Network community batteries

Would it really save $20 billion?

In the Australian Financial Review last month, there was an article on the New South Wales electricity distribution business¹ Ausgrid, and its plans to roll out “community batteries” across its network. The by-line read:

“The CEO of NSW distribution company Ausgrid has found a sweet spot in the gap between residential batteries and utility scale batteries that could save the state $20 billion on its energy storage rollout.” 

The idea of a “community battery” is appealing — it’s like the energy version of getting your veggies from a communal garden! Instead of the energy transition being a machination of giant investors, global forces and complex markets, there is a battery sitting in your neighbourhood. Better yet, it offers the opportunity for communities to pitch in together and own an important piece of infrastructure as the energy system becomes renewable.

Certainly this view is shared by the Federal Government, who committed almost $200M to the development of community batteries (through a program called Community Batteries for Household Solar Program). The Victorian Government has allocated a further $12M of grants to the Neighbourhood Battery Initiative.

In the AFR article, Ausgrid CEO Marc England described the 5-10MWh batteries Ausgrid has started to deploy. The pitch Ausgrid’s CEO made in the article was thus:

1. If NSW (and the rest of Australia) needs to build large amounts of storage to support the energy transition, distribution businesses could build out a lot of this capacity. England argues that Ausgrid could install these batteries for 40% of the cost of residential household batteries (on a per kWh basis).

2. Although larger scale batteries are cheaper (again, on a per kWh basis) than the ones being installed by Ausgrid, these large scale batteries “cannot provide the benefits to residential and small business customers that community batteries provide.”

3. Locating the batteries on Ausgrid’s poles and wires eliminates NIMBYism — where there is a community backlash against having energy assets from landholders and nearby residents.²

4. If Ausgrid could treat community batteries as regulated assets, they wouldn’t need to meet a typical 15% return on capital, they could settled for 6-7%, reducing the costs to the community.³

What are Ausgrid doing with the batteries?

Ausgrid currently have three community batteries installed - one each in the NSW suburbs of Cameron Park, Bankstown and Beacon Hill. For these batteries, they’ve recruited local solar owners who are able to “virtually” send some of their excess solar to be stored in the community battery.⁴ These participating customers receive a payment for the solar they export.⁵

The batteries are presumably being operated to help manage the network. If the batteries can help soak up some excess solar and lop peak demand, they can reduce the costs for distribution businesses to supply customers.

If you’re reading this as someone outside the energy industry, wouldn’t this sound like a wonderful thing? So many of the barriers to storage can be addressed, communities get the benefits, and it’s going to be cheaper!

Like most things in energy, it’s not quite that simple.

Ausgrid community battery. Source.

Is it too good to be true?

There are aspects of what Ausgrid CEO Marc England advocates for that I agree with. Networks should be exploring the role storage can play in reducing the cost of supplying energy consumers. Storage is highly controllable and well suited to managing the peak demands that place stress on the grid for limited periods of time.

And, community energy projects are a fantastic idea. Energy projects can be powerful drivers for bringing together communities and providing ownership. A number of small communities across Australia have banded together and delivered important projects with strong community support. How could you not love that!

However, I don’t think it’s the exciting opportunity being described in the article.

There are risks with distribution businesses owning batteries

Regulated monopolies, like Ausgrid, entering the battery game comes with some non-trivial risks. The most significant is the impact on other, non-monopoly businesses ability to compete.

Because they’re monopolies, distribution businesses are “ring fenced” from participating in competitive markets. This means distribution businesses can’t generate electricity to sell into the market or retail electricity to customers. There are good reasons for this — monopolies have structural advantages that would allow them to block or undercut competition, dominate the market and set their own prices. This is why they are price regulated and prohibited from participating in competitive markets.

Batteries sit in a bit of a grey area. Although batteries can provide network services⁶ (the purview of network businesses), networks are not normally allowed to operate these batteries in markets, or lease them out to someone else to do this for them. This is because, as the monopoly in charge of allowing connections to their network, distribution businesses have huge advantages in terms of connecting these sized batteries. The Australian Energy Regulator (AER) noted this in its Ring-fencing Guidelines:

“Given the interest from third parties and competitive players in batteries and the fact it is an emerging technology, it is important that we ensure that we do not foreclose the potential benefits that this innovation may provide, particularly at a time when the electricity sector is going through a major transition in which batteries are expected to play a significant role.”

Despite these concerns, the AER agreed to provide a ring-fencing waiver for batteries funded through the Australian Government’s Community Batteries for Household Solar Program. This means, that with the waiver, distribution businesses can own batteries and lease the capacity to someone who will operate the battery in markets. The three existing Ausgrid community batteries pre-date this Federal program, and appear to be covered by a separate waiver. The spare capacity of these batteries are being operated by Simply Energy.

