By Cameron Cooper.

Electricity markets have never experienced a storm quite like this.

Technologies such as solar photovoltaics and lithium-ion battery storage are getting better and cheaper as they transform electricity distribution. Smart, nimble start-ups – and even home-owners – are part of a new breed of small suppliers who are taking on the energy giants. At the same time, industry powerbrokers and politicians are under pressure to rein in rising electricity costs for households and businesses. Some consumers have seen years of rising bills – and they’re running out of patience. 

Where does this leave major electricity generators and retailers? Iain MacGill is Joint Director (Engineering) at the Centre for Energy and Environmental Markets at the University of NSW. He believes that generators and retailers must weigh up how to respond and capture new revenue streams in a rapidly-changing energy environment.

“They face the choice of resisting change, or embracing change and seeking to lead it,” MacGill says. 

Power shift

The electricity revolution is sweeping the globe, as countries grapple with the shift from traditional power sources such as coal-fired generators to solar, wind, pumped hydro and other renewables. 

In Australia, high electricity prices are fuelling an already heated debate. The Australian Competition & Consumer Commission recently reported that residential prices have risen by 63% in real terms since 2007-08. That rise, it says, has put businesses and consumers under “unacceptable pressure”.

It’s the most ridiculously scalable technology – you can put it on a watch, your house, your business or build gigawatt power stations

In such a climate, the big energy retailers are watching with interest as new providers try to carve out a piece of the market by using new and affordable technologies. Typical of the new providers are GreenSync, which promotes more flexible and decentralised grids; Powershop, an NZ-based carbon-neutral green energy retailer now operating in Australia and the UK; and Power Ledger, which uses blockchain technology to let solar-equipped households and businesses trade surplus energy. 

These and many other new players are helping to create an “energy cloud” of millions of small power suppliers. Instead of a centralised grid that serves one-way transmission and distribution networks, a new interconnected platform allows the two-way flow of power. This includes “distributed” power generated at homes and business premises. Paul Burke, an energy and environment economist at the Australian National University, talks of “prosumers” – households that both generate and consume electricity.

Geoff Swier of electricity and gas consultancy Farrier Swier notes that by changing the way power flows through the grid, we are changing the distribution networks themselves. He believes real opportunities rest with innovators who can provide support technology to orchestrate these new networks, just as Facebook, Uber and others have done in their markets.

Burke agrees that the change from big generators to a distributed network puts a premium on flexible grid management. “That’s a challenge for the times,” he says.

Hot seat

In Australasia, much of the responsibility for maintaining electricity reliability while responding to this explosion of supply sources – many of them greener, cheaper and potentially less reliable – will fall to the Australian Energy Market Operator (AEMO) and the Electricity Authority in New Zealand. 

Carl Hansen, chief executive of NZ’s Electricity Authority, acknowledges that the sector is facing unprecedented change.

(Pictured: Carl Hansen)

“This is potentially quite transformative and most people are viewing it as exciting,” he says.

The Electricity Authority wants to enable mass participation and remove any barriers that are stopping new players entering the market. The aim is to ensure everyone can get equal access to the network, to buy and sell electricity easily and to access high-quality data to inform their decisions. There is no doubt, Hansen adds, that the electricity model in New Zealand is becoming more dispersed.

“So instead of having 130 parties participating directly in our wholesale market, it could in the future be thousands,” he says.

For established market participants, Hansen says more competition is on the way and they will “need to innovate in order to remain competitive”.

In Australia, AEMO sees its primary role as trying to maintain balance in the system against the backdrop of the Australian Government’s proposed new National Energy Guarantee (NEG). The guarantee is designed to deliver more affordable and reliable electricity while meeting Australia’s emissions guarantees. AEMO states it is indifferent to the fuels or technology resources that are used to secure energy supplies. And indeed this summer, it’s trialling the idea of securing electricity supply to some sources by paying others to give up power for a few hours at a time. In the past the electricity industry focused on supply, but now it is starting to manage demand. 

