Australia points the way to a decentralised energy future
The triple challenge of improving sustainability, reliability and price is helping shape new responses to old issues in global energy markets. One powerful example is the growing interest in, and appetite for, more decentralised energy production.
While our future energy networks will still require large-scale power plants – including fossil fuel-powered plants – we believe these will increasingly be complemented by networks of distributed energy resources (DERs) bound together in virtual power plants (VPPs).
This shift, which will be driven by continued technology improvements and cost reductions in DERs, should create a new asset class in VPPs – one with diverse opportunities for asset owners and developers. It will also provide real benefits for energy consumers, giving them greater discretion over how and when they consume energy, as well as how much they pay for it.
An aging network with a changing business model
A significant factor in Australia’s high prices is that the country’s energy network is aging. Fossil fuels still account for around 85 per cent of the country’s energy supply. However, this amount is shrinking, as the country’s aging coal-fired power plants (the majority of which were built 30-to-50 years ago) are gradually closed and not replaced. More recently, failures in two significant fossil-fuel power plants, Mortlake and Loy Yang, have brought more attention to this issue.
But as more renewables come online, it is not anticipated fossil fuel plants will disappear immediately, it is more that the model for baseload coal is changing.
Solar and wind power can only be generated in certain conditions. If the sun doesn’t shine or the wind doesn’t blow they can’t produce energy. This means, for instance, that South Australia now generates a large portion of its energy from intermittent renewables - including around a quarter of it from rooftop PV - but it still requires other energy sources and technologies to fill the gap, one of which is large scale energy storage.
The tyranny of distance in Australia’s energy networks
Another defining characteristic of Australia’s energy grid is the geographic size of the country compared with its population: Australia is the world’s fourth least densely populated country.
To help overcome this challenge, strong network infrastructure was built to connect fossil fuel plants to load centres. The same is true for large-scale renewables and energy storage, which tend to be located far from load centres and where few people live.
The result is that it remains expensive to transport energy from its point of generation to the point at which it is needed. It also means that Australia’s vast transmission networks are becoming increasingly inefficient due to increasing congestion and transmission losses.
However, constructing the same level of infrastructure for renewables and energy storage is a hugely expensive task and one with no small degree of risk. Identifying “no regrets” investments is a difficult task when technology is changing so rapidly.
The opportunities in distributed networks
Australia’s energy providers already understand the opportunities of new capital outlay structures. Almost all major electricity companies now sell and install solar panels, inverters and batteries direct to consumers. This allows them to tap into a new source of revenue and provides them the ability to potentially serve customers at a lower cost of energy than through traditional methods. Many of Australia’s major retailers have also deployed their own VPP pilot programs, with at least one announcing that it will expand its VPP network following early successes.
On the other side of the equation, VPPs offer consumers greater control over where their energy comes from, when and how they use it and ultimately how much they pay.
Meanwhile, for investors, the companies that develop these technologies could potentially represent a compelling investment opportunity. So too could VPPs themselves, given that their funding, revenue and business models will likely be different to those of traditional power plants –potentially making them a whole new asset class, with a different risk profile and different returns to anything currently available in the energy infrastructure market.