Frank Calabria, Origin Energy

24 October 2013 — At General Electric’s panel discussion on energy on Tuesday as part of its At Work2013 conference in Sydney, there was a dominant emotion or body language that kept coming through the rational discussion on grids, costs, profitability and technology.

You could sense it was some kind of latent fear or threat.

Here were a number of people in the audience on stage whose key industry is heavily invested in the national electricity grid to the tune of $47 billion. Was the investment worth it?

On stage were:

  • Frank Calabria, Origin Energy chief executive energy markets
  • Alex Wonhas, director Energy Flagship, CSIRO
  • Matt McKenzie, Regional Leader – Asia Pacific GE Energy Management, Digital Energy
  • Moderator Adam Creighton, from The Australian.

The problem was clear as the discussion progressed: falling energy demand driven by higher energy efficiency in buildings and appliances, a spate of less intense weather, and the pesky emergence of cheap, widespread solar power.

Possibly there was also some restructuring of the economy that might have played a part, but the big story was that all these things had come together to reduce the overall demand for electricity in a way that was unexpected. Costs of wholesale electricity were dangerously low. And quite frankly some of the players were hurting.

In South Australia, perhaps thanks to the early work of former premier Mike Rann, renewable energy often comprised half the grid.

Energy authority Alan Pears who spoke to The Fifth Estate on Thursday said it could often be up to 100 per cent, which meant that coal fired power stations would need to be turned off, with the resultant negative income for the generators.

So what’s the lie of the land in the electricity landscape?

Here are the bare bones:

Falling energy consumption that has taken the electricity industry by surprise

A recent Productivity Commission report on the industry which said there was “no point in simply fixing a punctured tyre if the car has no engine.” (See our recent Spinifex article from Pears)

One million Australian houses have solar photo voltaic panels on their roofs – Pears estimates about two million voters in that bunch

About 30 per cent of all is currently consumed by residential and commercial sector and could be theoretically and technically replaced by renewables

Battery storage for home available “if not this year, then next year or the one after” according to Pears.

The Coalition Government has promised one million low income households will be assisted to put solar power on their roof, though the subsidy for this has already been lowered from $1000 to $500 per household

A new white paper on energy expected from the federal government in the new year

Interesting was during more than an hour of talk on an industry based on fossil fuels there was not a single mention of climate change or sustainability or the need to reduce emissions.

According to Pears, who shed considerable light on the subtext of the seminar, the massive investment in the grid was made because energy consumption was expected to grow.

The nub is that the consumer now underwrites and pays for that investment with a guaranteed return for the investors of 10 per cent.

Which is why the cost of electricity is so high.

But as an industry member said after the presentation, “the grid is important and we have to protect it”.

Alex Wonhas,CSIRO

Alex Wonhas agrees. In a conversation after the event he said, “The grid in the past has served us well and we should actually use it in the best possible way especially when we talk about large scale renewables that might be built further away from the cities and need that grid to transport that energy to consumers.

“I think it’s a useful thing.”

Given the investment already made, said Wonhas, “the question we’ve asked is what’s the most intelligent deployment of new energy technology and renewables and power generation? Or the demand side response to minimise further expenditure?”

But how did an industry that provides possibly the most important critical infrastructure of this nation, get demand forecasts so wrong?

“Hindsight is a wonderful thing,” Wonhas said.

“When we were in the late 2000s we were seeing electricity demand going up.”

Could the industry have foreseen the drop?

Possibly not.

All the factors that led to the fall in demand happened at once, he said.

Panel highlights

During the panel much of the consensus was about the pressure on the system.

Origin Energy chief executive energy markets Frank Calabria said utilities were “struggling all around the world.”

Profitability had come down, Calabria said.

“The biggest driver is the fall in demand.”

There had been a rising demand environment for decades and in the last few years demand has been falling, he said.

With such intensive capital costs in electricity generation, it was a structure where generators are experiencing “very low wholesale prices”.

In Victoria, generators had “no real return on their capital. So certainly it’s come off.”

GE’s Matt McKenzie said the low wholesale price and shrinking margins ultimately benefitted the consumer.

The assumption that the network business is a stable regulated business didn’t add up, the panel said.

The big competition to the network was off-grid power. Rooftop power, for instance, reduces reliance on the network power.

There was a need to fast forward and start to think about how battery storage and futuristic technologies like fuel cells would increase the competition for networks going forward.

CSIRO’s Alex Wonhas said it was difficult to forecast the future but there was an interesting exercise CSIRO had undertaken with GE in it’s Future Grid forum to come up with plausible scenarios.

Among them was a future where less densely populated areas in particular could go off grid and generate their own power.

So the use of power might rise but the amount supplied by the industry might shrink, asked the moderator?

Well, yes.

The main reasons for the decline in demand, said Wonhas, included the rise of solar, the effect of the more stable lower temperature weather in recent times and the last bloc something that people can’t explain – perhaps greater energy efficiency, or increased standards for appliances (See Alan Pears comments in an article by The Fifth Estate on this way back in January 2012: Stockland claims reveal a stunning turnaround in energy costs for housing) or a structural change to the economy.

Maybe it was the way we build buildings, Wonhas said.

Left to right: Adam Creighton,The Australian; Frank Calabria, Origin Energy;Alex Wonhas, CSIRO; Matt McKenzie, GE

GE’s McKenzie said no matter what happened in 50 years, we would still need transmission distribution networks.

Most network operators were considering battery storage to manage peak demand, which smooths over the need to “gold plate” the grid, bringing prices down, so the “incentive to go off grid is less… we’re always going to need the network”.

Calabria said the industry had conquered big problems before and it would again. “This market has served the economy well.” It’s been reliable, he said.

In terms of cost the rule of thumb still made coal-fired electricity the cheapest, followed by gas and then renewables the panel said.

However, in a recent interview with The Fifth Estate

Alistair Sproul, photovoltaics lecturer and postgraduate coordinator in the School of Photovoltaic and Renewable Energy Engineering at the University of NSW, said the average cost of solar energy was 6 cents a kWh, while power from the grid was about 12 cents a kWh.

Calabria said it was very expensive to build a new coal fired power but the running cost was low once it got going.

To invest in wind farm, if Origin was writing a long-term power purchase agreement it would cost between $90 and $100 a megawatt hour.

The moderator pointed out that once the renewable plants were built “they’re obviously free” to run.

The panel said there was a very high penetration of rooftop solar and that it was integrated into the network was very important.

Technology could play a big part in this, Wonhas said. For instance by sophisticated forecasting to work out peak production times.

Australia had highest per capital penetration of solar on people’s roofs, he said.

Only 30 per cent of energy is used in the residential and commercial. So industrial use is 70 per cent.

On a really hot day the percentage of energy could be supplied by solar was about 2-3 per cent of a total 40 gigawatts, Wonhas said.

So regardless of penetration there would always be a need for the grid?

You could theoretically dramatically increase renewable sources but in the current configuration fossil fuels would continue unless we change the system fundamentally, Wonhas said.

What about the pros and cons of solar and wind?

Alex McKenzie said that on cost wind power was becoming “quite cost effective”, at $90 to $100 a MWh, which was comparable to gas and only slightly more expensive than building a new coal fired power station which is $60 or $70 per MWh.

The cost of utility scale solar was probably closer to $190- $200 a MWh.