Origin CEO Frank Calabria’s speech to The Australian Financial Review’s National Energy Summit, 9 October 2019
Today, I wanted to talk about getting energy right for customers and communities and the planet. Getting energy right is our purpose statement because what it does is it ties together every aspect of our business to a clear objective. And that’s our focus across Origin.
I was reflecting on what was happening in the energy sector since the first national energy summit three years ago. Since that time, there’s been close to agreement on two major energy policy framework reforms that will enable the transition to lower emissions. The first of which is the Clean Energy Target and the second of which is the National Energy Guarantee. I don’t need to, nor I think it’s productive to detail to this audience what’s happened here, but it is a reminder that we are here, yet once again. And it appears that the problem that we’re faced with is ever more urgent to address.
What has transpired over recent years is that affordability remains an issue for too many Australians. And I think the important thing associated with this is that the impact is felt disproportionately by low income households. So according to the Australian Energy Regulator, energy costs for a low-income household on the median market offer [is] double the proportion of disposable income compared to the average-income household. So whilst there’s been recent activity that brought prices down, mostly, we should never forget the fact that we’ve got low income households, which have their disposable income being paid on energy.
Transformation under way
Now, I don’t need to tell you that there’s a massive transformation underway in the Australian energy market, and Kerry has highlighted so many of those through in her slides and speech preceeding me. What I would raise at a headline level though is that in just a few short years since 2014, the National Electricity Market’s gone from 4% renewables to today, it’s over 21% being generated by wind and solar in capacity terms. And at the same time, we’ve had more than 4000 megawatts, which has mainly been coal, that has been withdrawn from the market.
We have now more than 2 million Australian households with rooftop solar installed. And this number increases every single day, and it is becoming an increasingly mainstream source of energy to households across Australia.
What has played out and you’ve probably read over recent months is a new feature to the market. And that is that we are now regularly seeing wholesale electricity prices go from zero or go negative down to their minimum floor price of minus $1,000 a megawatt hour during the day, and then peak at night somewhere around, regularly hitting around $300 a megawatt hour. Not only that, they reached a peak price cap more often than you think. And that price cap you should never forget is $14,700 a megawatt an hour.
That happens when you’ve got big demand and scarcity of supply. This is profoundly changing the industry as we all seek to get ahead and navigate the future energy world. So the one thing I’ll point to is last year we’ve would have been speaking about that volatility, but we have been speaking about the need for a price and market signal for reliability and emissions to back into generation in this market.
Industry is not standing still
This situation is actually increasingly urgent. When you consider the next tranches of generation to come out of the market in the early 2020s, and in the absence of long-term policy, I want to deliver the message that the industry has not stood still and doesn’t stand still, every single day.
The strong signal that was set by the Renewable Energy Target a decade ago, I might say, over a decade ago, alongside a carbon price signal, that’s the signal that has remained, it’s been a strong enough one. And now look at the investment in renewable generation. There is a cause and effect. In the last year, it doubled in capacity from $10 billion to $20 billion. And there’s now 14.5 gigawatts under construction or financially community across 87 large-scale projects.
There are two messages here, you send a strong enough signal and then you will get investment to flow and the capital will flow. But Kerry pointed out is, it’s bringing associated with that another set of challenges for the existing generation in the market. And now for the introduction of what we call dispatchable or underscore firming generation needs to be introduced.
In response to that renewable target, Origin itself has actually grown its generation capacity from renewable sources. In 2016, we will have probably 10% of our capacity. Tonight we have had on the 20% and by next year will be 25%. That’s introducing 500 megawatts a year in response to our obligations that are under the Renewable Energy Target. And I agree with Kerry that there’s a slowing down now. And I also think that for a number of proponents in the sector, that have come into this sector, underappreciated the risks of those investments as they have entered the market.
Alongside that though, the industry is also working very hard, against the backdrop of renewable energy coming into the market, to make existing gas and coal generation more flexible to the extent you can to support the growth of these renewables and firm supply. And also, I would say that investing in capital to continue to pay them running reliably.
