This article was updated on 3 February 2020.
Andrew Horwood looks at the potential of the sharing economy in the electricity market.
By now you’re probably familiar with the sharing economy, where individually owned assets or services are ‘shared’ with others, typically for a fee. We’ve seen Uber dominate the traditional taxi market, and charming cottages on Airbnb now compete with hotels. You can offer to babysit a dog, borrow a car from your neighbours, hire a handyperson and more, all via the sharing economy.
So could the electricity market be next? And if so, what would this mean for New Zealand producers, consumers and government?
The enabler: decentralised power generation
For over a century, power has been generated in large, centralised facilities — like the massive hydroelectric dams of Otago. From there, power is transmitted around the country and distributed to households, who pay a retailer for the privilege.
Now we’re seeing the rise of decentralised power generation, as people are able to generate power locally through solar panels on buildings and wind turbines in car parks. While these ‘distributed generation’ methods have an obvious drawback — they only work when the sun is out or the wind is blowing — battery technology is rapidly evolving to get around this. Modern batteries can store surplus energy generated when the conditions are right, stockpiling power so it’s available when the conditions are unfavourable.
Therein lies the opportunity for the sharing economy.
How would it work?
If you had power stored in your battery and your neighbour needed it, the power could be shared — just as spare car seats are shared via Uber, and spare rooms via Airbnb.
In fact, there are already platforms for sharing electricity peer-to-peer from distributed generation in New Zealand, such as the ‘Lemonade’ platform, which is in the process of being expanded to more areas by Wellington-based Our Energy. Likewise, in the Netherlands, Vandebron (meaning ‘from the source’) allows consumers to buy power directly from local farmers who have generated excess electricity from solar panels or biogas-to-power installations.
One appealing aspect of the sharing economy is that barriers to entry are low — for instance, you don’t need much more than a spare bed to be an Airbnb host. Participating in the distributed electricity storage market requires some investment in solar panels and batteries, but the outlay is still being met by an increasing number of people. So, will we see the rise of full-time electricity ‘prosumers’ — small-scale producers who also consume energy? Will the market allow for an enthusiast to cover every wall of their house in solar panels, and every square metre of their yard with battery storage, in order to spend their time selling energy to the market?
Here are the impacts that we may begin to see, if distributed generation takes off.
Impact 1) Supply may begin to outstrip demand
The Ministry of Business, Innovation and Employment predicts that electricity demand will grow by an average of 0.4% to 1.3% each year out to 2050, driven by population and GDP growth, and by the increased use of electric vehicles. Yet distributed generation could lead to even greater increases in supply. We’d expect this scenario if local generation becomes very common, if improvements in technology and energy-efficient appliances mean that households will routinely produce more electricity than they need, and if sharing platforms become widespread.
If all those conditions hold, distributed generation could outstrip the growth of total electricity demand, and eat into the large-scale generation that supplies the national grid.
Which in turn would mean…
Impact 2) Electricity assets could be used more effectively
Historically, grids have been unable to store electricity, so they’ve been constructed to cater for peak demand. This creates surplus capacity a lot of the time, and therefore underutilised assets. According to the World Economic Forum: ‘In the US, the average utilization rate of the majority of generation infrastructure was below 55% in 2015. A decrease of 10% in peak demand could create up to $80 billion of value by increasing the overall utilization rate of infrastructure.’
If distributed generation technology takes off, and supports the national grid, then we can expect to see reductions in peak demand and better use of our national infrastructure.
Impact 3) NZ’s electricity generation could go even greener
As a country our power generation is already quite ‘green’, with around 85% of power coming from renewable sources. However, decentralised generation based on wind and solar energy could help to further decarbonise the New Zealand economy. This shift is likely to happen even faster if the price of carbon rises.
Impact 4) Power to the people?
These trends may see consumers being charged less for electricity, and potentially enjoying better service. How so?
First, if stored power could be deployed to reduce the load at peak times, then there is less need for utility providers to buy expensive wholesale energy to deliver to households during periods of peak demand.
Second, the rise of prosumers would put market power in the hands of consumers. Competition would increase at the retail level. If the price point was right, this would force the electricity establishment to drop prices, offer better service, or compete in some other way to survive.
Impacts for producers & regulatory considerations
Those various impacts all sound positive — but we need to proceed with caution, to avoid unintended consequences.
Take the issue of pricing. If people start generating power themselves, and there’s reduced demand for power from traditional sources, then the price of power set by the market could be lower than the cost of production for traditional, centralised generators. This will affect the profitability of companies — including those owned by the state, reducing dividends that contribute to the Crown’s bottom line.
This model also raises questions around the social impacts of personal generation. The upfront investment in solar panel, battery storage and other technologies is not insignificant, and this might mean some individuals and communities won’t be able to take advantage of this opportunity to generate their own electricity or move to a distributed model.
There will also still need to be ongoing investments in the national transmission system to ensure electricity can flow around the country. Currently this is paid for through your monthly electricity bill. But as more people start to generate their own power or move to more localised distribution, then this raises questions about who should — and who can — pay to maintain the national network.
Which brings us nicely to regulatory considerations. The Electricity Authority administers the Electricity Industry Act 2010, along with the Code and Regulations made under the Act. The Authority aims to promote competition, efficient operation and reliable supply in the industry. The increase of distributed generation and storage seems quite compatible with security of supply and strong competition, but there may be challenges when it comes to integrating the new electricity sharing model into the market.
In addition, the Authority and the government may need to decide how it wants obligations on industry participants in the Act to apply to prosumers. It’s not unusual for the sharing economy to ask questions of regulatory regimes and there’s no reason to think electricity would be an exception.
Sharing isn’t new — nor is making a buck from it. Firms like New Zealand’s Our Energy show that the technology to share electricity is already here on some level, and it’s improving all the time.
Distributed generation of power could have real benefits — with power produced more sustainably, in a way that makes better use of existing infrastructure assets, and with citizens enjoying lower prices, and also stronger social connections to each other. Given all those positives, it might not be long before you’re arranging your next Uber or Airbnb using a device powered by your neighbour’s solar panel.
About the author
Highly skilled in regulatory analysis, Andy understands ministerial and government agency perspectives and knows the public policy and regulatory environments intimately. With his open, straight-up interpersonal style, he is recognised for always providing free, frank and constructive advice. Andy knows how to build and manage successful relationships with government, industry, iwi and other stakeholders.
Clients value Andy’s canny, energetic focus on getting things done. With his proactive, pragmatic approach, he is able to see problems and priorities clearly, develop solutions that work, and build the collaborative relationships needed to make the solutions happen.
Andy’s recent projects for MartinJenkins include co-leading a review of New Zealand’s sport integrity arrangements at Sport New Zealand, which included preparing a comprehensive discussion document. In 2018 he also supported the Treasury’s advice to Select Committee on the Overseas Investment Amendment Bill, and helped the Ministry of Education by mustering Budget bids.