Thinking Differently about Energy
Working in electricity was once about understanding the entire system. The deregulation and deconstruction of the industry that began around the mid 1990s forced in a new way of thinking in the sector – where deep, niche knowledge focused on delivering super competency and ever-more revenue. But as renewables and technology transform the power sector again, the time has come to embrace a broader, holistic view of the overall system.
Before the reform of the electricity system, power was generated, transported, and sold mostly by vertically integrated utilities under shared services structures for commercial services, strategy, and finance. Costs were allocated, not charged. The end-use tariffs were the revenue drivers, and these, in most cases, were heavily controlled by predominantly government owners policing cost of living across their full array of electoral concerns. Hiding within these structures were layer upon layer of cross-subsidisation, inefficiency, distorted signalling and cost, but electricity was supplied reliably and, for the most part, the sector stayed under the radar.
Microeconomics does not deal well with guilds, and when the bells of reform began to ring for the infrastructure industries, they rang loudly in energy. By 1995, Australia’s competition agreements had been struck, by 1998 the National Electricity Market was born. By 2000 there were more than 10 times the number of generation and retail players active in the market than were present pre-reform.
The era of separation of generation, networks and retail was underway, and these new players flooded into the wholesale and retail markets in chase of the efficiency arbitrage promised by the regime. While these external battles raged, internally the re-education had begun for staff previously judged on system knowledge; and what good looked like had changed. Wholesale company employees were taught to think in MW and revenue, with their principal clients being retailers. Network company employees were taught to think in meters, later national metering identifiers (NMIs). Retail company employees were taught to think in cost and margin. The era of deconstructivism had begun and to win at the game of energy was to achieve super competency in the pillar-like strata of the supply chain.
But the past ten years have seen yet more change, this time driven by the rise of renewables, digital technology and evolving customer preferences. A new paradigm in electricity has emerged as the way we generate, distribute and use our power moves away from centralised coal-powered production, peak-driven networks and margin-driven retailing. New renewables are already cheaper than new coal, decentralised virtual power plants (VPPs) will be cheaper than grid supply by 2021, electric vehicles will be cheaper than those powered by combustion engines by 2025, and it will be cheaper to dispatch new renewables than existing coal by 2040. As we approach and pass these tipping points, the game will change both in scope and breadth. The era of deconstructivism has come to an end. To win, we must re-aggregate our thinking.
Reconstructing the skill set
To reassemble the parts into the whole is not as simple as it might sound – indeed the industry is being pulled into a recognition of both metagames and the need for a broader view of the system whether it likes it or not. Consider the marginal loss factor (MLF) debate currently underway – a factor driven by the reliability metagame, and historically of little importance, now thrust into the mainstream of both transmission and generation in completely different ways, and into the political consciousness through yet another. MLFs reflect losses in electricity between a generator and the market. They are volatile because the way in which renewable investment is occurring, given the reductions in cost and the need for new capacity in most systems, is reflective of both renewable resource (where the sun is shining) and the availability of land; these drivers have never before had such an impact on transmission systems. Further, the time between decision and build is incredibly short – it can be less than 18 months between an idea for a new solar plant and its commissioning. It is now essential for renewable developers to understand not only the congestion in the network today, but the congestion that may occur from all other possible renewable projects in the future. For transmission companies which have had the luxury of certainty as to generation source for so long, and had only to deal with the growth of aggregate customer demand, these new generation sources require a new architecture.
To win, we must look ahead, beyond the forces that are driving us in the immediate. We must understand with clarity that we cannot focus on our own part of the value chain anymore. We must regain the knowledge that the sector had before microeconomic reform began, but with the same degree of super competence. To win in generation, one must understand transmission pricing and the regulatory framework governing connection, pricing and service classification; to win in transmission, we must understand the true role of transmission as a system balancer, and MLFs and settlements residue within this; and in distribution, to win we must understand the role that can be played by new technologies in network balancing and design a framework that interfaces seamlessly with system control to balance the overall system.
Before 1995, when we in the industry were asked what we did, the answer was “keeping the lights on”. We may yet be there again.