To be successful tomorrow, do Oceania’s utilities need to be bold today?

By

Matt Rennie

EY Oceania Power & Utilities Leader

Transactions partner in utilities and infrastructure. Focused on the wave of disruptive technologies and influences entering the sectors.

5 minute read 7 Jun 2018

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We predict that Oceania's utilities sector will be the first to be changed forever by the impact of distributed energy resources.

Sometimes crisis presents opportunity. Despite plentiful natural resources, Australia’s energy affordability, access and security have become some of the biggest issues both in politics and around kitchen tables.

Motivated by fast growing energy bills and a recent spate of power outages, Australian business and residential electricity consumers are accelerating their adoption of renewables and new energy technologies.

We’ve worked with a leading global analyst house to calculate that these drivers will come to a head in 2021. This is when, based on current trends, Oceania will reach grid parity - when it will cost the same to self-generate power as it will to buy it from a provider. This is a year ahead of Europe.

The impact of grid parity goes beyond the immediate consequences of large numbers of consumers leaving the grid. It marks a critical tipping point on a journey to a radically different energy sector.

In 2021, not everyone will leave the electricity grid, but self-generation and battery storage will have matured to the point where traditional energy business models will be under increasing competitive pressure from viable alternatives. How Australia’s utilities reimagine their competitive roles and capabilities will determine their success.

And grid parity is just the first tipping point on a journey to a new energy world.

  • Tipping point 1  – When off-grid energy reaches cost and performance parity with grid-delivered energy - will arrive as early as 2021 in Oceania.
  • Tipping point 2 – When electric vehicles (EVs) reach price and performance parity with internal combustion engine vehicles – follows shortly afterwards in 2025.
  • Tipping point 3 – When the cost of transporting electricity exceeds the cost of generating and storing it – will be reached in 2040.
  • Tipping point methodology

    The energy industry is at the start of a period of unprecedented change, one that will fundamentally change the market place (presenting new challenges as well as new opportunities). Three tipping points will mark the emergence of a new energy system.

    • Tipping point 1: when self-generation reaches cost parity with grid-delivered electricity. To determine this date, we calculated the projected demand for electricity, future generation mix and cost of delivering electricity via a central grid between 2015 and 2050, and then compared it to the predicted cost of self-generating electricity using solar PV and battery storage.

      To help determine when these costs would reach parity, we worked with a leading global analyst house to model the expected adoption and interactive impacts on electricity demands and costs of 10 core distributed energy and information technologies: solar PV; battery storage; electric vehicles; microgrids; home and building energy management systems; P2P electricity exchange; smart meters; artificial intelligence; grid-edge technology; and cloud.
    • Tipping point 2: when the price of battery electric vehicles reaches cost and performance parity with traditional cars with internal combustion engines
    • Tipping point 3: when the mere cost of delivering electricity (i.e., the unit-cost of electricity transmission and distribution) exceeds the cost of self-generated electricity

    Because drivers vary across markets, the tipping points will hit different regions at different times. 

Preparing for these changes will not be easy for Australia’s utilities. They already face challenges unlike those in many other markets - including transporting electricity over vast distances and with varied interconnectivity between states. Between now and 2021, they’ll have to tackle the increasing impact of less revenue from grid-connected customers, more complex DER to manage, increased regulatory scrutiny on costs and mounting political pressure around affordability. Finding intelligent new ways to tap the value of the grid, grow new revenue and drive productivity will be vital to survival.

Cashing in on grid defection

Utility networks around the world are looking for opportunities for horizontal moves into new areas of the energy value chain such as directly offering new energy products to consumers, or even entering the EV market.  So, what will be the best bets for Oceania energy players to reshape their businesses to withstand growing grid defection?

The good news is that there are many exciting opportunities for agile network players to capture value by positioning as a future platform to connect energy supply and demand.

A connected, digitized grid also has the potential to become a platform for apps offered by third party providers. These apps could include services to manage the appliances in a connected home, charge EVs or conduct peer-to-peer transactions to trade solar energy with neighbors. Utilities may not develop or run these services but instead host the platform (ie. the digital grid) on which they are held – similar to the way that today’s technology giants host apps via smart phones and devices.

