Professionals Australia Informer – Electricity

ELECTRICITY INFORMER

Respect, recognition and reward

Professionals Australia Industry Briefing

Professionals Australia Informer – Electricity

Australia’s electricity sector is highly diverse, encompassing a range of

different forms of energy generation, and transmission and distribution

businesses that bridge the gap between generators and end users. Over

the past decade, the trend towards solar power has added a new facet to

the already complex system, with households and businesses now able to

generate their own electricity for personal use, and feed power back to the

grid.

For many years, generators, networks and regulators alike all forecast

that Australia’s energy needs would continue to rise, much as they always

have. However, over the past five years, the trend has shifted, as demand

for electricity flattened, and even declined in some markets. While an

ongoing decline is not expected, flatter demand growth is likely over the

coming years, placing greater pressure on the sector to maintain adequate

investment and maintenance while operating alongside new technologies.

While the sector faces a number of challenges, a high level of professional

expertise will be a key factor maintaining the reliability, safety and

sustainability of Australia’s electricity supply.

Professionals Australia Informer – Electricity

The overview

To cater for the energy needs of individuals and businesses across Australia, a wide range of electricity generation technologies are used. In the most basic form, most generation technologies require some form of energy to drive generators (with the exception of solar), with fossil fuels such as coal and gas being the most common. Hydro, wind and solar are also employed across Australia to varying degrees in order to meet demand.

While each form of power maintains varying advantages and disadvantages, the ultimate composition of Australia’s energy production essentially comes down to cost, with different power stations effectively turned up and down as demand requires. Coal power is ultimately the most cost-effective and reliable form of production. However, high start-up costs and the time taken to alter generation levels mean that coal generation is less responsive to demand shifts, making it ideal in providing a base level of power.

Gas generation is much more costly, but more easily turned on and off, making it most important in covering periods of peak demand, when cheaper forms of energy are not adequate. Gas and hydro can rapidly respond to changes in demand, and are key forms of generation in preventing blackouts. Alternatively, wind is more reliant on wind speeds, meaning that essentially “it goes when it blows”, providing a level of base energy but not replacing the need for fossil fuels. At present, energy is not stored in any significant manner by the grid, meaning that generation is required to increase or decrease to cater for changes in demand.

While the ultimate composition of our electricity generation is complex, with demand expected to rise slightly above current levels over the coming years, all forms of energy will play an important role.

Figure 1: NEM generation capacity by region and type 1

Source: Australia Energy Regulator

Current performance

The past five years have provided some major challenges for the sector, with unexpected demand patterns, regulation, safety concerns and new technologies driving the need for change. While these challenges have placed pressure on some parts of the industry, they have also created opportunities in new areas, particularly in renewable energy sources.

Weaker demand

The single largest challenge facing the industry has come from a shift in demand trends. After many years of uninterrupted demand growth, between 2009 and 2015 energy usage in most markets declined or remained flat. While lower than expected demand levels pose no significant challenge to networks, revenue cuts have made this process more challenging, forcing businesses to maintain and improve large networks with fewer resources. Additionally, while overall demand for energy has failed to grow as expected, networks must remain solid enough to cater for peak demand levels, which are less predictable.

1Australian Energy Regulator, Industry Statistics, February 2016

2

Professionals Australia Informer – Electricity

Weaker energy demand across Australia has been due to a range of factors, with a number of heavy energy-consuming industries having reduced production in recent years. Some major manufacturers have rationalised their local operations while others have closed or shifted their operations abroad. Solar PV technology is also among the major contributors to lower demand for grid energy, while energy efficient appliances and higher electricity prices have contributed to the decline, as consumers and businesses sought to manage their energy consumption.

While these factors have contributed to lower energy use in many markets, the capacity for further decreases is weakening. Many forms of new technology such as lighting and appliances have already moved towards greater energy efficiency, with future gains unlikely to be as substantial. The migration towards solar energy is also slowing, with installation of new solar panels recently falling dramatically below the 2011 peak, with most subsidies now removed. The potential for solar panels to reduce peak demand is also unlikely to increase significantly, with peak demand periods moving later in the day. While solar has been effective in decreasing demand during daylight hours, as peak grid demand moves to the evening, solar panels will be much less effective.

