Is that the time?

Thoughts on the ENA's "The Time Is Now" report

Earlier this month, Energy Networks Australia (ENA) published a report called “The Time Is Now.” This report, produced in conjunction with consultancy L.E.K., sets out a range of recommendations for how the distribution network could evolve. By allowing networks to take on some new roles and responsibilities, they modelling suggests we can save billions of dollars and meet our renewable energy targets.

It’s not all sunshine and rainbows. In this post, I look into the report and provide some thoughts on their recommendations.

What does a distribution network do and what do they want?

Parts of the electricity industry are competitive. A household can choose who they buy their electricity from (i.e., choose a retailer), and generators compete with each other to be able to create that electricity. A retailer that does a bad job or is too expensive will lose customers. A generator that is unreliable or too expensive will make poor returns. That is, both are subjected to the trials and tribulations of market forces.

Networks are the odd ones out. Unlike retailers and generators, they do not have to compete to win customers. Households do not get to choose which distribution network they connect to. Instead of being provided through a competitive market, distribution networks are monopolies.

(Note — for the rest of the article I’ll refer to the distributor as the business that owns and runs the distribution network).

An unregulated monopoly is a bad thing for customers. An unregulated monopoly can overcharge their customers and offer low-quality services. To curb these impulses, we either break-up monopolies or we regulate them. We can’t break up distribution networks, so distributors are regulated. The Australian Energy Regulator (AER) approves how much distributors are allowed to make and sets their prices. In addition, distributors are not allowed to participate in competitive markets. As a monopoly, they would have an unfair advantage in markets, leading to poor outcomes for competition and consumers.

If you haven’t read much about networks and monopoly regulation, you might find this article helpful. I’ll be referring to concepts covered in that article throughout this post.

Monopolies

So what does a distributor want to do? Make money!¹ They are another business with shareholders. How do they make money? There’s three main buckets:

1. Build more stuff: The more they build, the larger their asset base is. On this asset base, distributors get a guaranteed return. So more stuff built, more money.

2. Operate more efficiently: Each network gets an allocated budget for a five-year window. If, in that five-year window they find some savings, they get to keep them. This should encourage more efficient operations over time.

3. Make unregulated revenue: distributors can also make money outside the regulated services they’re required to provide.

An important point to note before we go through the report is distributors don’t really take investment risks when providing distribution services. If the AER approves expenditure, consumers pay the costs regardless of whether the investment is prudent or not.²

The report

This article is going to be a long one, so I’ll just cover the highlights of the report here and let you decide to look at it in more depth if you want the details.

• L.E.K. describes an “All Levers Pulled” scenario, where multiple actions are taken to “unlock the distribution grid.”

• L.E.K. found $7B in annual benefits for consumers when comparing a baseline scenario called “Missed Opportunities” with the “All Levers Pulled” scenario. All consumer archetypes described in the report are better off.

• Australia will meet its 82% renewable energy target by 2030 in the “All Levers Pulled” scenario.

Is it all too good to be true?

As with all reports and modelling, there is an agenda the ENA are trying to promote. I’ve not seen much published digging into the report and those goals. In that vein, there were five areas of the report that caught my eye as I read through it:³

• The savings

• Classify EV charging as a distribution service

• A class waiver to build and own batteries

• The language

• Developing local energy hubs.

The savings

The first thing that jumps out from the report is the savings. $7B/year is a huge number.

“Mwahahah, so many SAVINGS”

When you look at the $7B/year in savings, the context for that number is important. These savings are relative to a contrived base-case. The L.E.K. report constructs a “Missed Opportunities” scenario as the baseline from which $7B savings are measured. This scenario is fundamental if you’re going to put any stock in the numbers in this report.

Unless I’m missing it, I can’t see much detail about what this scenario is. All the report really says is:

“This scenario deploys large scale generation at rates consistent with the maximum levels achieved in Australia to date. This baseline represents an increasingly likely ‘prolonged transition’ for the broader energy system, and also demonstrates the customer benefits from seizing the opportunity for distribution networks to contribute to the desired outcomes of the energy system.”

I think this is key to understanding the modelling results. The report essentially assumes large-scale renewable generation won’t accelerate to create the “Missed Opportunities” scenario. This opens the door for lots of value to be realised by connecting renewables in the distribution network. But is that realistic? If you think renewables growth can increase in line with the AEMO’s Integrated System Plan, the $7B/year entirely disappears. The graph below is from the report. The ISP scenario and the “All Levers Pulled” scenario are both at $98B.

The Time Is Now, p. 10.

Maybe you don’t think renewables growth will hit the targets in the ISP, but to the extent the growth rate for renewables does go up, the benefits delivered in this report would fall.

I think it’s very difficult to put that much faith in the scale of the benefits in the modelling. The modelling results ultimately come back to the assumptions that feed into the model, and there’s not enough information to make a judgement call on these assumptions. So, without being able to fully interrogate the assumptions, I think it’s fair to be skeptical of the headline numbers supporting recommendations that further the interests of distributors. The ENA’s write up of this report even notes that readers are warranted in being skeptical of the modelling results.

