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Select Committee into the Resilience of Electricity Infrastructure in a Warming World
20/02/2017
Storage technologies and localised distributed generation in Australian electricity networks

GONZALEZ, Mr Ismario, Director, Global Business Development, AES Energy Storage

GREEN, Mr David, Partner, Lyon Group

KATHPAL, Mr Praveen, Vice President for Global Market Development, AES Energy Storage

O'DAY, Mr Nicholas, Partner, Lyon Group

RIEBOLGE, Mr Robert, Chief Network Analyst, 1414 Degrees

SCHOENEMANN, Mr Richard, Director of Economics, Policy and Regulation, Sunverge Energy

Evidence from Mr Gonzalez, Mr Kathpal and Mr Schoenemann was taken via teleconference—

[09:58]

CHAIR: Thank you for appearing before us today. Information regarding parliamentary privilege should have been given to you. We accept that this is quite a tight little room today, and having the teleconference as well will mean that we will just have to be patient with each other in questions being answered and who they are directed at. Would any of you like to give an opening statement before we go to questions?

Mr Riebolge : I can give you an opening statement. On behalf of 1414 Degrees, thank you for the opportunity of addressing this committee. The electricity demand profile in most Australian jurisdictions is becoming characterised by peaks and troughs that are increasingly widening and a baseload that is decreasing so that the ratio of the difference between the peak and the trough to the base is increasing. The generation mix and market rules in Australia have not been designed to meet this kind of demand profile, so the resilience of the electricity infrastructure will continue to deteriorate if measures are not put in place to address this problem quickly.

What seems to have gone unnoticed in the current debate on electricity is the emergence of a new category of consumer in the next three to five years. This category of consumer is electric vehicles. Most major auto manufacturers say they plan to release electric vehicles that are market ready over this period. As this consumer category places greater demand on the grid, the peaks and troughs will greatly widen, as most electric vehicle owners will be charging their cars at the same time. To adequately deal with such a demand profile, what is required is a technology that converts intermittent renewables into load-following generators that react instantaneously to the demand placed on the grid.

After a decade of research and development, from work originally done by the CSIRO in conjunction with Adelaide University and grants from AusIndustry, 1414 Degrees has developed such technology, with a commercial prototype commissioned in September 2016 and currently operating under test conditions at Tonsley innovation precinct south of Adelaide. The performance of the prototype is exceeding expectations. The technology is in the form of a storage system that employs the latent heat properties of silicon, which can store more energy per unit of mass than any other known material. The storage system comprises a heat store that raises silicon to its melting point of 1,414 degrees using any external energy source such as renewables, biomass or run-of-river hydro. Heat energy is then released from the heat store to satisfy consumers' heat demand or is converted to electricity by coupling it to a turbine.

The standard thermal energy storage system—what we call a TESS—comprises a 10-megawatt-hour thermal heat store coupled to a turbine of up to 4½ megawatts, and this fits into a 40-foot shipping container. These standard containers can be positioned almost anywhere on the grid or behind the meter and are scalable simply by adding more units. Very large units of the order of hundreds of megawatt hours are of bespoke design. The TESS is fabricated from readily available components that are off the shelf. For instance, turbines are standard models, and the refractory insulation material is used in applications currently. 1414 Degrees has US and Australian patents. The TESS is sustainable technology that uses abundantly available silicon. It has negligible environmental impact, with no emissions and no toxic residues on decommissioning, and it only leaves behind materials that are easily and quickly recyclable.

As grids in Australia transition rapidly from legacy to smart—with Victoria having rolled out all of its smart meters some years ago—the smart grid will orchestrate and dispatch a myriad of load-following generators that include TESS paired with renewables and domestic photovoltaics paired with batteries. Generator dispatch will make use of the internet of things, artificial intelligence, robotics and big data. As the build-out of the infrastructure is rolled out and amortised, there will be increased reliability and hardening of the grid against black-start events, with significant downward pressure put on electricity prices. Preliminary modelling carried out by 1414 Degrees for the South Australian grid indicates that a fully decarbonised grid would yield a societal cost-benefit internal rate of return of the order of 10 per cent and make downward changes to prices on electricity of the order of 30 per cent.

Given that the National Electricity Market in Australia is one of the largest interconnected grids in the world, the world is watching how we deal with these pressing issues in Australia. Australia now has the opportunity of being at the forefront of this energy revolution which has global reach. The potential for exports for revolutionary 1414 Degrees Australian technology and job creation is therefore very great. 1414 Degrees has had inquiries from places such as the Faroe Islands, which is about as far away from Australia as you can get.

The final word is on silicon. Silicon gave the world glass thousands of years ago. It gave the world optics and fine glass art pieces hundreds of years ago. About 70 years ago, it gave the world the transistor. In the latter part of last century, we have had the silicon chip and Silicon Valley. More recently, it gave the world printed circuits, which are now ubiquitous in computers and smart phones, that have connected the world and given birth to the internet. Silicon is now poised to give us the energy internet and, in its molten state, the potential of decarbonising the energy and heat transportation sector. Indeed, silicon is the miracle element that John Browne writes about in his fascinating book, Seven Elements That Have Changed the World.

