assessing the transformation ahead national energy market...

Jim Snow and Lance HochExecutive Directors

Queensland Power and Gas Forum21 July 2015

Assessing the Transformation Ahead Assessing the Transformation Ahead Assessing the Transformation Ahead Assessing the Transformation Ahead National Energy Market Mark 2National Energy Market Mark 2National Energy Market Mark 2National Energy Market Mark 2

Private and ConfidentialCopyright Oakley Greenwood

What we will cover today

• The developments and forces that are shaping the future of our energy markets?The developments and forces that are shaping the future of our energy markets?The developments and forces that are shaping the future of our energy markets?The developments and forces that are shaping the future of our energy markets?

– Technology

– Pricing and Tariff Structures

– Regulation

– Renewables Policy

– Customer expectations and preferences

• Implications for the traditional energy supply industry?Implications for the traditional energy supply industry?Implications for the traditional energy supply industry?Implications for the traditional energy supply industry?

– Entrepreneurs are providing new and very real competition

– Customers looking to hedge against the electricity supply industry

– Gas at high risk of losing relevance at the residential level

• How should the traditional supply industry and Government respond?How should the traditional supply industry and Government respond?How should the traditional supply industry and Government respond?How should the traditional supply industry and Government respond?

– Evaluating “effective competition” – has it really arrived, competitive responses (or are they anti-competitive)?

– Policies on storage and renewables – which side of the meter and does this matter?

– Customers – engaging them in planning, protecting them – understanding themunderstanding themunderstanding themunderstanding them?

– Forecasting – major changes needed – becomes even more critical

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Technology

Solar PV and Electrical Energy Storage

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Distributive (& Disruptive) Generation at the Residential Level!

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PV module price forecasts ($/watt, retail)

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• Australian installed solar price – maturing market – prices flattening out

Exchange Assumption $0.85US/$1 AU

Source: Solar Choice


PV Trends Currently in Australia

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• Falling residential installations• Increasing commercial installations (10kW-100kW)• Emerging large scale sector (>100kW)

Source: Green Energy Trading


PV Trends Currently in Australia

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• PV capacity 20% lower than peak in 2012 but system size increased by 47%

Source: Green Energy Trading


Who owns one of these – were they “economic”?

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Current Technology for battery storage:

• Two most important here and now:

• Lead Acid

• Lithium Ion

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Strengths & weaknesses of different battery chemistries

Flooded

Lead AcidGel

Absorbed

Glass MatLithium Ion

Capital Cost Low Medium Medium Medium-High

Maintenance Costs High Low Low Very Low

Useable Energy Capacity Low Low - Medium Low - Medium High

Lifetime Cycles at High Depth of Discharge

Very Low Low Low High

Capacity at High Discharge Rate Low Low Low High

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Domestic Electricity Storage – Competition for ESI?

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As we move from this;;;;;;;;;;..;;;;;;;;To this!

Move from a functional base to an emotive base – and moves to

become a fast selling consumer good�.

Private and Confidential

“As big as the Pentagon”;.$US5 billion

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Private and ConfidentialCopyright Oakley Greenwood12

Domestic Electricity Storage – Competition for ESI!

• Tesla’s have put domestic battery storage on the map - excited entrepreneurs• Most units into the market with value add will be the winner regardless of

technology – Beta VHS race?

The Tesla GigaFactory in a single year will make more stationery battery storage (15 GWh) than pumped hydros could deliver after years of construction!

To put it into perspective:


Li-ion Battery Cost Projections

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*

• SolarCity will provide the 10kWh Tesla battery plus inverter, controls and maintenance for US$5000 on a 9-year lease, or US$7,140 outright.

Tesla Powerwall 7kWh cyclic


Domestic Electricity Storage – The IT Industry Moves In

Where were are now.

A bunch of single application hardware devices.

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The near future.

Bundling a number of applications at the unit level.

The need is for smarter, integrated software as much as cheaper hardware to add value.

Where it needs to be in the future to realise the full value.

Aggregating for additional system benefits


Domestic Electricity Storage – IT moves in - Reposit Power

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Tesla, Tesla, Tesla – that is all we hear!

• Enphase Energy entered into Australian market in 2013

• Start-up out of California tech scene in 2006 (now listed NASDAQ)

• Developed a micro-inverter that has shipped over 7.2 million units.

• Managing 1TB of data/day from their installations! In a good position.

• Developing a fully self contained 1.2kWh pluggable battery unit that is AC coupled with bi-directional inverter. Scalable by adding more units by simply plugging in – consumer good just like a TV!

• Try forecasting that with economic correlations?

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Do you want the ultimate status symbol in eco-bling!

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• 2.5kWh modules can be combined to 20kWh in total. Deliveries scheduled in September

• Note the (electric) Vehicle manufacturer connection


Pricing issues driving disruptive technologies.