But competition in this space will be fierce. The jury is out as to whether behind the meter services will be an attractive segment for Oceania utilities in the current environment. 

We anticipate that some of the biggest opportunities for networks in the future may be - ironically - in enabling the move towards energy self-sufficiency.

He says that today’s network utilities can also tap into their vast depth of experience in grid planning, construction and service delivery to build the physical and digital infrastructure of the new distributed energy world.  “We anticipate that some of the biggest opportunities for networks in the future may be – ironically – in enabling the move toward energy self-sufficiency.”

Some of Australia’s biggest power consumers, across manufacturing, mining and even agriculture are starting to build their own microgrids to take more control of energy costs and supply. Australian networks are well-positioned to become the developers of these industrial-scale new energy infrastructures by leveraging existing capabilities in construction, engineering and project management. We are also seeing some making plans to connect distributed generation sources and enable virtual power plants.  However, to be successful, players will need to develop the necessary commercial skills needed to manage risks.

The future energy system will also present opportunities for network players to leverage their grid management knowledge to help households, neighborhoods and businesses manage their self-generated energy and electricity demand. The influx of intermittent DER on the grid will also step up the need for more balancing and demand management services to ensure the lights stay on.

Digital reinvention

Are utilities in the region gearing up to take on these new roles? Hartley says that some of Oceania’s most progressive utilities see the energy transformation as the once-in-a-generational opportunity it is to reimagine their businesses. They are reshaping themselves in readiness for this vastly different energy world, with digital capabilities at the core of change.

Leading utilities know that tomorrow’s digital grid -  a two way flow of information and energy - will require a true hyper-connected and intelligent network player to capitalize on the data it produces.

However, true digital progress remains sluggish across most of the region due to short-term reactions to today’s energy challenges. With the clock ticking, now is the time to acquire the new skills and mindsets needed to be ready for 2021. It’s time for Oceania utilities to:

  • Invest with purpose: Utilities need to decide what business they want to be in when their sector changes forever.  Do they want to maintain their role as connector, integrator and manager of electricity supply and demand when the energy market is distributed and the grid is digital? Do they want to play a role in helping industrial consumers go off-grid? With little time to prepare and cost pressures, a clear purpose will be critical to guide the focused investment required to be ready in 2021.
  • Build the right digital capabilities: A clear purpose will also shine light on where skills and capability gaps lie. When time is short, prioritizing which capabilities to adopt or acquire is critical.  These capabilities will need to enable the digitization of connecting the new two-way flow of energy and information.
  • Understand customers: Utilities need a greater knowledge of customer behaviors around energy usage and the ability to harness that data to plan future, differentiated products and services and improve customer experiences at those moments that matter.

Can Oceania maintain the lead?

Our modeling predicts Oceania will reach grid parity first – but will the region’s utilities seize this opportunity to lead the way to a new energy system? This may depend on whether government and regulators play their part in creating the right environment for investment and innovation.

  • Government needs to ensure appropriate signals are in place to create market certainty and stability to establish a clearer set of rules for investment decisions – and Australia’s proposed new National Energy Guarantee (NEG) has the potential to deliver this with the right support.
  • Regulators need to carefully consider how to incentivize innovation. Balancing affordability pressures in the short term with longer-term innovation will be difficult yet critical if Oceania is to embrace the opportunities of a new energy world.

Our message to Oceania utilities is clear – move fast, be decisive. Change is coming more quickly than anticipated by most in the sector. Mastery of digital grid capabilities will be critical to being ready to hit the ground running.

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Summary

It’s time to move the mindset from cautious to bold and shift investment priorities from physical infrastructure to digital capabilities. Courage will be needed to look beyond Australia’s current affordability crisis but those utilities that can, will build a more sustainable long-term energy market that is truly world-leading.

About this article

By

Matt Rennie

EY Oceania Power & Utilities Leader

Transactions partner in utilities and infrastructure. Focused on the wave of disruptive technologies and influences entering the sectors.