Mr Green : The Lyon Group, and in particular my colleague, Nicholas O'Day, and I, wish to thank the chair and the right honourable members for the opportunity to appear in front of the Senate Select Committee into the Resilience of Electricity Infrastructure in a Warming World. That is quite a mouthful, isn't it! Recent weather events in South Australia helped to highlight the risk our electricity network faces as weather events become more extreme. Battery storage can play a major role in equipping our electricity infrastructure to deal with these types of risks. Significantly, Lyon began the process of conceiving, designing and developing the world's first grid-connected, utility-scale integrated solar PV and battery storage project some four years ago in recognition of the matters that are now under consideration by this committee, so we are pleased to have the opportunity to present to the committee on our practical experience and expectations for the future.

Briefly, by way of background to Lyon, Lyon is an independent Australian developer with three principals with more than 75 years of collective experience in the energy and infrastructure sectors both in Australia and internationally. In the energy sector, this experience includes involvement in the design and implementation of the National Electricity Market, raising billions of dollars for infrastructure projects, developing more than 5,000 megawatts of electricity generation ranging from base-load coal, gas-fired plant, wind, solar and now integrated solar and large-scale renewable projects. Further, my colleague, Nicholas O'Day, is a former chair of the APEC energy business council.

Some four years ago, and in recognition of the warming climate and government initiatives globally to increase the proportion of renewables in our electricity generation mix, Lyon took a strategic decision to focus on utility-scale renewable energy projects that would: (1) provide a stable base-load form of power to the electricity grid; (2) connect to the grid in locations that would stabilise the grid and remove the need for grid augmentation; (3) be located near the demand for electricity; (4) continue to provide power to communities and businesses even if the deep network was disrupted—of course, South Australians know all about that—and (5) lead the way in demonstrating smart renewables for the future of the electricity system in Australia and overseas.

In doing so, over the past four years, Lyon has achieved a number of firsts: the first utility-scale, grid-connected integrated solar and battery storage project designed and developed for the Australian market—and funding was received from ARENA for that program; first to progress an integrated solar and PV battery storage project on a utility scale with a distribution network service provider in Australia; first to develop the battery storage performance standards and have them reviewed by a transmission network service provider and AEMO; and first to negotiate a power purchase agreement with a retailer in Australia where the retailer recognised that having control of the battery had value and were prepared to pay for dispatch control of the battery.

What is Lyon doing now? Now that we have been called before the committee, it seems appropriate to provide a bit of an overview of Lyon's current activities. Over the past two years, Lyon has been quietly bringing together Australia's largest pipeline of solar PV projects, which now stands at more than 1,500 megawatts of high-quality solar PV utility-scale projects. Separately, Lyon has more than 1,000 megawatts of large-scale battery storage projects. Both the solar PV and battery storage projects are ready to be deployed over the next two years and be operational in that time.

The funding for Lyon's solar PV pipeline is underpinned by a major US fund. Separately, we have formed an alliance with Mitsubishi Corporation and AES—who are with us today and who are headquartered in the US—to develop utility battery storage in Australia. AES is the world's leading battery integrator with nearly 10 years experience in deploying large-scale batteries in their own business and globally. AES really is without peer, globally, in their experience in utility-scale batteries and have developed 400 megawatts of battery storage—we are talking utility scale here, the largest of which is 100 megawatts. It is worth noting that combined Mitsubishi Corporation and AES own and operate twice the total generation capacity in the Australian market at the moment—so two very significant corporations are aligned with us in doing this.

In closing, I would like to make a number of points, and these are based on our experience. The unique technological benefits offered by battery storage were not conceived when the National Electricity Market was designed and implemented, so the current market does not readily accommodate the full commercialisation of battery storage. There are a number of barriers to the entry of battery storage and its ability to play a full and legitimate role in the current market—and I am happy to discuss those. These need to be addressed urgently if battery storage can bring to dealing with the network the security of supply issues that are needed. The NEM was developed on the causer-pays principle. That principle seems to have been overlooked in recent years and has significant implications for network stability.

The use of utility-scale battery storage has been demonstrated to prevent network tripping and significantly improve network security—and our AES colleagues can talk about that in significant detail. There also needs to be recognition given to independent developments to increase the competition in the market, and I think there has been a number of public comments made about this. Independence is important in this market as it enables developments to be undertaken where they are needed and connected to the network where they are needed, rather than incumbents seeking to develop in a part of the market that will shore up asset values and their portfolio in another part of the market.

There is plenty of academic work indicating the benefits of battery storage; however, if we are going to move forward to capture these benefits, we need projects on the ground. To this end, and with the support of our partners, Lyon expects to have 350 megawatts of grid-connected, utility-scale battery storage developed and operational in the financial year 2017-18 and, in doing so, provide a major boost to Australia's electricity security and supply. Thank you.

