The Energy Supply Chain Overview
Present Situation
A brief overview of the present situation in relation to energy distribution and the challenges. If the readers are accustomed with the subject, they may skip this section.
Presently, energy services can be divided into generation, transmission, distribution, and retail.
Generation
Generation is electricity production by commercial scale energy producers. Historically these producers have been classified into hydro, fossil-fuel or nuclear based power plants.
Recently, large alternative energy production facilities are considered as a “energy generators” too.
Transmission
Transmission is moving of high-voltage electricity over long distances, usually from power plants (generators) to consumer networks (distributors).
Distribution
Distribution is moving of electricity from the transmission (high voltage) network to the consumers. Distributors operate lower-voltage electrical lines.
Retail
Retail (energy utility) business sell the electricity to the consumers. Retailers are responsible for administering and billing consumers.
In regulated markets, the energy supply chain operates as a single, vertically integrated monopoly. In deregulated markets there is market segmentation and more competition, so each role in the supply chain must be operated by a separate entity.
Residential electricity retail price is in constant rise. Traditional energy retailers Gross retail margin has increased as well. The biggest risk for current retailers is usually the wholesale cost of electricity generation — electricity spot prices fluctuate every five minutes (the basic interval for trading on the National Energy Market). Spot prices are determined in real-time based on some combination of electricity demand volume, generation capacity available and fuel type composition (e.g. a mix of wind, coal and gas). Part of the premium that they put on electricity usage charges has to do with the risk that they take.
The chart gives a simplified example of electricity prices from the grid vs electricity prices from a solar system on a $/kWh basis (assuming a conservative 3% average annual inflation rate) and how grid electricity rates increase over time (assuming 4% electricity price inflation per year) vs how solar PPA rates might increase (assuming a solar escalator of 2.5% annually). Solar rates stay well below the grid rates. While the current real-life retail rates may fluctuate, they would have to drop very low to be more cost-effective than the solar PPA rates in this scenario.
Deregulated Energy Markets
In deregulated markets, energy retailers (utility companies), buy electricity at wholesale prices and sell it directly to consumers. Retailers are responsible only for metering and billing. About 50% of the cost of retail electricity is used to pay for the electrical energy. The other half goes for administrative, marketing, risk management, and bad debts, plus loss in electricity transmission.
Renewable Solutions
Renewable energy solutions are much more efficient and environmentally friendly. Typically, produced energy is used by household and any excess generated will be sold back to the grid. For a household sustainable solution, when deployed at significant scale, introduces severe technical challenges how to balance stability of the electrical grid designed only to feed in energy, but not handle energy feedback into the electrical grid, causing over-voltage and potential infrastructure damages.
Solar energy generated during the day, but the peak demand is in the evening. Therefore, power plants must adjust electricity production as soon as sunlight exposure changes, which is not efficient and adds additional burden on power plants and energy distribution. Improvements in energy storage capabilities and drop in production cost make batteries economically viable.
