Origin CEO Frank Calabria’s speech to The Australian Financial Review’s National Energy and Climate Summit, 24 November 2020. Check against delivery.
Today, I wanted to focus on the exciting future of energy unfolding, and how several forces of change already at play are accelerating, driving an even more rapid transformation of the sector than we would have envisaged even six or 12 months ago.
Even five years ago, BP announcing it will be net zero by 2050 would have been unthinkable. As one of the largest producers of emissions globally – and with the ability to accelerate emissions reduction in many other sectors – the energy sector must and will be front and centre of efforts to lead the charge on decarbonisation.
The same forces that are transforming energy shape our core beliefs on how energy will be generated, distributed and sold in the future. The key question remains how we manage the transition smoothly to minimise price and affordability impacts on customers.
Last year at this event, I talked about the need to get back on track with energy and unlock the investment required to modernise our energy system by setting targets and a strong market-based signal to invest.
While that is still the case, we have seen some progress this year as the Energy Security Board progresses its NEM2025 market reform agenda. The point for me is that’s all about coordination at a national level. That remains a challenge for us to collectively solve. Retaining a national approach to energy market design remains critically important to delivering good outcomes, while also accommodating differing and evolving state preferences.
Energy companies will change markedly. In addition to our traditional roles as producers and suppliers of energy, we will take on a new role as energy aggregators. Customers will be at the centre of everything, becoming more actively engaged in the market.
The forces of change in the energy transition – decarbonisation, decentralisation and data, or the 3Ds – have been underway for more than a decade.
We continue to see decarbonisation accelerating, driven predominantly by lower costs and capital markets, and more recently, customer preferences.
Decentralisation is the second force of change – we’ve seen continued growth of distributed energy resources like rooftop solar and storage. There is a huge opportunity to run our grid more efficiently, better utilise all the capacity in the system and avoid unnecessary investment that inevitably adds costs for customers.
The third force of change is data and more specifically, the convergence of data and energy. Smart meters have enabled rapid growth in data, giving us more than 17,500 data points a year. With the Internet of Things and growth in connected devices, the potential to deliver greater value to customers is enormous.
COVID has resulted in the acceleration of technology in every aspect of our lives and there will be no turning back. This is a fundamental shift.
The same forces are driving change in energy and lasting changes in consumer behaviour.
To give an example, Australia already had among the world’s highest penetration of rooftop solar, comprising around 20% of households, compared to 0.2% in 2007. And despite the economic uncertainty posed by COVID, solar installations continue to grow, with 2020 tracking ahead of 2019, which was itself a record year with 2.2GW installed.
This has real potential, because solar is the gateway to greater energy literacy and customers engaging more with energy, which will help accelerate the take-up of data-driven products and services.
We have also seen with COVID a further step change in customers engaging with us digitally. This is by far the dominant way that customers now engage with us – in short, we’ve come forward many years in a matter of short months.
What does it mean for the future of energy?
The forces shaping the future of energy inform some of our core beliefs about what will unfold in our sector over the coming decades:
- Electrification will move beyond mobility to buildings and industries – over time anything that can be electrified, will be.
- We will see the continued uptake of renewables and storage, supported by an ongoing role for gas with development of future fuels such as hydrogen.
- Customers will be at the core of everything, becoming more actively engaged in the market.
Core belief 1: Electrification of everything
Some of the biggest gains to be made globally in emissions reduction will be through electrification, particularly in parts of the world which still depend on carbon intensive fuels such as diesel for energy.
In mobility, the transition is already well advanced. Car makers are increasingly focused on developing their EV fleets and some have signalled they will cease making petrol engine vehicles within the next decade. Governments will play a role here too. Only last week, the UK Government announced sales of new petrol and diesel engine cars would be banned from 2030.
In Australia, take-up of EVs is still in its infancy – making up just 0.6% of all cars on the road. But from this low base, EV sales tripled in 2019 (to 6,718) and like solar, sales in 2020 are continuing at the same pace, despite the economic uncertainty due to COVID.
We expect EV sales to rapidly grow in Australia as new models with longer ranges and lower price points become available, combined with greater understanding of the benefits, including lower running costs.
Beyond mobility, electrification of industry and of buildings is a huge opportunity.
Just 21% of the energy consumed by industry is electricity – 44% is fuel burned for energy and the remainder is used as feedstock. It’s estimated that half of the fuel burned for energy by industry today could be replaced with electricity using existing technology. Electrification will transform industry, which will be met predominantly by renewables and storage.