CHAIR: I understand we have representatives from AES and Sunverge Energy on the line. AES, would you like to make a very brief opening statement?

Mr Kathpal : AES Energy Storage thanks the committee for the opportunity to speak with you today. All electricity networks, including in Australia, face risks to reliability and resilience and are challenged to make infrastructure storages that will mitigate these risks. AES has been using battery energy storage as a solution to electricity network issues for nearly 10 years, and it is great to be able to share our experience with the committee today.

First, there are a number of common impressions about energy storage that I would like to address that are relevant to its role in providing electricity networks with resilience. The first is that the technology is not mature. It is. All of the nearly 20 energy storage systems AES has developed or deployed since 2008 use advanced lithium ion batteries, a technology that is mature and is manufactured at massive scale already, with wide use in the consumer electronics and automotive industries. The electricity industry is the next industry that will benefit from the widespread adoption of this technology.

The second is that energy storage is not at a meaningful scale. As an example, AES has contracted a 100-megawatt energy storage array with an electric utility in California as an alternative to building a new gas-fired peaking plant, and we have over 400 megawatts across our portfolio in operations, construction or advanced development. The modularity of the underlying battery technology allows energy storage to scale up meaningfully to an order of magnitude to compare with new large generation or transmission infrastructure investments.

The third is that energy storage is not cost-effective. It is. The above-referenced 100-megawatt project was selected in a competitive tender, on an economic basis, as an alternative to new gas-fired peaking generation. The tender incorporated in its evaluation the many benefits provided by energy storage resources, including system level fuel-costs and operating-costs reduction. This project is planned to meet the utility's needs over the life of a 20-year performance contract.

In addition to that example of energy storage serving as an alternative to peaking generation, it can also provide market operators, transmission networks and distribution networks with resilience by serving as a network resource, as a provider of frequency control, voltage control or other needed reliability services. As an example, battery energy storage can provide resilience to electricity networks through its fast response capability—that is, its ability to quickly respond to sudden power system needs by injecting power into the network.

Currently, many electricity networks' reliability roles hold generators back from operating at their full output and limit transmission lines from operating at their fully rated capability. This mandated reduction in use represents an economic weight on electricity consumers, having to pay for assets that cannot be fully utilised. While this is necessary to maintain system reliability and facility, there is a better way. Battery energy storage offers a solution that can relieve electricity systems of the economic burden of unused capacity on installed assets. Energy storage allows system and network operators to cost-effectively produce and deliver power from the most efficient sources when and where it is needed. They can serve many functions, from efficiently integrating renewable energy and replacing conventional peaking generation capacity to reducing the need for expensive transmission and distribution investments. Thank you. We look forward to the committee's questions.

CHAIR: Mr Schoenemann, would you like to give us a brief opening statement? I am just conscious we do want to move to questions; that is all.

Mr Schoenemann : Thank you. Yes, I will make it a very brief opening statement, for context. Thank you for inviting us today. Sunverge is a virtual power platform provider. Basically, in the same way that the internet connects to computers we connect customer sited energy storage through a cloud based platform that allows customers to maximise their power savings through their protocol takes, their solar and their storage. This allows the aggregated PV and storage to act as a large unit for internet work issues and to opt for the wholesale market generator, for instance. So it is by summing-up those items.

Our company was founded in 2009 in San Francisco and we have projects all over the world, including some of the largest VPPs—virtual power plants—all over the world. We have, at the moment, the largest virtual power plant in the world, in South Australia, which we are currently deploying with AGL. Our investors include Siemens, Total Energy, Southern Cross Venture Partners and ARENA, AGL and Mitsui in Japan. Sunverge believes customer sited solutions, behind-the-meter solutions, maximise the value of distributed energy resources. This value can be shared and harmonised between energy consumers, between energy providers and utilities and society as a whole.

Core to our beliefs is that Sunverge wants to strengthen both the grid and utilities relationships with customers and we believe that the grid is a social good and should be made stronger and more resilient for everyone's benefit. With the process, we think, with connecting customers' storage, Sunverge will help utilities provide better services to their customers.

Most market forecasts predict that over time there will be millions of energy storage systems installed in Australia and also millions of energy storage systems installed in other parts of the world. The key to optimising the benefits of this hardware across all of the parts of the energy ecosystem—that is, the consumer part, the network part, the wholesale and the broader community—is to be able to aggregate and manage these systems via a single control layer. We call that the VPP software platform or the virtual power plant software platform.

CHAIR: Thank you. Perhaps I will go first to you, Mr Green. You mentioned that the market rules as they are currently set make it difficult for large-scale—I imagine even smaller-scale—battery storage to meet the energy needs and participate in the market. Is it just a lack of competition or is it that the rules are set in such a way that they just benefit incumbents and therefore the lack of competition compounds the problem per se? What has to change first?

