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.

How Australia’s energy landscape could benefit from distributed networks

One market leading the way in this area is the Australian energy market. BloombergNEF forecasts that by 2035, as much as 33 per cent of Australia’s capacity will sit behind the meter rather than on the transmission network. This is significantly ahead of forecasts of 18 per cent in Japan, 17 per cent in Germany, 15 per cent in Europe and 10 per cent in the U.S.

This statistic is perhaps why Australians are taking up PV solar at an impressive rate. According to the Clean Energy Council, 1.55 GW of rooftop solar was installed in 2018 and more than one-in-five Australian homes now host rooftop solar. This puts the country in a unique position when it comes to the number of distributed energy resources (DERs) already in the grid. 

Meanwhile, the cost of producing a unit of solar energy via PV solar in Australia is amongst the lowest in the world – thanks to a combination of abundant sunshine, comparatively large rooftops and government policy settings such as feed-in-tariffs and small scale technology certificates (STCs), that promoted small scale solar uptake.

And yet, an official report by the Australian Competition & Consumer Commission (ACCC) has estimated that the country’s electricity prices are among the highest, rising an average of 44 per cent in real terms in the decade to 2018. 

Costs can vary significantly between states and territories. Notably, South Australia’s energy costs are equivalent to those of the most expensive markets in Germany or Denmark. However, unlike these jurisdictions, South Australia’s prices are not artificially inflated by a “green tax”. Other factors are at play – as they are – to varying degrees – across other Australian states. Some of these are outlined below.

“By 2035, as much as 33 per cent of Australia’s capacity will sit behind the meter rather than on the transmission network.”

BloombergNEF

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.

How VPPs can help solve these challenges

VPPs could provide part of the solution to some of the significant challenges when it comes to price and reliability. This is because they are deployed at the location where the majority of the energy will be consumed and utilise existing distribution networks to deliver the remainder of the generated energy. This is made possible through the use of cloud-based software which combines multiple DERs into a fleet that can be centrally orchestrated, bid and dispatched. 

For instance, in Japan, which has been suffering from critical supply and demand imbalances since the Fukushima nuclear accident in 2011, VPPs are being explored as a way to help the power grid cope when demand surges. While this is still in demonstration phase, the country intends to build the world’s largest energy-storage based power plant by 2022. 

In the United States, Macquarie has acquired a 50-megawatt portfolio of distributed battery storage systems from AMS over approximately 100 sites in the Los Angeles area. The batteries assist the local grid in supplying large load commercial and industrial customers. It can reduce peak demand by up to 10 MW within minutes of an automated signal from the grid operator. In 2018, its first full year of operation, the VPP delivered an extra 2GWh to the city’s grid.

Back in Australia, the South Australian government has teamed up with Tesla and an energy provider to take the VPP to a whole new level. Over three phases, it is developing a VPP that comprises more than 50,000 homes, all of which will generate energy through solar panels and store it in battery systems. The first two phases have been completed, with the government having funded the installation of solar-producing and storage capacity at 1,100 housing trust-owned homes. In the final phase, it will do the same for another 49,000 private and public homes. Operating at full scale, the VPP could generate 250MW and store 650MWh. 

VPP offerings will also present new capital outlay structures, where customers may pay for a portion of the VPP equipment and services under an agreement with providers who in turn will pass on some of the additional value created to customers.

Overview of Virtual Power Plants (VPPs)
Source: Macquarie Capital

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.

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