Home / What cleantech means for the NSW electricity sell-off

(pictured: Mitch King)

By Patrick Liddy

Innovation is a tricky business. Even in times of hostility, lessons are hard to learn and the consequences can be dire. The American civil war, for example, saw the introduction of rapid-firing rifles to replace muskets. This, in turn, led to trench warfare.

The trenches of the American civil war, in fact, were difficult to tell apart from those of the first World War more than 50 years later. But the first World War’s generals did not take rapid-firing guns into account in their tactics until the creative Australian engineer John Monash took over and won that war. The appalling casualties are testament to this initial lack of innovative thinking until Monash.

According to Mitch King, the managing director of Lighthouse Infrastructure, Australians have been at the leading edge of innovation for a long time. In his area – infrastructure – they have maintained a lead over other investors for three decades. “It’s so much so that both here and overseas Australian accents dominate the infrastructure field,” King says.

It all started in 1994, when the Kennett Government of Victoria disaggregated the state’s electricity supply, the SECV, into five distribution and retail companies (absorbing the Municipal Electricity undertakings in the process), five-generation companies, and a transmission company. Along with other state-owned utilities (such as the Gas and Fuel Corporation of Victoria), these businesses were all corporatised, then privatised between 1995 and 1999, when they privatised the states electricity assets. Thus, Australia was set on the path of infrastructure leadership. And that’s right where Mitch King’s pedigree began, by managing the CBA’s lending of billions of dollars into this sector. He has had over three decades of experience and can spot a trend or two.

King believes things are about to get a lot more interesting in the fields of energy and transport. He also cites that it was the early buyers of infrastructure who benefited most. These early adopters “got a 12 per cent-plus return over a 20-year period, they were rewarded with good excess returns,” he says. Many Australian funds gained along with their members. Early adoption secured a better wealth outcome before and it will happen again.

Now, according to King and others, the combination of batteries, solar panels, transport and technology will cause us to enter into the “3^rd Industrial Revolution”, one that will change many of the fundamentals of the economy. He has a very strong case and is supported by some of the best minds in the world and mainstream corporations.

Consider transport and batteries. The centre of attention at last month’s Detroit Motor Show was a not a car but a battery – that of the 2017 Chevrolet Bolt, which has both long range and an affordable price tag. Tesla is starting mass production of lithium-ion batteries some time this year in a ‘gigafactory’. BYD, a Chinese rival has sold more electric cars than Tesla since 2008. Plus, batteries are a big part of China’s next five-year plan.

“The linkage of batteries to transport is important,” King says. He cites Dr Christensen, a distinguished Professor of Computer Science and the KUKA Chair of Robotics at the Georgia Institute of Technology. Christensen’s prediction is that kids born today will never have to drive a car, thanks to Google-like driverless cars. No parking, no garages, no driving and zero marginal cost of fuel are some knock-on effects.

King also reckons that the lithium-ion battery is just one year into a steep downward reduction in costs to consumers – both retail and wholesale. The next five years will see very substantial reduction in battery costs. This is especially pertinent when one considers the very effective combination of solar panels coupled with cost effective methods of storage. Up till now if you could not use the energy your solar panel harvested from the sun your only real option was to put it back on the grid. According to King you “pay around 15 – 18 cents a kilowatt from your PPA provider, they pay you around 6 cents when you feed it back into their grid.” Quite a disparity, one that does cause disquiet and will make consumers look for alternatives. Enter the Tesla Powerwall battery for homeowners at around $3,000 US (and the Chinese are hot on their heels with a cheaper version). This means you will have a cost effective method of storing the power harvested from you roof. For people and businesses that want “energy independence and control” this may become a very compelling solution.

Now we come to the assets the NSW government intends to sell. The changes that are occurring in battery storage coupled with solar generation will have an impact on the sale of the electricity assets in the state of NSW. But not in a way you probably think.

According to King, there are three main variables in the electricity process, generation, transmission and distribution. Out of these three there will be winners and losers. Again, the firm’s ability to innovate will have an impact.

With generation the result will be mixed. The composition of generation will change. It will be the old coal fired stations at risk. These stations have low marginal cost structures, but they are being phased out and will be replaced with alternatives, and the main alternative will be solar.

Transmission is likely to be a net beneficiary. As they utilise the advances in battery technology to centralise and manage loads. Their costs will become lower and their functionality will increase. So one would expect a more profitable outcome for these folks. With distribution the prediction is less sunny. Tired franchises are at risk, with the largest threat being the valuation of the underlying assets. In this highly regulated field, the distributor is only allowed to make a certain percentage of revenue from the underlying value of the assets. Now the value of these assets is not book value but a value imposed upon them. This is where it gets very interesting, if the distributor has over invested and reckons the assets are worth $2 billion, but the regulator disagrees and halves that, well the maths is not in the distributors favour and there has been a lot of over investment in this field. Many of distributors did not appreciate that demand in the national energy market peaked in 2007.

The future is by definition true uncertainty. So the outcomes of these changes are sometimes difficult to gauge. But one way to mitigate risk is to use existing technologies as an enabler to reduce costs and increase functionality. This is what Lighthouse is doing and the view is that the earlier adaptors will again harvest better returns over the longer term. Overall it is a good story – the world transitioning to a better lower carbon future.

NOTE: Mitch King is speaking at the My Platform Rules II conference on the Gold Coast, February 21-23. See www.www.ioandc.com for details.