Mr Green : A difficult situation for this new technology is that under the rules transmission countries can get a regulated revenue if they own a battery that builds their asset base and they can pass those costs through to the consumers, and that revenue is a regulated revenue and can only go to the network service provider for owning that battery. So if you have an independent owner of a battery and they want to provide—there are about 20 services that batteries can provide—a range of those, including acting to take the peak off the peak periods, then that operates under the rules as a generator. So you have a split in the total revenue that can be gained. What that does is reduce potential for a battery to be fully commercial in the market.

The regulators are aware of this. We have had a number of discussions. Those are specific rule issues and market design issues. These might seem trivial and trite but they are not. When we first worked through our project in Queensland and we went to put in a network connection application for our solar-plus-battery project, there was nowhere on the application form where you could tick 'battery.' It threw the system out—delaying, delaying. I think it took us two and a half years to work through those issues with Ergon, and we did. Also, AEMO had never confronted service standards at that point, so we have broken those down.

But I would also say that there is a significant—what I would say—inertia, and this is really a social and cultural issue. If you are familiar with the regulatory test for either distribution or transmission companies and the way in which they apply them, they can look at the full range of technology that is available. But we also confronted this solution, and think this option is commonly called a 'catch 22.' So Ergon's approach to doing those regulatory tests was to say, 'Well, we can't use any technology connected to our network that hasn't been proven on our network before.' Therefore, before it even gets to the economic assessment to see whether it is a better economic choice than putting a diesel-fired project out there, it is ruled out because it has never been connected to their network before. So those are cultural, systematic and institutional issues that need to be addressed.

Far be it for me to criticise an engineer, because I started life that way, but they do have very difficult conditions in the electricity system to work with, that is, fine tolerances on voltage and frequency control in the electricity networks. We hold them accountable for ensuring that those are maintained. One of the difficulties for them when you present a technology like this, which they have not been comfortable in using previously, is that they are obviously nervous because they are held accountable to the energy security and the network security.

There are real issues. There is institutional change that needs to occur, but fundamentally, the way to do that is to have projects that can demonstrate these things, so that people can touch them and feel them, and they get comfortable. Sorry, that is a long way of answering your question.

Senator McALLISTER: Just before we move on from that very useful explanation—when you are talking about unlocking these cultural and institutional barriers, is that something that is going to happen in the market in and of itself, or is there a role for government in that process?

Mr Green : There is certainly a role for government in the way in which it deals with the market rules. I think AEMO is looking at some of those issues at the moment, so that we can get a circumstance where the batteries can capture the full suite of revenue that it can at the moment. The other issue is that, if you are going into the market and you want to make batteries fully commercial—and I would suggest this is a significant issue for government consideration—you do not want to be subsidising technology like this. There is no need to continue subsidising technology like this. Battery prices are falling significantly.

What is not fully appreciated by the market is how to value those services. First of all, the market in Australia is still quite naive about batteries. In the discussions we have had with regulators, they were not aware that there were batteries like this operational in other parts of the world. We are starting from a long way back. If you are talking about being able to fully recognise that batteries can offer about 20 different services at the moment to the market, which of those is the market recognising and valuing? Generally, none, because they do not know about them. It took us a long time to get Ergon retailer to understand that having dispatch control of a battery could actually be valued. It took them, probably, 15 months before they started to understand they could model having the ability to dispatch a battery when prices spiked, and therefore, start to put a value to controlling it.

CHAIR: Can I ask you, in relation to that instantaneous nature of being able to dispatch power from battery storage—I am not sure if you were here earlier when we had Engie giving evidence—

Mr Green : No.

CHAIR: They had said that, as a general rule, it would take up to four hours to fire up Pelican Point to unit. Surely a battery storage unit that can deliver 350 megawatts, did you say, that could be instantly dispatched would overcome some of those more cumbersome issues of outdated technology?

Mr Green : Our AES colleagues can talk about the technical issues there. Batteries, for instance, can respond to voltage and frequency fluctuations faster than any of the other generation technologies available at the moment. In Chile, for example, BHP has the world's largest copper and gold mine. AES has two large batteries, utility scale—they will correct me if I am wrong here—which are in the order of 30 or 40 megawatts, either side of the interconnector. They became operational not long before the interconnector would have tripped, but the batteries kicked in and prevented that. While BHP does not own the network or the power or the batteries, they significantly benefited from that. So a 200 megawatt battery in South Australia—and we have done significant modelling on this—would have prevented the interconnector tripping in September.

CHAIR: That was going to be my follow-up question. If we had that type of technology invested in, you would not have had that failure, in terms of the interconnector?

Mr Green : That is right.

CHAIR: Have you had appeals to either the state or the federal government particularly in relation to this issue of underwriting energy security? It seems as though the technology is there. You are saying that you are going ahead regardless of incentives from government, despite the fact that the rules seem to be sacked against you. This is a question for 1414 as well. Where is your conversation with government up to—state or federal.

Mr Green : Do you mind me being honest!

CHAIR: Yes, I would like you to be honest.