Figure 2: NEM energy generation 2

Source: Australian Energy Regulator

2 Australian Energy Regulator, Industry Statistics, February 2016

3

Regulation

Regulation has introduced a degree of uncertainty to the industry over the past five years, impacting the way generators, transmission companies and distributors do business. The most significant recent change has come as regulators have sought to drive electricity prices lower through lower revenue determinations for industry participants.

With demand failing to meet previous forecasts, the cuts imposed across the industry are not a complete surprise to many distributors and transmission businesses, however the size and timing of the cuts are more startling. Distribution and transmission businesses throughout most states will be forced to cut capital and operating expenditure budgets over the coming years, sacrificing new investment, maintenance spending, safety programs, and in all likelihood jobs. However, most businesses involved in the wider electricity sector have sought to diversify in recent years, limiting the impact of revenue cuts to one branch of the business to some degree. Businesses may hold operations in transmission, distribution, various forms of generation and retail. The industry has been highly vocal in its opposition to the cuts, suggesting instead a decrease of a lower magnitude, with a gradual decline to avoid such a sharp impact on the industry. At present, several distribution businesses across different states are in the process of appealing the AER determinations, with decisions expected over the coming months.

Professionals Australia Informer – Electricity

Alternative energy

Renewable energies have become more prevalent over the past five years, with additional projects expected to emerge going forward. Wind generation has become increasingly popular and can be installed with relative ease subject to required wind levels. Continued efforts to minimise Australia’s carbon footprint have accelerated this shift, with some opportunities present for funding, finance and grants for renewable energy initiatives. However, while renewables are becoming more effective and capturing a larger share of demand, they are unlikely to replace fossil fuels altogether. Carbon-based generation remains the cornerstone of Australia’s electricity supply, particularly in the eastern seaboard states. The low cost, high capacity and relative abundance of coal provides enormous cost advantages over other forms of energy generation. As a result, coal generators can easily provide the most cost effective supply bids.

With the AER currently trying to push electricity prices lower, it is unlikely that any major shift towards more costly generation methods will occur in the near term. Alternative energies, while important to the overall diversification of generation technologies, lack the reliability and affordability at present to fully replace fossil fuel generation.

Figure 3: Types of electricity generation NEM 2014-15 3

Source: Australian Energy Regulator

3 Australian Energy Regulator, Industry Statistics, February 2016

4

Professionals Australia Informer – Electricity

Sector outlook

While the past five years have posed some challenges for the sector, the coming years are expected to provide a raft of opportunities for the industry. Demand growth and new technology will drive much of the change, with the industry expected to rely on skilled industry professionals in order to adapt.

Demand

The past five years saw overall energy demand decline for the first time. However, over the coming five years demand is forecast to return to growth as the capacity for efficiency gains declines. The Australian Energy Regulator forecasts higher demand for energy over the coming years⁴ , however revenue cuts for industry businesses will restrict new investment to some degree.

While energy networks throughout Australia are as strong as they have ever been, the size and distribution of infrastructure and the significant safety concerns associated with failures mean that investment and maintenance will remain a high priority. With budgets stripped, the emphasis will be on smart management of infrastructure and the utilisation of skilled technical professionals to develop and prioritise infrastructure management programs.

Demand changes will also provide opportunities within generation businesses, with the spread of generation technologies expected to grow further. Wind generation will contribute a much larger share of the nation’s energy demand over the coming years, continuing its pattern of growth. While as hostile Liberal Government placed a halt on wind progression of late under the guise of aesthetics, recent discussion has been much more positive towards new wind capacity. While renewable technology is expected to capture a larger share of demand, this is unlikely to come at the cost of traditional fossil fuels. A lower demand base has caused coal generation to decline over the past three years, however, a resumption of demand growth is likely to flow through to an increase in demand for coal.

Over the longer-term, the greatest challenge facing the electricity sector is how to manage and finance large electricity networks if consumers eventually move away from the grid. This challenge was raised by the CSIRO in a recent analysis of the future of Australia’s electricity grid⁵.

Falling network utilisation would place greater strain on electricity prices as fewer consumers pay the costs of network management. Skilled engineers and technical professionals will be particularly important in developing solutions to this issue, with innovative new approaches required to manage network investment and maintenance.

