pv magazine: Can you provide some background as to the challenges facing Horizon Power in supply electricity to homes and businesses across such a vast area?
Frank Tudor: The vastness of regional Western Australia, which is 2.3 million square kilometres, and the density of population (we have one customer for every 53.5 square kilometres in the Horizon Power service area), which is largely located around the Perth area, really does preclude us having a statewide interconnectivity system. There is a major grid in the city, and outside of that – around 90% of the overall area of the State, Horizon operates in around 40 towns that are non-interconnected. These towns use microgrids, and Horizon operates those in a vertically integrated manner.
In these towns we have responsibility for fuel management, generation management – whether we own that or contract it out to IPPs -, we manage the transition and distribution systems, and the retail aspect of the deliver of energy to our customers.
The towns themselves are very different. At the top end we have towns that are in the tropics, where there are cyclonic conditions through November to March. In a typical year in this region there can be four or five cyclones that come through, bringing winds up to 300km/h. As you can imagine, towns that are in the path of that type of weather really do get hit hard, not so much the electricity transmission infrastructure but certainly the distribution network. So that is one of the big challenges we face up north.
In what other ways does the electricity demand from towns Horizon supplies differ?
At one end we have very small and remote Aboriginal communities, and that role for Horizon is expanding as a part of our portfolio, and at the other end we have some pretty significant networked towns that support big mining operations in the northwest.
The two principle towns, in the Pilbara region, are Karratha and Port Hedland, which collectively probably produce around 15 to 22% of the state’s domestic product, and a pretty significant proportion of the Australian GDP. When we talk about China being Australia’s largest trading partner, these towns feature very heavily, and Port Hedland itself is probably Australia’s strongest trading port with China.
So the towns themselves are very different, and then we have the much smaller Aboriginal communities. And naturally the distances mean that the towns are generally pretty high cost.
We have a gas pipeline that runs from the north of the state to the south and some of our towns benefit from taking natural gas from that. In some cases there is domestic Liquefied Natural Gas that is supplying some of the towns. We have a lot of hybrid power stations with solar and wind coupled with diesel generation. There are two small towns where there are flywheels for storage and significant solar farms alongside the low-load diesel. In a number of regions there is a wonderful solar resource.
How difficult is it to provide that power on a cost-effective or even breakeven basis, particularly looking back a few years when the costs of renewable energy components were much higher than today?
When we are looking at traditional technologies, even small-scale diesel, in a centralized power station distribution model, we did and continue to struggle [to cover costs]. The State Government has a uniform tariff policy, where broadly the price of electricity is set based on a cost reflective tariff, based on the cost of electricity in the Perth area. The idea behind this is that people are not disadvantaged if they choose to live in the regions.
But of course some of the places Horizon operates are 2500km from bigger towns where there is infrastructure that supports in the import of fuels. This means that we have to transport the diesel to some of these remote towns, meaning that the cost of delivery using traditional technology could be well above AU$2/kWh (US$1.53). By contrast the price resulting from the uniform tariff, that people pay, is AU$0.26/kWh ($19.95/kWh). There is a heavy subsidy that is paid by the taxpayer to support the government’s uniform tariff policy – approximately A$3000 per customer a year.
With traditional technology that was always going be a challenge, because the cost of diesel and getting it into some of those areas, could be AU$0.30 to AU$0.40/kWh, and then there is the cost of fixed generation, network and supporting a remote operation like that. When that is all combined it is very difficult to get it anywhere near the cost that might come out of Perth.
How then have renewables changed this equation?
As renewables costs worldwide, both on the utility scale and on a distributed level, have declined and they have become very economic, that kind of technology is going to have the biggest economic impact in the very high cost towns that we serve. The onset of renewables is a bonus for the towns that we operate, because we can drive down the costs as we deploy those [renewable technologies] while working with the communities.
We expect to see significant disruption and change as we drive towards higher levels of distributed energy penetration over the next ten to fifteen years. It will be challenging for the tariff system, and for the distribution system. The deployment of very smart grids will be required as high levels of distribution generation require that, for it to operate on stable basis.
We want to make sure that customers effectively pay for the service they receive from the grid, and it is largely determined by peak demand.
As you mention there will be both technical and economic challenges in integrating high levels of distributed generation. But what about the impact of renewables in terms of security of supply? Diesel generation fueled by very long supply lines doesn’t sound particularly reliable. Can renewables and distributed generation in fact enhance reliability?
I can see that if renewables are employed from a coordinated and orchestrated system point of view, then there are opportunities for them to be deployed at a distributed and utility level that can add to the cost effectiveness of the system, as well as maintaining the reliability as it might be today – given a traditional approach to the delivery of electricity.
At one extreme, it is interesting what has happened in New York, with their Reform of the Energy Vision, led by Mayor Andrew Cuomo, on the work that was done to look at the reliability of that system facing the super-storms Sandy and Irene. One of the observations that they made on that big system when vast amounts of it was blacked out, was that there were enclaves and microgrids within that, a university campus, hospital campus or the Pentagon, where the lights stayed on. So the vision that they have put in place, driven by regulation, has at its heart injected a refreshing of the infrastructure.