Mr Green : I have been on boards for the federal government and state governments. We have had many years of dealing with the delicate and detailed processes that governments need to go through in considering things. Our conclusion is that we need to get on with it. So we clearly will consult government when there is a need to do that. We welcome government support. In one state we were offered to be fast-tracked for our project by going into whatever that category is for a project of state significance. They said to us, 'Don't worry, we will fast-track this. It will be only 18 months.' And we thought, 'Hang on. We can go and sign up the land and get the network connection going in three months, thank you, and we can have a solar project delivered in six months—on the ground and fully operational.' Batteries take a little bit longer because there is more design work. So, to be honest, we went through the process with an application to ARENA. I would make a comment there as well. ARENA has changed now. No-one believed that our project in Cooktown, North Queensland, was relevant and no-one believed it could be done. We went to the technical panel—

Senator XENOPHON: ARENA?

Mr Green : ARENA.

Senator XENOPHON: And they did not believe you?

Mr Green : No. They ended up funding it but it took us 2½ years to get them to—

Mr O'Day : Yes, and six times to the technical panel.

Mr Green : Luckily, the chair of that panel understood batteries, but there was no-one else there who did. So no-one believed you could integrate batteries with solar, they did not believe you could connect it to the grid and they did not see what the benefit was of that. So we found ourselves having to spend a whole lot of time educating and, to be honest, we concluded that we could just get on. I will give you an example and I would appreciate if you do not ask me to tell you this one, because it is commercial-in-confidence just at this moment. We will announce two more projects for South Australia in the next couple of weeks, where we have been able to source the land and put in the application for network connection. They will be 150 to 170 megawatts solar and 50 megawatt batteries. We have done that with no assistance and not discussing it with government. We are just getting on with that.

CHAIR: Solar and batteries combined.

Mr Green : Integrated solar plus batteries, grid connected.

CHAIR: 150 to 170 megawatts?

Mr Green : Each—there will be two of them.

Mr Riebolge : I agree with a lot of what Mr David Green said, of course. The point about 1414 Degrees is that it is not a battery; it is a heat store. It stores energy in molten silica. The equivalent of one tonne of molten silica will raise a tonne of water up to the height of a 60-storey tower. That is the amount of energy it can store. The commercial prototype is running and exceeding expectations. We are now working on a 10 megawatt-hour thermal plant, with potentially a site in South Australia, which should be delivered sometime this year. We are also working on a 200 megawatt-hour thermal store. The design of that will be contingent upon a number of things, but we hope to have that design in place within the next nine months. Once that commercial demonstrator is running on site and we start to get data from it as to how it integrates into the grid et cetera we can basically roll out the TESS across the board very quickly. Within 3 to 5 years we could actually roll out the TESS on the entire South Australian grid. There are probably 400 substations in the grid in South Australia. If you park one of these TESSes in each one of the substations you have 4,000 megawatt-hours of thermal capacity. That is about 2½ thousand megawatts of electrical capacity, when heat is converted to electricity. That basically solves the problems of South Australia in terms of frequency regulation, voltage control, peak shaving, peak shifting, congestion relief et cetera. So the technology is there. It is just a question of having the will to do it.

Also, Victoria has rolled out smart meters—that is a smart grid. South Australia is in the process of doing that and it will become a smart grid. Once you have a smart grid it can dispatch all this plant with an energy internet, and it is settled by a peer to peer transactions, a bit like eBay on the internet when you are doing online shopping.

CHAIR: Or Uber or Airbnb.

Mr Riebolge : That is right.

Senator McALLISTER: Over the course of your testimony, gentlemen, including the gentlemen on the phone, you have indicated a range of services that battery technology might provide to a modern, smart electricity grid. Which of those do you see as being most significant, and of those which can currently return value to the provider under the NEM rules. I am looking for a high-level architecture about the services that are provided and where you can capture value and where value is being created, but the provider cannot capture it, and a rule change is required.

Mr Green : If you don't mind, I will start with a statement. What we all benefit from as a society is to create the circumstance where these batteries are commercial and not subsidised. I absolutely support research and development, but, fundamentally, we need bankable projects. We need private capital coming in to support these projects on the basis of their commercialisation. To do that we need to almost see batteries as a category of new technology that should be able to capture all of the disparate revenue sources—so there should not be an exclusion of the regulated source that is there for network security—to the battery. In other words, the battery should be able to capture that, not the regulated transmission business, simply by owning it, because they will have only one interest and that is to use it for network security. One of the significant opportunities, and what is driving our confidence to be able to roll this out, and our associates, is that the prices in Australia in particular states—and this will spread more through the other states—will be unstable for some time as we de-carbonise.

CHAIR: When you say that prices will be unstable, do you mean that they will be volatile?

Mr Green : More volatile and we may see higher spikes in the peak prices. Particularly as we de-carbonise, because the existing portfolios and the owners of those will operate them as they see fit. What that does is create the commercial incentives for batteries to be able to come into the market and operate as a peaking plant—load shift, effectively—and draw power either directly from the grid or from the solar and dispatch it when those prices are higher. Some people would see that as gaming, but that is the way in which the market is structured. Those higher prices are designed to incentivise further investment so that over time that investment in the right sort of technology brings those prices down and moderates them.

