Inside Story

Current affairs & culture from Australia and beyond.

1516 words

Gone solar

16 May 2013

The electricity generation industry is waking up to the fact that its business model is broken, writes Giles Parkinson. With consumption down, can it refit for the green economy?


“Consumers are realising they don’t need the power industry at all”: David Crane, the head of US electricity company NRG.
Photo: Stuart Isett/ Fortune Brainstorm Green

“Consumers are realising they don’t need the power industry at all”: David Crane, the head of US electricity company NRG.
Photo: Stuart Isett/ Fortune Brainstorm Green

FOR the past twenty years, some of the more optimistic figures in the solar industry have predicted that their technology would change the electricity game forever. They have largely been dismissed as green romantics or hopeless optimists.

But now it seems that their predictions are coming true. The electricity industry, virtually unchanged and unchallenged for a century or more, is facing a revolution: not from the outside but from within, from its own customer base. To quote the Edison Electric Institute, a trade group that accounts for most of the utilities in the United States, the industry that once considered itself indispensable and untouchable has found that its business model is being trashed. Declining demand is forcing wholesale energy prices lower. Worse still, the industry’s entire infrastructure, with trillions of dollars of sunk capital, may no longer be needed or wanted by many consumers.

“Consumers are realising they don’t need the power industry at all,” says David Crane, the head of NRG – the largest generator of power in the United States. “That is ultimately where big parts of the country will go.” Jim Rogers, the head of Duke Energy, the largest utility in the United States, agrees. “If the cost of solar panels keeps coming down, installation costs come down and if they combine solar with battery technology and a power management system, then we have someone just using us for backup,” he told a conference recently.

In Europe, it’s much the same story. Fossil fuel generators are being pulled off-line or are not being built because solar is changing the market dynamics. 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.

Curiously, in Australia, you don’t hear that sort of talk in the public domain, even though the proportion of homes here with rooftop solar PV is the highest in the world. By some estimates, between 10 and 20 per cent of available houses have a rooftop system.

But behind the public silence lies widespread concern within the industry about the impact of solar PV, and how to manage it – or even how to stop it. Electricity demand in Australia in 2012 was 10 per cent below the forecast made just twelve months earlier. In a high-volume, low-margin game, that’s having a dramatic impact on revenues. Some analysts predict that the price of wholesale electricity at the midday peak – which once provided the bulk of revenues for generators – may soon be lower than at midnight. The industry is truly being turned on its head.

That was the big issue that was canvassed when the heads of Australia's leading energy suppliers gathered in Sydney in March for the latest informal twice-yearly gathering where they freely discuss the issues of the day. Mostly, these have been incremental challenges, but the issues canvassed in March were more fundamental, and most likely part of a vicious circle from the industry’s perspective. The networks they’ve been encouraged to supersize over the past few years are losing what had been considered 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 greatly expanding the electricity grid has contributed to a near doubling of 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, not to mention greater use of energy-efficient appliances and lighting. What are the networks to do? They complain that 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 heels of solar PV – battery storage. This is considered by some in the solar industry to be the holy grail (it used to be “socket parity,” but we’re past that now). But even if it covers much of the evening peak and avoids the need for bigger networks in the future, battery storage doesn’t necessarily help the networks deal with their major current problem, which is ensuring they get revenue from network investments already made.

The more households and businesses turn to solar, and progressively to storage, the more the networks will need to extract revenue from fixed charges and their remaining clients. This could initiate a “death spiral”: the more utilities appear to declare war on their customers and seek to make solar unattractive by increasing 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.

FOR the industry, the only reasonable option seems to be to encourage people to consume more. Mandating them to turn on more air conditioning or reinstall wasteful appliances obviously won’t work. It’s time to think of something new, and 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, but 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 reducing 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.

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. It, too, found a new product that protected its 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. Indeed, the Edison report cites the experience of the telcos, as well as airlines (which were opened up to increased competition in the 1980s), as a warning to its own industry. “We are just not quite sure how quickly some of these distributed or disruptive technologies will enter the market,” Gutheridge says. But new technologies could affect 20 to 30 per cent of their market, and there will be new competition from the telcos that also see opportunities in the home energy market.

One of the biggest trends in the United States is for utilities to get stuck between really big communications companies such as Verizon, Vodafone, Comcast and ADT, who see a move into home energy management as a viable way to use their bundled 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 companies – 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.”

But can the network operators adapt? Can they be fleet of foot, or even of mind? David Roberts from Grist is not so sure, noting that the challenge of having to reshape their business models has, if you’ll excuse the 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.” •

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Witty, intelligent and strong-willed: Jennifer Ehle (above) as Elizabeth Bennet in the BBC’s 1995 production of Pride and Prejudice.

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