Don’t let some of the commentary from the Energy Markets 2016 conference fool you; the ‘death spiral’ remains a key risk to energy network companies. With the cost of solar with battery storage rapidly decreasing, opting out of the grid has never been more attractive.
A few years back, Australian electricity networks were being roundly criticised for ‘gold plating’ (overinvesting in) infrastructure and passing on the costs to consumers, triggering regulatory and political efforts to restrain the practice. The networks’ motivation was clear – CAPEX is the key metric for this industry.
Today, the big opportunity for electricity networks is to embrace carbon emission reduction initiatives that involve the grid. This makes it possible to continue CAPEX while reducing death spiral risks.
A switch in transport from petrol to electric power would be just such an opportunity for the electricity network businesses.
Electric vehicles (EVs) could be the energy networks’ salvation.
Luckily for them, according to the International Energy Agency (IEA) electric cars could make up a staggering 38% of the global fleet in 2040 – that is 715 million EVs – with progress on global commitments made at the 2015 Paris climate talks.
In Australia, there has been little activity in the EV space since Better Place (a venture-backed battery-charging and switching service for electric cars) closed its Australian operations in early 2013.
Last week the Australian Electric Vehicle Council was launched and a grant announced from the Australian Renewable Energy Agency (ARENA) to support the uptake of EVs in Australia. That’s great news for the climate policy advocates, but also for Australia’s energy networks.
If the networks embrace ‘smart’ grid improvements and renewable energy, instead of stagnation, they could see a return to strong capital growth. This depends not only on technology, but whether the networks are willing and able to make the change from regulatory game players to consumer-oriented energy solution providers.
Stocks to watch: Spark Infrastructure (SKI) and AusNet (AST). Regnan will also be monitoring APA Group (APA), AGL Energy (AGL), Origin Energy (ORG) and Caltex Australia (CTX).
The investment signals Regnan will be looking for include:
- Evidence that energy transition opportunities have been integrated into the business’s thinking including in business planning, capital allocation, investment due diligence and operational risk management, and that it receives sufficient senior level attention.
- Sufficient board capacity and oversight to oversee energy transformation risk and strategy execution and consideration of human capital implications – ensuring the right talent and organisational structures are in place to support successful innovation in ‘new energy’ markets.