30 July, 2015
Issues
The continued growth of solar rooftop generation, combined with new enthusiasm for battery storage has caused some commentators to question whether utilisation of network assets could diminish to the point where the owners’ Regulatory Asset Bases should be 're-optimised', leading to lower revenues.
At the same time, developments in battery technology could deliver opportunities to network owners to generate additional revenues.
RAB re-optimisation
Various customer advocates and commentators have expressed the view that already some material components of the established networks are not required and should be written off and removed from the utilities’ RABs.
Some predictions foreshadow as much as 45% of total generation being 'behind the meter' by 2050,1 not requiring use of the network.
While total demand has fallen across the NEM due to the decline in commercial and industrial demand, more energy efficient appliances and increased solar generation:
- growth in total demand had previously been a well-established long term trend and it may be too early to conclude that declining demand is the new paradigm – although AEMO’s prediction of a return to growth in its 2015 National Electricity Forecasting Report is not widely accepted, population growth continues to be strong, particularly in Melbourne and Sydney and must eventually demand growth, and
- maximum demand (which is what drives network utilisation) has declined to a lesser degree.
RAB is a core feature of the present NEM regulatory framework. Network owners receive a return on capital and a return of capital (depreciation). The return on capital is generally considered low compared to businesses which are exposed to asset stranding although some commentators, including the Grattan Institute would disagree). Significant private investment has been made and is about to be made in reliance on this model. A change to this core principle would give rise to a perception of sovereign risk, the costs of which would flow through other sectors of the economy, especially infrastructure investment.
If the regulatory framework was changed so that RAB were able to be re-optimised then a strong argument can be made that the return on investment would have to increase to compensate asset owners for this risk. The Energy Networks Association estimates that the higher returns would lead to an overall increase in network revenues, even though those returns would be applied to reduced asset bases.2
The Australian Energy Markets Commission, which is responsible for rule changes, would be reluctant to pursue changes of this magnitude without a reasonably fulsome enquiry and, most likely, the support of the COAG Energy Council, given the fundamental shift in policy it would involve.
For these reasons, a fundamental shift of this nature does not seem likely in the absence of a significant new shift in network utilisation.
How much will growth in rooftop PV and battery solutions change network utilisation?
The growth in rooftop solar PV in Australia has been spectacular. Australia’s 1.4 million solar households now represent the highest penetration of this technology in the world on a per capita basis. This is largely due to state-based subsidies and feed-in tariffs (now removed but with grandfathering), the Small Scale Renewable Energy Scheme which is due to start winding down in 2017 and tariff cross-subsidies which arise from the fact that tariffs are presently charged on total energy consumed, not maximum demand.
Of recent times rooftop solar growth has tempered and the economics are less attractive.3 The SRES wind -down and introduction of demand reflective tariffs will further reduce the attractiveness of rooftop solar, potentially offset by any future carbon pricing regime.
However PV costs have continued to fall and growth may resume although it must eventually reach saturation point and the majority of new housing in Melbourne and Sydney now comprises residential apartments.
The prospect of home battery storage has met with great enthusiasm, with much talk of life off-grid, perhaps harking back to the 1970’s BBC sitcom ‘The Good Life’.
The Grattan Institute has recently sounded a note of caution, concluding that for a household to achieve 99% reliability (ie. only 9 hours of blackout a year) would require a $72,000 investment compared to $13,000 to acquire power conventionally over 10 years. Battery costs are predicted to come down over time but it is difficult to predict at what rate.4
Demand reflective tariffs (see article below) will encourage storage options as customers seek to shave their own peak usage to minimise network charges. However, the break even cost is still estimated at $2,000 – $3,000 compared to the current installation cost of around $7,000.5
The lack of experience with storage technology makes it difficult to model, but it seems unlikely to lead to wholesale evacuation of the grid any time soon. Peak demand is relatively robust and only marginally affected by rooftop PV. It is difficult to see it materially affected by storage without a technological breakthrough. AEMO estimated that by 2035 maximum demand may be reduced by 2.4% in NSW as a result of battery storage (and 6.2% in Victoria), although without reflecting the impact of demand reflective tariffs.6
Hence the prospect of rooftop PV/storage delivering a ‘death spiral’ of network costs being borne by fewer and fewer customers – which would create political pressure for a RAB re-optimisation – seems relatively remote.
Grid scale storage solutions
This is increasingly spoken of as an opportunity for network owners. AusNet Services is experimenting with a 1 MW unit housed in four 20-foot shipping containers in Thomastown, coupled with a 1 MW diesel generator. The battery units can operate at full power (typically powering 300 homes) for one hour.
AusNet’s trial is one of a number of projects being undertaken by distribution companies to explore ways to manage demand at peak times and thereby defer network upgrades and minimise demand for peak generation. Other benefits may also include network stability and power quality functions.
Another model which is under trial is contracting with customers having battery storage to deploy them at times of network constraints.
The costs of these experimental projects are recovered through tariff revenues under AER’s Demand Management Innovation Allowance. A number of US utilities have also been experimenting with similar projects.
At present, all costs of the trials are treated as operating expenses and no revenues are generated (outside the approved recovery). The AusNet trial may or may not prove economically viable. But if viable solutions are proven (most likely in an 'edge of grid' environment), this type of technology could be included in normal capital expenditure programmes and be reflected in the RAB.
Indeed, a paper published as this note goes to print by Oakley & Greenwood7suggests there may be a sizable opportunity to reduce 'edge of grid' network costs. They estimate that 100,000km of network serves 25,000 customers (4km each on average but many would be much more). They believe there are opportunities to reduce network costs by creating off-grid islands supported by small scale generation and storage, particularly when major replacement programmes are required. Ergon Energy has been trialling a solution called 'grid utility support systems' to operate with constrained single wire earth return networks.
Ultimately, if the technologies prove up economically, distributors may face the risk that AER won’t allow pass-through of the full costs, or technical risks remain or AER disallows conventional capital programs on the basis that other technical solutions might have been cheaper.
The Grattan Institute have suggested that capex plans be re‑evaluated retrospectively so that, if opportunities like this are overlooked, capex could be removed from the RAB. They also suggest that capex plans be re-evaluated between each network and AER annually.8
Of course, a second opportunity for networks is to profit from actually trading energy through the storage solution. The grid batteries would be charged at times of low pool prices and are likely only to be used at times of greatest demand when prices would usually be high (unless usage is caused by local network outages at other times).
Network operators would enter the energy trading market for the first time, albeit in a fairly modest way.
Endnotes
- CSIRO, Change and Choice: The Future Grid Forum’s analysis of Australia’s potential electricity pathways to 2050, CSIRO Energy Flagship, 2013.
- Crawford G, Written-Down Value? Assessing proposals for electricity network write-downs, Energy Networks Association, August 2014.
- Wood T & Blowers D, Sundown, Sunrise: How Australia can finally get solar power right, Grattan Institute, May 2015.
- Ibid, 26.
- Ibid, 29.
- Australian Energy Market Operator, Emerging Technologies Information Paper, June 2015.
- Thorpe, Assessment of edge of grid regulatory and policy framework, Oakley Greenwood, prepared for Energy Supply Association of Australia, July 2015. Wood and Blowers, above, also consider these issues.
- Wood & Blowers, above, 42 and 52.
For further information, please contact:
Robert Nicholson, Partner, Herbert Smith Freehills
robert.nicholson@hsf.com