CHAIR: Is that what is driving the decision on your investment in South Australia?

Mr Green : Yes. One other thing I would add is that most of the people we deal with are very large energy users—household names. They are all looking to de-carbonise. They do not want to talk about it publicly, because they have an asset values to protect in that period of transition. Many global firms are looking to de-carbonise. Unless you had spoken to them yourself you would be surprised about some of those. They are looking to have major solar and batteries attached to their operations so that they can be carbon neutral.

CHAIR: From an investment perspective.

Mr Green : Investment, but also an energy security perspective. Also, there is an enormous amount of pressure coming through from institutional investors on large corporates. That activism, if you like, from large institutional investors is forcing that strategy, independently of whether or not those companies think it is a good idea. You may have seen just recently that there is a move to have the accounting standards and insurance recognise the climate risk, so boards and management will be held accountable for not dealing with that risk. So, whatever you want to assume about what is causing that risk—that is a separate issue—large corporates are needing to address the sort of issues this committee is considering.

Senator McALLISTER: Regarding the current market arrangements, services associated with stabilisation of voltage, frequency and system restart our valued separately and bid separately into a separate pool. Are there any challenges for battery providers in interacting with that particular dimension of the market?

Mr Green : There are, because some of those services are not valued at the moment. So the market can receive some of those services simply as an adjunct to a generator operating.

Senator McALLISTER: That is not just for your particular technology, but actually for a range of technologies currently in the market. Others have complained to us about this problem.

Mr Green : Yes. Fundamentally, if you want to drive particular outcomes, independently of technologies, there needs to be a value attached to a service and then you need to consider who can capture that value. If it is split between different parties in the market—transmission versus generation—then you are diluting the potential to make the batteries for that particular generation commercial, because you are reducing their access to particular revenue streams.

Senator McALLISTER: I think you will need to explain that point a little further because you made it earlier in your remarks and I wanted to learn more about it. I was not sure whether you were concerned about vertical integration between battery service providers and networks or whether you were concerned about the incentives that exist in the regulatory arrangements.

Mr Green : I am more concerned that what it does is split the revenue stream—

Senator McALLISTER: When you say 'it', do you mean the regulatory arrangements?

Mr Green : Yes, the regulatory arrangements and market rules. So the transmission companies and distribution companies can own those assets and they can have those assets included in their regulatory asset base and get a revenue stream for those assets.

Senator McALLISTER: They will still provide the capital value of the assets, essentially?

Mr Green : And they will use them for one particular service, not the 20 that the batteries can provide. If the battery were able to offer and the market were able to value all those independent services and attach a value to them then it would add to its commerciality. Some services can be sold in the generation market. One in particular can only be captured by the network service provider through its regulated asset base, but what that does to the individual piece of technology is dilute its commercialisation because it is not able to capture the full value and the parties that own that—the network service providers—have two interests: increasing their regulated asset base and using the battery to either defer augmentation or stabilise the network, and so predominantly only do that with it.

Senator McALLISTER: I am conscious that other senators have questions. I think we as a committee would be interested in understanding what solution you propose to address this split incentive. To allow other senators to ask questions I will put that to you on notice. If you could take that on notice—

Mr Green : Certainly.

Senator McALLISTER: It is not urgent, but we would love to know.

Mr Green : We would be happy to provide that.

CHAIR: It would be great if you could take that on notice.

Senator DUNIAM: The rules seem to prohibit proper participation of the technology we have discussed here in the energy mix. When were the rules last updated?

Mr Green : I do not know the answer to that, I am afraid. I think there is a real consideration going on at the moment that does look at this issue. This is coming back to me. There was a consideration undertaken late last year. I do not mean to be critical of any of the institutions that we have in any way, and please do not take my comments in that way, but there has been a disconnect between an understanding of what batteries can do and the way in which our market rules either create barriers to them being fully effective or not. Late last year I think AEMO had a review and concluded, based on submissions they received, that there was no need to change the rules.

Mr Riebolge : The AEMC released a rule change I think in January 2014. That is for the provision of non-network solutions, and batteries and storage devices come under that preview. So, for argument's sake, if you are looking at a non-network solution which is not increasing assets within the distribution base and what have you, there is a regulatory investment test distribution and a regulatory investment test transmission. With the non-network solution, batteries and, for instance, 1414 Degrees would fit into that category.

Unfortunately, those rules are not sufficiently flexible to address the issues which David has been raising. We need to do that to be able to get these types of technologies into the distribution networks and transmission networks. What is already happening though, which is really quite interesting, is that these types of solutions with batteries and heat stores like this are going into the edge of grid. The edge of grid is a reconfiguration of the grid architecture so that you set up virtual power plants and then they go off grid altogether. The problem with going off grid altogether is that those who have the capital capacity to be able to that will do it and that leaves those who do not have the capital capacity to do it stranded to the grid where prices will continue to go up. That is what we have to address. The smart grid is already there. The smart grid is there to be able to accommodate all the technology. It is recasting the regulatory mechanism, the market mechanisms, in order to come into the 21st and 22nd centuries.

