Energy: the disrupted industryPeter IsraelExecutive Consultant, Advisian

Disruption is nothing new

Easter 1900Spot the car

Easter 1913Spot the buggy

Key drivers of current energy market disruption

Increasing electrification

Decreasing cost of Solar PV

Renewable energy solutions - especially solar - are increasingly becoming economically attractive.

However, they are ‘variable’ and require reliability in their supply.

Unprecedented investment from three giant industries is accelerating battery efficiencies, scale and economy:

CommunicationAutomotive

Energy

…energy storage has the potential to upend the industry structures, both physical and economic, that have defined power markets for the last century or more. McKinsey 2016

“”

A few facts -traditional generation will struggle to cope

Prices will equalise across the globe

Australian electricity prices have risen and will stay higher for the foreseeable future

Through the LNG “bridge” energy is now an international commodity…

Duck Curve - energy demand net of predicted variable renewable generation, showing what “traditional” generation supply is required

Duck Curve - energy demand net of predicted variable renewable generation, showing what “traditional” generation supply is required

Solar energy production

reduces traditional generation during

the day…

Duck Curve - Solar energy production reduces traditional generation during the day…

…however produces an increased ‘rate-of- change-of-demand’ and a longer “neck” exacerbating the

traditional generation ‘ramp’ requirements

We are seeing an increased length and steepness of the evening ramp…

Complementary solutions exist to ensure supply during these periods such as gas-fired generation, battery storage and pumped hydro.

…however traditional coal fired technology is less

responsive to these rapid changes in demand

A few facts -Traditional investors are not comfortable to invest

PV - Resi PC - C&I PV - Utility Geothermal Wind Diesel OCGT Coal CCGT0

50

100

150

200

250

Fixed O&M

Capital cost

Fuel

Variable O&M

Data sourced Lazard 2016, averaged prices

US$/

MW

h

The need for investment has never been greater, however there has never been less clarity on whether to invest in traditional generation

Investors in large-scale generation require a long time (15+ years) to recover their investment

While the return on the fixed costs is recovered over the life of the asset, variable costs must be recovered every time the asset is running

Renewable energy

=variable cost

Zero

The ability to create a return on new gas or coal investments and an acceptable cash flow is undermined by emerging competitive renewable generation and storage.

Without a suitable regulatory framework traditional investors will be sidelined.

Some predictions about the near term

Some predictions about the near term

In the market

• Continued volatility:– Wholesale market will take

advantage of uncertainty to hold prices higher

– Demands for domestic gas will escalate

In parliament

• Increased calls for intervention, despite the risk to sovereign investment reputation

• Regulators will struggle to stay up with consumers demands and new technology deployment

Some predictions about the near term

Behind the meter

• Solar battery combinations will promote the emergence of the ‘prosumer’ (producer-consumer)

• For commercial users, solar battery usage will proliferate, further eroding traditional generation, and exacerbating the ‘dusk’ curve

Business success

Innovation in financial models

=

Some predictions about the medium term

Some predictions about the medium term

Energy Market

• Rules will be established to better incentivise:– Firm capacity generation – The technologies that provide grid

stability• Tariffs will encourage self

consumption, load shifting and storage

• Gas generation and battery technologies will be central to the solution

• Solar will continue to enjoy remarkable growth

• Coal demand will be in decline from 2025

Consumer

• As more low or zero variable cost energy is deployed, new paradigms will emerge:– The proliferation of the ‘prosumer’ trading

their surplus energy• Integrated home, car, supply, demand,

control etc.

Some predictions about the medium term

Current utilities

• Distributors – Will become enablers of

‘prosumers’ (physical energy flow, data management and net settlement agencies)

• Retailers– The slow demise of the energy

‘gentailer’ (generator – retailer) unless they facilitate the new consumer

Some predictions about the medium term

Cheaper energy and more integrated energy use.

Retailers will charge a fixed price for energy no matter how much you use (a.k.a internet use).

There is no energy crisis, however there is a need for steady policy implemented with a view to the long-term, and taking the input from industry experts rather than political bias.

The disruption is here and it’s only going to increase.

At this time of energy sector disruption industry leaders need to lead…

This is not the time to sit back and hope for a sensible outcome.

Industry leaders need to align and be heard:

• Educate yourself…• Be visionary…• Educate your staff…• Collaboration with your customers

and suppliers…• Put differences aside and look for

alignment…• Help provide solutions with the

long-term in mind