At the start of the year, an example of that is we have quite a large fleet of gas-fired generation plants, but we know the market needs to be increasingly fast-start. So we’re moving from traditional, open-cycle turbines, and in the case of Quarantine that’s been in the market for probably close to 20 years, what we’ve done is converted those turbines to later technology being really aero-derivative technology. And the simple fact is that they start up within five minutes rather than a more traditional 10 megawatts a minute over the first half hour. So it means that enables it to respond much more rapidly in a world that’s got more variable generation.
The other areas of investment and exploration that we do right now is trialling two-shifting at Eraring power station, to really do what Kerry described earlier is when the market’s not needing as much generation in the middle of the day, how do we switch units off during the day, keep them warm, while renewables are generating and then having to bring back on in the evening peak when there is the most pressure and load on our system.
On affordability and reliability, we ran Eraring … just like I think Mark asked the question about Bayswater, we’re running that at as high capacity as we ever have, it’s the largest power station, you should never forget that it provides 25% of the power for New South Wales customers. And It also does by running it more, as you bring more supply into market, it brings further downward pressure on wholesale prices.
The industry is working tirelessly to keep these dispatchable generation plants running every day, in an increasingly challenging environment where more renewables are coming in rapidly and more rapidly than people anticipated a year ago.
The federal government has acted on prices at a retail level by introducing the Default Market Offer. We have implemented that. And in the case of Origin, we extended that default pricing toward customers on flat plans. So that really has meant that more than half a million of our customers are paying less for energy from 1 July.
I’ll talk further about customer in a moment, but we are fundamentally transforming retail businesses. Customer experience continues to lift, has to continue to step-change. Costs need to continue to reduce and operating models need to rapidly evolve. And that’s where retailing for energy is going in the future. Twenty energy companies have signed up to a recent energy charter that was released this week. And so it’s the first time you see any industry come together to commit to customer principles through that charter.
The market does need gas. Industry is responding to gas. Interestingly enough, the biggest source of gas in the last 12 months has been as baseload gas-fired generation has moved to running low capacity factors, it’s that gas that’s being freed up to go to customers as gas increasingly moves to more of a peaking operation and therefore running less hours through the year. The gas supply challenge – so there’s no shortage of gas today widely reported – the gas challenge is that supply continues into the coming years and you will see that the upstream sector will continue to invest to bring those on.
What I want to impress upon you is that industry is just not standing still. There might have been a vacuum in energy and climate policy, but none of those actions reflect to you that we’re waiting for things to happen. We can’t do that for our customers. And we certainly can do that for a sector that needs to move into the future.
However, it doesn’t take away the fact that the industry is still desperately needs a strong market signal to ensure the transition in our energy system happens without creating price or reliability shocks, which ultimately hurt customers. What do I mean by that? It’s remarkably consistent with the speakers before me. What the the energy system needs is more dispatchable generation – the right type of generation that operates alongside renewable energy to provide reliable, affordable and lower emissions power. What there hasn’t been is a signal strong enough to invest into dispatchable generation. It needs to be flexible, which is why you’re seeing the current focus on gas and hydro. Because it’s much better than coal in this regard. Although the coal industry will continue to find ways to actually operate more flexibly over time. But the [signal] needs to be strong enough, most importantly for investment to flow.
A future NEM
Now, probably this point that I just reflect a little bit about the National Electricity Market, because it provided the rules and set the signal for investment for a long time. It’s 21 years since the NEM has been established and the question increasingly asked is whether it remains fit for purpose. The NEM was created to provide reliability and interconnectivity between the East Coast markets and has been very effective historically at getting the right investment at the right time. Rises to wholesale prices have always been followed by investment in capacity. And this new supply in turn put down the pressure on prices which, in summary, is a market at work.
It’s very hard to argue today, however, that the NEM is working well right now with prices and reliability a concern each summer. There’s been very little investment into dispatchable generation – Origin invested in Mortlake in 2011, which was a gas peaking plant in Victoria. And I think you’ll find Barker’s Inlet the latest from AGL replacing Torrens Island in South Australia.
Outside of that, all of the investment dollars in the sector have gone into renewable generation.