Of course, electrification of some industries will be much easier than others, for example, those that rely on gas as a feedstock. We therefore expect the switch to occur at different paces in different sectors.
For consumers, the pace of electrification is likely to be a little slower, as it typically takes longer for households to replace appliances – chiefly gas hobs for cooking and heating.
While the pace of electrification will vary, over time anything that can be electrified, will be.
Core belief 2: Continued uptake of clean energy
Economics and technology have been driving the push to renewable energy and storage for some time, and this continues to accelerate.
Renewables will increasingly do the heavy lifting in meeting our energy needs, with a range of firming technologies as back-up.
Batteries are growing at a rapid pace, however, the technology cannot support the market on its own.
How to firm increasing amounts of intermittent renewable generation is a problem that needs to be solved in the here and now and the technology available today to support rapid uptake of renewables and reduce our emissions intensity is gas.
Gas will have detractors, but let’s not allow the loudest voices dominate the discussion and ignore the solution that can help us add more renewables to the system faster today.
Australia’s Chief Scientist Alan Finkel was very pragmatic in his assessment of the role of gas: we need an energy companion that is itself relatively low in emissions and flexible enough to operate only when needed.
But for now, it is a crucial piece of the puzzle that can help us rapidly decarbonise without significant impacts to reliability or affordability for customers.
Over time, we will see future fuels such as hydrogen playing a strong role. Hydrogen has enormous potential. It can be blended with coal or gas to reduce the emissions intensity of those fuels and existing plant can be adapted to use it. It is also safely transportable. We expect customers, many of which will be the countries that heavily rely on LNG today, to be a continued driver of progress.
And if the number of hydrogen projects across Australia is any indication, I expect us to be one of the nations at the forefront of the development of a global hydrogen industry. Hydrogen is a tremendous opportunity for Australia.
Core belief 3: Customers will be at the core of everything
Customers have already become more engaged in energy through solar. Growth in connected devices and the internet of things combined with new platforms have opened up a world of virtual power plants and demand management.
We already have more than 11,000 customers connected to a VPP equivalent to 85 MW – devices such as batteries, air-conditioning units, pool pumps and EV smart chargers, which we can orchestrate using AI to help customers save, and manage demand peaks to support the grid.
Mass market demand response will also play an increasingly important role.
Even 12 months ago, residential customers may not have been ready for demand response or understood how they could play a role in balancing demand across the network. Our recent launch of Spike, Australia’s first mass market demand response program, is proving customers are willing to embrace it if you make it easy, engaging and rewarding.
From a standing start in August, we have close to 20,000 customers and strong participation rates of around 70% in regular ‘Spike Hour’ events, where we reward customers for making small changes in energy usage. For example, putting on the dishwasher or a load of washing or drying a little later or adjusting thermostats.
California has a lot of similarities to Australia in terms of climate and high penetration of renewables and exit of thermal generation, driving similar supply-demand tightness in the summer. Recent heatwaves lasting many days saw demand outstrip supply and rolling blackouts affecting many customers.
Our technology partner on Spike, OhmConnect, paid customers US$1.2 million to reduce usage by 1GWh, helping to avoid further blackouts. The ability to engage mass market customers to rapidly and materially reduce demand when needed, has major potential for our market.
We believe it won’t take long for us to grow customer participation in Spike to a point where we too can use it during peak demand events such as heatwaves.
Storage in the home until now has been high cost and complicated, but there are a number of developments underway that will change this.
We are working on smaller, portable battery options for homes that are plug and play, opening battery storage up to new markets such as renters or apartment-dwellers.
Touching again on EVs, we believe these will become the primary means of storage in the home. There is a lot of work underway now with orchestration to optimise the charging and usage of EVs for customers across the network.
What this all means is that customers will be more empowered and engaged in energy than ever before and with more choice in products and services that meet their needs. Every household will be its own energy portfolio and our role will be to efficiently manage it for them.
The importance of trust
To deliver the benefits of this future energy world, customers will entrust us to manage their distributed generation and consumption in the most efficient way for them, a path that we have been on for a number of years.
We will need to meet customers’ expectations around data security and privacy, as well as provide full transparency on their energy use in a way that makes it easy for them to understand. We also need to demonstrate to our customers the clear benefits.
Our game-changing partnership with Octopus Energy and adoption of their market leading Kraken platform and operating model for our retail business is central to us achieving this vision. Kraken was custom-built for energy retailing and the entire system is based on the needs of the customer.