In New York, some of the network was put in place around 1880, and while that is the oldest part there is a lot of aged infrastructure that needs to be contended with. Replacing that network in that particular concrete jungle with traditional technology would be prohibitively expensive. And obviously people want to exercise choice and be seen to be contributing towards lowering emissions through deploying distributed renewable energy.
That scheme is trying to achieve all of those goals while building resilience in that big system through basically using the network as a facilitator, enabling enclaves to work with one another to develop essentially autonomously or as part of a bigger system.
That is an interesting response and I would contrast that with how Australia has reacted, at the political level, at least to what has been happening in South Australia [where storms caused a state-wide blackout and the federal government has linked it to high levels of renewable energy penetration on the state grid]. Renewables can play a component at a microgrid level to help with resilience but I think that you still need the big transmission lines and the big generation in concert. So it is a hybrid solution that will provide the most cost-effective outcome today.
So how does this apply to Horizon?
In our systems, particularly with the remote systems, we have the advantage of being a vertically integrated utility operator and we have the ability to look at our systems out into the future and map the different technology cross over points. We call these system blueprints. Doing this we have seen that our systems will be best delivered over the next 20 years in a highly distributed energy system. That is what we are driving towards. But we have the benefit of having the security of system very visible to us as a system operator, and obviously we will be putting in the redundancy that we need and the fossil backup, to ensure that reliability is not compromised. So in some sense in a remote grid, given the situation that we have, we can do that in a way that will create the opportunities without having to compromise reliability. Horizon has also installed advanced meters throughout its service area, a key platform to deliver higher levels of distributed energy.
But I do make that example of what is happening in New York in the context of a much different type of system. The microgrids there are also going to form a critical part in maintaining the resilience of that network, particularly in the critical campuses that can’t suffer from power unreliability.
As you have alluded to, there is a political nature to electricity and energy provision. As a state-owned utility do you feel that you have free reign to pursue the vision you are setting out, or could vested interests and politics get in the way?
It is a difficult question to answer because we have had a state government that has been in place over the last eight years. Through that period the kind of technology that we are talking about has come to the fore and we have embraced it. This essentially is driving our towns towards a distributed energy outcome, employing technology that will allow us to do that and working with the government, and that has all been done effectively under the two terms of the current government.
Having said all of that, what we are looking to achieve are better, more effective outcomes that allow customers to exercise choice and put in place distributed energy, and so I expect it would also be supported by the other side politically. My view is that both parties irrespective of their political persuasion are probably going to be supportive of our work.
The other interesting thing is that we believe, as I start to look at our portfolio with very different eyes, that there is an additional value in the portfolio. What has always been there is what has been reflected in our balance sheet: the value of the assets and the revenue that we receive. I now also see an intangible value that is not reflected in a traditional balance sheet. That is not only good will, but it is also the value that we have got in being able to work up products, systems and technologies that will allow us to drive towards a very high level of distributed energy. I don’t think that has been done in too many microgrids anywhere in the world.
Looking at Brisbane [Queensland state capital] for example, it is a city that probably has the highest level of distributed generation anywhere globally, at 30%. Perth is probably at 15 to 20%, with all the cities somewhere in between. We are taking one of our towns, Onslo in the northwest, to 60 to 80% and we believe in doing so we are developing interfaces, micro-operating platforms and services to customers, that are going to be really valuable not only to our portfolio in Australia, but also to microgrids in countries outside of Australia that are very close – Indonesia, Malaysia and even Africa and India. In these countries there are 1.5 billion people that don’t have access to reliable electricity, and you can bet that it is not going to be provided by a traditional approach. Electricity provision in these countries will be provided in a bottom-up way, where people will deploy distributed resources, connect them and develop the microgrids.
The kind of technology that we have will allow these grids to operate optimally and I can see us potentially working with communities or with local utilities to deliver that. As we do our work we may or may not be physically involved in the delivery of the energy, that remains to be seen, but we will have the technology. And with Onslo as our showpiece, we have that broader market in mind.
Can you put a hard number of the kind of savings you expect to achieve from the effective subsidy figure that Horizon and its customers have been receiving?
Over the last three or four years, we have had to do a fairly significant traditional transformation of our business, and our business is around AU$600 million ($460 million) a year. Through this we have taken about AU$100 million ($77 million) per year, reoccurring, out of that figure, and a lot of that is related to generation costs. One of the things that we have done is demonstrated that we are about as efficient as we can be, and this is really important to have sufficient credibility regarding the disruptive future we are looking at.
Even with all of that, we have a subsidy based on the uniform tariff policy, that runs to AU$100 – AU$150 million (US$77 million – $115 million) per annum. I would think that as we deploy distributed energy over the next 15 to 20 years, we would completely remove that subsidy and be operating with the community, democratizing the energy system, and looking at the cost points for solar and batteries.