Alan Kohler: Giles, what do you think of the lessons out of the South Australian spike in electricity prices?
Giles Parkinson: I think there’s a lot of lessons and I think that it’s probably two big lessons. One: that we do need a coordinated and focused energy policy. We need to think about how we integrate renewables. Two: I think that it shows the risk of relying on volatile fossil fuel prices. We’ve heard a lot of people talking about how these price spikes are quite extraordinary and no good for the economy, but if you actually just go back five or six years, these sort of price hikes used to happen every once every second day. So…
AK: A lot people are blaming it on renewables rather than fossil fuels. You seem to be saying that it’s fossil fuels.
GP: That’s what the Australian energy regulator is saying. It’s saying that the primary cause is surging gas prices. Remember that gas prices hit record highs in Sydney, Melbourne, and Adelaide, and Queensland in the last few weeks. In South Australia, the gas prices have been average over the last week or two, four times more than what they normally are. They sent up the cost of gas generation. This has been foreseen for a couple of years. So when you rely on gas to fill your gaps, which you do whether you have a renewables based grid or a fossil fuel based grid, you still need gas to reach those peaks and fill in demand. That’s the price you pay.
AK: Well, in fact, Grant King says that the future lies with renewables, both wind and solar, with gas to deal with the intermittency that’s inherent in renewables.
GP: Gas will survive for as long as it’s cheaper than storage and I think that in the next few years I think we’re going to see various forms of storage, be it in solar towers and thermal storage, or be it in battery storage paired with wind plants or in solar plants, that’s going to be the technology that’s going to take us there because you don’t have the pricing risk. And it’s really interesting to see that the regulators and the market operators are supporting the law change in which the wholesale markets operate that would encourage more battery storage because it’s said that this will encourage faster response mechanisms to deal with movement and lower prices but remain… generators, gas generators such as [company name unintelligible] are actually fighting that law change because they say it mean the end of many of their gas plants. So, they’re basically fighting technology costs which are challenging almost every bit of infrastructure and hardware that they’ve got. And it’s coming very quickly, but they’re.. they’re fighting again [unintelligible] slow down that change.
AK: But both Origin and AGL are selling batteries as a part of a solar package. But do you think that battery storage, particularly household battery storage, is a big threat to them?
GP: Oh look, I think it is. Yeah, I think that when I was talking about battery storage vs gas, I was talking about grid based battery storage, large battery storage. But the other side of the equation is what’s happening in the household market. And that is a threat and they see that as a threat which is why they are trying to get involved in that business now. When you think about the way their business operates, they have large generators, coal and gas fired generators, which generate electricity and they sell it on the market. The other part of their business is retailing, which is basically just packaging up vendors and selling on to customers. Which is about the only contact they have with customers usually because the bill is not a pleasant one. To get their skin in the game they are trying, now having abandoned the area a few years ago, are trying to get their own hardware, their own rooftop solar and now battery storage on top and inside the homes, because they see that they need to have that solid engagement with the customers which enables them to keep customers longer. The big danger is can they actually do that and with a decent enough generation, all that that infers and changing energy markets and keep the main structure of their business based around generation intact. There’s a great deal of debate around that. A lot of people think it’s going to be new players, people who are pretty smart at dealing with consumers – they could be telco’s, they could be the Google’s and the Facebook’s of the world, they could be the Tesla’s – are going to now know how to provide a new energy emergent service and how the current utilities can compete with that or maybe they’re able to partner with it. That’s going to be fascinating to see.
AK: And do you think the end of feed-in tariffs at the end of this year will be good or bad for companies like Origin and AGL?
GP: It’s difficult to know what we are going to see with the end of Feed In tariffs and a lot of people getting attracted to battery storage. Now, I guess that depends on what, how many of those people take up battery storage. I think it’s going to be the [4:55 unintelligible] parts of the market. What we will see, if people like Morgan Stanley are right, and they’re predicting there could several million homes within six years having battery storage, that’s the change the demand profile of their wholesale electricity markets as well. It’s going to flatter then out which means removing those spikes, which is you go back five or six years ago is where most of the generators made most of their money. So, once again, maybe origin and AGL can get a share of the battery storage market, but how does then stack up with the rest of their business? That’s where most of their money comes from. It comes from generation and the classic utility retail business. How will this new energy divisions, of which they both have, how can that grow without cannibalizing what we already have?
AK: So how do you think people should think about investing in the future of energy and in solar and batteries and so on? What’s the best way to go about that?
GP: Well, stay clear of people who make things because as we see in the solar industry we don’t know who has the best technology, we don’t know who has the best management and we know that manufacturing costs will come down quite quickly. So that’s a reasonably risky proposition. And we don’t quite yet know, and particularly with battery storage, which battery is actually going to make it in the real world. Lots of people have got different sorts of storage devices and they have different roles to play and they have different features and specification. We don’t actually know which one is going to win. My bet would be with the firms who are looking… it’s going to come down to smart software. You’ve got a big lump of metal sitting on your roof or your rooftop somewhere, you’ve got another lump of metal sitting in your garage or outside your house which is actually storage of all the little cells inside doing wonderful things. The key for this is in the software. So, the people who can deliver the software which can then deliver that service because it’s thinking about what appliances are being used in the house and when and how that fits in with the various tariffs that are on the market and how they relate to that, how they can actually package the market to create these sorts of virtual metering or virtual power stations by aggregating all the households. People who can deliver that software, the people who can develop those business models, I think are going to be winners. We just don’t know yet which one is going to be. Although, I’ve got to say, there’s a couple of interesting Australian companies which are looking pretty interesting in this space, but they’re kind of privately owned at the moment.
AK: Are there any listed ones you think will be winners?
GP: Redflow is an interesting one. That’s battery storage. That’s now chaired by Simon Hackett. That’s a really interesting company that’s done quite well. Once again, very promising battery storage. Whether it ends up beating the others, just don’t know. What we are seeing though is a couple of large scale solar funds which are taking in private investor money to invest, a bit like the infrastructure trusts, so they’re basically looking to pick up solar farms, large, small, and medium size, because they reckon that they can get a guaranteed return and the one interesting thing about renewable energy is that once you’ve built the thing, you actually know what your costs are, which is very little. So it kind of creates that certainty for investors. And that might be something of interest to people and you’ll start to see those projects paired with storage and what have you.
AK: Thanks very much, Giles.
GP: Pleasure to be here.