It seems almost weekly now that I hear complaints about power prices and more importantly, the sound of 'Death Spiral' alarm bells. It would appear that electricity utilities across the globe are finding it more and more difficult to charge their customers enough and yet fend off the threat of 'Grid Defection' and the impact of Distributed Generation. In Australia, we see governments doing their best to defend their investments by reducing incentives and programs that were introduced to address climate change and a demanding voter population.
There is plenty of history behind all this, but the question remains; what lies ahead for large utilities?
What we are witnessing is, as always, a change driven by market forces. The issue is, that the utility stakeholders have been so used to being the primary player, they have been caught off-guard by the combination of climate change policy and the economics of new technology and large-scale manufacturing. A key factor that has brought about this 'surprise' is the long life-cycle and investment period of utility assets combined with good old change denial. Thus we are seeing the beginning of an 'Energy Revolution' whether the utilities like it or not - People Power!
For a long time, the customer has had little choice; connect to the grid, or to not connect to the grid. Alternatives such as private fossil-fueled generation were laden with cost, inconvenience and uncertainty. With the advent of mature power electronics and Photo-Voltaic (PV) technologies manufactured on a large scale there is more choice. Of course other technologies such as wind and geothermal power have entered onto the scene, however they have tended to manifest in large-scale plants which are much more manageable for utilities. Additionally, small-scale credit is seemingly free-flowing to support the upfront capital costs that plagued the early adopters.
In the beginning, PV was adopted as a 'green' option by the high-end of town. To look good and feel good. Climate change politics sought to bring these feelings to the masses by introducing incentives. What can I say? It worked. But it is genuinely a threat to the business-as-usual utility model. In response to the reduction in revenue brought about by distributed generation, utilities have increased c/kWh tariffs and daily connection charges. However, the relative increase in daily connection charges reflects a reduction in per-customer demand and the need to maintain revenue to pay for long-term investments. From a utility perspective, they're managing their budget. Great.
However from a customer perspective, there's a couple of scenarios...
On one hand you have your working poor. The don't have the income to leverage their own generation to reduce the impact of tariff increases. Their only real option to try and cope is to reduce consumption through energy efficiency, a reduction in lifestyle or, of course, to find a better paid job. In my mind, their best option is energy efficiency, though that still comes with an upfront cost.
On the other hand, you have those customers that have already, or are considering distributed generation. The increase in tariffs pushes them to reduce consumption, then install generation. With the current trend that sees Feed In Tariffs (FITs) paying well under the cost of energy to the consumer, energy storage (self consumption) is looking attractive. The increase in daily charges just provides an additional incentive to get off the grid altogether and bump up the capacity of their energy storage. Of course, from an investment perspective, it is clear that grid connected electricity charges are only going to increase, and the cost trends of manufacturing will only make the alternatives cheaper in the future.
But we still haven't answered the question; how do utilities transform their business to survive? Can they survive?
At the end of the day, each customer is different. And that is primarily what distributed generation is addressing; the needs of some customers who have the desire and ability to invest funds to provide cost and energy security. On the other hand, the utility restricts itself (or are restricted by regulation) to provide a 'standard' service to each customer (at the residential scale at least). What if a utility was able to offer a cost-reflective tariff based upon supply reliability? And a cost-reflective tariff based upon energy contract term? These demands could be provided with a range of technical solutions including the normal grid-connect through to grid-connected, storage backed, PV installations purchased through the utility. But the utility has to be prepared to deal with providing tailored services to customers on a per-customer basis! That's the quantum leap.
In many ways this has some similarities to the broadband and telephony market; although there are some flaws there too of course. However individual customers can choose a supplier based upon network speed and reliability, contract term and service cost.
The advantage that a utility has in the energy market is scale. This is only an advantage if they can match up consumers with products and demand with generation. To leverage this scale, it requires one thing, data. And lots of it. For example...
Where the majority of a community or suburb values reliability, the grid could be beefed up to provide redundancy, or a community-scale PV power station with energy storage could be installed to meet these demands. Demands that are driven by the willingness of those customers to pay for it. And it's likely to be more cost effective than meeting this need with per-household systems. When the surrounding grid suffers an outage, the community runs from it's own supply, when the surround grid supply returns, the utility will maintain a return on its aging investment.
On the contrary, where these is demand for cheap electricity at a lower reliability, then the utility has the ability to provide basic, yet robust infrastructure that tolerates more frequent outages and possibly provides demand management opportunities.
But how do you know these communities exist? How do you know what the energy demand is? How do you transition from BAU grid supply to stand-alone grid supply? How can you justify the long-term investment and reduce the risk of Grid Defection? By collecting data. And then analysing it! It amazes me how much data that utilities already collect, but don't take full advantage of it. The advent of 'smart meter' is likely to only make this worse in the short-term, but I feel it is a necessary investment.
Could a utility offer a integrated PV / Battery / Inverter unit with integrated metering and communications? On a large scale this could provide a wide range of options for the consumer and utility. Of course there would need to be agreements about data usage and privacy, etc.
There's even options such as as the utility installing PV on my roof, paying me a monthly credit, while my neighbour is paying for it to improve his supply reliability. Now that's just not possible without a utility network or a connected customer base.
In summary, the average utility needs to step up and look at the opportunities that lie in front of them and proactively work to keep the long-term cost of electricity at a minimum. Rather than hiking prices to protect the investments that were made decades ago and stare down the barrel of stranded assets and the death spiral.
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