expended on protecting the monopoly than on changing it. Compared to the costs of other essential utilities such as telcos, the regulated price of electricity has crept ever upwards over a period of time when technology has driven down the real cost of most other essential services. Regulators are doing as good a job they can on managing costs, but their regulatory lens is the same scope as it has always been. They are not equipped to understand what new technologies are available nor are they in a position to proscribe such technology. So how can we possibly expect to see development of the best platform for new technology in the electricity industry?
Customers are already taking matters into their own hands. Australia is the highest per capita adopter of solar panels – which of course makes sense given our climate. Now with the prospect of electricity storage, the very real opportunity to create an alternative to the traditional grid is presenting itself. Add to this the visibility, control and empowerment that smart meters enable, energy independence is no longer a dream.
So what will this nascent technological disruption mean to the monopoly of electricity networks, including the newly privatised New South Wales grid? Is it a risk or an opportunity? If the new owners in New South Wales think they will simply continue the approach of the former owner and clip the coupon on a regulated asset base they will be woefully, and expensively, wrong. Solar powered domestic generation will become more abundant, driven by cost and scale efficiencies as well as government policy. The energy efficiency of modern appliances is continuing to improve and new technology that manages power quality will reduce the amount of electricity delivered to meet exactly the requirements of the home. All this means a lower volume of energy passing over the network and therefore a lower revenue stream to the new owners. So, potentially, this is a big risk to the new owners investment.
How will they respond? Potentially there will be requests for an increase in electricity network tariffs to compensate for lower than forecast usage. This simply will not be politically acceptable. Alternatively, network companies will push for a higher fixed charge payable by each household for being connected to the grid.
Before you howl in objection to such a change, think about the real value of the service being provided by the networks. Electricity is a basic need. Looked at from the network owner’s perspective, they provide a full guarantee of availability of that vital commodity. That’s pretty valuable back-up insurance even if you are using solar panels to generate your power needs most of the time.
So a fixed connection or availability charge starts to make more sense and is probably more equitable if it applies to all consumers, even those using solar for most of the year. Such a fundamental pricing change, however, will take several years to implement across the broad scope of different consumers. This means there will be very uncertain economic outcomes for the network owners in the short-term.
So, in the face of changing customer habits and demand, as well as a regulator that will be highly sensitive to revenue increases, what will happen in the short-term? First there will be inevitable cost cutting – internal operating inefficiencies and potentially a relaxation of technical constraints. This is already happening across the national network as operators are relaxing the tighter constraints on voltage levels to accommodate the variability of voltage delivered by the 1.3 million domestic solar producers. Then there will be a move to merge in order to cut out duplication on corporate costs.
But technology will continue to make the customer’s move away from the grid more viable, with the combination of solar panels and electricity storage making the traditional grid redundant even for back-up power. This is what has been labelled the customer death spiral, and it will continue and ultimately demand a response from the networks.
And here’s the rub. This does not need to be a death spiral for the networks. These networks can have a direct physical connection with each customer, whether through a smart meter or other energy management device. It is this physical connection point that provides the opportunity for the more innovative network to change its business model, prosper from new technology, and deliver the choice and control that customers desire.
Control of the connection point between the house and the grid enables networks to help the customer choose the cheapest option between solar generation, storage or on-grid power. Networks can help the customer export to the grid when demand is high or pay the customer to switch off non-essential appliances on that peak, once a year hot day. It’s a different model, based on a trusted partnership with the customer, which aims to create a low-cost, flexible solution that is ultimately more efficient, more reliable and better for the environment.
Electricity networks run at higher voltage levels than our appliances require. There are a number of reasons behind this. The increase in electricity generated from domestic solar panels pushes up voltage levels and the industry will claim it needs to run the voltages at higher levels to ensure there is adequate supply when the output of all those panels falls in and out as clouds pass overhead. But one of the consequences of running significantly higher voltage levels than our appliances require is that we end up paying for more electricity than we need. This is great for the electricity companies, but not for the customer.
Voltage regulation devices that deliver a constant voltage ensure customers consume only the amount of power needed to run their appliances. This technology can disrupt a business model that relies on trying to sell ever more electricity to cover ever-increasing costs. The technology is now available to deliver the least amount of electricity necessary to maintain the customer’s lifestyle, thereby managing both our costs and our emissions. It is technology that will reduce the generation we require from the coal-fired power stations of the Hunter and Latrobe Valleys. It is technology that, more effectively than any carbon tax, will lead to market driven closure of those heavy emitting power stations.
The risk for the new owners of the New South Wales networks is that they continue with Edison’s model of just trying to sell ever-more generation from centralised power stations. New customer technology that improves our energy efficiency guarantees that this will not be a sustainable business model. Likewise the energy retailer who still believes a marketing strategy of cold calls, price discounts and incomprehensible bills will be competitive is going to be found out pretty quickly.
In this disrupted electricity industry, both retailers and networks are trying to understand what the new world will mean to them. The smart ones are learning how to embrace new technology, better understand customer needs and work alongside customers to manage down their energy usage in a controlled manner. With the greater certainty and control of customer demand that new technology delivers, longer-term costs can be reduced and we can better harness the potential of clean generation and energy storage.
Richard McIndoe is chairman of Edge Electrons. He was formerly the CEO of EnergyAustralia. This article also appears in the February/March 2016 edition of Facility Management.