• On-grid use of battery is very much driven by:

– Pricing structure:

• the over level of energy charges affects economics of pairing battery with solar (higher the energy charge, the more solar+battery);

• peak/off peak differential affects economics of a standalone battery

– Opportunity cost of not exporting excess energy to grid (e.g. level of feed-in tariff)

• Higher feed-in tariffs reduce the economics of battery

– Whether customers have already made a sunk investment in ‘excess’ solar capacity

– Level of consumption

• High consumption customers are more likely to take up battery as they are better able to monetise the benefits of the battery (their consumption is better able to accommodate the full output of the battery)

– Load shape

• Commercial load shape results in it being less beneficial to take up battery but stay on grid with a flat tariff and use solar PV

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Network consumption tariffs & “competition”

• The Distribution Network Pricing Arrangements Rule change (Nov 2014)

• Key features that may affect take-up of energy storage:

– Each network tariff must reflect the efficient costs of providing network services

– Each tariff must be based on the Long Run Marginal Costs (LRMC) of supply

– DNSPs must recover their allowed revenue in a way that minimises price distortions

• Goes into effect 1 Jan 2017; transitional arrangements apply until then

• In general, these changes will result in a shift from flat (non time-differentiated) energy charges to any or all of the following:

– time-differentiated energy charges (including static or seasonal ToU or CP prices)

– fixed charges (daily or monthly)

– anytime maximum or coincident peak demand or capacity based charges

– Lot though does depend on the caveat: “where appropriate metrology exists”

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Common Retail Tariff Structures

• Flat rate

– Flat rate variable charge (c/kWh) applying to all energy consumption

• Peak/Off peak

– Off peak rate (generally overnight and early morning (11pm-7am))

– “Peak” rate (generally covers the majority of the day throughout the entire year)

• Time-of-use

– Peak rates (generally higher in mid afternoon/early evening)

– Shoulder (generally applies to consumption mid morning/early afternoon)

– Off peak (generally applies to consumption overnight / early morning)

• Anytime Maximum Demand

– Based on recorded anytime maximum demand

• Critical Peak Demand Tariffs

– Based on demand on network at (expected) times of system peak demand

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Typical Residential Consumption profile

• Residential consumption (random customer in VIC)

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General Features:

• Peaks in early evening, and morning to lesser extent

• Winter consumption higher in morning and evening than average*Based on Endeavour Energy’s 2013 net system load profile. The net system load profile (NSLP) is the total generation system profile within a specific distribution area minus all interval metered loads, controlled loads (such as off-peak water heating) and deemed loads (such as street lighting).

• Endeavour Energy average profile*


Commercial Consumption profiles

• Small commercial consumption (random customer in VIC)

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General Features:

• Fairly flat profile over business hours (not surprising) – drops off significantly pre/post business hours

• Winter slightly higher than all other seasons

• Higher average usage than the ‘average’ residential customer


Common PV generation profiles

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• Generation profile from a PV system*

*Estimated seasonal PV output (Eastern Standard Time) - NSW

• Majority of generation occurs during sunlight hours (not surprising), which coincides with business hours

• Matches commercial consumption better than residentialMatches commercial consumption better than residentialMatches commercial consumption better than residentialMatches commercial consumption better than residential


Future tariff structure changes - potential impacts

• The introduction of a kVA charge may partially offset the effect a drop in kWh charges has on PV economics (in isolation), (in isolation), (in isolation), (in isolation), however depends on many things, including the spread of hours covered by demand charge

• For example:

– Benefits of PV on average demand between 2pm and 7pm (~25%) is very different to the benefits of PV at a say 7pm (1.96% capacity factor)

– Structure of any demand charge impacts PV economics, as well as battery

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Later timing of peak demand �

Larger spread of hours may � PV

economics


(cont’d)

• Battery economics may:

– Improve under critical peak charges that cover 30-80 hours a year

• Better able to monetise peak lopping benefits of battery, without using large , without using large , without using large , without using large number of charge/discharge cyclesnumber of charge/discharge cyclesnumber of charge/discharge cyclesnumber of charge/discharge cycles, but

• Reasonable length of peak period limits demand side response options for customer

– Decline under a less granular demand charge (e.g., anytime peak demand)

• Particular if customer has a fairly flat load duration curve

– Decline further under a very fine grained demand (e.g., peak demand recorded by customer on peak demand day),

• If willingness to pay of customer for electricity at that time of peak demand < cost of battery

• Customer may find it easier to curtail demand over that small peak demand subject to high price rather than pay for battery or pay network price.

• Residential customers who have made sunk investments in excess PV capacity and who are receiving low feed-in tariffs are likely to be the first to take-up battery.

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Pricing and Regulation - is the deck just burning?

• Network businesses in particular likely to “competitively” respond by:

– Moving to more cost reflective prices (required by Rules anyway) – or an optimum tariff structure that minimises economic benefits of PV and batteries beyond the meter – while also indicating costs of peak demand

– Rebalancing revenue generation away from customers who may be faced with an economic alternative to the grid – Ramsey pricing across customer classes rather than price on asset use alone

• Are these options anti-competitive or simply a foreseeable market response?

