Giles Parkinson at RenewEconomy tolls the bell for fossil fuel energy producers pretty much on a daily basis. Recently he posted that Energex’ business model was broken, according to its annual report.
To explain the set-up, Energex is the state-owned electricity wholesaler and distributor for South East Queensland. It doesn’t generate power or retail power to the customers. It services 1.3 residences and other customers in an area with a population of 3.1 million:
Power is generated by power stations and delivered to Energex through a high-voltage transmission network that is owned and operated by Powerlink Queensland, also a government owned corporation. Go here for brief industry structure. The network that delivers power to residences and other customers is owned and operated by Energex.
In our house we buy power from AGL. I’m not sure they do anything other than send us a bill. They probably outsource their metre reading. Certainly they outsource marketing as became clear when I asked a question of a sales representative.
Ergon Energy, also state-owned, is the equivalent company for the rest of the State. Actually it is a cluster of operating companies with several joint ventures, including SPARQ Solutions Pty Ltd, which provides information and communications technology (ICT) solutions and services to both Ergon and Energex. Ergon owns and operates 33 stand-alone power stations in remote off-grid locations selling directly to customers. The shaded area on this map shows the extent of the grid:
According to its website Ergon also retails directly to grid customers (through a separate operating company) at prices determined by the Queensland Competition Authority to provide uniform pricing access for Queenslanders, wherever they live. Ergon has a total of 712,000 customers. To ensure all remote users are charged the same price Ergon receives a State Government subsidy of $596 million (last year) as the Community Service Obligation payment.
Parkinson in this article says Ergon has been told by the troglodyte Qld government not to invest in large-scale solar.
Energex’ residential demand has fallen 10.4% in the last four years, 3.8% in the last year. Non-residential energy grew by 1.1% in the four-year period. According to Parkinson:
The network operator, which manages a $10 billion network, says the number of customers with solar PV has jumped from less than 2,000 in 2009 to more than 221,000 at the end of June, 2013. It made 74,000 new solar connections in the last financial year, and had 675MW of capacity as at June 30.
Solar is certainly chewing into the market. Some household customers were now “zero net energy”.
What Parkinson does not say is that solar cuts in during the shoulder period in SEQ, it does not reduce the peaks, and the peaks are continuing to rise. So the network continues to need enhancing to cope with the increased peaks, an investment that must be paid for by a shrinking consumption base.
Parkinson says that the State may have no alternative than to write down the value of its networks. I’m struggling to see how that would help if debt remains the same. On the other hand households do use the network to export energy and perhaps there is logic in charging for that facility.
When battery storage becomes viable for households then peak loads should be reduced. Nevertheless the question remains as to whether households could ever be energy independent in the face of several days or more of rain and cloud.
Ergon also reported at the same time (go here for their five reports). In the Ergon article Parkinson tells us that Ergon’s average household demand from the grid fell 5% in the past year alone, and by 15% over four years. Overall demand has fallen slightly as has peak demand, he says. Yet in the report Statement of Corporate Intent (see reports link above) on page 17 Ergon describes the same pattern as does Energex: a decrease in consumption during the shoulder period but increasing peaks. Moreover, Ergon states that the two-way electricity traffic is testing the network which must be enhanced in order to cope. Furthermore Parkinson doesn’t mention three large CSG gas liquefaction facilities which are due to come on stream in Gladstone over the next few years providing an increase in consumption.
Parkinson takes the stance Ergon ‘good’ and Energex ‘bad’ in their response to changing circumstances. When private retailers intervene between customers and the supplier it is hard to see how Energex can work constructively with customers in meeting their energy needs as Ergon seems to be doing.
Parkinson mentions at the end of that article and in this one that the Qld Government wants to merge Energex and Ergon and install a single management. Consequently a decision has been made to establish a single holding company.
On the face of it this makes no sense. Both are essentially monopolies which are not competing with each other. The two organisations are rather different in their relation to customers and the contexts in which they operate. Cost savings are likely be minimal in the context of two large companies, where the majority of functions seem to be decentralised and spread across the networks. However, such a merger would almost certainly introduce internal cultural conflict, or at least dysfunction between management and operations.
I suspect there is a mixture of privatisation ideology, put on the table by the Costello report, but initially resisted by Newman, and panic over a 22.6% electricity price increased after an initial government-mandated freeze. They need to look as though they are doing something. In fact there has already been a significant pruning of staff resources and a review of capital expenditure plans.
It sounds to me, but I don’t know, that Energex was been constrained in it’s scope and mode of operation by National Competition Policy. Ergon may have negotiated some exemptions because of the size and remoteness of the state and the fact that it is subsidised by the taxpayer to the tune of $600 million pa.
It is commonly thought that states are ‘gold-plating’ the networks and making excessive profits. Energex made a profit of $361 million last year after paying $155 million in tax. Ergon made $434 million after paying $177 million tax. After the subsidy Queensland made around $200 million on assets worth close to $20 billion. I make that a 1% return on assets. The Commonwealth made $332 in company tax, plus the income tax from around 8400 employees. That’s by owning nothing and doing nothing noticeable.
Parkinson keeps saying that energy storage is the new big thing with:
“smart” technology that will link storage devices and renewables, and lead to what [cleantech investor Vinod] Khosla describes as “cost-effective, intelligent, decentralized power grid solutions.”
By localised he means multi-street, suburban or single town.
Meanwhile at the production end of the business:
Stanwell Corp, the Queensland government owned electricity generator, has failed to make any money in the past year from its 4,000MW of coal and gas fired generation because rooftop solar has taken away demand and pushed down wholesale electricity prices.
There was some hope “from the giant LNG plants being built in the state’s north”. (He means Gladstone. That’s Central Queensland, Parkinson, mate!) The article goes on to say that Queensland “has argued strongly for the renewable energy target to be discontinued.”
This demonstrates that fossil fuel interests don’t have to be private to cause problems.
So what to make of all this?
I’m not informed or clever enough to nut out the best solutions, but I’d venture that demand is going to be lumpy across time and across the landscape. On the supply side Qld is not a premium wind area, but has plenty sun, especially from about 150km inland. But it can pour raining for weeks at a time. To me the solution still looks like a larger network, smart, with multiple inputs from renewables and storage capacity, but backed by fast peaking gas. That will cost.
And please get the useless private retailers out of the way. We need networks and suppliers that are directly in touch with and responsive to the customers.
Elsewhere Wallerawang coal fired power station in NSW could be closed in 2014, the biggest baseload closure so far. Whatever the role in solar some of thee aging plants have been hanging on waiting for Greg Hunt and the LNP Direct Action program to offer them a fist full of money to do the inevitable.