Sunrise or sunset for electricity networks?

There has been quite a bit of talk among Australasian electricity network businesses about falling demand.  Energy demand per residential customer seems to be falling everywhere – the impact of more efficient appliances, better-insulated dwellings and roof-top solar PV.  In many places aggregate demand is falling too. 

The most pessimistic commentators foresee a death spiral whereby ever falling demand requires ever higher per-unit network charges which, in turn, makes more energy efficiency and consumer generation projects profitable.  For the record, I’m not in that camp.

Even more optimistic folk think that significant value could be eroded away.   It seems that New Zealand’s Minister of Finance supports that view.

But true network optimists are looking to electric vehicles (EVs) as saviours of network businesses.  A typical daily commute could be 6kWh to 12kWh, adding 10% to 50% to a residential customer’s demand. 

And then you have batteries.  Some people argue that consumer batteries will facilitate mass disconnection from networks, allowing customers to store solar (and other consumer generation) energy for later use.  But inter-customer diversity, the economies of scale associated with batteries and technical expertise of utilities means that it’ll likely be more efficient for your network company to own and operate a neighbourhood battery.  Personal or neighbourhood batteries would help solve many of the stability and solar export problems that are causing angst in some quarters.  So I don't know whether batteries are part of the problem or the solution to network commercial viability.

I’ve been thinking about this for most of the year, prompted by various engagements in several different businesses.  I’ve listened to divergent views of industry CEOs, academics, entrepreneurs, industry commentators, consultants of all stripes and distribution engineers.  There is no consensus.  So I have little confidence in anyone’s vision of the future, including my own vague ideas.  In an industry that has been pretty much unchanged for a century, I think that’s exciting.

On the whole, I’m in the “sunrise” camp: customers value a reliable electricity supply more than ever and they want simplicity and certainty.  In industries where regulators do not get to mandate tariff structures we’ve seen the rise of the subscription model: Netflix et al have a smorgasbord of TV for $10/month, Spotify and other streaming services offer the same model for music, uncapped broadband and telecommunications plans are increasingly common, we now pay $5/day for international mobile roaming rather than seemingly random but exorbitant call charges, etc.  The future for energy cannot be each customer operating and maintaining his/her own internal utility and constantly fretting over the instantaneous cost of capacity.

What I do know is that the current pricing and regulatory regimes are very poorly placed to cope with any of this: falling demand, mass market consumer generation, storage of bidirectional flows, off-peak EV charging loads.

For example, in response to changes in regulations related to signalling the marginal cost of network capacity, Victorian distributors are introducing mass-market peak period demand charges.  But demand is falling so you can make a case that peak period demand is less relevant now than in any time in the last two decades.  And roof-top solar, batteries and EV charging might significantly change the peak period in Victoria over the next decade.  The regulator is “fixing” the 1990s air-conditioning boom pricing problem, 20 years after the fact.

A complete re-think of commercial arrangements is required.  I’ll write something about what those arrangements should look like, just as soon as I have any clue!

Paul Webber

Baku is brilliant

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Baku, Azerbaijan

I’m currently in Baku, capital city of Azerbaijan, working on a proposed Asian Development Bank US$750 million loan to the government to fix up Soviet–era electricity distribution networks (mostly in rural areas). This is work-in-progress and some difficult decisions still need to be taken, so I can’t say too much right now.

One observation I can share is that having the state coffers brimming with oil royalties does not seem to be an exclusively good thing for a country. Strange things happen and long-term perspectives get distorted. Economic realities become tomorrow’s problem and instead, baubles appear and everything shines.

Not a mirage, as such, but not the full picture either.

But never mind any of that. It’s mid-summer and Baku is a gorgeous city with a penchant for enjoying itself. Who am I to argue with that?

Paul White

Customer consultation to the rescue?

Some of you will know that I’m not a big fan of revenue caps (sorry if I’ve bored you on that subject).  I think revenue caps isolate regulated businesses from their customers, with detrimental effects on internal culture, customer service and innovation.  I think an average revenue yield control is better.  But I lost that argument a long time ago.

Anyway… I have been somewhat depressed that revenue caps are being rolled out across all distribution businesses in the Australian National Electricity Market.

But at this month’s ACCC/AER regulatory conference there was a session on the United Kingdom water industry experience with customer challenge groups.  These are not the pantomime customer consultation efforts we know from Australia and New Zealand, when almost nobody turns up to advertised consultations, and most that do turn up push self-serving agendas.  Under the UK model, service standards, expenditure proposals and the regulated business’s rewards/penalties are bashed out between the business and customer representatives before they’re submitted to the regulator.

It seems to me that something like the UK customer challenge groups could be a vehicle for getting a real customer voice into the heart of network business’s decision-making.  This might even mitigate the downsides of revenue caps to the point that I can stop complaining about them.

Paul Webber

Australia’s first flow-based water network tariffs

For more than a decade (!) we’ve been helping the Gladstone Area Water Board (GAWB) think about the way it charges for its services.  At the end of this month GAWB will send out bills with the “delivery” component based on customers’ contracted maximum daily quantities (MDQ).

Pricing use of networks based on the maximum rate of use (rather than total volumes) is common in the electricity and gas industries.  But we think this is the first flow-based bulk water pricing in Australia.

GAWB has worked with its customers and economic regulator to make this happen.  “Shadow billing” was in place for most of last year, so customers knew the likely impact of the change.  Customer protection measures and grandfathered volume-based tariffs will further ease the transition for customers that are currently very “peaky”.

Flow-based pricing is fairer: customers will pay for the network capacity they use.  And early indications are that customers are responding to the price signal by changing behaviour.   One customer has modified its use (even before the first bills were sent out!) to reduce demand on the network.   This has already released capacity that could be contracted by other customers, thereby reducing the future price to all customers.

That customer is quite small by GAWB standards.  It will be interesting to see whether larger customers can change their consumption profile too.  If so, it will be compelling evidence for other utilities considering pricing reform.

Paul Webber