• Are they economically efficient decisions to avoid “free riding” of batteries and renewables on existing infrastructure?

• This is a major issue for our Regulators and Policy makers,

• BUT……does the industry even have the metrology installed to make this work –and will Retailers elect to install it – do they and/or customers really make this call anyway - do customers have simply have the option of not playing the ESI game anymore?

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Retailers and customers – and entrepreneurs

• Will customers really care and just make the choice to hedge against the supply industry in any case, and

• Will Retailers pass through complex pricing when they also want to be “winners” from change, and customers are in the mood to limit their exposure to the ESI – there are a lot of drivers here:

– The Retailers can (and are) putting products into the market that bypasses the supply side and gives them the advantage of engaging customers on long term supply deals - an almost intoxicating formula

– The customers will be able to “hedge” their supply costs in the same way - changing tariffs and trying to get them to install meters to deliver them is likely to be just another reason for suspicion and risk to customers – self generation may well be extremely attractive, particularly

– With an ageing population – the idea of a next to zero energy bill as you approach retirement, or the risks of being put of work for extended periods escalate, is great risk management and use of capital

– Even lower costs PPAs (or lease arrangements) with fixed longer term pricing would be attractive – and maybe similar for many other customer segments (new buyers, families, etc.)

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Retailers and customers – and entrepreneurs

• Four of the five largest retailers have announced that they will be offering some form of battery product to customers – and PPA products are part of this

– PV + battery + maintenance

– + retail electricity contract

• All other things being equal, the higher electricity prices and bills are, the more competitive on-site generation and storage becomes

• Where policy decisions increase electricity prices as compared to alternatives (e.g. when will the RET bite), or reduce the costs of other alternatives (e.g. SA Battery subsidies – yes folks $5,000/battery installed and that’s not all…) they can skew the relative economic attractiveness of the use of storage as compared to other options (can you feel a solar bonus scheme rerun coming on..)

• This ground swell may very well grow as it attracts voters – there may very well be a major push for subsidies for batteries (when coupled with PV), justified as a way to offset carbon fuel “subsidies” – we have seen this logic used before

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The gas industry?

• This all has major implications for the gas industry - which are just starting to be realised – gas is slowly losing market share to electricity at the residential level –particularly for heating - and then maybe hot water and eventually the whole load - a combination of additional costs and changes in technology (including appliances such as induction cooking) – one energy “bill” may dominate?

• Qld gas networks have been deregulated due to “competition” from electricity

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NSW household average gas consumption

Sydney actual and forecast

Frontier Economics forecast for Jemena Tariff V -Access Agreement submission 2015-2020)


Energy Forecasting – the case for change is urgent

• Forecasting using econometric correlations has had its day (has for more than a decade) - it simply is not fit for purposes anymore

• Forecasting can and does influence the investments in the ESI and gas industry –in fact billions of dollars of potential investments, and

• The value of assets like networks and generation – and the bias has been gross over forecasting which arguably matches major over investment – and equally under-forecasting of renewable options….

• How can regulators and policy makers, let alone investors, make sensible decisions without credible and consistent forecasts of how, where and when energy will be used and customer preferences going forward?

• It needs to change to market based tracking and monitoring research - this is easy to achieve but continues to get ignored

• Needs to sit much higher on the national agenda – regulators, rule makers, market operators and policy makers looking for reforms need to first understand what is happening or risk the burning deck

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Last words - customers may drive this change

• They may elect to install home generation packages as a hedge against the supply side industry – been burnt badly in many places on cost increases

• Very attractive to older people – retiring, concerned about job security, etc. –investing in a low cost future effectively – and beware subsidies fuelling change

• Retailers will be strongly drawn to the model of PPA or leasing products – gives them longer term tenure over customers (lower churn) and better controls over long term margins – likely to increase take up substantially – and they kind of missed the boat with PV so getting in early

• Network tariff “reforms” may well convince customers to install PV battery combinations – or just be lost in the whole metrology morass – but there are also no barriers to networks selling this product combination and third parties are already very active and many PV vendors will seek to sell on batteries to existing customers

• And technology innovation will be rapid, as will cost decline – if the PV market is a good indicator this will be substantial over the next few years

• The economics may look marginal but this is not the whole story – deployment could be very rapid – and subsidised…

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Private and ConfidentialCopyright Oakley Greenwood32

Jim SnowJim SnowJim SnowJim SnowExecutive DirectorExecutive DirectorExecutive DirectorExecutive Director

Oakley Greenwood Pty Ltd214C Maundrell TceAspley, QLD 4034Ph: 07 3263 7612

Mob: 04 1777 5893

[email protected]@[email protected]@oakleygreenwood.com.au

Lance HochLance HochLance HochLance HochExecutive DirectorExecutive DirectorExecutive DirectorExecutive Director

Oakley Greenwood Pty LtdGPO Box 4345

Melbourne, Vic, 3001Ph: 03 9016 2550

Mob: 04 1172 1386

[email protected]@[email protected]@oakleygreenwood.com.au

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