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Address to the Smart Grid Australia Conference, Canberra
THE HON GARY GRAY AO MP SHADOW MINISTER FOR RESOURCES SHADOW MINISTER FOR NORTHERN AUSTRALIA SHADOW SPECIAL MINISTER OF STATE
MEMBER FOR BRAND
SMART GRID AUSTRALIA CONFERENCE, PARLIAMENT HOUSE WEDNESDAY, 5 MARCH 2014
I pay my respects to the traditional custodians of the land on which we meet, the Ngunnawal People, and to their elders past and present.
I am here today at the invitation of Smart Grid Australia to present my perspective on the future of electricity markets, and where I think we in the Parliament can be of assistance, and just as importantly, how we can avoid adding to the challenge before you.
Looking forward in energy is a difficult and flawed thing. Let me explain why.
I am a West Australian; our capital city Perth has enjoyed electricity reticulation of some form, in some locations, for a little over 130 years. Generation started from premises in what is now the CBD of Perth and within fifty years it is said over 140 electricity supply undertakings were offering AC or DC transmissions.
Electricity was a nascent but diverse industry in a small growing settlement.
As has been the case throughout human experience, the growth of the electricity industry in Perth has been rapid; and technology, regulator and market driven.
I doubt anyone foresaw what we have today.
The West Australian energy market rarely gets a look in during national policy discussions. We’re seen as small, and we are “off the NEM”.
So I mention the WA experience both as an illustration and just because we usually get left out.
Electricity supply began in the colonial era.
The Constitution is silent on electricity supply, which therefore remained in the control of the States. The Commonwealth interest is stirred in the 1990’s with the COAG reform process and the creation of the NEM.
The Commonwealth interest is still a work in progress, much of that progress was made by my successor Minister Ian MacFarlane, when he was my predecessor.
As the former Minister for Energy, I was comprehensively briefed on the Smart Grid project and I visited the site. I was fascinated by the research undertaken to underpin it; creating a taxonomy of electricity users if you will.
This research outlined the different attitudes and levels of flexibility around electricity usage displayed by various consumers and demographics.
In the past electricity users were viewed as an homogenous lot - all expecting the same high levels of consistency in supply, and prepared to pay for the “necessary infrastructure” providing they didn’t have to think too much about what was involved. I guess this alone is interesting.
We think of energy markets as constant things - they are not, they are organic - evolving, driven by technology, need and opportunity.
The research tells us that individual consumer price sensitivity, and use flexibility, depend on variables such as income, age, level of tech savvy-ness, and number and type of people within a household.
And that is where smart grid can play an important role.
Smart grid allows us to see a world where consumers broadly set their usage patterns according to their own needs.
Smart grid is about smart consumers and smart generators and smart retailers because if the market does not adapt, it will find itself increasingly shelved in favour of consumers finding alternatives such as buying lower electricity consuming appliances, or even going off the grid all together.
If there is such a thing as the electricity market then it has begun to shift from being heavily centralised, to increasingly decentralised.
This brings with it a variety of positives but also challenges that need to addressed.
The FutureGrid work done by the CSIRO has mapped out some of the possible scenarios for what the future might look like and has identified a lot of the challenges that will need to be tackled.
Beyond the physical changes to the generation-side of the electricity market; we’re seeing dramatic changes from the consumer side too, and the changes keep coming.
Throughout most of my life, energy efficiency by consumers was a passive act, only really affecting them and their power bills, not really thought of as a policy or technical lever for managing the total market.
As electricity tariffs and contracts become more sophisticated, consumers will increasingly have choice and control over when and if they use power, and this will be a reality in the network of the future.
For example: A trial in North Adelaide is offering incentives for consumers to reduce their peak electricity demand and potentially save up to $500 a year.
Under a “capacity tariff system” being trialled by the SA Power Networks, customers are rewarded for drawing less than their individually determined demand but they are penalised if they go above it.
Consumers are also now empowered, through greater choice afforded by competition, but also through opportunities to be a direct participant in the electricity market, not just a passive end point consumer.
That participation comes through things like solar PV, which means consumers are also producers of electricity and that is transforming the electricity market from a one-way process to a network of many production and consumption points with some actors playing both roles.
Essentially we’re seeing the emergence of new business models, for the electricity market as a whole, and for ALL the participants in it - not just the generators.
But the pace and scope of those changes will be limited by the underlying technology platform, and that’s where smart grid informs us all.
The analogy used to explain this to me is the internet. As the internet has evolved technologically, new business models and business types are possible.
The first generation of dial up; primitive internet, wasn’t much of a platform for business to find customers - too slow, too many limits of data size, not enough security for financial transactions.
Sure it was good for what we called B2B, but Web 2.0 changed that, made the net truly interactive and opened the opportunity for multiple business models.
But we need optical fibre for the internet to go to the next level. To open up all the possibilities of super-fast access for video streaming [for example. tele-medicine] and more content rich applications and sites.
In the electricity market we’ve seen lots of disruptive new technologies come through like solar PV, but the smart grid is the optical fibre of electricity markets.
It blows open the possibilities for whole new ways of organising the market and participating in it. And just as we can’t quite imagine all the things that would be possible with optical fibre, at the moment we can probably only see the tip of the iceberg of what a truly smart grid could offer.
But the thinking is being done; the entrepreneurs are waiting and the opportunities for new ways of doing things are huge as we tackle peaks, reliability, affordability and of course sustainability.
So it’s an exciting time in which change is coming at a rate so fast that it’s nearly impossible to imagine the future, but change at the speed of light is on its way.
We’re trying to do things that have never been done before and create models that have never been trialled at scale.
There will be mistakes, there will be setbacks, but we shouldn’t fear setbacks because that’s the innovation process.
What we can expect is that the transition will likely be hardest on average consumers, even as they are the group that has the most to gain.
