By Lynne Blundell

The smart grid is a “much riskier business model, beyond poles and wires, as it’s now about a customer response. Letting customer response drive initiatives is riskier. We have to break the existing business model and build a new one. And it’s a riskier model because there is no framework in place” – energy company executive (Logica survey)

11 February 2010 – The Federal Government’s $100 million smart grid pilot has attracted some high quality bids, with four consortia from around the country competing to establish Australia’s first commercial-scale smart grid in their region (see our story on this). But it will take more than a pilot project to bring about the necessary market and culture shift from Australia’s archaic centralised power network to one that uses smart grid technology, say industry insiders. What is needed is real political will and regulatory change.

Key points:

  • The current system rewards expansion of conventional networks with real returns of 7-8 per cent
  • A smart grid requires major regulatory change
  • Consumers would have more control over power use, driving efficiency
  • New Zealand introduced smart grid technology a decade ago
  • In California the government needed to go to extreme lengths before the culture moved to demand side action
  • The technology moves very fast – wind towers can be installed in weeks
  • Smart grids will allow China to build 25 per cent less supply capacity than would otherwise be required

The government is providing funding for the smart grid pilot as part of its National Energy Efficiency Initiative announced last May. It has made much of the pivotal role the project will play in rolling out smart grid technology across the country. But energy companies, including some of those bidding for the funding, believe it falls far short of what is needed.

A recent survey, Smart Grid Study 2009, undertaken by Logica, a supplier to the energy and utilities sector, interviewed 35 executives from the largest energy companies in Australia. They were asked about their smart grid strategy and the challenges for the industry in moving to smart grid operation.

When asked about the $100 million federal funding, respondents said it was a step in the right direction but was a fraction of what was needed for an actual rollout of smart grid technology. There was a concern that the pilot funding would fall short even for initial R&D.

What is needed, say the energy companies and other industry experts, is political will, regulatory change and synergy between the supply and demand sides. Energy company executives interviewed for the survey said it was difficult to develop a long term strategy or a business case for investing in smart grid technology when many factors remain unclear and the market is so fragmented.

“Many respondents said regulation doesn’t allow for any return on innovation. Smart grids require a substantial investment in research and development and at present the regulators do not offer a framework to reward R & D. This is seen as a big issue by the energy community, affecting many parts of the value chain, including retailers,” the survey concluded.

Using power more efficiently

A smart or intelligent energy grid wastes less power than the traditional electricity grid, as it uses it more efficiently and generates power closer to the point where it is needed. It does this by using distributed energy resources (smaller forms of electricity generation such as wind turbines, solar panels and fuel cells) that are located closer to the users.

Conventional electricity networks relies on heavy infrastructure that take years to plan and are designed to last for more than 50 years. They are supplier-driven. Smart technology is faster to create and allows input from renewable energy sources and consumers

The smart grid pilot project is expected to demonstrate the capacity of a smart grid to more effectively integrate electricity from renewable and distributed energy sources, such as wind and solar generation, into the existing electricity network.

A key feature is that consumers have more control over their power use with smart meters showing real time use and costs. This encourages customers to better manage their energy costs and avoid using electricity at the busiest and most expensive times, thus helping reduce peak demands and black-outs.

Energy suppliers, through agreements with customers, are also able to remotely control smart appliances, to increase efficiency and ease peak loads. According to the government, smart grids would also mean fewer coal fired power stations.

Customer engagement is a challenge for energy companies and many say uncertainty around consumer engagement makes strategy development difficult.

One energy company CEO talked about this difficulty in the Logica survey:

It’s a much riskier business model, beyond poles and wires, as it’s now about a customer response. Letting customer response drive initiatives is riskier. We have to break the existing business model and build a new one. And it’s a riskier model because there is no framework in place.”

The survey concluded that the current regulatory framework does not support the move towards smart grids as it doesn’t provide incentives to distributors to do so. Currently distributors invest in capital assets and gain a return from these assets. As a smart grid will effectively reduce capital expenditure, the incentive to develop a smarter network and thus reduce capital expenditure is not there for a distributor.

Suppliers currently encouraged to keep expanding

Alan Pears, adjunct Professor at RMIT and a major contributor to energy policy reform and energy efficiency schemes in Australia, told The Fifth Estate that under the current energy system network providers are encouraged to keep expanding. The bigger the asset base, the more the rewards. Under this system there is no mechanism to give distributed energy networks fair market power.

“Conventional energy networks are declared to be monopolies under the current regulations and if it is decided that they had to invest and expand in order to cope with peak demand, then the regulator ensures they receive a real return of 7 to 8 per cent on those assets.

“Generators, distributors and retailers also have no incentive to move to a distributed model. Each is simply responding to the regulatory framework that works in their interest. It is the set of rules that is wrong and no government has made it their business to fix it,” says Pears.