A decade of policy inertia, including failed attempts at major energy and climate reform and market design has made it very difficult for board to commit capital expenditure on long-dated assets of 20-to-30 years or more into such an uncertain market, where the rules can change at any time.
Where to from here?
To deliver an energy system that continues to serve the needs of customers, it needs to operate in the context of this greater variability and uncertainty in supply and demand. Right now, the price of firming energy is not enough to ensure what you need to make the system reliable will be built.
Which brings me to the proposed divestment bill, the so-called big stick. The government says that the worst penalties under the big stick would only ever be used as a last resort to address the very worst behaviour by energy companies. Despite these reassurances, the mere existence of the big stick is acting as a handbrake on investment, right when we need investment the most. What the Default Market Offer or the big stick unfortunately don’t do is provide an incentive to build new generation capacity to ensure a orderly transition as coal-fired plants retire and more renewables come online. Summers are increasingly tight and an unplanned outage at any of the coal or gas-fired generators in the national electricity market will send pool prices soaring, particularly during the early evening peaks when everybody goes home.
Now Origin will always work productively with governments of the day. We’ve always taken a long view and we’ve structured our portfolio to make this big transition. We have significant open cycle gas-fired peakers, we have left our demand much greater than our supply of energy so we can invest into this transition. But unless there’s a holistic approach to energy reform, that aligns the industry, the results for customers will be suboptimal. However, we’ve lost the past decade to inertia on energy policy rather than leading ahead on a broad based plan on emissions and reliability that puts the customer first by ensuring affordable and reliable supply as wind and solar and storage replace our legacy generation fleet.
Engaging the customer
What I want to do is just turn to the point of engaging customers. What do the customers want? We know they see that the very, very basic of those we know sits firstly at affordability. We know that coming into summer that’s now stretched to reliability. And people do want it to be more sustainable and they do want it to be more easy. Deregulation and competition opened up the market and gave consumers a lot of choice and the majority of consumers have taken it. Depending on the state, between 5 and 40% of residential customers remain on what we call a standing offer. While the majority of customers have embraced shopping around for energy offers, energy remains a low engagement category – it’s not always what people get excited about. And also with greater choice came greater complexity that Kerry referred to, making it more difficult for people to navigate the market, industry practices, discounts priced off different base tariffs, offering different discounts that weren’t cost-reflective such as pay on time discounts has meant that customers have found it difficult to be confident choosing an energy provider. With a lack of consistency across the industry, it’s easy to see why there has been low trust amongst customers.
One of the ways customers have engaged, and you saw the chart before, they’ve engaged in solar. Solar is one innovation in the past 10 years that has truly engaged customers positively with energy and this is where the major opportunity lies. Compared to normal grid consumption that customers don’t think about, solar is tangible and easy for customers to understand. You can really see how much you generate on your roof and the impact it has on your bills.
But that’s just the start of technology. What we see today will be stimulated by distributed generation, distributed storage. But most importantly, a digital revolution that was attached to the electrons that have been produced and consumed in the grid, will be an evolution of business models and propositions for customers. And I think that’s what that Kerry was referring to earlier. It will change the engagement with customers, it will change the products and services, it will make energy easier, smarter and more affordable. And that is actually a trend that won’t be driven by government policy or any other initiatives, it is going to continue to march forward. More and more customers will be generating electricity on rooftops, but also selling it back to the grid. The cost of batteries will go down. As they go down, the customers will be able to choose how do they consume. It’s niche at the moment. But we do see that more customers will install batteries every year. And the research we’ve done is that households will – 6 out of 10 households said they would install batteries when payback periods reduce, with their primary motivator to reduce energy bills.
Other technologies like electric vehicles will drive engagement in energy like solar and ultimately storage do. New models that are cheaper and can drive 500 kilometres on a single charge will transform the market and take electric vehicles from niche early adopters into the mainstream over the future years. The electrification of our world will actually change the way we are engaging consumers through the technology and the distributed energy that is emerging so rapidly.