That’s one of the hardest realities of energy market reform - millions of winners who all win a little.
Making a massive net gain, but relatively dispersed over a large number of consumers.
It’s very easy to forget just how limited both the public’s understanding is of the electricity markets, and their interest in learning more about electricity markets.
Early adopters of new technology are not a good guide.
By definition they are more interested and engaged, less motivated by economics and ease, and more willing to tolerate problems and changes.
Think about the first mobile phone customer contracts and how difficult they were at first.
The average household doesn’t want electricity to be a complicated thing, they want it to be simple and cheap and reliable, it always has been.
So automation of processes is critical.
Expecting families to monitor their usage and real time pricing, etc. is not going to happen, except in limited cases.
Similarly, while the economists will tell us that price is the tool for influencing behaviour, there are practical, policy and political limits to how far we can go with price as a tool for shaping electricity demand.
Victoria is the case study here because they have the most deregulated and sophisticated electricity market so they are the tip of the iceberg in terms of reform.
An opt-in and limited time-of-use retail pricing model was introduced in Victoria last year and despite the best efforts of all involved, the early feedback seems to be that interest from consumers is low.
Very few consumers have switched to the new 3-part tariffs, which means their shift in demand patterns will be too small and dispersed around the grid to have any impact on localised peak demand infrastructure costs.
Why so little interest? Fear. Ignorance. Disinterest.
(1) Fear: that is fear of getting hit with higher bills because of a failure/inability to shift usage of energy out of the peak time zone;
(2) Ignorance of the benefits of time of use contracts or that the contract type even exists; and
(3) Disinterest/inertia: that is, everyone wants a lower electricity bill, but there are lots of easy energy efficiency things you could do which most people don’t, which are a lot easier and less risky than a time-of-use contract.
So maybe time of use isn’t the way to go.
Maybe a smart grid can actually avoid the need to use relatively blunt tools like price shocks on end users to control peak demand and improve the efficiency of the grid.
In any case, the key is to find ways to gain the benefits that are possible in a much more sophisticated electricity market, but in a way that spares average consumers from undue risk and hassle.
A system that has a complex back-end, but easy to navigate front end.
This brings me now to the point where I tell you what role I think this place can do in assisting those of you facing these challenges:
â¢ Communicate â¢ Benefit consumers â¢ Consumer focussed
(1) We ask that participants communicate in a consumer-centred way.
We here must understand that a super-sophisticated grid is exciting for people in this room, but not in our living rooms where it is somewhere between deathly dull and completely terrifying for consumers, who want simplicity.
We need to be talking to Australians in the context of their cost of living.
Technology such as a Smart Grid does mean that they take control of their electricity bills without the burden of closely monitoring their use.
They need to have it explained to them in simple terms that by making common sense changes to their usage - for example using electricity at certain times of the day, or turning off high use appliance when the weather is extreme - they can make a real difference to their bill.
(2) We need to make sure the benefits to consumers are front loaded and ready to go.
For example, some of the clever new retail and network tariff pricing structures in Victoria are only just becoming available now, years after the roll-out of smart meters started.
If we are going to make changes, we need to make sure the consumers see what they are getting straight up; otherwise they are just going to resent the impact those changes have on their lives and their hip-pocket.
(3) And most importantly in my mind, Government decisions on energy policy need to be customer focused, predictable, consistent, based on evidence and without gimmick and slogans.
Governments are not going to be able to completely smooth out the bumps. We in politics must have an appropriate appetite for risk, and not just playing binary politics.
No one ever planned an entirely smooth transition to a whole new economic and technical model, not in Energy anyway!
Governments need to be upfront.
Enthusiastically espouse the possibilities, but manage expectations about the time frames and the level of unknowns, inform and trust oppositions.
We must ensure policy transparency; market solutions and diversity in generation capacity.
Energy investment needs consistent predictable public policy, and will be placed at risk by imprudent actions.
Energy policy needs to be long-term, and not subject to partisan point scoring.
Put simply - energy policy should be bipartisan. This can be done.
An example of this is the Renewable Energy Target (RET). For over a decade the renewable energy mix has had broad bipartisan support.
At the 2004, 2007, 2010 and 2013 elections, both Labor and the Coalition clearly committed to a RET.
Since the introduction of the RET in 2001, around $18 billion has been invested in energy generation capacity.
These investments simply would not have been made without a commitment from both sides of politics to the basic principles underpinning the RET.
We must be responsive to changing conditions, but simultaneously provide as much investor certainty as it can.
It is a balance, and best done in a bipartisan manner.
I understand that the majority of people here today have been involved in energy generation, distribution, research and retail for many years, and you have a depth of knowledge in your area that others including myself, would do well to listen to.
And I also recognise that you are here today precisely because you understand that the market is changing and that you need to get ahead of that change and make it work for you, and for businesses, families and the community.
I thank you all for that.
The facts are Australians, particularly younger Australians, are demanding an increase in the composition of renewable energy. It’s a popular initiative.
Consumers are demanding smart and user friendly solutions such as an app on their phone or tablet to help them manage utility expenses, and people are questioning the price they are paying for power - and as such looking for alternatives to “the grid”.
Add to this the speed with which technologies available to you and your competitors is changing.
I haven’t got the answers - but I will do all within my power to ensure that you are operating in a predictable environment when it comes to regulation, incentives and targets.
Thank you all for what you do; for being here and for listening, for talking with us.
I thank my staff and advisers for their work on this speech, and I would like to particularly thank Monique in my office, Tim Sonnreich, CSIRO, several generators and market participants that have each added to my thoughts expressed here today.
Please tell me if there are things you think I need to learn on this journey.
Thank you for your time.
MEDIA CONTACT: ANDREW O’DONNELL 0405 538 887