The inconvenient truth for the Australian electricity industry, whether the existing players like it or not, is the inevitable and rapid transformation of our energy networks from providing single direction energy flows to multi-direction flows from multiple distributed sources. The sooner the utilities of the future embrace this new reality the better off we will all be.

For years I have advocated a move to a service based business model. Today the focus is on selling widgets (aka electrons), and all participants in the supply chain get rewarded for just this. However, when the electricity itself becomes an input to the services being provided, rather than ‘the product’ being sold, then the most efficient least cost production is rewarded. It also favors clean, non-polluting energy, because once the pollution, health and environmental impacts are internalised fossil fuels (and nuclear) simply cannot compete.

I was recently in New Zealand which already produces more than 80% of its energy from renewables. Despite this New Zealand is planning for an influx of solar renewables and energy storage. The approach of NZ utilities, regulators, politicians and businesses was refreshing. There is a genuine openness to innovation and new ideas – the obverse of what we have seen so far in Australia. This tells me the priority for the renewables industry in Australia needs to be closer collaboration with utilities to help them through this transition as quickly as possible. In 2015 the ASC and ESC will be doing exactly this to facilitate critical energy system transformation.

The utility market process is brutally simple– they:

1. Forecast and assume demand then build or acquire supply to fit (including the delivery means i.e.: the physical network). Despite rhetoric saying otherwise and sometime even legal terms of reference too, the regulators focus on the ROI of the participants rather than on consumer benefit. We have seen some light on that recently, but down a very long tunnel; and

2. Implement demand-side management only if there is no other option – generally only when compelled by governments, which is rarely effectively and often only possible through a public subsidy.

The reason is simple too: every player makes its money in proportion to how many electrons flow through the system – generators, networks and retailers – the more electrons the more revenue and the greater the profit. There is no incentive for energy conservation (not using generated energy at all for the task e.g.: turning off lights or reducing their number, transport mode shift, turning down thermostats in winter or up in summer etc.) or energy efficiency (using less energy to achieve the same level of outcomes or improving the level of outcomes from the same amount of energy).

The new demand management utility model will be performance-based: with revenue and profit coming from services not throughput.

The services will vary according to customer and the industry participants, but will necessarily bring the network owners closer to end-users. The utilities will become effective brokers who manage providing the service using every distributed resource and technology on the network. This will include a range of supply side capacity from residential rooftops, commercial rooftops and large scale hydro, wind, solar and any new dispatch able or variable supply technology (eg: wave, geothermal hot rocks etc). They will also manage complementary storage technologies, whether batteries, flywheels, capacitors, distributed low volume pumped hydro, or whatever is available to deliver the supply to meet the demand.

This would promote intelligent network capabilities to allow highly granular network management (including smart meters, full use of inverters as well as the behind/ through the meter possibilities from smart appliances and fixtures). The services model would also give the utilities an incentive to increase the energy efficiency of buildings – and with a churn of just 2% annually more than 60% of current stock will still be in use in 30 years. So retrofitting energy efficiency mechanisms and/or adding distributed energy generation or storage technologies (whichever is most cost effective) becomes a value-add service, paid for via long term energy services contracts.

Such a load management utility model would pass on operating surpluses i.e.: better prices, downstream to customers, as happens with all mature services markets. This is the alternative to the oft mentioned ‘death spiral’ – a model that can be profitable for those players who are flexible and agile enough to adopt it, while a smart grid grows in importance and services get better. In a flexible service model, the service may be offering high-security, high-reliability back up services for urban or rural ‘off-gridders’. This model needs to be underpinned by locally integrated resource planning process, and would provide transparent price information determining short, medium, and long term planning cost values for marginal distribution of capacity and energy resources.

The regulator role in this model is to ensure the energy participants are operating with performance standards that reward short and long-term prices, environmental responsibility, internalisation of costs, customer satisfaction, grid security and reliability and quality of the services delivery.

The regulator would continue to have particular regulatory responsibility for low-income customers. However, this model would likely remove the need for energy concessions as specific purpose service level agreements, backed by government, would replace them. This is a more traditional business model based on service level agreements and market competition, between technologies and on service quality beyond the base ‘utility’, so it reduces (or maybe even removes) the need for price regulation.

The demand management utility should provide the ‘utility’ platform to encourage wide third-party participation in providing services such as independent distribution system operators (eg: peer to peer at household, business, precinct or local government level). The demand management utility operates at the retail level, fully under the oversight of markets and state and federal regulators – but using new measures and guidelines based on customer based services and success metrics.

Such a move would remove the split and confusing regulatory responsibilities in the NEM of today (which really should really be a national physical distributed energy network – now there’s a nation building project!) with distributors blended with retailers, so becoming services providers, and being forced to face the consumer. This would ensure that business incentives match the best interests of utilities, customers, and the public good more generally – they don’t right now.

This is an increasingly urgent conversation, to engage policy makers and political leaders on solutions to a broken system. But that must focus on collaboration, because the increasingly common and intense fight currently underway are ultimately a distraction.

The elephant in the room is the existing massive investment in fossil fuel assets – and how to move faster than business as usual to remove them and replace them with renewables. That’s the killer for renewables of all types even if the RET issue is resolved today: it is a fact that there is a massive generation capacity overhang – albeit EVs and rising gas prices might change that a little, or a lot – (I think the latter), which makes the transformation even more urgent. But based on current demand BAU forecast Australia has no need for new generation capacity until at least 2026 – none at all of any type!

Unless we rapidly take out the oldest and dirtiest generators somehow and then the rest, we will have a broken electricity energy system unable to achieve needed emissions reductions and poor opportunities for viable and growing renewables businesses too. Distributed generation bring great regional employment and other social and economic flow-ons.

We could simply try to get government mandates on emissions and/or a new carbon price, but I suspect that battle will remain hard and be too slow to meet the decarbonisation timetable science tells us we must follow to reduce CO 2 and other GHG emissions. I have some ideas about how we can shut down dirty power stations sooner than later, but although market based they are uncomfortable ideas that many will reject out of hand. I will discuss them in a future article.

Steve Blume is president of the Australian Solar Council and the Australian Energy Storage Council.