So what does this mean? Well, distribution businesses have a waiver that lets them apply for funding from the Federal program to build and own batteries. Part of the costs will be covered by taxpayers (through Federal funding), part by energy users (the proportion of the battery allocated to providing network services) and some will be unregulated. The unregulated part will likely be leased to a third party and Ausgrid will get unregulated revenue for the leased component. This means it is returned to Ausgrid shareholders, not to Ausgrid customers.

If you were looking at developing your own community battery, this could be a scary prospect. The network you need to negotiate with to connect your battery has commercial interests in the success of other similar sized batteries. What’s to stop the network picking the best spots for itself or making life difficult for other developers? Can the network try to push as much of its upfront costs onto captive energy users and undercut the non-network developers? These are the challenging questions the AER will need to try and monitor. Good luck.

Are these community batteries?

I’m not exactly sure what Ausgrid is valued at — when the NSW government sold 50.4% in 2016, the sale valued Ausgrid at 1.4 times its total regulatory asset base. Using the same crude methodology, Ausgrid would be worth about $26 billion today.⁷ The business is 49.6% owned by the NSW Government, 8.4% owned by AustralianSuper, 25.2% owned by IFM Investors and 16.8% owned by APG Asset Management Group. Point being, it’s a very large monopoly backed by big institutional investors.

For this reason, Ausgrid and their community batteries are not what I would think a layperson would consider community energy assets — particularly compared to other community battery projects where there is community ownership, or projects developed by not-for-profits.

So why are the batteries built by Ausgrid called “community batteries”? The new batteries are being funded under the Community Batteries for Household Solar Program which gives Ausgrid plenty of leeway to call them community batteries.

But they’re not community owned. They’re being built so Ausgrid can meet its obligations as a network service provider and make money.

Ausgrid and other distribution businesses also have a different level of accountability to communities. They provide an essential service, but they don’t have to win and retain energy users. The normal incentives to look after your customers aren’t there, they have to be regulated into existence through incentive schemes. Distribution businesses don’t risk losing business from disaffected customers unless they literally move across the country.⁸

Again, I’m not arguing that this is a reason to not look at building storage in the distribution network. Rather, should the terminology “community batteries” be reserved for project where communities actually have some ownership over the asset? And if that is what’s considered important, why not fund communities and local councils to own the batteries themselves?

Is it cheaper? / there’s no free lunch

One of the arguments made in AFR article is that if Ausgrid could classify assets as ‘regulated assets’, they could lower the financing costs to meet a 6-7% return on capital.

On the face of it, this makes it sound like some pesky red tape is holding back huge potential savings. In reality, if community batteries were classified as regulated assets, financing costs for Ausgrid would fall because their investment risk would fall. This risk doesn’t magically disappear though — for regulated assets, it’s shifted onto energy consumers.

For normal investors and developers, you need to decide that you expect the financial returns from your project to be good enough to return your costs and make enough profit to make the whole endeavour worthwhile. This has to factor in the many uncertainties underlying an investment in energy. If you make a poor investment decision, you’ll lose your money.

For regulated assets, the money spent by the distribution business is approved in five year lots by the Australian Energy Regulator. If they sign off on the investment, the distribution business can spend the money and recover those costs from captive electricity consumers, regardless of the necessity of the investment.

So, in reality, while classifying batteries as regulated assets would reduce the costs for Ausgrid, it does not mean consumers would be getting a better deal. Instead, consumers would need to hope the AER is a good judge of how much distribution businesses are allowed to spend on batteries, because no matter what they would be picking up the tab.

Are they interchangeable with household batteries?

One of the other arguments is that these community batteries could substitute for household batteries. It’s good to offer access to storage-like services to those households unable to install batteries.

“England says NSW’s energy storage task over the next five years is about 16 gigawatt hours (16,000 MWh) – the equivalent of about 1.33 million residential 12 kWh batteries’ storage capacity. He says that if half of the capacity of the household batteries expected to be installed over that period were instead 20 MWh community batteries, which cost about 40 per cent of household batteries per kWh, the savings would be $19 billion to $20 billion.”

While I understand the point he’s making, I’m not sure it’s fair to just substitute the two. Households have a range of motivations for buying a household battery, some of which are not purely financial (for example household batteries can provide independence from the rest of the energy system).

In order for network owned batteries to replace household batteries, households would need to be convinced that the deal they get from Ausgrid is better than buying their own battery. I just can’t see how that’s going to come about.

The trial being conducted by Ausgrid, at least as I understand it, does not represent an enduring commercial model. Under the trial, participating customers do not have to pay anything to join up (fair enough, it is a trial.) However, I’m not sure how this transitions into a long term model — Ausgrid can’t continue just paying customers for exporting solar to a community battery. In fact, Ausgrid and most other distribution business are proposing tariffs that would do the opposite and charge solar owners for exporting in the middle of the day.