It will have a profound impact on how we operate today and into the future. The traditional model of a retailer as you’re all well aware, sees the retailer manage the complexity effectively of the market. We price-risk management on behalf of consumers who can’t do that for themselves as cost effectively, we bill customers and we manage load. We package it up for the end user so they will see just one bill. In a world of massive growth of distributed generation both large-scale and the millions of customers who are generating, storing and dispatching back into the grid, what will the industry look like? How will we cater for the full range of consumers from the passive to the prosumers in how they want to engage in the market and what tools will they use to do so? The key question for us is where energy companies fit into this space? How do we navigate the new energy landscape and make it easy and seamless? How would we continue to add value for customers when they increasingly generate and store their own energy? That’s the opportunity for the energy sector. But it is why there will need to be the rapid evolution of both propositions, technologies and business models to respond to that challenge.
As the Internet of Things drives growth in connected devices and storage technology improves, there will be a role that retailers can play – they will either be entrusted to actually do the legwork for consumers or they’ll do it themselves. So that’s why you’re seeing a lot of trials of demand management technology. You’ve seen devices remotely using artificial intelligence in a way that minimises energy costs. And you’re now seeing that as appliances and devices get connected, ultimately digitally, it will see a much more dynamic management of supply and demand.
How do we put the customer first? Rebuilding trust
Coming back to how we get back on track. So more than 300,000 school kids striking all over Australia last month shows how many people feel powerless and cynical that anything’s been done by our political and business leaders about climate change and energy policy. And you can’t blame them. They have every reason to think that need to agitate for action. There was a growing trust deficit between people calling for our leaders to do something. And the leaders who are caught up in the public debate of who’s right and wrong, roaring 24 hours a day, on Twitter, on TV, radio, and in the newspapers … other than the AFR.
The trust issue masks actions that, in particular, business is taking every day to ensure that the lights stay on and emissions continue to go down. But that’s what customers expect of us. The fact that that’s challenging, we’ve got people right across the sector working hard every day to keep the lights on is noble for them and meaningful for them. But we do have expectations that are rising every day.
So when it comes to then speaking, though, on behalf of business – last month, we released a 21-page rebuttal to misleading claims by activists that we are not supporting efforts to decarbonise the economy. We did this because we wanted to set the record straight on all the actions we’re taking to ensure that Origin is sustainable, not just now but for decades to come.
Businesses and industry that rely on affordable energy to be competitive, millions of households all over the country that want to switch the lights on and know that each year, the energy that they consume is more sustainable, we all want it to be more affordable, we all want it to be reliable and we all expect over time emissions to reduce.
We want customers to engage more in energy and be interested in getting more out of energy than switching the lights on and off. So here’s a call – let’s move forward on a platform of consensus and give the community the confidence that we’re taking the steps we need to manage the transition with reliability and affordability as priorities.
We need to ensure an orderly exit of coal-fired generation and ensure that it is being replaced by dispatchable generation. Customers cannot be again exposed to the price shocks caused by the closure of Hazelwood and Northern and they were significantly let down on those occasions.
Now, this is where this industry desperately needs a strong signal to invest. We have some hard questions to ask in the coming years because there’s the next tranche of exits proposed coming up in 2022 and 2023. We need a signal strong enough for reliability and emissions in place that will get investment flowing in firming generation.
We are, unfortunately, at the point that the range of solutions on the table are solving very specific short-term problems, such as the UNGI or the underwriting of government investment, or the Default Market Offer. Without a long-term view of market design, what we need to do to ensure we have a NEM to serve us for a few decades. I should mention that there’s also the reliability obligation, which is early days and it’s actually a positive development, I think the question remains as to whether or not that signal will be strong enough for investment to flow rather than manage the existing [facilities].
We should never forget with those actions that has governments playing an increasing role in the investment, when we look longer-term, the investment challenge for this industry is staggeringly large. With such a significant task ahead, we need to get back on track with a strong market signal for reliability and emissions, [so] that the capital starts flowing.
As it stands, we have 2020 renewables target and a 2030 emissions reduction target while the states each have ambitious targets. So while that may not be on the table today, I want to leave you with a message that we need to keep our eye on the prize and work towards a framework that sees us to 2030, 2050 and beyond so we continue to have an energy system that serves Australian homes and businesses well into the future.
To quote Kerry earlier on, which I love, ‘let the market have a go at providing the gap’. Thanks very much