Swier says AEMO’s job in this new era is subject to debate, with some critics suggesting it should extend its role in the distribution network, which is currently dominated by industry giants. “But a lot of the distribution networks don’t like that idea,” he adds. “They’d like to think they can do it themselves.”

Challenges ahead

New Zealand and Australia are facing different challenges as they respond to change. 

The new Ardern government in New Zealand has set a target of 100% renewable electricity by 2035. For many nations, this would be a huge challenge. But for New Zealand, with more than half its electricity coming from hydroelectricity, and more from geothermal and wind, many experts see an all-renewable grid as an achievable goal.

The Electricity Authority blueprint for change in NZ calls for new ways of doing business in the energy market and low-cost opportunities for generation, storage and demand response, plus more consumer choice.

Traditionally coal-reliant Australia faces a larger challenge. After several years of uncertainty, the reforms adopted from the Finkel Review, together with the arrival of the NEG, hold out the possibility of a workable policy framework for Australia as it shifts its energy mix. 

A new Australian Energy Market Commission report confirms the rise of distributed energy resources in Australia. It notes that the uptake of rooftop solar PV systems, battery storage, electric vehicles and other technologies is significantly changing the way consumers use electricity. For example, home owners can use a battery storage system to maximise the value of a solar PV system, while a distribution network business can use power provided by that system to help manage network demand.

Plummeting solar costs

While there has been understandable focus on improved battery storage options, plummeting solar costs around the world are the other big story. A Bloomberg New Energy Finance report on the evolution of energy markets to 2040 points out that solar power is becoming cheap enough to “push coal and even natural gas plants out of business faster than previously forecast” in markets such as Germany, the US, China and India.

In New Zealand, Hansen says the Electricity Authority is not trying to pick energy or electricity winners. Solar is now joining hydro and geothermal power in the NZ renewable mix, though off a low base: Just 15,000 homes in the country sport solar panels. It’s not yet clear how far home and business-based solar can go, or how it will affect other sources.

“If it’s crowding out hydro and geothermal or wind, then it’s not really adding greatly to our renewability or reducing our carbon emissions,” Hansen says. “So the debate in New Zealand is far less caught up in solar being the solution.”

Batteries included

Lithium-ion battery storage is shaping up as a possible game-changer.

A report from the International Renewable Energy Agency, entitled REthinking Energy 2017, forecasts the market value of battery storage will rise to US$14 billion by 2020, up from US$2.2 billion in 2015. This should lead to economies of scale in battery manufacturing and cut battery costs. This in turn may make energy storage an increasingly cheap and practical way to overcome solar and wind power’s biggest problem – an inconsistent supply of power.

Management consultants at Bain & Company go further, tipping that by 2025, large scale battery storage could be cost effective peaking plants such as gas turbines. 

Policy changes are also having an impact. The Australian Energy Market Commission has cut the settlement period for the nation’s wholesale electricity market to five minutes, from the previous 30-minute requirement, to get electricity into the market at times of tight supply. The consensus is that such a rule change will help agile battery technology at the expense of gas.

However, Australian National University energy expert Paul Burke warns the industry to avoid investing too much in storage technology.

(Pictured: Paul Burke)

“It’s possible that we could waste money,” Burke says. “We want to have a system that’s managed as smartly as possible that minimises the additional costs that could be required for storage services.”

No turning back

In November 2017, a solar energy auction in Mexico in November set a new record low price of US$17.70 per megawatt hour. Such a price, says MacGill, shows how dramatically electricity markets are changing.

“It’s the most ridiculously scalable technology – you can put it on a watch, your house, your business or build gigawatt power stations.”

MacGill says that as PV and wind power continue to become cheaper, the key will be to effectively integrate them into changing electricity markets. There is no doubt, he suggests, that some current market leaders will resist the changes coming their way. However, he warns that “putting the genie back in the bottle is going to be very difficult”.

As the wave of new technology and players arrives, simply battening down the hatches will not cut it.

China is to invest US$360b in renewable energy by 2020 and is poised to become a world leader in the field.

Main photograph by Markel Redondo.

Cameron Cooper is a business journalist based in Brisbane.