What will happen when more and more households wire themselves up with solar panels, batteries and smart meters? The investment decision may be harder to make as feed-in tariffs come to a screaming halt, but a steady drop in prices for all the essential technologies will have homeowners queuing to switch to renewables over the coming years.
Lower energy bills will be good news for residents but bad news for the giants of the industry. Eventually, of course, something will have to give.
How will the future play out? There are plenty of theories. Some parties will be expected to protect what they’ve got. Others will benefit from having an open mind. One relative new-comer is Mojo Power, which claims it was born to “completely shake up the energy industry”.
EcoGeneration tapped CEO James Myatt for his bold prediction of what power will look like when our cities go green.
How will prevailing business models of the majors be impacted with a rollout of distributed generation?
In the traditional retailer energy model you’re deriving profit from a customer as they buy so many kilowatt hours from you, but when they install a solar system all of a sudden they’re substituting the energy they’re taking from you with energy from their rooftop. As a retailer your profit suddenly drops significantly, yet your underlying costs to serve that customer haven’t changed: you’ve still got to send the bill out to them, you’ve still got to buy wholesale energy for them, you’ve still got to interface with regulators and do the other things a retailer does. When battery storage becomes more popular it will put a lot of pressure on their model longer term.
In the traditional energy retail world, the bigger customers effectively provide the gross margin contribution that subsidises the really small users. For them to change the model around, one, they’ve got an incumbent base of small users who would potentially have to pay more, and two, they’ve got a big customer base of large users and would suffer big profit losses if they changed their model around.
How do you imagine the energy market will look when solar and home storage reach critical mass?
We want to be a part of it and that’s one of the reasons we created the business. In our model, if you install solar and a battery system, our margin stays the same because you’re still paying a monthly subscription fee. I say the Mojo model is a platform for distributed generation because we’ll be marketing solar and battery systems to our customers to try to get them to adopt that and reduce their energy consumption overall. We’re an active player in the distributed generation market.
Are you forming any partnerships with hardware makers?
We’re testing some battery systems at the moment, and I have pretty strong pedigree [as former CEO of Sungevity] at understanding solar, which is becoming more commoditised. The battery world is a new world, and we are testing options out. We’re planning on offering that out to the market in a variety of ways; some that we’ll own [the whole system] and offer to customers as part of their energy rate. We’re looking at some lease options as well, where we might co-own with a customer.
Queensland retailer Ergon is trialling batteries in a sample of households in its market. Are you planning something similar?
Yes, we’re looking at participating in some trial projects, in Victoria and maybe one in Queensland. The whole world of how batteries are going to be fully utilised in the market, peer-to-peer trading or distributed generated assets and things like that is evolving; the rules are not yet formed. ARENA is an equity owner in Mojo … [and] we’re involved in ARENA’s A Lab, its innovation lab, which is looking at some of the new barriers and technology options in the market.
What will the energy market look like one day?
We think there’ll be players such as ourselves that will be aggregators in the marketplace and have, say, 10,000 battery systems under our control — and we can negotiate [with that]. The problem with small battery systems is it’s very tiny volume, you’re talking a few kilowatts, and you probably need megawatts to play in the energy market. We think there’s a role for an aggregator.
We certainly think there’s probably consolidation of network services; being able to sell for grid support, being able to sell into the wholesale market, the frequency control markets, where they require very fast, active response into the energy marketplace.
We think there’s a role for a type of peer-to-peer trading model, where people can participate or nominate their assets to participate in that. We’re trialling [Canberra-based company] Reposit’s software and control systems at the moment but we see it more as an aggregated basis. The same with electric vehicles; we see us having a relationship and utilising electric vehicles for grid services.
Do you think the government will be happy allowing a company it’s partly funded to control other people’s electricity?
The goal for ARENA is to bring forward the rollout of distributed generation and we see businesses like ours being at the forefront of that rollout.
Do you run solar at home?
Yes, I have a 5kW LG system with an SMA Sunnyboy inverter connected through my wifi. [Mojo co-founder and CFO] Darren [Miller] has just installed a 6.4kW LG battery system at his place. I’m looking to rollout some storage at my place in the next month or so.
Do you have any concerns about battery safety?
