Where are the new energy business models?

More fundamental changes are needed to allow energy market incumbents to develop new business models rather than the current focus on tweaking old and outdated models.

Electricity network businesses, retailers and coal and gas generators are becoming more and more concerned by the reduction in electricity use that is in part caused by the uptake of PV and energy efficiency measures. Likewise governments, especially those who own these businesses, are also increasingly worried. This is not only happening in Australia but also internationally.

For quite understandable reasons, this is resulting in increasing opposition from utilities and government, mainly to PV but also to any measures that reduce energy use.

Historically, measures to support PV, and also energy efficiency, have focussed on increasing deployment – for example, feed-in tariffs and white certificate schemes. However, if significant levels of penetration of distributed generation, demand management and energy efficiency are to be achieved, it is becoming more and more apparent that a much more sophisticated approach is required, including consideration of new market structures for distributed energy.

In July last year the Australian PV Association initiated a project – funded by the Australian Solar Institute but now by ARENA under the United States-Australia Collaborative agreement – that aims to identify the regulatory arrangements required for the development of such a distributed energy market. This aspect of the work is being carried out by IT Power and Solar Business Services. The CSIRO is also involved, looking at the types of technical options that residential customers might be interested in, and how they might like to pay for them. The US collaborator is the University of Arizona, which is conducting equivalent work in the US.

To date, it is clear that the responses to date by both governments and utilities essentially focus on maintaining the incumbent business models. Such approaches are unlikely to be sufficient because PV, demand management and energy efficiency options are ‘disruptive’ (as were mobile phones for the telecommunications industry), and change customers from being passive users of electricity as they have been in the past, to active players with a range of options now available to them.

Thus, more fundamental changes are required that will allow incumbents to develop new business models and new entrants to fully participate on an equal basis. Competition between supply and demand needs to be introduced at all levels: generation, networks and retail.

For networks, which are viewed as ‘natural monopolies’, competition needs to be introduced during the planning stages (when they are being built or upgraded) and we propose the use of Integrated Resource Planning as an alternative to the current Determination process.

Competition also needs to be introduced on a day-to-day basis, and needs to separately target (i) the operation of the incumbents (eg. regulation under a revenue cap to reduce inherent opposition to options such as PV and energy efficiency that reduce electricity sales), (ii) the design of the broader market (eg. allowing third parties to sell and buy electricity and energy services more generally, as well as solar access rights), and (iii) stimulation of the market (eg. through information such as demand forecasts, as well as direct support through energy efficiency schemes).

Most policies currently focus only on point (iii), and will be insufficient.

The outcomes of this research project, including those of the CSIRO, will be presented at a workshop to be held in Canberra on July 19. More details will be made available on the APVA website as they are finalised.

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