Australia’s Energy Future

Introduction

The national Electricity Market (NEM) is a framework designed for centralised electricity generation and distribution; and as such is a concept not easy to align with the notion of energy security – it is a fact born in proof recently that the current system facilitates many single points of failure with no redundancy. What we need is a complete rethink of electricity generation and distribution that reflects the current and future realities of a rapidly decentralised generation system rather than reinforcing and reinvesting in the old system that was designed in the 1950s to suit large-scale, centralised, coal-fired generation. This submission argues that a decentralised market should be adopted for the general consumer which mirrors the market mechanism encountered within an embedded network. It also argues that such a model would allow for competition in the largest cost component of our electricity bills: the distribution network. Transferring or taking ownership and placing it back in the hands of local government would allow for the adoption of a local electricity market that would support and encourage independence from the transmission network through investment in large-scale renewables coupled with battery and pumped-hydro storage. The concept of centralised generation and energy security are not compatible and do not reflect the emerging trend of small and large-scale localised generation.

Background

Prior to the 1950s, electricity distribution and generation was largely decentralised, with the networks built, owned and operated by local governments. The advent of state government legislation to centralise and normalise the grid was sensible policy in the day of massive pollution in city centres, along with the necessity for large-scale industry to have access to reliable, consistent power sources. In short, it made sense at the time to take the distribution networks from the local governments, and allow the state bureaucrats to engineer a significantly better solution. It also supported the drive to build a new-generation of massive coal-fired power stations near sources of coal, and deliver the electricity remotely over new large-scale transmission networks. As demand was centralised through the expanding grid, it became an easier and more predictable environment in which to forward estimate demand and provide sufficient capacity at various stages of the day or year. The centralisation of the electricity generation, transmission and distribution was an important policy at the time and allowed the electricity market to develop into what it is today – but it does not reflect the new reality.

Coal-fired generation has always had one major drawback from a technical perspective and that is the fact that you cannot “ramp-up” or “ramp-down” production in line with the rapidly changing demand from consumers during the course of a day. So to support the coal-fired generators, a market was established that put incentives to use electricity at night through substantially reduced tariffs – an effort to smooth out demand and increase predictability for generators. Today we have demand and capacity pricing for large electricity consumers which heavily penalises peaks in demand. The consumer pays for the capacity of what they have used as a peak for 12 months – in other words, it acts as a major financial penalty to have a spike in demand, which is in line with what the coal-fired generators need – predictability in demand. The NEM reflects the needs of the coal-fired generators – large, predictable demand – it is not designed for nor does it reflect the future needs of the network.

When the NEM was established, the concept of mass-rollout of rooftop solar, wind farms and the like was not even considered a possibility – and it is correct to say that the planning of energy policy has not evolved in line with this rapid advancement of technology both on a state and federal level. What we have seen is predictable from an economic standpoint: a majority of the wind generators set-up in South Australia because that’s where modelling showed they would achieve their best return on investment. Money flows to where it will be returned fastest – a simple law of economics. For the stability of the grid, this has been a bit of a disaster as has been documented repeatedly, despite the misinformation surrounding the felling of transmission towers in the South Australian storms in September 2016. It is true to say that wind and solar installations cannot provide consistent, baseload power in isolation. It is also true to say that “baseload” coal or gas-fired generators could not have saved the day in South Australia late last year. As well, you could point to February 12th 2017 in NSW, where there were a series of rolling blackouts enforced despite the almost complete reliance on coal-fired generation in that state.

 

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Figure 1 – Electricity Generation by Source

 

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Figure 2 – Unplanned electricity outages, Essential Energy, NSW, February 12 2017 at 17:40

 

These events along with many others prove that it is not one generation technology that is at fault for unreliable supplies of electricity and that reliable baseload power is not synonymous with fossil fuels. And despite the massive investment in transmission and distribution over the last 20 years (the infamous “gold-plating”), nothing could avoid these outages due to either excess demand, or through extreme weather events. The fact is that we are paying very high prices to cover days like February 12 2017, while the network remains relatively idle for much of the year. And despite the price we pay, the model adopted and the system as whole does not have the level of reliability or resilience that we expect.

