24/08/2016 - 14:19

Power shift disrupts traditional model

24/08/2016 - 14:19

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SPECIAL REPORT: Discussion about a sale of Western Power is taking place against a backdrop of rapid technological change in the sector, as networks brace for an onslaught of competition from battery storage.

Power shift disrupts traditional model
Jemma Green says there is a battle getting under way between networks and battery storage. Photo: Attila Csaszar

Discussion about a sale of Western Power is taking place against a backdrop of rapid technological change in the sector, as networks brace for an onslaught of competition from battery storage.

Disruption is infiltrating the capital-intensive energy sector, with network operators and generators on notice to be more flexible in the face of unprecedented change.

And there’s an additional uncertainty from a Western Australian perspective, with the state’s governing Liberal Party yet to declare its hand on a potential sale of metropolitan network operator, Western Power.

A full sale of the network, which has a regulated asset base of about $10 billion, would earn up to $15 billion if it achieves the same multiple as the recent privatisation of Transgrid in NSW.

Evidence from consultancy EY suggests the sale of the WA utility would put downward pressure on network costs.

Government inertia on the sale of Western Power aside, there is still a level of private sector investment under way and planned, mostly in the north-west, including the South Hedland power station.

Potential expansions elsewhere, such as Sumitomo’s Bluewaters coal plant near Collie, appear to be stalled, however.

That’s because the state’s South West Interconnected System, the electricity network covering from Geraldton to Albany, has an excess capacity of about 1,060 megawatts, according to Energy Minister Mike Nahan.

The largest generator on the network, Synergy, will be reducing its capacity by about 380MW before October 2018.

To ameliorate the excess, the government has reduced capacity payments and will cut funding for demand-side management providers, which had been worth $430 million in the past decade.

Another notable development is the increasing capacity of battery storage, with some players in the industry predicting an uptake of battery and solar systems, particularly among commercial applications.

A large uptake of the technology would have major consequences for existing networks, however.

Distributed generation

Business News 2016 40under40 winner Jemma Green is a doctoral candidate undertaking research in the disruption to energy markets from distributed solar and storage, and is chairman of Perth startup Power Ledger.

The company hopes to use a blockchain system, the process underpinning bitcoin, to track electricity movements.

Ms Green said that would be one example of technology electricity network owners would use to improve utilisation of their assets in the face of improving battery storage capabilities.

“There’s really fundamental reasons why the grid is valuable, but if we don’t start enabling the use of it … people will start to feel like they’re being ripped off and store most of their electricity,” Ms Green told Business News.

“And we will start seeing a disaggregated energy future.”

The factors underpinning long-term demand on the grid would include essential services, the uptake of high-density residential properties unable to generate sufficient energy on their own, and the high upfront cost of solar systems, she said.

It would mean that power generation became more decentralised, with households likely to sell into the grid for usage by other households, or effectively by high-density users.

Decreasing battery storage costs driven by developments such as the Tesla Powerwall point in the other direction, however, where households will buy solar panels and store power on the premises.

“Batteries have a huge future,” Ms Green said, adding that there were not many in Perth, yet.

But there will come a point when the price difference between batteries and network power will be enough to encourage widespread use of storage – and it could be as soon as two years away.

“Even if it is in five years’ time ... most of the network decisions are made long-term, it’s happening,” Ms Green said.

“To ensure continued relevance, utilities in Australia, and generators and retailers, need to be thinking about the commercial models that will ensure their viability.”

There were plenty of options on that front, she said, with some Australian players already thinking about possibilities.

Examples included generator leasing and the co-ownership of assets, and providing differential power, which is the gap between total demand and the amount provided by solar and batteries.

Ms Green said Power Ledger’s technology would enable distributed generation owners to sell electricity on the network and track its movements to many points and many buyers.

The same technology is now being used to ensure wine provenance and is being trialled on the ASX for instant stock transaction settlement.

It will soon be trialled at the National Lifestyle Village site in Busselton.

Market structure
Keeping network utilisation high isn’t just for the benefit of owners, however.

