The Pears Report: Electricity industry potential

Alan Pears

The electricity sector is broadening, with yet more complexity in store. Alan Pears examines the opportunities and risks.

Our definition of the electricity sector has broadened in recent years, but it will become even more complicated. If we step back and look at the fundamentals, we can see why. As I’ve noted before, people (and businesses) don’t want energy (or electricity)—they want energy-related services, such as lighting, cooking, heating, clothes washing and internet.

The overall costs of an electricity-related service are comprised of both supply-side and consumer-side costs. These include:

  • supply-side costs of the electricity used, reflected in the retail price and fixed charges for the electricity
  • consumer-side costs of electricity supply infrastructure, such as wiring, on-site generation, storage and electricity management systems
  • consumer-side costs to purchase and install energy-consuming equipment
  • ongoing consumer-side costs of maintenance and ‘consumables’, such as provision of cable TV and internet services, repairs, detergent, etc.

Estimating the consumer-side costs

Since no one else seems to have attempted to estimate the costs on the consumer side of the meter, here’s a try.

The 2010 ABS survey of household expenditure on goods and services shows average weekly household energy bills were then $32.52 (more like $40 to $50 now). But the weekly average purchase and non-energy-related operating costs of appliances, IT and AV equipment, internet and phone amounted to $93.26. Of this, $36.78 covered appliance purchases and $44.97 covered the payments to providers for internet, pay TV and phone usage.

So, in 2010, direct energy costs comprised only about a quarter of the total household cost of providing energy-related services (excluding spending on building features such as insulation, house design and draught proofing, but still including heating and cooling appliances and running costs).

We should also keep in mind that each appliance purchase locks in energy use for a decade or more; $1000 spent on a new fridge can lock in $1000 of energy waste over 15 years if you choose ‘worst on market’ instead of best.

The big money for businesses and the big savings for consumers are not in supplying energy, but rather in the provision of smart, energy-efficient and renewable energy appliances, equipment and associated services on the consumer side of the meter.

More profit in retail electricity

Based on the Bureau of Resources and Energy Economic’s 2011–12 energy data and my best guesses at electricity prices for each sector, residential consumers provide 43% of electricity revenue, but use only 28% of the electricity. Business retail electricity consumers pay around 45% of total electricity costs while using around 35% of total electricity. This reflects the high network usage and administrative costs for the small consumers in these sectors.

Despite several hours of searching, I couldn’t find out how much industry pays for electricity and gas—from publicly available information (!)—so these numbers are rough. But it seems that a profitable electricity business needs to focus on retail customers (residential and business), not big industry.

The potential profit margins, and the number of places in the supply chain where margins can be added, are greater for retail customers. In contrast, big industry is quite capable of negotiating low electricity prices—or even subsidies.

Opportunities—and risks

There are both big opportunities and risks for the electricity industry in this complex retail space on the consumer side of the meter.

Businesses selling on-site energy efficiency improvement, generation and storage to retail customers compete against high electricity prices—unless the electricity retailers can fool regulators into allowing them to charge high fixed fees… So, it’s not surprising that PV businesses have targeted residential and, increasingly, commercial customers. It’s also not surprising that attractive financing packages and buyer-friendly installations are important.

Broader issues such as what services customers really want, trust in providers, packaging of overall deals and social and environmental impacts of options will increasingly influence decisions that drive electricity demand.

Potential for the appliance and building industries

Many markets, including appliances, building, property, installation, insurance, IT and telecommunications, will influence the future of our electricity sector, as much as or potentially more than the energy industry itself. Players in these markets understand customers better and can move very fast. They are bigger and more powerful than the energy industry. But, at present, they are fragmented.

Once the appliance industry focuses on energy issues, they will see many opportunities. For example, adding built-in micro-storage and smart controls to an induction cooktop, dishwasher, oven or air conditioner cuts installation costs by avoiding the need to upgrade wiring capacity within a house and/or offers better quality services. This ‘added value’ will offset the extra cost—and help cut peak demand costs. Indeed, such micro-storage may also help overall household management of electricity.

There is potential for an appliance manufacturer to partner with a major builder and renewable energy business to offer a house full of high-efficiency new appliances, ‘smarts’ and PV system for ‘free’ (actually paid off via your mortgage) in a new home package. Some banks could even offer a discounted interest rate for such a home.

The appliance manufacturer would gain an ongoing relationship with a household to leverage future sales and get valuable feedback on appliance performance, reliability and user behaviour. The builder would save on wiring and gas plumbing costs, while offering home buyers a very attractive package. This model could easily roll out to low-income households.
Meanwhile, the traditional energy sector, protected by outdated policy frameworks, looks at the supply side of the meter, where scope for profit and customer benefit is much smaller.

Where to on energy policy?

State and local governments, reflecting what I call ‘competitive democracy’ are filling the vacuum created by bizarre national government policies, by supporting renewable energy projects and, in some cases, energy efficiency, as they seek electoral popularity. In some cases, concern about climate change even drives policy!

Global factors are driving closure of Australian energy-intensive industries that are too small to compete globally or rely on outdated technologies. Indeed, free trade agreements and other government policies are making this problem even worse for energy suppliers by driving industry closures.

Global oil, coal and gas prices have fallen —driven by a complex combination of excess (but high cost) supply and lower-than-expected demand. It seems that many economies really are decoupling energy growth (and greenhouse gas emissions) from economic development. And, with asset values of fossil fuel producers and traditional energy utilities crashing, their problems will grow as investors shift their money to safer options. Already, those who have not yet divested from fossil fuels have lost a lot of money.

Existing Australian policies and regulatory requirements, despite being fairly weak by world standards and poorly enforced, are driving step changes in new building and appliance efficiency. Product manufacturers (mainly from overseas) are providing more efficient products because of global demand. And business must respond to higher electricity and gas prices by improving energy efficiency.

So, no government can provide policy certainty in energy. At the same time, declining demand (due partly to energy efficiency improvement) and increasing support for renewables at many levels, means excess supply capacity will remain unless incumbent energy businesses close down a lot of existing obsolescent or high-production-cost plants. And if this happens, governments will face criticism for allowing it, given that it will likely increase consumer energy prices!

Meanwhile, the Australian government and its policy makers are preparing our next Energy White Paper. The Green Paper, published in late 2014, provides little basis for this policy document, as most of it was simply irrelevant to the fundamentals of the situation (see my submission at ewp.industry.gov.au). Of course, official government energy policy is usually out of touch: its main aim seems to be to support ongoing economic growth (based on past directions) and reassure incumbent industries and their investors. So it will be interesting to see what the White Paper actually says, and what government actually does.

I don’t know of anyone who can predict where this will lead. But it is a risky time for owners of large fossil fuel assets and investors in any large energy project that takes five years or more to implement. So, my money is on modular and smart solutions that can generate cash flow quickly, through incremental rollout. S

Alan Pears is one of Australia’s best regarded sustainable energy experts. He teaches part-time at RMIT University and is co-director of Sustainable Solutions, a small consultancy.

This article was first published in ReNew 131.