The element that is often forgotten in this conversation is the household and what their motivations are and will be going forward – principally with the drive for rooftop solar and battery storage systems both in a hybrid grid connect, and more importantly in an off-grid mode. The current feed-in-tariff (FIT) is at 6-7c/kWh in NSW, and slightly higher in Victoria at 11c/kWh which reflects the market reality that generation costs only represent 35% of our electricity bills. This is the price that coal- fired generation feeds in to the grids, so why would electricity purchasers and retailers pay more for one source than another, other than for ideological reasons? The answer is, they won’t. So, households will never see more than 12c/kWh, which makes the return on investment for rooftop solar and battery storage very marginal. Indeed, at 7c/kWh in regional NSW, the ROI for a $7,000 residential grid-connect project would be 150+ years if you exclude avoided consumption.

 

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Figure 3 – The National Electricity Market – Cost Distribution. Source: RBA – How are electricity prices set in Australia?

 

Regional areas face daily connection fees of up to $1.50/day in comparison to an average cost of $0.70 in metro areas. This places not only a high cost on regional consumers, but also encourages disconnects from the grid.

A hypothetical: you buy a block of land which is not connected to the grid – your options are connect at $20,000 plus $550/year in fees, or invest that money and go off-grid. Increasingly, people will choose the off-grid option because it provides a predictable return on investment and reduced operational costs, as opposed to facing the ever-changing feed-in-tariffs on the NEM. I would argue that existing connected customers will be encouraged to disconnect by the ever- decreasing costs of renewable energy and battery storage. Indeed, Energy Networks Australia has pre-empted this trend, thereby acknowledging the threat and risk to the stability of the market.

In 2015, Energy Networks Australia proposed five solutions to avoid disconnections and financial loss to the distributors, including:

  1. Higher daily fees to “help reduce the risk of stranded assets”;
  2. Charging exit fees to customers equivalent to their “historic share of network capacity”;
  3. Setting up compulsory “rates” style  notices  to  charge  all  ratepayers  for electricity distribution regardless of connection to the grid;
  4. Higher network charges for reasons in point 1; and
  5. Tax advantages such as faster depreciation.

The advent of off-grid represents a massive challenge for the NEM – while conversely leading to more energy security for the individual household, it also leads to less energy security for the community at large.

We can see therefore that the adoption of off-grid technologies is a real challenge – the economics of the market is not designed to suit the consumer who generates their own electricity. While in the current framework of the NEM it makes perfect sense for every generator to receive the same feed-in-tariff, for the average householder whom does not understand the intricacies of the NEM, it makes little to no sense. We see campaigns like that from Solar Citizens, whom rightly point out from a householder’s perspective that while we put in electricity at 6c, we pay 24c to take it out. As they put it “Stop the daylight robbery”. There is little appreciation for the fact that most of that difference is soaked up by the poles and wires.

 

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Figure 4 – Solar Citizens “Stop the Daylight Robbery” – Fair Price FIT Campaign

 

Rooftop solar should play an important role in stabilising the grid, and as such, grid-defections need to be discouraged by making households a partner in creating energy security. The only way to do this is to be able to offer a higher feed-in-tariff. Methods of subsidy have been used or are being used to create an artificial market

– but should the general taxpayer be offsetting cost or reducing electricity bills for those with the money to invest in renewables in the first place? The only reason that subsidies had to be offered was because the NEM was incapable of paying a higher FIT to households. Moving forward, we need to understand that solar is here to stay, and that we therefore need a market that encourages grid-connect, rather than the scenario that we have now, where it actively encourages grid defections.