Senator DUNIAM: Yes, that makes sense. You mentioned the rule update just before. Are those updates set at arm's length from government, or are they a decision by the minister?

Mr Riebolge : The Australian energy market regulator has made recommendations on rule change, which then the AER accepts. That is different from the Australian Energy Market Operator. They dispatch the plant, and the way in which they dispatch the plant is using linear programming methodologies. They are last century's methodologies. They no longer apply. What you have to do is dispatch plant using an internet of things—an energy internet—with artificial intelligence, robotics and big data. That is already in place. The technology—

Senator XENOPHON: Mr Riebolge, it is the Australian Energy Market Commission, not the Australian energy market regulator.

Mr Schoenemann : That is correct. It is probably worth noting that there is actually a change request at the moment for contestability of energy services with the AEMC.

CHAIR: We were not able to hear you on that. I am not sure if Hansard is able to make that a bit clearer. Maybe have another go at repeating what you have just said.

Mr Schoenemann : I just wanted to draw your attention to the AEMC rule change on contestability of energy services that is currently—

CHAIR: We might get you to put that on notice for us, if you could, because the audio here is just terrible. I am sorry.

Senator McALLISTER: Chair, Senator Urquhart suggests that in previous inquiries sometimes people have been speaking to us on speakerphone, but it works better if they use the handset. We might advise our witnesses on teleconference that that would help.

CHAIR: I am not sure if you heard that. If you are on speakerphone, that might be the problem. If you could use the handset, that would be more helpful.

Mr Schoenemann : I was on a headset, but now I am on the handset. Is that better?

CHAIR: That is a bit better. Thank you.

Mr Schoenemann : My point was that the AEMC has a rule change program open at the moment. It is for the contestability of energy services, including battery storage.

Mr Green : I wish to add—and this goes back to a point I made earlier—that it does not address the cultural issues, and so it is easy to still say things like, 'I've never had something connected to my network like that. I don't know how it will operate.' And so you can rule out the technology before it goes through, if you like, the filter of the test. The other comment I would make—and I know there are others in the industry who will have a different view on this—is that each of those regulatory institutions that make up the governance of the market consult the industry widely, as they should, but if you are an incumbent there is clearly an interest in the status quo or in maintaining you particular approach to how you want the market to operate. I think the way in which you need to see battery technology is its functionality. The broad services that battery technology can deliver were not envisaged when those businesses were established and the market was established, so in some ways it threatens the status quo. It is not an easy fit for some, and so you might ask yourself, and I would if I were you: why is Lyon sitting in front of you talking about rolling out large battery and solar projects and not some of our leading market players?

Senator DUNIAM: I have a practical question regarding a point made earlier on about the instantaneous responsiveness of the technologies you have discussed. In the case of either the batteries or the modern silicon heat storage, I presume, if we take the analogy of a battery, they run out of energy at some point. They are drained and then need to be recharged. How long does it take to recharge them? Can I apply the analogy, too, to the heat storage, if it works that way, to understand that point you made about instant response.

Mr Riebolge : It is almost instantaneous.

Mr Gonzalez : If I may interact as well from across the world, I would also like to put in my two cents worth in terms of the technology. Today, the 100 megawatts that my colleague Praveen mentioned is designed to have a duration of four hours. That means that it can discharge 400 megawatt hours over a period of four hours. Also, it takes the same amount of period if it went from high completely charged to a discharged period during four hours. Depending on one of those 20 values that it is providing to the market, it will be able to connect itself or interact with providing the service no more than five minutes. And in some of the markets we have participated already in our eight to 10 deployments we have between 20 milliseconds to five minutes, depending on the regulatory requirements of those specific markets.

Mr Kathpal : There is one example that I would like to add. In addition to that four-hour duration example, that is just how that particular system was designed and specified. Some of the areas where we are providing a contingency response for the fast response, fast ramping attributes of storage are the most highly valued. When we require it to run for 15, 20, 30 minutes in order for the rest of the generational system to get re-dispatched—for example, for back-up generation to fire up—the greatest value that energy storage is providing in those applications is that instantaneous injection when there is a loss of a generator or when there is the loss of the transmission line to maintain the system frequency immediately, because generators either cannot ramp up or start up quickly enough. By having that instantaneous response, you actually allow all of those elements of the system, whether it is generation or network elements, like transmission lines and interconnectors, to run much more closely to their rated level, so you get the maximum utilisation out of that.

Mr Riebolge : An advantage of the test is that it is an energy store. So it can charge and discharge simultaneously. It is like having a bathtub, an outlet and a tap, and the tap is intermittent—it flows and does not flow—but you use the store in the bathtub to regulate the amount that comes out. It is extremely cheap compared to other technologies. It is about a 10th of other technologies in terms of cost.

Senator XENOPHON: Mr Green, you said that when you went to ARENA they did not understand the technology. Do you think that the transmission companies, the regulators and the market operators understand the technology in terms of battery storage?