An unusual aspect of Western Power’s regulatory regime is that it targets a regulated level of revenue, rather than price.

That results in a special adjustment, which effectively means that if users disconnect or the demand falls, prices are increased to hit the revenue cap.

Western Power will be moving regulators, however, from the state’s Economic Regulation Authority to the Australian Energy Regulator, pending legislation in state parliament.

Internally, the poles and wires operator is going through a transition.

Nearly 500 positions were axed across two tranches this year, in June and August.

Another recent change at Western Power has been the appointment of Guy Chalkley as managing director.

At the time Mr Chalkley said the job losses were reflecting reduced work in the field and aligning head office support to that new work level.

It is not yet clear if the state government plans to sell the network, either.

Dr Nahan reaffirmed to Business News that a final decision had not been made.

“I have been tasked with investigating options for the sale of Western Power and that’s what I’m currently doing,” Dr Nahan said.

“Significant consultation with the community and industry will occur well before any decision is made.

“Any proposal to sell these assets will only occur if we can be assured that the outcome is in the best interests of both WA taxpayers and electricity consumers, and will not in any way compromise the safety and reliability of the network.”

Moves to sell or lease the network were dealt a blow this month when the federal government moved to block the sale of Ausgrid in NSW to Chinese interests on national security grounds.

It means that, although either Ausgrid or Western Power could still be sold to a pension fund or other big investor without the Chinese government connection, the diluted pool of bidders might reduce the potential sale price.

Power Ledger’s Ms Green said the value of a sale would be determined by the regulatory structure in place.

“Personally, I think that (if it were) well regulated it would make a lot of sense for the government to sell off the asset,” she said.

One industry specialist contacted by Business News advocated a single buyer model, where the state government would buy electricity from generators and on-sell to retailers.

That recommendation was made on the basis that the market was not big enough to have genuine competition among generators.

Another suggestion has been that generating companies could be limited to one asset each, similar to the case in Victoria.

Up north

Meanwhile, the state government is making moves to encourage further private investment in the North Western Interconnected System.

In this year’s budget, Dr Nahan announced a sale of Horizon Power’s Pilbara transmission assets, expected to be worth around $600 million.

He suggested the move could provide opportunities for resources companies in the area to sell their networks or generation assets and free up capital in a leaseback arrangement.

There’s an enormous amount of excess capacity in the region, with peak loads about half of the 2,700MW total capacity.

That’s because many generators are not linked into the network, and so have excess built in.

Fortescue Metals Group, led by chief executive Nev Power, is one company with a transmission line, albeit small in length, and power production in the NWIS area. 

“Any sale of Horizon Power’s network should consider ongoing transparency of pricing and regulation in order to maintain business and community confidence in the service,” Mr Power said.

“Ultimately, any sale should deliver an integrated and competitive energy market for the Pilbara, to ensure the sustainable development of the region.”

Projects

Chevron is funding construction of a $110 million power station at Onslow, with development to be undertaken by Horizon Power as a modular operation.

In the SWIS, development assessment panel approval was recently received for a solar farm at the Walkaway 2 & 3 renewables project near Geraldton.

The whole project could be worth up to $900 million.

ASX listed Infigen Energy, which owns the Walkaway 1 wind farm, will have a stake in the project in a venture with OneWind and Carbon Solutions.

Onewind manager David Griffin said the project would feature wind, solar and battery storage.

“It has arguably the best wind resource in the world,” Mr Griffin told Business News.

“It also has a fantastic solar resource.”

Mr Griffin said it had been slow going as the Commonwealth government reviewed the Renewable Energy Target, although the plan would now be to begin construction within a couple of years.

The first goal is to find an offtake target for the power, with the project having a possible capacity of 450MW.

One project due for completion next year is the Transalta South Hedland combined cycle natural gas generation power station. It will have a capacity of about 150MW, and is proceeding under a build, own, operate structure, with IHI Engineering the EPC contractor.

The plant will provide power for regional retailer Horizon and iron ore miner Fortescue, with Horizon to spend $15 million this financial year to upgrade the transmission network.

New Energy recently signed off on a deal for a $200 million waste-to-energy facility in Port Hedland.