In a professional capacity, I have worked on the designs or operations of many embedded networks across the country – for those fresh to the idea of an embedded network, it is essentially an electricity network within the broader network. Examples of existing embedded networks would be any reasonable scale shopping centre, apartment building or complexes. These networks allow the owner or body corporate to establish one connection to the distribution network and become a large-market customer and bulk-buy electricity from a retailer. The entity can then sell electricity to their tenants at a margin. This is a win-win-win because the building pays less to run common-area consumers such as air-conditioning and lighting, the tenant pays less than retail rates for their electricity and the network has one big, predictable customer that regulates their demand and provides power factor correction into the mix. Embedded networks provide an alternate economic model that has been adopted successfully across Australia through a highly-regulated environment – but they also offer one very unique feature – local generation and sale of energy.

A shopping centre, like a home, usually has plenty of roof space to install large-scale solar PV installations, but more importantly, it has a market in which to sell electricity at a far higher feed-in-tariff than if they were to sell back to the grid. This is enormously significant as I will get to shortly. Where the shopping centre may be buying electricity off the network at 10c/kWh and selling to their tenants at 18c/kWh, this provides the opportunity to create a FIT of 18c/kWh on the solar installation. This changes the economic proposition markedly – an ROI of <2.5 years can be achieved in this local electricity market.

While rooftop solar presently will not meet the demands of the centres or households in its entirety, this localised generation will more importantly remove demand from the network – and is a vital first step in achieving true energy security. Buildings and precincts such as Fraser’s One Central Park provide more energy independence for their residents by investments made in a central thermal plant that provides chilled & heated water along with electricity from local gas-fired generation. None of this would be possible without an embedded network. Property trusts are doing everything in their power to reduce demand and costs in their portfolios and an embedded network is a very important facilitator of these efforts by providing the correct financial returns for investments made.

 

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Figure 5 – An Embedded Network in relation to the NEM

 

For those not lucky enough to be in an embedded network, the returns on investment for local generation are paltry in comparison, particularly when you consider the daily fees and charges – and I would argue that this disincentive for investment is also stifling innovation and halting progress towards true energy security. What are the answers we’ve heard from government so far? Build more “baseload” power stations. Sure, but at what cost? Expand our distribution networks to cater for increased demand. Yes, but at what cost?

Following this model will only lead to higher costs and do nothing for energy security – on that front it would truly be a status-quo situation, but with higher prices. What if instead of the march towards centralisation, we decided to go in the other direction and adopt a decentralised model? What if we took the embedded network concept and extended it beyond the limited geographical boundary of one suburb, precinct, building or shopping centre? Clearly this is a model that has been widely adopted on the micro-scale, and is one that is proven to work. Could the local government take back ownership of the distribution network in their geographical area and constitute an embedded network? I think the answer to this is yes, and it brings a lot of benefits that tackle the energy policy trifecta: affordability and security with reduced emissions.

A new approach

Benefits:

  1. Electricity distribution assets would be owned by local government – but this opens an opportunity to expose this massive cost component to competition for the first time through a tender for maintenance services. The obvious candidates would be existing distribution networks such as Ausgrid, Endeavour, Essential Energy, Energex, etc.
  2. Local government bulk buys electricity as a large-market customer direct from the transmission network through an electricity retailer. This cheaper electricity is used to feed pumps, sewerage treatment works and other energy intensive components of their infrastructure network. Subsequently, reductions in costs can be passed through to ratepayers.
  3. Local governments typically own and operate their water networks – this provides an opportunity to shift administrative jobs surrounding electricity to their local communities as well as streamline services by using the one meter reader to read both water and electricity.
  4. Local government can retail electricity to households in the same way they sell water or send rates notices. This allows discounted electricity to be sold to households, providing real competition to the existing retailers in the market. Existing retailers would be allowed to operate on the local network as part of ‘freedom of choice’ – this will enhance competition and set a benchmark price.
  5. Local government, operating as an electricity retailer, can set a far higher feed-in- tariff knowing that generation will be consumed in the local electricity network. Nominally, this should be retail price minus a margin for maintenance of the distribution network.
  6. This creates a “hybrid-microgrid” as I have termed it, wherein a local electricity market is created that is controlled by the community. The hybrid-microgrid model is an easy transition path from centralised distribution that ensures guarantee of supply while local generation is brought online.
  7. Local government are directly answerable to ratepayers and households and this will ensure that there is a greater degree of accountability and transparency both in operation and planning of the future needs of the network.
  8. Creating a series of local electricity markets will encourage competition and foster innovation. Areas that set higher feed-in-tariffs will attract more investment in renewables; those seeking lower electricity prices can use the tendering of the distribution network operation as an instrument to achieve this outcome.
  9. Local governments can create a market to seek energy independence through adoption of pumped-hydro and large-scale battery storage. Changing tariffs to reflect the new reality of generation during the day and storage at night requires a reversal of the current tariff structure. This new structure and the margin from operating the distribution network can be used to fund battery storage at the connection point to the transmission network.
  10. As local government areas become more energy independent, the reliance on the transmission network eases, allowing it to provide the role of balancing generation across multiple regions, rather than it being a single point of failure, as it currently stands.
  11. “If only every electricity customer were like shopping centres!” Well, in this model they can be. LGA can adopt many measures to smooth out demand and improve power quality – including existing and proven technologies such as power factor correction, but in future large-scale battery storage. This makes for a very nice large- market customer for the central generators and the transmission network.
  12. Electricity distribution costs could be charged as part of a connection fee, or simply be included in rates. Adopting a rates style policy would mirror the proposals made by Energy Networks Australia and encourage connection and participation in the grid, rather than the opposite.
  13. Investments in the transmission network could effectively cease as demand on the infrastructure wanes. The model will allow the community to realise the investments made during the “gold-plating” of the network over time without further expansion.
  14. Existing infrastructure is used in it’s entirety – and over time. As local generation picks up, infrastructure use will shift from a central generation/distribution model to a energy sharing market, whereby communities can share excess generation to the main grid for consumption elsewhere.

Strategy:

Stage 1: Assess current infrastructure arrangements. Exiting distribution networks are complex affairs that have been built up over a century. This offers a simple view of the current distribution network in relation to a town or LGA.

stage1

 

Stage 2: Implement “Gate” meters at LGA boundary or at substations. Transfer all distribution assets to LGA.

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Stage 3: When in operation, investments will be made into renewable and battery storage via higher FIT and new local market mechanism. Addition of battery storage at boundary allows for true energy independence for each LGA.

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Conclusions

Energy policy and energy security will not be solved by central committee – rather, it is a task that should be handed to communities to solve on a micro-level, with policy oversight and regulation on a macro-level. The current discussion in the community does little-to-nothing to address the policy trifecta: affordability and security with reduced emissions. All submissions to this enquiry should be viewed through this prism; there is little point proposing expensive central additions to the grid that makes energy unaffordable and less secure, as outlined herein. As a centralised approach to energy policy stifles innovation in the same way that a command-and-control or closed economy stifles innovation compared to the free market more broadly.

It is perplexing to watch policy makers argue for the free market on one hand, then “pick a winner” and decide to provide taxpayer subsidies to one technology on the other. Again, the question of affordability, security and emissions needs to be asked in relation to any of these proposals.

Rather than taking a central committee approach, I believe we need to dramatically move in the other direction. Fragmenting distribution with ownership vested in local communities will not only provide an upsurge in innovation, it will drive  down  costs  by  exposing  the  biggest  cost  component  of  our  bills  –  the distribution network – to competition for the first time. It will facilitate proactive energy policy and an open marketplace for pricing between communities that will increase innovation and affordability. It will lead to a decentralisation of generation and storage that will increase security. And by nature, as a community weans itself off carbon based generation sources, emissions reductions occur as a result. The age of the macro-grid is over – it is time for the micro-grid to take centre stage in our energy policy.

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