Batteries and distributed electricity
The Tesla Powerwall battery was launched in Australia in 2016 and, along with predecessor batteries, commenced the slow journey towards Australian households generating, storing and using their own electricity. Of course, solar panels have been around for much longer and now over 20%, or 2 million homes, have installed PV panels on their roof.
When do panels and batteries become common place?
It is not difficult to imagine a world in which panels and batteries become common place in many, or even most, Australian residential houses. How long this will take is difficult to forecast, as it was with the emergence of smart phones. Who would have predicted that the iPhone – which was launched in 2007, a little over a decade ago – would have had such an impact on how we communicate in our work and home environments? In most advanced economies it is now practically taken for granted and is embedded in our daily lives – for better or worse.
Incumbents must chose between cannibalisation, milking and diversification strategies
With the emergence of new technologies there are a range of business opportunities, including for example hardware manufacturers, apps, software, retailing and installation to name a few. There are also typically winners and losers as the game plays out. In fintech for example we have the large incumbent banks with the early stage payment, loans and mortgage companies and neo banks seeking to carve out a space for themselves. Incumbents facing these challengers most often need to make some dramatic decisions about holding on to their existing models or delivering new products and services, often at lower price points and unfortunately lower profits. The strategy typically involves some form of (a) a ‘cannibalisation strategy’ (proactively moving with the market), (b) a ‘miking strategy’ which involves holding onto existing products and margins for as long as possible or (c) a ‘diversification strategy’ which involves investment in adjacent markets. Sensis (owner of the yellow pages) has successfully adopted a milking strategy that has delivered elongated earnings – but ultimately puts at risk the entire business. The flip side is the more recent Kayo strategy adopted by Foxtel – which puts at risk its existing ‘full service’ product in the hope of maintaining relevance in the new streaming world. AGL (see below) appears to be pursuing a diversification strategy.
Electricity: the gentailers’ dilemma
In the case of electricity, we believe the new era is arriving where the ‘distributed electricity’ model is about to unfold. Gentailers – the large generators / retailers will need to carefully manage the transition. To promote solar and batteries will proportionally impact the value of their coal and gas reserves. To ignore this process could be equally perilous as electricity is generated and stored by their own customers – saving them money at the cost of these incumbent retailers.
AGL: is Vocus its diversification strategy?
On 11 June 2019, Vocus granted AGL exclusivity to undertake due diligence in relation to a full takeover of the company for around $4 billion (Enterprise Value). AGL has a market capitalisation of around $13 billion and as such this is a relatively large deal – but not “betting the farm”.
Vocus Group is a specialist fibre network services provider operating Australia’s second largest inter-capital network as well as back haul fibre connecting most regional centres in Australia. Vocus owns a portfolio of brands catering to enterprise, government, wholesale, small business and residential customers across Australia and New Zealand.
AGL’s share price responded negatively on the day of the announcement and investors were quick to ask the company for the merits of such a move. AGL’s response related to the benefits that could be delivered to its customer base by bundling or converged energy and data services and to improve its “value proposition” to enterprise, wholesale and government clients. There is however little or no mention in their rationale or explanation for the acquisition, as to the risk in its core business emerging from the mainstreaming of solar power which was the topic early in the year of a Morgan Stanley broker report entitled “Shedding Sunlight on AGL”. This report described solar power as being the “next major” inflection in energy markets.
Some Venture Insights predictions
How long does this take and what will happen? Difficult to know. Venture Insights has recently published a report with the following key findings:
The combination of more solar houses and installed batteries will have a large impact on demand for grid-electricity – which could be as much as 15% over the next five to ten years. They estimate that by 2025 there will be in the range 31-35% of households with solar panels, of which between 10-15% will have batteries. On this basis, they estimate that total on-grid electricity consumption will fall by around 15% on current levels
Market commentators and forecasters expect solar PV penetration will ultimately rise to around 50-55% of all Australian households (from 21% in 2018). Whilst there is no market consensus on the time frame in which this will be achieved, with some saying we will get there in around ten years and others saying it will take until 2050. Venture Insights estimates that solar PV will reach 31-35% penetration or more than 3.5 million households over the next 5 years
The adoption of batteries remains early stage, but Venture Insights believes that a drop in the price of batteries over the next couple of years will result in increased adoption rates; only 0.6% of solar homes have installed batteries, mostly as a result of the investment payback period being too long. Once they go below around $300 / kWh (5 year payback) Venture Insights believes mass adoption will arrive. Consumer financing at this point will emerge, further fuelling uptake
Most of the key drivers for the uptake of solar and batteries favour widespread adoption. The ongoing decline in battery prices, lower feed-in tariffs and increased government intervention will result in a sharp uplift in the installation of batteries, which will ultimately be sold as part of a bundle with solar panels. Government is doing its best to control retail electricity prices but ultimately cannot control the attractiveness of cheaper renewable electricity
Tesla Powerwall 3 Price
According to Canstar Blue ...
"The Tesla Powerwall 3 will likely cost around $8,000 to $10,000, excluding installation costs. As we saw with the Powerwall 2, the rapid improvement in storage technology allows manufacturers like Tesla to constantly improve upon their product without substantially increasing costs. Alternatively, it has been speculated that Tesla might continue producing 14kWh batteries and focus its efforts on reducing size and price of the Powerwall to make it more widely accessible."
We expect that the ongoing decline in battery prices, lower feed-in tariffs and increased government intervention will result in a sharp uplift in the installation of batteries, which will ultimately be sold as part of a bundle with solar panels. Venture Insights’ conclusion is that by 2025, there will be in the range 31-35% of households with solar panels, of which between 10-15% will have batteries. On this basis, Venture Insights estimate that total on-grid electricity consumption will fall by 13-15%. We believe that this will create winners and losers as the market unfolds – with the winners supporting the ‘next generation’ services i.e. renewables. How much and how quickly the incumbents lose will depend on their ability to read the trends and transition with the market. However, unless they can ‘make it up’ on the renewable side they are at risk of losing it in the fossil fuel side.