We think the chemistry is OK. The naysayers of Lithium-ion will say you can get thermal runaway in certain circumstances. I think the challenge for the industry as opposed to being scared of what the consequences could be is having installation standards so we don’t get cowboys in the market and [another requirement is robust] quality control standards from manufacturers. I think the standards are not up to pace on where the market’s at at the moment. There is probably some work that needs to be done. We have no qualms about the kit coming out of Germany or Asia, at the higher end.
How do you think the networks will adapt to this future scenario?
We have a view that the networks should be the marketplace facilitators, like a linkage of toll roads that connect distributed generation assets. They should play a role in facilitating the transportation of energy among the customer base, and potentially offer markets for additional services. For example, rather than put a new substation into an area they might put a price to the market to say we’ll pay X per kilowatt hour when we need it for battery to come into the market, so they create a demand marketplace.
It would also be good to see some standards across the national market for distributors; at the moment each of them have different connection rules and it makes it a very fragmented market to try and get consistency in the rollout of a business model. That‘s one of the big challenges.
The role of the networks is to be not behind the meter; we see that as a customer-facing role, that retailers would play. Networks should be, as monopoly asset owners, operating an open marketplace for people to participate in. We see them as vital. We don’t see off-grid as a viable option in metro areas.
Are there parts of the grid that would become obsolete under this future scenario?
I don’t think many parts of the grid will become obsolete. It will dramatically slowdown how much the assets have to be upgraded or grown, because it will be substituted with localised energy supply rather than centralised energy supply coming down, so you won’t need bigger pipes up the top to bring it down. I imagine some of the subtransmission and transmission lines will face lesser loads over time.
Is there anything that would inspire grid operators to encourage homeowners to go solar and install storage?
Yes, the forward-thinking ones will absolutely encourage it. It will offset their capital cost structures, and if something’s coming anyway because it’s economic you might as well embrace it. I think the forward-thinking ones will think of future business models in which they can embrace distributed generation as part of the mix to offset capital costs from upgrades of their poles and wires but also for additional revenues sources of operating in the marketplace.
What sort of tipping point in take-up of solar and storage would it take for peaking generators to become redundant? They are expensive assets which are barely used.
There is currently a rule change proposed in the wholesale energy market, a five-minute settlement rule proposal. Currently when energy is sold in the wholesale market, generators bid every five minutes and it’s averaged over the half hour. The rule change, which we are strong advocates for, would say that the energy market should be settled every five minutes, rather than averaged over the half hour. If that rule were changed it would mean that battery all of a sudden would start to take over from peaking generators as a source of peaking energy.
Peaking generators take longer than five minutes to start up and to dispatch, whereas a battery takes milliseconds to dispatch. So battery, when it’s at scale, will start to capture all of the value in the peaking market in the five-minute settlement. That transition won’t happen immediately, because there is not enough battery in the market. But that rule change, we think, is a really important one.
I think there is far more chance of the death of peaking generators than of some of the baseload generators, because there’ll be a requirement for baseload energy for a long period. Peaking generators will really struggle in a distributed generation environment. It’s going to shave the peak out of the market.
Looking at the rate of take-up in our cities, how far away do you think that tipping point would be?
It depends on how quickly the price points drop. I reckon it will be quicker than what everyone thinks. Morgan Stanley [analysts] thinks there will be a million domestic batteries in the market by 2020. There will be quite a lot of momentum; a realistic timeframe is this will be in the next five to 10 years.
As a retailer you want customers to use more power, right?
Not necessarily. That’s one of the fundamental differences in the Mojo model. We do sell retail energy as a product, but the big difference in our model is every other energy company in the world derives their profit from having consumers consume energy, because their profit margin is imbedded into the kilowatt per hour rate. In the Mojo model there is no margin in the energy. We pass the energy through at our forward view of the wholesale cost, so there’s no mark up on it, and in exchange we make our profit by a monthly subscription fee.
We would rather they use less energy rather than more. The goal of the Mojo model is to create a platform for the later rollout of distributed generation [such as solar and battery].
How often are your subscription fees reset?
We’re looking to set the wholesale price annually. We don’t expose the customer to the variability of the spot market. We take a hedged position against that, which lasts out a year.
How do you hedge the price?
We take a forward price in the market using [energy] futures traded on the Sydney Futures Exchange.
What if every other energy provider suddenly decides to copy your model?
Firstly, we have a global patent pending on the business process at the moment. Secondly, for [mass market providers] to suddenly change their pricing model [is very difficult].