It may come as a surprise to hear that the systems most energy companies use are based around the meter and the meter is of course not the customer. At its core, this structure makes it almost impossible to join the dots and provide a seamless customer experience, let alone offered tailored products.
Kraken is more than a platform – we believe it will enable us to get the basics of energy retailing right, giving us a competitive advantage and enabling us to build the high levels of trust required to help share the full benefits of the energy transition.
What are the settings required for a smooth transition?
The transition is happening regardless, but how fast and how smoothly depends on a number of things. First, the market needs to change and evolve so that it remains fit for purpose.
The NEM began in 1998 and was designed at a time electricity was centrally generated and traded between state markets – it was not designed for a world dominated by renewables, storage and decentralised energy resources with electrons flowing in two directions.
There is very important work underway in the ESB’s post-2025 market review looking at rules and frameworks to keep up with the accelerating pace of change and addressing reliability challenges which, if not well managed, can hurt customers.
The ESB’s two main focuses are resource adequacy, for which we believe there should be a targeted mechanism that provides the investment signal in the market for the right firming capacity or dispatchable generation; and integrating essential system services into the market. These services which currently come at a very high price for energy users, are increasingly important for the stability of the NEM.
We also need to update the market settings to support a higher level of engagement by customers and more products and services – none of which was envisaged when the NEM started. For customers to see the benefit of participating in this new world of energy, the market needs to have the right incentives and rewards, for example agile pricing and more demand management.
It’s a giant puzzle with many moving parts – we need to reset the market to support the transition already underway and ensure it happens at the least cost and disruption to customers.
Role of regulation
Globally, we are seeing a move away from pure markets with governments increasingly willing to step in where markets are not perceived to be achieving good outcomes, especially in essential services that underpin the economy.
The challenge for the energy sector is how we adjust from a pure market view and learn how to navigate and make sound decisions that are good for the market and customers, expecting governments could take a more direct role. There are challenges, but potential opportunities too.
Regulation should encourage investment in more and different types of firming generation to support more intermittent wind and solar coming into the market, and replace the large amount of coal coming out.
The NSW electricity roadmap is the latest major development in energy policy. While we are yet to see the details of the policy, and the details are very important here to produce good outcomes for customers, it is sending a strong investment signal for new renewable energy and long duration storage.
With governments at the federal and state level all separately working on their own policies and targets, coordination will be absolutely key to delivering a smooth, orderly transition at the least cost to customers.
Energy companies will also have to change if we are to smoothly transition to a net zero economy by 2050.
To be successful – not just survive – energy companies will need to look vastly different to the way they do today.
We will need to keep doing what we have always done, like produce energy on a large scale, and selling electricity, gas, solar and storage. But we will need to develop new skills and strengths – including becoming aggregators of energy.
With more and more activity behind the meter, harnessing data will be key to helping our customers participate more actively in the market.
We are already starting to see the convergence of industries like telco and energy, and this and other factors will see competition intensify. We will have to be better than everyone else at customer service, offering tailored products and services and delivering value.
Big energy companies will need to move faster and be nimble in our decision making. We have demonstrated through COVID the ability to do this, and we have to continue to flex this muscle as we establish the new normal, and as new entrants and business models enter our market.
We will need to continue to rapidly build expertise in data and analytics and leading edge technology like AI to better understand our customers, deliver tailored products and services and to allow us to respond to the market in real time. We need to be the missing link bridging centralised and decentralised energy, maximising all the capacity in the system to deliver benefits to customers and the grid.
We will also need to progressively invest less in legacy technologies, and more into renewable energy and storage and the development of future fuels like hydrogen.
The vision I’ve outlined is an exciting one, and as we track to net zero emissions by 2050, the energy sector will look vastly different to how it looks today.
I see Origin’s role in the energy system and our relationship with customers growing in importance over this time.
The traditional utility model will change but create opportunities for those willing to innovate and disrupt.
Getting closer to our customers is a win:win – by using our deeper insight to more efficiently manage and harness all the assets across the system, we can improve services and keep energy affordable for our customers at the same time as managing demand peaks, stabilise the grid and possibly reduce the level of investment required in large centralised power stations.
As we navigate the transition, we’re determined to continue leading the way on decarbonising our business and enabling decarbonisation across the economy. We will see our progress reflected in our social purpose. And I believe social purpose will increasingly be a form of competitive advantage in the future world.