Running a business in Australia’s energy sector is difficult. Proprietors have to contend with intense competition, rapid technological change, climate change, natural disasters…even complaints about rising energy prices and poor service.
But arguably the greatest challenge is the uncertainty. There is no widely agreed vision of the future form of our energy sector. Some advocate carbon capture and storage with large power stations or a nuclear future. Others see an emerging energy efficient, smart, renewable energy future. An overarching factor is that we cannot afford to burn more than around a third of proven fossil fuel reserves without driving atmospheric concentrations of greenhouse gases into dangerous territory.
Because of the many uncertainties, it is increasingly difficult to negotiate finance for large, long-lasting energy infrastructure, especially if it relies on fossil fuels. It is a time that favours flexible, incremental solutions.
Fundamentally, energy is a derived need. We certainly need some energy to deliver services we want (or think we need), such as comfortable buildings, food storage and production of goods. But how much? What kind? When?
Rapid technological, economic, social and cultural changes have thrown up many energy options, and the range continues to expand. An energy efficient household can now go “off grid” for less than the cost of a major bathroom renovation. The cost and difficulty of changing is declining.
As consumers become more active in supplying and managing energy related services, we are seeing very different outcomes. Average Australian households now consume 6500 kWh of electricity and 20 gigajoules of heat annually. We could easily, with technology we have now, reduce this to 2500 kilowatt-hours of electricity and 3 to 5 gigajoules of heat.
Many end-use technologies are considerably more efficient than they were even six or seven years ago. Efficient office buildings now use two-thirds less energy than average, and can do a lot better. Even our energy intensive industries have surprising potential to reduce energy requirements. A UK study estimated global efficiency of energy use is around 12% – that means 88% losses!
Improving energy efficiency could make debate about capacity to satisfy base load irrelevant. Increasingly consumers value access to energy at different times, and large base load power stations are not flexible enough to satisfy this varying demand profile.
One illustration of the absurdity of debate about variability of renewable energy sources is to compare the output of a rooftop solar system to the demand profile of an appliance, such as a dishwasher. The dishwasher’s electricity demand is far more variable and unpredictable. Yet the electricity sector accepts this variable demand as “normal” while complaining about the costs of accommodating solar. This asymmetry reflects an outdated paradigm, not a fundamental problem.
Australia’s base load demand has been artificially increased over many decades through low off-peak electricity prices that encouraged wasteful practices such as leaving equipment on overnight. Sites that require 24-hour power are finding cogeneration (on-site generation of electricity and heat at high efficiency) increasingly attractive.
The real issue now is to manage both varying demand and supply, using energy storage and efficient, smart systems to match energy availability to requirements for energy inputs to services.
Today’s energy policy frameworks are hindering progress towards new models by giving incumbents excessive market power and blocking innovation. This will change, either through conflict or cooperation – or a bit of both.
Creative innovators will get around outdated rules. For example, it is very difficult to sell electricity in competition with the grid directly to a neighbour, or to share a back-up generator or storage with neighbours under present market rules.
A critical step towards innovation is to allow energy consumers to supply power to neighbours using their own power lines, including low capacity low voltage cables (subject to reasonable and standardised safety and power system stability requirements). Until consumers have this right, they will be disadvantaged, and vulnerable to the market power of networks and retailers. They will increasingly seek to work around this unfair distortion.
Businesses from outside the energy sector are emerging as competitors. Appliance manufacturers like Samsung and Kyocera are beginning to offer integrated building energy systems that include on-site generation, storage, smart controls and smart, efficient appliances. This is potentially a profitable business model for appliance retailers. It offers scope to sell a complete package of appliances and energy supply to households and businesses. These companies understand that economy of scale doesn’t have to come from bigger systems: mass production also works.
Over time, this may evolve into the long discussed “energy services” model, where clients could pay for use of services, including maintenance and upgrades, instead of for equipment. This has potential to enhance equity by overcoming the upfront cost barrier.
Existing energy businesses will need to change their business models. Energy market rules will have to become more flexible to allow them to be part of the future; otherwise they will face serious financial problems (which taxpayers may have to bear). Government will have to apply stronger pressure to control unfair use of market power, and provide stronger policy direction and vision.
Like most change, this is and will be a bumpy road. It can be made smoother by effective policy, but we don’t have that - yet. We live in interesting times.