Dr Paul Bannister, managing director of energy consultancy Exergy, agrees, saying it is a mystery to him why the Australian power industry is still stuck with an outdated centralised grid when other countries, including New Zealand, introduced smart grid technology a decade ago. The crux of the problem, says Bannister, is the dominance of power generators and suppliers.

“The key thing in moving to a network which uses distributed power is interaction between the supply and demand side. It is well established that suppliers get better results if customers can manage their loads so that they use power outside of peak times. It is cheaper for the supplier and the consumer. Some retailers are already looking at this,” said Bannister.

But for this to work the price of electricity to consumers would need to be variable, with the cost higher during peak periods. This would encourage customers to change their usage patterns. Currently the cost of power to suppliers varies but is fixed for the end user. This is a major barrier to moving to a smart grid, says Bannister.

“The demand side of the equation has had little or no say and the supply side has exerted their say very strongly. Moving to a distributed power model does not suit generators and it is not in their interest to reduce power consumption.”

Australia lags behind other countries

In California the government forced the network to change through regulations that rewarded efficiency not unnecessary expansion. As a result renewables have grown and energy consumption dropped

In places such as California, where the government has in recent years regulated the number of new power stations that could be built, power consumption has dropped dramatically.

“In California the power commission forced generators to be more efficient through regulation. It stopped the construction of more power stations and per capita consumption of power has been frozen there, while it has risen markedly elsewhere in the US. That goes against the market philosophy in Australia – it’s the Wild West here,” says Bannister.

But the Californian battle was not an easy one, according to Alan Pears, with the government having to go to extreme lengths before the culture moved to demand side action. It was done through regulatory change by rewarding energy companies exponentially for every unit of energy they saved through efficiency.

“They had to go to these lengths to break the focus of the energy networks. By contrast our regulators and policy makers take baby steps and pussy foot around,” says Pears.

Other countries have made bold moves towards new energy networks. At the Copenhagen climate change summit last December Chinese representative, Fuglang Yang, outlined China’s smart grid experience, saying it has been estimated that smart grids could allow China to build 25 per cent less supply capacity than would otherwise be required. He also stated that inverted tariffs for households are being introduced, with users consuming over 100 kWh paying a higher price and that smart grids would be needed to manage this.

Germany now gets a substantial amount of its power from renewable energy. As Hermann Scheer, a member of the German Parliament and General Chairman of the World Council for Renewable Energy, points out in a recent article published in Ode magazine, this is not because it has more solar or wind power available, but because there was the political will to force change.

International climate change negotiations have failed and will never lead to large scale use of renewable energy, says Scheer, because they start from the wrong premise.

“It all begins with the wrong premise that the introduction of the clean energy economy is a painful process. The right premise is: The shift to clean energy has great economic advantages. It will bring big macro-economic benefits to all countries who embark on the journey.”

History is littered with examples of technological revolution that changed the world, says Scheer. Most of them needed a political framework or targeted help at their inception in order to develop and showcase their economic and cultural benefits.

“To unlock the economic and environmental benefits of renewable energy, dismantle the conventional power industry,” he says.

Hermann Scheer – “To unlock the economic and environmental benefits of renewable energy, dismantle the conventional power industry.”

In Germany the shift to renewables was achieved through the 20TK Renewable Energy Act. Under the act all new renewable energies have priority at a guaranteed price in the power market. Whatever renewable energy is produced must be taken by the grid and must be taken by the whole electric power service. The conventional energy companies have no possibility to block it.

“This simple act has created a lot of new investment and has already inspired more than 40 countries, including China and India, to develop a renewable energy technology market,” says Scheer.

Meanwhile in Australia energy companies are preparing for the inevitable move to a distributed energy model. Origin Energy, for example, is involved in two solar park projects at Bendigo and Ballarat, which are employing smart grid technology. With a combined area of almost 29,300 square meters, the parks are expected to produce enough renewable energy to provide 150 households with solar power which, says Origin, is approximately the equivalent of these households installing a 2 kW solar PV system on their roof.

Energy Australia is another company active in this area, this week putting out the call for a family to live in its Smart Home for a year (see our story on this ).

State governments are also setting up trials using new forms of distributed energy. At the CSIRO significant research in this area has been going on for some time. And the Federal Government insists it is committed to developing a national smart grid.

When announcing the National Energy Initiative, Environment Minister Peter Garrett described smart grids as having the ability to “deliver significant economic and environmental benefits to the Australian economy, including an estimated minimum reduction of 3.5 mega-tonnes of carbon emissions per annum.”

But is the political will there to go beyond the rhetoric and allow the transformation of the energy system that is required? And how long are they going to take? Alan Pears believes there is a major battle going on within the energy sector right now.

“What many of the policy makers don’t seem to realise is that this type of technology moves very fast. They are used to projects taking two or three years to plan and then lasting 50 years– wind towers can be installed in weeks and once factories are in place many of the components of smart grids can be churned out like sausages,” said Pears.

“We’re now moving into a much more modular, mass produced energy system and culturally the energy sector is not tuned in.”