A Revolution is Coming in the Energy Business

By Michael Costello

Nations, governments, organisations, businesses large and small have to be organised and disposed to adapt to change, to discard the old and grasp the new, maintaining their core values but accepting what new realities have thrown up.  Sounds easy but the problem is the one identified by Machiavelli many centuries ago in his second most important work, The Prince: “It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things.”

 

Machiavelli uttered many a truth but I suspect that many in this room would recognise in that particular quote, the source of the great frustrations which can face those engaged in trying to do new things in either public or private life. 

 

That frustration is this.  The instinctive reaction to anything new, to any major proposal to do things differently, certainly to any proposal for radical change, or to any large project, is ‘no, no, a thousand times no.’ 

 

Now that is not altogether bad and doesn’t necessarily just reflect inertia.  There are plenty of mad, bad and totally self-serving ideas around that justify scepticism and meticulous questioning.  And a ‘NIMBY’ instinct – not in my backyard – is often fully justified, and always understandable to those concerned.  I’m not talking about sensible scepticism but about destructive cynicism, about heeding only the noisy voice of minority protest, and showing no interest in broad support.  And worst of all are the routine efforts to conjure up or suggest bad faith, cover up or downright misrepresentation. 

 

Sometimes you feel it would just be better to keep your head down, your mouth shut and just plod along doing the same thing in the same way that has worked in the past.  If it ain’t broke, why fix it?  The trouble is that eventually all things are broken.  If you don’t adapt, if you don’t change then, as Darwin said, you don’t survive.

 

If ever there was an industry where just plodding along comfortably seemed to be the way to go it is in the utility industry.  Water, sewerage, gas, electricity – what can possibly go wrong.  I put it to you however that over the next decade the energy business will be transformed.  That it will be the next great global industry.  That it will be the focus of technological inquiry and technological advance.  If we don’t get ready and we don’t respond we won’t survive. 

 

Consider some global facts:

·      By 2030 world primary energy demand will be at least 40 per cent higher than it is now;

·      Electricity demand will grow by 76 per cent between 2007 and 2030 requiring an additional 4,800 gigawatts of capacity.  Just in case that number didn’t sink home, let me point out that 4,800 gigawatts is almost five times the existing capacity of the United States. 

·      Over the past twenty years China has connected some 700 million people to the electricity system.  The country is now 90 per cent electrified with about 80 per cent of Chinese electricity fuelled by coal.  China is currently constructing the equivalent of two 500 megawatt coal fired power plants each week. 

 

Consider some Australian facts.  Over the next five years the energy sector will require $90.7 billion to refinance existing generation and network assets and to invest in both existing and new assets.  Of this $90.7 billion, $76 billion will be directed to new and existing network assets of the kind which ActewAGL runs.  Network capex requirements are driven by a range of factors including replacement of aging infrastructure, the roll out of smart meters, population growth and regional economic development and continuing growth in demand for energy driven by our consumption of air conditioning, plasma televisions and the like.  I might add that in what is a positive in environmental and economic terms there will be a very significant new demand for energy for electric vehicles.

 

Consider some ActewAGL facts.  Over this current five year regulatory period we will be spending $380 million on our electricity and gas assets.  ACTEW will be spending $517 million on assets.  ActewAGL is currently doing a complete strategic study of new requirements on new sewerage networks that could also require major investments over the coming decade in new sewerage capabilities. 

 

There is no way around it.  Prices are going to go up because of this increased network capital expenditure.  Add to this the tightening of credit availability and climate change policies, and it will be substantial. 

 

Let me give you one current example.  Under the recently approved electricity prices in New South Wales a typical Country Energy residential customer will pay $918 more in 2013 if the CPRS is implemented as planned and even if the CPRS is not implemented, $601 more.  Note that only one third of that increase is attributable to CPRS.  Two thirds will happen anyway. 

 

You may have noticed in today’s Australian Financial Review, Grant King, the CEO of Origin Energy, saying that prices will treble over the next ten years.

 

These increases in costs are not going to stop, and in my view, will be even higher at the global level than in Australia, unless deep new technological advances come to the rescue.  In the long run, such advances will need to be as profound as solving the commercialisation of nuclear fusion, which unlike nuclear fission provides cheap, limitless energy with little nuclear waste to dispose of.  And my own guess is that Star Wars-type laser energy beamed from sub-orbital reflectors back to Earth-based storage will play a big role – but that just may be comic book fantasy. 

 

But both of those things are a long way off, if indeed they ever eventuate.  More likely in the short and medium term will be radical breakthroughs in electricity storage technology such as batteries into which huge research dollars are already being invested.  If that were to happen, it would completely change the energy industry. 

 

Businesses like mine will have to wait awhile before technology comes to the rescue.  In the interim, price increases will be entirely blamed on ActewAGL and other energy businesses and will be alleged to be a result of our rapacious nature, exploitative behaviour and general all round hopeless incompetence - all of that in alliance with unfeeling regulatory bodies.

 

Now, however unfair that may be, we cannot just sit here and hope it will all wash over us.  It won’t.  We have to be part of the solution. 

 

One obvious way is to make our traditional dumb distribution networks much smarter.  We intend to upgrade the existing low voltage distribution networks with sensoring and monitoring devices and then insert a layer of ‘intelligence’ into the networks by integrating telecommunications and IT equipment, including smart metering.  This will improve network reliability and reduce network interruptions; it will lower maintenance and replacement costs; lead to greater asset utilisation; improve grid management; and provide industry and consumers with much more information on energy patterns and greenhouse emissions.  All of this will help to some extent ameliorate the price increases. 

 

Secondly, we will be offering to business new services in distributed generation.  For many businesses these coming price increases will tip the balance from buying electricity from the grid to building their own gas-fired generation capability.  At present, this makes sense only for very large businesses, but as prices increase and small gas generation technology improves it will make sense to smaller businesses as well.

 

We also hope to offer through a large-scale solar power facility of 40-50 megawatts a much cheaper solar power alternative (less than half the price) to the photo voltaic installations currently being placed on people’s residences and on commercial buildings.

 

Finally, and importantly, we intend to work with householders and businesses to find ways to better manage their energy usage.  This will require very active community and business outreach and support programmes and we are working hard on developing that over the next year or two.

 

Some people say how can you trust an energy business to assist in reducing energy consumption.  The answer is self-preservation.  To be not part of the solution but just the problem, then sooner or later we will pay a heavy price and alternatives will be sougght.

Excerpt of a speech by ActewAGL CEO Michael Costello AO to the ACT Chamber of Commerce, 14 April 2010.