Mr Green : I think they are coming to understand it. I do not think there was a good understanding in the Australian market. We had our AES colleagues here in November meeting with some ministers and regulators. I think that really addressed a number of myths about battery storage. That has helped. I think one of those myths is: it is not happening anywhere. Well, it is happening, and the AES guys can talk about that. It has been happening for a long time. It has not happened in this market. So I think, Senator, they are getting there. I think they need to get there faster.

Senator XENOPHON: Because of time constraints, could you please provide copies of any correspondence that any of you on the panel have had that may go to the level of frustration you have had in getting the regulators to understand it and those responsible for the rules.

You might want to take this question on notice. What integration testing is required to connect a new technology to the national electricity market? Further, what sort of technical testing is required, and what is the time frame for that? Obviously, it must be technically robust. Further, what sort of operational testing is required so that they and AEMO understand the capabilities and limitations? If you could all take that on notice, if you are able to shed any light on that.

Mr Green : Yes—certainly.

Senator HANSON-YOUNG: Mr Green, I just have one final question. You talked about the two new SA projects. Have you participated in the bidding for the government energy provider contracts of the 75 megawatts—the tenders that are currently open?

Mr Green : We did earlier on. Unfortunately, we would have liked to have bid in the last one but we just had too much on our plate. It just really boiled down to that. We would have liked to have been part of that but we just were not able to.

CHAIR: But you foresee in the future that, if you have got these two projects moving ahead—and you said that we will hear more about that over the next couple of weeks—

Mr Green : Yes. I was hoping to be able to tell you today, but it did not quite work that way. We strongly believe we can trade the battery commercially in the market, because of the pricing.

Senator XENOPHON: At what price point? Do you mean compared to other forms of generation?

Mr Green : Just in terms of market prices—so going into the market spot, trading the battery when the prices spike.

Senator XENOPHON: At what price?

CHAIR: So you can compare compete with spot pricing?

Mr Green : Yes.

Senator XENOPHON: Which spot prices? Up to 14,000 megawatt hour?

Mr Green : No. Just on average what has been happening in the market in South Australia and Queensland. We use very experienced market modellers both in terms of network flows and pricing forecasts, and they are bankable models. So our equity is supporting that approach. On the solar side, we do not need power purchase agreements. We have all equity funding for our projects, no banks involved.

Senator XENOPHON: So what is the price point, approximately, without giving away commercial-in-confidence? At what point can you bid into the market? Is it a continuous bid or just a spot price bid?

Mr Green : It is bidding at those times the prices spike. We can sell particular services into the market, but then, on the basis of our forecasts of future prices going out for the next number of years, we believe we can follow the load and sell power at the times the prices spike—so just bring in an extra 100 megawatts of capacity, for example.

Senator XENOPHON: You are virtually baseload, though, aren't you, because you can switch it on and off?

Mr Green : We can operate in a baseload, no obs. So we can operate in a peaker mode or we can operate in a baseload mode.

Senator XENOPHON: In a baseload mode, what is the approximate price point for you?

Mr O'Day : In the baseload mode, we are looking to capture the morning peak and the afternoon peak, and so the average spot prices in South Australia are more than enough to cover that.

Senator XENOPHON: Which is?

Mr O'Day : Which is, at the moment, getting towards $100 per megawatt.

Mr Green : It is $300 in Queensland, I think.

Mr O'Day : And then just to round that out: in terms of capturing the vol events, that is very similar to gas-fired peaker. So, by selling peak or caps in the market—

CHAIR: I want to take you back to what occurred in South Australia a fortnight ago, on 8 February, where there was effectively a shortage of 39 megawatts, when you look at AEMO's report about the demand versus the supply. Even just one of your projects, at 150 to 170 megawatts, could have easily bid for that spot price when you saw demand was high. When AEMO originally listed their warning sign, you could have gone straight in and said, 'Yes, we can provide that.'

Mr Green : That is right.

CHAIR: Instantaneous—no waiting of four hours?

Mr Green : Instantaneous, faster than anything else can react.

Mr Gonzalez : No hour to four-hour wait at all.

Mr Riebolge : That is what storage does. It basically enhances the demand management processes, where the demand management has other techniques supply associated with it, like direct load control of air conditioners or different types of plant et cetera.

CHAIR: Just to be really clear: we would not have had to have power outages in South Australia if this type of technology were connected to the grid?

Mr Green : That is right.

Mr Riebolge : Precisely.

CHAIR: And if you were able to bid on a fair playing field?

Mr Green : That is right.

CHAIR: Thank you, gentlemen. Particularly for those of you on the telephones—I know it was difficult to hear—if there is anything further that you would like to put to the committee on notice, we would be more than happy to take that. Some questions have been put on notice. The secretariat will get back to you with the time frame in which we will require those answers back. I appreciate your time this morning. It was very illuminating.

Mr Green : Thank you. We will leave a presentation for you as well.

CHAIR: Great. We appreciate that.

Proceedings suspended from 11:04 to 11:17