Reliability vs price

Australia’s energy networks are as strong as they have ever been. This strength has come off the back of strong investment in infrastructure, improved maintenance programs and the development of a skilled workforce of technical professionals. The reliability of supply is also strong, with average outage duration and frequency all falling in recent decades.

While the focus has long been on providing reliable networks, this emphasis has shifted dramatically towards providing affordable electricity. This shift places a strain on networks as they seek to balance the priorities of different groups. After a spate of bushfires, networks have sought to improve their safety programs and preventative maintenance. However, some of these programs will come into question as efforts to cut costs increase.

While cost cutting will undoubtedly affect the ability of network businesses to manage infrastructure, it will also provide some opportunities for technical professionals. The complexity of the role of networks and generators is increasing rapidly, with businesses forced to provide more reliable, safer networks, at a lower cost, while adapting to new technology and potentially lower network utilisation. Competent, high-level professional expertise will play a big part in allowing businesses to respond to these challenges.

The industry will need to find new and innovative ways to manage networks, and will likely need to incorporate new technology with the grid. Many electricity companies now actively promote solar panels in an effort to diversify energy sources, relying on solar to reduce peak demand and limit the need for network augmentation. This trend is expected to continue, particularly as energy storage technology improves and costs decline.

⁴Australian Energy Regulator, State of the energy market 2015, February 2016 ⁵CSIRO (2013), Change and choice: the Future Grid Forum’s analysis of Australia’s potential electricity pathways to 2050

5

Professionals Australia Informer – Electricity

Figure 4: Yearly solar PV installations⁶

Source: Clean Energy Regulator

However, the development of improved battery technology is expected to have a dramatic effect on the industry, allowing users to generate their own electricity through solar panels during the day, and store unused energy in batteries for later use. Early battery models are already available, with the Tesla Powerwall home battery being the most high profile model to hit the market. While the potential to impact the sector and drive the sale of solar panels is clear, the current cost of battery technologies is somewhat prohibitive, with the payoff period currently outweighing the warranty period of most batteries.

However, prices are already declining, and will fall much further over the coming years as technology improves and more competition enters the market.

Complementary systems will also play a part in the rising popularity of battery technology. Smart power systems are likely to become increasingly prevalent, as battery owners seek to gain the maximum benefit from their investment and minimise the payoff period. Software is already available that allows solar and battery owners to take advantage of spikes in electricity spot prices, selling power back to the network for the maximum gain. These new technologies are just a few examples of the opportunities that will be present for technical professionals over the coming years, with existing companies and start-ups expected to take advantage of this emerging market.

Opportunities

• Demand growth: While electricity demand has declined in recent years, the trend is expected to reverse as the rate of solar uptake declines.

• Reliability: Network businesses will be expected to do more with less over the coming years, driving the need for greater technical expertise. While job cuts have occurred in the short run, a renewed focus on innovation and expert knowledge is expected.

• Technology: While the uptake of solar has slowed in the short term, the development of affordable battery technology will accelerate growth over the longer term. This will provide opportunities for skilled technical professionals in developing technology, integrating with networks and building innovative solutions to support electricity networks as users move off the grid.

• Renewables: An increase in renewable energy generation will provide a range of opportunities for skilled engineers and technical professionals, both in the construction and generation phases.

Technology

Technology is likely to play a significant role in shaping the sector over the coming years. While change within the next five years will be slow, as technologies become more affordable the speed of change is expected to accelerate.

Solar PV generation has received a significant level of media attention in recent years, with panels becoming commonplace around Australia. However, the speed of adoption has declined markedly in recent years as the market reaches saturation. While the capacity of solar panels available has increased over the past five years, the inability to store the electricity generated has left users unable to benefit during the evenings, when families are at home and electricity usage is often at its highest.

6

⁶ Clean Energy Regulator, Small-scale installations by installation year, February 2016

Professionals Australia Informer – Electricity

Electricity Informer

Level 1, 163 Eastern Road SOUTH MELBOURNE VIC 3205 marketing-team@professionalsaustralia.org.au 1300 273 762

Respect, recognition and reward