The behaviour the trial encouraging is also not commensurate with efficient use of the network. To encourage people to best utilise the network, customers should be rewarded for consuming from the grid when there’s excess solar and avoiding using energy from the grid in peaks. This should be the case even if you have a household battery, i.e. we should reward end users for reducing usage during system peaks and reward them for exporting from batteries.

This trial pays customers to export to a battery then use that energy later. This doesn’t appear to be encouraging a customer to change their behaviour so there is more efficient use the network. Instead, it’s paying for customers for BAU.

So, while the trial will hopefully provide some useful insights into the operation of these batteries, I can’t see how the trial run by Ausgrid can be transitioned into an ongoing commercial model without significant change. This change could be charging customers to ‘rent’ part of the community battery in exchange for storing energy, which will obviously make it much harder to get community members onboard.

Another way forward

Although the cat is mostly already out of the bag, I think there are other approaches that can be taken to encourage investment in batteries in the distribution network.

Firstly, the distribution networks could (and are) develop cost-reflective tariffs that reward efficient operation of the batteries. These tariffs could reward charging during periods of excess solar and reward exporting to manage local peak demand. These tariffs will help form business cases for developers and/or communities to build these batteries.

As a side note, there were comments in the article about regulatory reform:

“England says more support – such as regulatory tariff changes – is needed for the community to get the most out of batteries located in local distribution networks.”

This was curious to me, as networks are responsible for proposing their own tariffs to the regulator.

Secondly, more information could be made available about where it would be valuable to connect community batteries. Distribution businesses could provide heat maps to indicate the areas where these batteries are going to be able to provide the largest benefits to the system. They could take this further and work to support community energy projects by smoothing the process of finding a site and connecting a battery.

Lastly, and probably most difficult, there should be more focus on how to integrate price responsive storage (and other demand) into network planning. If there are price signals being delivered to community batteries, they can help to lower peak demand on a feeder or zone substation. If this is dependable enough, it should be able to defer the costs of upgrading the network, creating savings for all energy users. I expect this is a significant and challenging change for networks to make. However, until they do, the benefits of price signals incentivising efficient utilisation of the network can’t be realised.

Conclusion

I’ll start by saying it’s always easy to throw rocks. I’ll freely acknowledge there’s a lot of complexity associated with these projects and likely there are perspectives that Ausgrid and other distribution businesses have that I haven’t considered.

However, the headline statements from Ausgrid about saving $20 billion by giving them the ability to build “community batteries” and roll them into the regulated asset base deserved to be unpacked.

Energy storage is going to be deployed en masse on the transmission network, distribution network, in our cars, in our households and just about everywhere else. The most effective deployment of storage across all these applications should occur through markets where the investors/developers/households bear responsibility for making sensible investments.

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Things happen

• Interest in nuclear power keeps ramping up, with articles abound, the Federal Opposition getting very excited about SMRs and a 17 year old kid on Q and A talking about his hopes and dreams for nuclear reactors. What a time to be alive.

• El Niño DECLARED. Brace yourselves for a hot and dry summer, and a lot more articles about blackouts.

• The Mining and Energy Union has advised that it will begin industrial action at Kogan Creek (Queensland’s largest and newest coal station) and is threatening to continue into summer. Plenty of scary headlines, but if you read into the details it’s unlikely to have any significant impacts (unless of course the action drags on for many months).

• The AEMC is proposing to progressively ramp up the Market Price Cap from its current value of $16,600/MWh value to $22,800/MWh in July 2027 (previously the MPC has been increasing at roughly CPI each year). This is a response to both the problems of May-June 2022 and the challenges of generation investment in an energy-only system.

1. A reminder, distribution businesses own and operate the poles and wires that take power to and from our houses.

2. I’m not aware of community backlash being a significant barrier for large-scale batteries; certainly they aren’t to the same extent as wind and solar farms or transmission lines. Not that there aren’t concerns (including the risks of fire, noise), but I’m not sure NMIBYism is a major challenge for battery projects. It might become more of an issue as more batteries are installed I suppose.

3. I can’t tell from the article if this is included in the previous claim about community costs being about 40% of the cost of equivalent kWhs in home batteries.

4. This isn’t really how the power system works. Energy sent back into power grid is directed only by the laws of physics. You can’t direct those electrons toward a community battery or anywhere else.

5. I’ve garnered most of my understanding of the trial from these Ausgrid FAQs.

6. That is, at a very high level, transport electricity through a fairly reliable system to end users.

7. Please don’t @ me, I know this is not going to be right.

8. Or at the very least across the city. If you live in Melbourne you might be lucky enough to move suburbs and switch distributors, how luxurious!