Electric vehicle chargers

Possibly the most egregious recommendation relates to electric vehicle charging. The report claims that if distributors could build EV chargers, they would get 1.2M more EVs onto the road by 2030 and a commensurate $2.2B/year benefit. The logic is as follows:

1. People want more EV chargers to have the confidence to buy an EV

2. The current market might not be building enough chargers

3. Distribution businesses can build them so we should let them.

They sum up by calling out the “barrier” as:

“Installation and ownership of EVCI is not considered a distribution service under our current regulatory framework, which restricts DNSPs from playing a role in rolling out and maintaining kerbside public chargers as part of their regulated asset base.”

In other words, as regulated monopolies we aren’t allow to spend money on chargers and recover the money and make a profit from electricity consumers. Yes — that’s exactly the point of the regulatory framework! And changing this seems to be so obviously a bad idea.

Firstly, network businesses control the connection of public EV chargers to the grid. You have to get approval and work with the distribution network to get connected. In what world does it make sense to also allow network businesses to build competing EV chargers?? The very obvious risk is that the distribution networks would now be able to block their competition. This report claims a huge increase in EV uptake if distributors can build chargers, but what is the impact on EV uptake if a monopoly scares off all other private investment in EV charging?

Second, the logic and analysis behind this recommendation is tenuous. There is so little analysis in this report to justify the following statement:

“Kerbside charging is essential to support EV uptake, but asset utilisation is too low to be economical for commercial providers in most locations. This means a market led approach may fail to deliver the infrastructure that communities need”

Is kerbside charging that important? A lot of the early adopters in Australia will have off-street parking for a lot of their EV charging. Does the next tranche of drivers want to rely on kerbside charging? Maybe they won’t. Australia is behind lots of other countries on EV charging — surely L.E.K. or ENA could find some international examples to justify these assumptions.

And if asset utilisation is too low for it to be a good investment, why would we greenlight distribution networks to invest in it? Do the “communities” need it? What if utilisation is low because it’s a bad spot to build a charger and no one will use it? And what if distribution networks do a horrible job operating these chargers?

The report claims an increase in number of 1.2M extra EVs on the road by 2030. The report modelled networks installing 51,000 public kerbside EV chargers.⁴ That’s 23 cars per kerbside charger. If those cars are charging at 11kW, the charger would have to be close to 100% utilisation. But the report previously said these chargers would have low utilsation making them commercially unviable. So presumably, the report is not claiming responsibility for the full 1.2M EVs coming about because of the kerbside chargers, but that isn’t reflected in the report, with the claim:

“Facilitating an extra 1.2 million consumers switch to EVs delivers total annual benefits of $2.2 billion per year”

Third, the proposal is so nebulous. They propose defining owning and operating EV chargers as a distribution service. How exactly would you define the service the distributor is providing? Are they providing all EV charging? A subset? Just pole-mounted units or where the distribution business has made some determination around inequity? The AER is the only check on this expenditure — how is the AER meant to decide if it’s a prudent investment? If the investments are all white elephants, that risk doesn’t fall on the distribution businesses, we pay for it regardless.

I’m sure it’s complex to build, own and operate EV chargers but these trade-offs are exactly the kinds of problems you want markets to solve! Let businesses take risks trying to find the right solutions that consumers want and the good ones will thrive. And if governments want chargers to be build in places where it’s not economic, they can subsidise them directly — the NSW Government is already doing this.

Far from giving governments and drivers confidence in the EV transition, these recommendations should be a cause for concern. We definitely need more EV chargers, and we need the networks to connect them. Why muddy those waters?

Battery waivers

In a similar vein to EV chargers, the report recommends a waiver to allow DNSPs to own batteries. Distributors would need a waiver to allow them to build and own batteries that they then lease out to other market participants to operate in wholesale markets.

There is a lot of overlap with the EV chargers recommendation. To connect batteries to the network, you need to negotiate with the network. This is tricky when they are now also a competitor. What stops the network withholding information about the best locations? There are regulatory mechanisms to try to prevent this happening, but you’re introducing incentives for the distributor to want to build batteries in the preferable spots.

According to the report, the benefits are of allowing DNSPs to build and own batteries are:

“Lower cost: Enables efficient procurement and installation at scale in a coordinated program, and leverages the land and field workforce DNSPs already have available.

Enables value stacking: Batteries are versatile assets. DNSP ownership (in partnership with retailers to access the market and customer benefits) allows the full value and customer benefits to be quickly unlocked.”

I don’t think its a given that DNSPs can install batteries at lower costs than a competitive market. The report suggests this is due to scale and existing workforce, but there isn’t evidence presented to back this up. But if a coordinated program of batteries was needed to support the distribution network, why not run a huge tender? That would surely find the cheapest option?

On value stacking, the value stacking can also go the other way. If distributors get some benefit from batteries being installed (e.g. deferring network augmentation, voltage support etc.), they can offer network support payments to battery operators.

