Are We Headed For An Energy “Death Spiral”?
Posted: 07 Nov 2014
When you hear that large energy retailers are quaking in their boots at the threat that renewable energy poses to their century-old business model, you know that something must be very wrong in the world.
Or, perhaps, very right.
Retailers like Western Australia’s Synergy are using the term “death spiral” to describe the potential impact of “distributed renewable energy” on their profits. They are especially concerned about the rise of the so-called electricity “prosumer” – people who are choosing to supplement the electricity they purchase from the grid with “distributed electricity” they produce themselves, most often from rooftop solar photovoltaic (PV) systems. Distributed renewable energy has the potential to eat away at energy retailers’ earnings in the same way that self-publishing has reduced the earnings of traditional book publishers.
In 2013, the Edison Electric Institute (EEI), an association representing large energy companies, warned that distributed generation was a grave danger to the long-term financial well-being of its corporate members. Likewise, Morningstar, an independent investment research firm, recently declared “Investors beware: distributed generation could kill utilities as we know them today.”
How might the so-called “death spiral” play out? As the price of solar technology continues to decline – much like the price of computer chips – it becomes more affordable for homeowners and businesses to get in on the energy game. Indeed, in Australia, falling solar PV prices have led to a boom in rooftop solar installations over the past several years. As homeowners and businesses continue to install solar, demand for electricity from energy retailers falls, reducing their earnings.
Even worse for retailers, this happens at the same time that modifications in the electricity network are needed to integrate thousands of new distributed energy sources into the grid. (While some solar “prosumers” purchase battery storage systems as a way to avoid being connected to the grid, most still choose to connect their solar systems to the grid in order to sell excess electricity.) In order to maintain and operate the grid in its present form and continue modifying it as needed, retailers must raise rates on the smaller pool of remaining customers. The rate increase then drives even more customers towards distributed energy solutions.
In the retailers’ worst case scenario, the “death spiral” ends with shuttered electricity generation plants and empty bank accounts.
While the “death spiral” could transpire in Australia over the next several years, some argue that it has already begun. Centralized electricity production grew in Australia for over a century, until 2010, when it began to decline. In just the last two years, demand has fallen 10 percent while new solar systems are being installed at a rate of more than 2,000 per month.
Synergy has revealed that the gap between its revenue and expenses increased to nearly $500 million in 2013. It is possible that Synergy and other Australian retailers may have to pay for investments in fossil fuel plants that will never be fully utilized.
The “death spiral” could have a particularly pronounced effect on old King Coal. Coal provides over 80% of Australia’s electricity, and the recent decline in electricity consumption has hit coal generators especially hard. Coal, of course, is also a significant contributor to global climate change. Not coincidentally, Australia’s greenhouse gas emissions fell by approximately 2% in 2012 alone.
What might Australia’s energy future hold? The term “death spiral,” used by the energy industry itself, provides a clue. Retailers, who have been slow to realise the benefits of solar energy and overly reliant on and optimistic about coal, want to continue doing business as usual. Yet business as usual (coal) has little room for distributed energy (solar). The industry’s use of the term “death spiral” may be interpreted as a means of stimulating public concern and government policies that preserve business as usual for as long as possible.
In fact, the Australian renewable energy industry has recently taken a hit due to changes in federal government policies. But experts like Ray Wills, adjunct professor at the School of Earth and Environment at the University of Western Australia, believe that this is “merely an aberration that will prove to be irrelevant.” Wills believes that renewables will eventually transform the landscape of Australian electricity production, even if they are resisted at the beginning.
Integrating solar energy in a way that does not lead to a sudden “death spiral” among large retailers is on the mind of the Australian solar industry, which has proposed a “distributed energy market” and other measures to coolly yet effectively expand the use of solar across the country.
As we mentioned in our last post, the federal government is currently reviewing – and may eventually terminate – the rebate offered to those who install solar systems. (Which is one reason you might want to lock in a quote for a solar system soon.) Is it possible that the spectre of the energy retailer “death spiral” is behind this review? While the point could be argued either way, it’s obvious to most Australians that the production of electricity from fossil fuels such as coal must be phased out sooner rather than later, not only because of climate change but because the fuels themselves will eventually run out.
“Death spiral” or not, the future of Australian energy is distributed renewable energy. Are you ready?
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