The Australian government’s official position on fossil fuel subsidies is that it doesn’t pay any. Leaving aside the unmet environmental and climate costs of burning fossil fuels, or the diesel fuel rebate, you only have to travel to a remote or regional town in Australia to discover that this is not true.

Dozens of small towns and communities across Australia meet their electricity demands by burning diesel, at a horrendous cost that is subsidised by state governments.

Take the former gold rush town of Sandstone in the West Australian mid west (pictured above) , as an example. About 670kms north of Perth, it used to cost $2/kWh to supply power to the community until recently. At Menzies, it still costs $1.65/kWh to supply power

Other regional towns source their power from coal-fired power station via poles and wires stretching across more than 1,000kms. Again, this is at horrendous cost – but it is nearly always subsidised by the state.

In most states this is an unseen cross-subsidy, but in Queensland and Western Australia, the cost is very visible – at more than $500 million each.

Indeed, Horizon Power, the state-owned utility that covers all but the south-west corner of the country’s biggest state, Western Australia, has the biggest subsidy of them all: not in total sums, because there is $500 billion of subsidies across the world, but in sheer scale and cost per customer.

Horizon’s 50,000 customer are spread across 2.3 million square kilometres – that’s one for every 53 square kilometres. All are guaranteed to pay no more than 26c/kWh charged in Perth.

That results in a subsidy to match its vast geography – an average of $5,000 a year for every customer. That is a total of $250 million a year, and it’s a sum that CEO Frank Tudor intends to reduce to zero.

So far, he has already slashed around $100 million from the subsidy, bringing the average down to $3,000 per customer. Much of that has come from cost savings and efficiencies, and other business improvements, such as the use of smart metering to save on the costs of meter reads.

But lately the falling cost of solar and battery storage technologies is also making its presence felt. And it is that with these technologies that Tudor expects to rid the remaining subsidy, and to promote Horizon Power as the leading company for micro-grids around the world.

This 110kW solar farm installed at the Meekatharra power station which is part of the Midwest project which has already saved millions due to a new contract – and such projects have helped bring down the cost of electricity in Sandstone, mentioned above, to 96c/kWh, with further falls expected.

“I’d like to think that we can completely remove the subsidy, because the drive of technology will us to deliver electricity cost effectively to those communities,” Tudor tells RenewEconomy in an interview. “It could be 10 years, or it could be 20 years. The subsidy will be removed. It is just a question of time.”

Tudor expects Horizon to be something of a test case for the rest of Australia. While the CSIRO and the network owners lobby, ENA – expect more than half of all electricity to be supplied by distributed energy, and possibly one third of all customers to go off grid, Tudor expects Horizon to get there in half the time.

“When I look at the electricity industry, we are going to go through massive transformation …. every pice of infrastructure will be permeate with some sort of solar power. It will be a completely different approach (to energy).”

Already, the change is taking place. When severe bushfires took down much of the network around Esperance, Horizon didn’t rebuild the poles and wires to some customers, they installed solar and battery storage at a much lower cost.

In Carnarvon, two 1MWh batteries are being put in place to offset the use of fossil fuels at the Mungallah gas-fired power station. It will allow one generator to be switched off, rather than running as spinning reserve, and allow for more renewable energy to be integrated into the local micro-grid.

In Onslow, a town used as a base for the huge LNG projects, an even bigger transformation is taking place with a shift towards a renewable energy-focused micro-grid that will reduce the amount of fossil fuels by around 70 per cent.

It claims it will be the country’s largest solar and storage micro-grid, will include local energy trading and prepare for the introduction of electric vehicles.

“We think of this as a living laboratory,” Tudor says. We will trial different products and services and then deploy them across all systems.”

Horizon Power does have one significant advantage over other utilities – it is vertically integrated all the way through, which means it can extract the value of systems improvements as a network, or a generator, or a retailer, or a combination of all three.

That puts it ahead of other states, which are mostly split between network operators on one side, and retailers and generators on the other.

Tudor is in no doubt which part of the value stream will emerge as the most valuable – networks: because even in a micro-grid, consumers and generators need to be connected.

Tudor says that cost falls in solar and storage – the two key technologies for the Horizon area – will occur more rapidly than even those contemplated by the CSIRO modelling.

“We think we can do better than their cost curves,” he says. “We are heading to a highly distributed end state …. you can either defend against it, or embrace it, and deal with the regulatory and pricing issues.”

Tudor draws comparisons to what he is doing with the New York’s Reform the Energy Vision. You can hardly imagine two more contrasting geographies and population distribution, but Tudor says the approach is the same.

“Their regulatory approach is to use network to refresh infrastructure, allow customers to make a choice, and to encourage the development of micro-grids. Those individual micro-grids will look something like what Onslow will look like.”

And Tudor is confident that Horizon will develop IP that will be very valuable on the international stage.

“If you look at the one billion people across the world that do not have electricity, they are not going to be putting up poles and wires …. they are going to be looking at distributed energy and micro-grids.”

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