We’ve written about network community batteries in detail before, and a lot of those concerns are valid.

Network community batteries

One thing that has changed since I wrote that article is the size of these batteries. Some network batteries were previously quite small and pole-mounted. The batteries described in the report are now in the range of 5MW. While mounting a battery on top of a distribution pole was maybe something only a distributor could do, there doesn’t seem to be anything special about the ability of distributors to be able to build 5MW batteries.

There has been a waiver provided to networks to build batteries. Before rushing off to give them unimpeded ability to build these batteries, there should at least be some open consultation about the risks of pursuing this recommendation.

The language of “equity” and “community”

Something else that I found notable, although unsurprising, is the language in this report. The report is at pains to talk using terms like “community/communities” (gets 32 mentions) and “equity/equitable” (gets 12 mentions, excluding its appearance in “private equity firm.”) The ENA blog post describes this as a “customer-centric” modelling approach.

The ENA isn’t alone in gravitating to these terms — it’s also being used consistently by governments and regulators. But it’s hard not to read this and have it feel somewhat disingenuous. For example, generation connected to the distribution network is called “community generation” — why? There’s even this line:

“A Local Energy Hub unlocks energy within the community to be used for the community.”

The report never defines what it means by “community generation.” There’s no suggestion it would be owned by the community, or delivered in partnership with a local community. Rather, the prefix “community” seems tacked on the front to make it sound more palatable. This happened with “community batteries” — most of these are owned by multi-billion dollar monopolies and leased to multi-billion dollar businesses. Big communities.

Recycling one of our old memes because it’s appropriate and good for the environment.

Equity is messy and subjective. The report declares subsidies for batteries installed behind-the-meter are inequitable but distribution-connected batteries are the most cost effective and equitable means to deploy the small and medium scale battery storage…” Similarly, current EV charger rollouts are “inequitable” and networks could invest to fill the gap.

There’s no discussion of what equitable means in these contexts. What does the ENA think an equitable outcome is? Why is a network-owned battery more equitable than a subsidised home battery by default?

More importantly, should regulated monopolies be allowed to make investment decisions based on equity/inequity? If yes, where do you draw the line? Should networks be also be offering favourable tariffs of free electricity to address equity concerns?

No one wants to sounds like they’re opposed to addressing inequity. Even writing this section of a blog post feels tricky because I don’t want to imply it’s unimportant. But we should be asking who should be defining and addressing inequality. We should really step back and ask whether distribution businesses should be anywhere near making long-term investments on the basis of equity. If we let them, what happens if they do a bad job? How do you even define a good or bad job? Frankly, a distributor has no incentive to address equity well — they can’t win or lose customers. Further, they are incentivised to invest money when they are guaranteed a return on that investment.

We shouldn’t be relying on any profit-driven entity to fix inequality, including distributors, retailers and generators. That is a role much better defined and addressed by governments.

Local energy hubs

Finally, there is a recommendation to link “local energy hubs” which is a term I’m not familiar with.⁵ Local energy hubs in the report refer to a designated area of the distribution network that is analogous to the transmission scale renewable energy zone. This is also the recommendation that produces almost 60% of the benefits modelled.

Connecting renewables into the distribution system is a good thing. It’s another avenue to get projects built and operational. However, it’s not clear why we need to designate local energy hubs to do this? In the report, L.E.K. says:

“Distribution networks can … tak[e] steps to better facilitate the ease and speed of larger rooftop solar connections by conducting advanced connection studies and simplifying connection processes for projects of this size.”

This sounds great! But why not just do this anyway? Why specifically in a local hub? Declaring local renewable energy hubs seems to add extra layers of regulatory complexity. The report calls out two case studies where Essential Energy and AusNet Services are working to get more renewables connected to their networks. More of that! But why not provide the information to all about network capacities and let the community decide where it wants to build its generation?

Conclusion

For sure, it is easy to throw rocks. I’ve not worked for a distribution network before, and without doubt my perspective is different to someone who has worked at a distributor and faced their unique challenges before. I’d welcome some thoughts from distributors with a different perspective!

However, once you get past the headline numbers and recommendations in this report, there is a lot that doesn’t make sense to me. While ENA and L.E.K. have presented what they think is a compelling case, there are some very real risks to consumers and the energy transition here as well.

If you’re a bureaucrat or regulator, you’re no doubt being lobbied to consider these recommendations. Before agreeing to anything here, the time to think through the incentives and long-term implications is now.

1. No different to practically every other business. So why call it out? Because networks’ bottom line is not consumer outcomes, or equitable outcomes or anything else altruistic.

2. There are incentive schemes in place that encourage distributors to make good investments e.g., incentives to keep the network reliable.

3. There were plenty of other recommendations in the report that I haven’t gone into, mostly because they seemed less contentious.

4. Kerbside chargers are much slower than fast chargers. Kerbside chargers typically charger between 7 - 22kW.

5. Admittedly, this is most terms.