Done right, network investment is an antidote to the ‘death spiral’

Electricity transmission towers (regulator revenue)
Image: Shutterstock

Electricity networks have been on a rollercoaster of investment ups and downs over the last two decades, writes Cara Graham, EY Partner—Power & Utilities. 

A period of underinvestment (‘sweating the assets’) in the early 2000s led to some large-scale outages, which in turn saw stricter reliability standards imposed. Coupled with the need to accommodate the burgeoning peak demand issue caused by customers installing new equipment such as air conditioners, this resulted in large increases in network expenditure. The term ‘gold plated’ was coined to describe the state of the network that existed at the end of this era.

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As network tariffs rose sharply, we then saw the handbrake applied to investment expenditure. Regulators started to focus on the efficiency of expenditure, and benchmarking among peers was introduced. At the same time, incentives were put in place to allow customers to better control their consumption in response to rising costs of electricity, most notably in the form of generous solar PV feed-in tariffs which triggered a solar revolution that has resulted in solar PV now collectively being the largest generator in our electricity systems. This was heralded by some to be the ‘death spiral’ that was going to be the downfall of many network businesses as customers would reduce consumption at best, and completely defect from the grid at worst. 

But today, we are on the cusp of a new era that will be characterised by two factors. 

The first is the decarbonisation-driven electrification of everything, including transport, mining and infrastructure. Under AEMO’s strong electrification scenario in the Draft 2022 Integrated System Plan, electricity consumption is forecast to more than double from around 180TWh per annum today, to over 380TWh by 2050. 

The second is hyper-connectivity. Far from grid defection, we will see network connectivity on a scale never seen before. Transmission-level connections will be needed to support more large-scale renewable generation including those in Renewable Energy Zones, stronger transmission interconnection will be required between regions, and literally millions of customer-owned Distributed Energy Resources (DER) will connect to distribution networks.

But the networks we need in this new era are different to those that have been built over the last 20 years. From the networks’ perspective, they will be more complex ecosystems to manage: they need to remain stable despite dynamic fluctuations in both supply and demand that a can result in power flowing in both directions, and require far greater visibility and active management than exists today. And ideally, all this complexity needs to be invisible to the customer who simply wants their network to be ‘plug and play’, regardless of whether their version of ‘play’ involves a passive load connection only, or active assets participating in one or more of the markets that will become accessible to DER.

All of this requires investment. Nationally, our electricity transmission and distribution networks are currently valued at around $110 billion. It is forecast that $70-$80 billion in investment will be needed across these networks between now and 2030 to get our grids into a state where they can support higher levels of electrification and cater for the new ways that customers want to use the grid. 

As an industry, we have become quite good at planning this transition. We have ISPs, ESOOs, GSOOs, TAPRS, DAPRs, AMPs. But this new era is already dawning, and we need to start turning our attention to doing in addition to the important rolling cycle of planning.  

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At their core, network businesses have three groups of assets they manage to deliver services: physical assets, digital assets and human assets. ‘Doing’ requires making decisions across these three asset groups. There’s no doubt that uncertainty caused by an evolving policy, regulatory and technology landscapes makes decision making challenging. But the reality is, there will never be (nor has there ever been) complete certainty in the electricity industry. Network businesses that get comfortable making decisions in the face of uncertainty, keep an eye on trends impacting physical, digital and human assets, and are not afraid to adapt as things invariably change are more likely to succeed in this environment.

As we embark on this new era of decarbonisation-driven electrification and hyper-connectivity, the critical role of network businesses is clear, as is the significant investment required. Done right, it will be the antidote to the ‘death spiral’, contribute to meeting decarbonisation targets and unlock value for all customers.

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