A 20-year deal signed with the Port Hedland council will mean up to 40,000 tonnes of waste per annum goes through the facility, to be completed in 2018.

South of Laverton, miner Gold Fields will be using modularised gas generators provided by Aggreko at its Granny Smith mine site, a recent completed project that followed the installation of a gas pipeline to the mine.

In the South West, Sumitomo and Kansai Electric Power had planned an expansion of their Bluewaters coal power station near Collie, with the Environment Protection Authority last year extending approval for the plant’s third stage to 2020.

Business News understands the upgrades are unlikely in the near future.

Batteries

Clean NRG managing director Craig Donohue said battery technology had captured the imagination of the public in the same way microwave ovens did in the 1980s.

That had been driven by recent media interest, a lot of which followed the release of the Tesla Powerwall last year, he added.

The big benefit of adding batteries to a solar array was the ability to smooth consumption, Mr Donohue said.

Solar panels generate power during the day, while most electricity usage in the average household is in the late afternoon and evening.

Batteries enable home owners to shift the power made available by solar from when it is most available to when it is needed, improving reliability and delivering a higher utilisation for a given upfront investment.

Working in conjunction with time-varying tariffs, such a system can create significant household savings, Mr Donohue said.

About 20 per cent of households had solar, he said, and only 1 per cent of businesses, representing a major growth opportunity.

For a commercial operation, Mr Donohue said the payback would be reached within just a few years.

One model currently in use involves shopping centre owners installing the panels, and then selling cheaper electricity to retailers leasing their property.

The lower power prices encourage tenants to take particular spaces, while the lower generation cost means property owners can earn an additional revenue stream.

After amortisation, the cost per kilowatt-hour might be as low as 7 cents, Mr Donohue said, while many tenants were paying more than 30 cents under current bulk contracts with centre owners.

Australian Vanadium managing director Vincent Algar said his company is setting up its first vanadium-flow battery system in WA, in Busselton.

That type of battery differed from the better-known lithium battery in a few ways, he said.

The most important of those was that it could provide power for a longer period of time, making it useful for applications that required energy to be used during varying time periods.

Additionally, he said, vanadium could be easily scaled up for industrial applications (for example providing three-phase power), and could be used to store wind energy.

Mining companies and agricultural operations were two major targets for Australian Vanadium, Mr Algar said.

The batteries are in a unit the size of a shipping container.

Mr Algar said many farmers in the state’s South West on the edge of the grid would face a large capital cost to upgrade lines or get higher capacity to their farms. Installing a vanadium system could help avoid that.

Similarly, miners that might pay 30 or 40 cents per kilowatt-hour using diesel can get costs down to around 20 cents by using renewables and battery for expansions.

Domestic and commercial

Speaking at a recent renewable energy breakfast, Dr Nahan said household solar installations in WA had grown from basically zero to around 500MW in the past eight years.

The next area of growth would be in commercial installations, he said.

Fertiliser and property kingpin Vikas Rambal has put his money where his mouth is, taking a slice of a solar consultancy while planning the largest built environment solar array in the state for his Northam Boulevard shopping centre.

Mr Rambal recently bought 50 per cent of Enigin WA, which has been renamed Perdaman Advanced Energy as part of his Perdaman Industries group.

Other shopping centres taking the renewables route are Primewest’s Gwelup shopping centre, which has a commercial solar panel installation, and Lesmurdie Village.

Landowners can have panels installed with no fixed cost through a power purchasing agreement, through which they lock in to buy electricity over a long timeframe, often 20 years.

The state government is pitching in to support providers by allowing them to apply to waive the requirement for licensing as an electricity retailer.

Tim Bray, who is chief executive at R&D organisation EcoCentric Energy, said the business case for cutting emissions was clear, and corporate leaders were becoming increasingly keen to do so.

“You don’t actually need to hold some philosophical view around saving the planet, it just makes good sense,” he said.

“We’d rather government get out of the way and let business make sensible decisions.”

That’s because there can be productivity benefits from focusing on energy efficiency, in addition to lower energy costs, he said.

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