Home batteries can play a key role in helping energy consumers take control of their energy usage and costs.
However, not every consumer is able to afford one or has a home that can accommodate one. Why should these consumers miss out on the benefits that batteries can bring to their energy bills?
There are many innovative ways to deliver battery services to consumers. One approach is to install a battery in the distribution network system, but not at an individual customer premises. These types of battery arrangements are often referred to ‘community batteries’, or ‘Front of the Meter (FTM)’ batteries.
By locating the batteries in front of the meter on the local distribution network, they can provide a network service, like managing peak demand, and can also be used to offer their capacity to local customers on a subscription service where they ‘lease’ capacity in the battery virtually to store their excess solar energy generation and then offset their evening consumption.
FTM batteries essentially provides the same tariff arbitrage service that a residential battery would but without the need for a large upfront investment in a home battery. Consumers are therefore able to lower their energy bills whilst also helping the local distribution network to manage reliability.
Alternative models also include the use of these batteries in wholesale energy and ancillary services markets to earn additional revenue to support the economics of these energy storage systems, which remain relatively high for systems of this scale.
Establishing the right regulatory framework for ownership and control
A key regulatory issue is emerging on establishing the right regulatory framework for ownership and control of these FTM batteries to deliver greatest efficiency across the energy supply chain.
Distribution networks are keen to invest in FTM batteries through their regulated asset base. Distribution networks rightly say these batteries provide a more attractive, lower cost solution to addressing localised network system constraints and needs than the high capital expenditure that would be required to build more traditional network infrastructure.
However, uncertainty remains as to is whether these localised network challenges can be addressed more efficiently through alternative approaches to networks building and owning FTM batteries, the cost of which would be borne by all energy consumers through higher network charges.
Alternative solutions should be pursued
In AGL’s view, an alternative approach to network ownership would deliver greater efficiency whilst continuing to support customer participation and choice.
Australia has a rapidly expanding aggregation market, evidenced by the multitude of aggregators operating in South Australia alone. We believe Australia’s aggregation market is the most promising delivery model for FTM batteries into the future, as retailers and aggregators are best placed to access and share each of the value streams associated with the FTM battery investments, effectively optimising across the energy value chain for the benefit of all consumers.
Evidence from the UK (that has a similar energy system to Australia’s) has demonstrated that facilitating a more mature market for network services can deliver substantial network support services in a more cost-efficient manner whilst also supporting customer participation and choice:
- In it is simplest form, networks businesses in the UK are required to provide information and data on where these local network constraints exist and allow third party service providers like aggregators or retailers to offer the most cost effective solutions to alleviate those constraints through a competitive tender process.
- The solution could take the form of a FTM battery, a Virtual Power Plant, or a combination of the two.
- Energy consumers are then rewarded by retailers and aggregators for providing energy to address local network constraints, including through energy storage at their home or by participating in FTM batteries.
Australian policymakers have long appreciated that allowing monopoly network businesses to compete in the delivery of competitive products and services is not in the long-term interest of energy consumers. As such, distribution businesses are required to establish separately run and ring-fenced entities if they want to compete in providing competitive electricity services.
In the energy sector, ring-fencing obligations are governed by the Australian Energy Regulator (AER) through the Distribution Network Ring-fencing Guideline (Ring-fencing Guideline). The Ring-fencing Guideline mitigates against the risk of consumers paying more as a result of networks’ market discrimination and requires separated business activities, costs and revenues for delivering network services on a monopoly basis from the delivery of other competitive services.
The Ring-fencing Guideline review
The AER is currently reviewing the Ring-fencing Guideline and is considering whether to relax ring-fencing arrangements to allow distribution networks to procure and operate energy storage devices as a distribution services and include them in their regulated asset base. This could significantly impact how FTM batteries are built in networks across Australia, and importantly, who pays for these investments and who gains the benefits from them.
As Australia continues to transition towards a more decentralised power system with the increasing interaction of solar, energy storage and electric vehicles, AGL believes it is of even greater importance to maintain an effective ring-fencing framework to ensure a level playing field in the maturing market so that new participants and business models can fairly compete in delivering cost effective solutions.
Against the backdrop of technology advancements that can provide services to consumers, in contestable markets, and also to support the ongoing security and operation of local distribution networks, we believe a market-based approach is best placed to support efficient outcomes, including energy storage solutions, for the benefit of all consumers.
Accordingly, we believe policymakers and regulators should focus on strengthening and improving the effectiveness of the ring-fencing framework and implementing complementary reforms to support the development of a more mature market for distribution network services. Complementary reforms should require distribution networks to openly and transparently procure network services and provide relevant data and information to other market participants about applicable network system and voltage constraints.
A copy of our submission is available here.