The battle lines in the fight to power the nation are rapidly being redrawn as the emergence of domestic solar and storage systems have forced the big utilities to scramble to protect their shrinking fiefdoms.
Six months ago, the big three power companies – AGL, Origin and EnergyAustralia – were spending considerable time and resources fighting to have both large and small scale Renewable Energy Targets (LRET and SRES) either cut or abolished.
In the past few weeks the rhetoric has been all about the lucrative growth opportunities for their small residential solar businesses.
Both the big listed Australian utilities - AGL and Origin - have told their recent investor briefings that their traditional businesses in the National Electricity Market (NEM) do not exactly have bright prospects.
Coal fired generation in decline; demand and prices hit
A recent report from Bloomberg's New Energy Finance division found that, since 2010, electricity supplied by fossil fuel generators has declined by 9.5 per cent.
Electricity demand has fallen by 6.7 per cent over the same period, while the Australian economy has grown by 9 per cent.On NEM figures, prices have fallen on average by 12 per cent a year between 2007 and 2012, making coal generation increasingly marginal.
"Price declines have impacted fossil fuel generators the greatest, as they have fuel and operating costs not borne by renewable assets and are more exposed to spot prices," the Bloomberg research pointed out.
"The market revenue of fossil fuels in the NEM has declined by more than half since 2007, after accounting for the pass through cost of carbon and the wholesale energy sold or offset by renewables," Bloomberg found.
AGL, Origin and the Hong Kong-owned EnergyAustralia – which accounted for more than a third of the NEM's capacity – say they are not contemplating a full scale retreat from coal burning generation in the short term but, at the same time, they are not deploying more resources there.
In a sign of the times, Alinta – another sizeable generator – last week decided to close two uneconomical coal-fired power stations, as well as an associated coal mine in South Australia.
Alinta cited the glut in power supply, driven by falling industrial demand and increased renewable supply, for the closures and the loss of 400 jobs.
Retail conditions hit by customer churn and shrinking margins
In retail, the big three's position is even more dominant, with their market share ballooning from around 50 per cent to 75 per cent between 2010 and 2014.
Bloomberg said the "bold growth strategies have sometimes been poorly executed", with the utilities struggling to counter growing consumer churn, which has risen from around 13 per cent to 20 per cent over the same period.
"In an effort to keep and attract customers, energy retailers have offered discounts in what has become a race to the bottom on margins," Bloomberg argued.
Bogged down in the morass of their traditional business battlefields, and having fired most of their shots – at least for the time being - in the policy war, the vertically integrated utilities have decided to adapt to, rather than fight, the dangerous disruptions posed by advances in home based renewable power generation and storage.
Battlefront now on the other side of the meter
The battlefront has now moved to the other side of household electricity meters - away from the coal valleys, grid and the NEM - and onto suburbia's rooftops.
Shifting the battle just the 15 centimetres to the other side of the meter has massive implications for both the utilities and consumers.
A survey conducted recently by Morgan Stanley's utilities team found there was a strong level of consumer interest in escaping the grid.
Around half the households surveyed expressed an interest in solar and storage systems at around the $10,000 price point with a 10-year payback period.
Morgan Stanley argued the utilities' cost of not adapting to the challenge would be substantial.
The continued financial blood letting from ignoring the growth of domestic solar and storage would see AGL and Origin's earnings cut by $30 to $40 million by 2017 and up to $100 million by 2020.
"We think the incumbents will work hard on a competitive response, leveraging their customer data, relationships and balance sheets, but we think the replacement [revenue] streams may only partly offset the revisions to core earnings," Morgan Stanley told clients.
"Assuming 20 per cent market shares, we think Origin and AGL could claw back about $20 million of the lost load earnings each year until the market matures."
The storage scramble is on
Last month AGL made the first significant foray into the 'solar-plus-storage' household market, announcing its Power Advantage product from its New Energy division.
The lithium ion battery AGL plans to sell is capable of storing 6 Kilowatt-hours (kWh) of solar energy and is suitable for mid-sized household solar units.
AGL told its investor presentation that the New Energy division would have a separate culture from its declining core grid electricity business and it would be central to its longer-term transition away from coal.
It is an understandable move given AGL's forecast that the household solar market could worth as much as $2 billion a year by 2030.
AGL said the New Energy business would post a loss of around $45 million this year and should reach a financial breakeven point by 2018.
By 2020 it is expected to churn out revenues of $400 million, although much of this will be coming from low-margin operations such as installations and ongoing finance and service payments.
Days after the AGL presentation, Origin laid out its own plans to become the dominant player in solar.
Since 2001, Origin has installed 80,000 solar units making it the second biggest player in the market.
Origin has been driving its growth using a rather different tactic to AGL.
Its strategy is based on pay-as-go, power purchase agreements with "zero cost" up-front.
Customers will be committed to take electricity off the panels on seven to 15-year terms at prices up to 70 per cent below current tariffs.
The consumer gets immediate financial benefits and Origin locks in long-term relationships aimed at reducing its "churn".
Origin said it expects a loss of $25 million in 2016 before breaking even the next year.
While Origin told investors it has been trialling residential battery storage products, it is yet to commit to bundling solar and storage for its customers.
The third big player - EnergyAustralia - is still testing its solar expansion and has a partnership with US-based Enphase Energy.
It is believed EnergyAustralia has been looking closely at developing a storage package in partnership with Tesla's headline grabbing Powerwall battery next year as well.
Battery storage prices are tumbling
Even without being released, the Tesla product is proving to be a game changer.
The RenewEconomy website has reported that the price of Legato storage system being offered by AGL has dropped by a third over the past six months, largely due to the impending arrival of the Powerwall.
On Morgan Stanley's figures, the estimated payback period on solar and battery installation currently ranges from about nine years in Queensland, to up to 16 years in NSW, and a tedious and uneconomic 20 to 38 years in Victoria, depending on the supplier.
However Tesla's decision to recoup its research and development costs over a much longer period than its competitors has forced a major rethink on pricing in the industry.
One industry insider told the ABC that Tesla's Powerwall battery – at the current Australian dollar level – could be landed and installed at around $1,100 per kWh of capacity compared to the current price of around $2,500 per kWh for mid-range units.
If that pricing regime was adopted across the industry, it would slash payback times and drive an even more rapid uptake.
Morgan Stanley said it does not expect a mass migration off the grid - at least in the medium term - primarily because solar and battery systems will not ensure the 99.9 per cent availability of power currently provided by the grid.
"Put simply … household battery systems won't have enough juice to make it all the way through the winter, especially in Victoria," Morgan Stanley noted.
On top of that, there are a large number of households – such as apartment dwellers and renters - with insufficient rooftop space, money or interest to totally unplug the grid.
Battery storage success not dependent on subsidies
Bloomberg research analyst Hugh Bromley said a big advantage of solar-plus-storage was it was not reliant on subsidies.
"Its growth is organic, unlike the large scale renewable generation sector which is driven by policy and without subsidies is not economically viable at the moment," Mr Bromley told the ABC.
"The utilities are recalibrating their businesses to focus more on the customer and not so much on the technology," Mr Bromley said.
The utilities are now well aware of the threat posed by rooftop solar-plus-storage and the risk of the so-called coal-fired "death spiral" to their businesses.
Rather than fighting or ignoring the threat, the big power companies best hope of survival rests with their ability to adapt.
This article is sourced from The ABC News