Distributed energy resources (DER) will play a pivotal role in shaping the trajectory of Australia’s renewable energy transition. In this New Energy Experts Insights, we sit down for an interview with Myles Carrucan to discuss the DER market’s rapid transformation, key trends and challenges shaping the sector, and the increasing importance of ESG objectives.
When we last spoke in December 2021, we discussed how businesses were often slow to adopt complex, innovative DER solutions. Has the DER market changed since then?
Customer sophistication has rocketed in the last 12 months. The big end of town has woken up and we are seeing an understanding of the problem and acceptance of the potential solution as companies try to address the “E” in ESG. That seems to be lending to the power purchase agreement (PPA) model, as sophisticated clients are bringing in companies like GPE to manage their risk.
The industry has been going from strength to strength, with the average transaction size substantially increasing and the market trending in the right direction.
Are you experiencing environmental considerations as the main driver for your clients?
When we first started the motivator for DER was cost saving, but not anymore. We have many clients who will happily do a deal, provided that it does not cost them more. Clients are increasingly motivated by ESG objectives set by their boards. Substantial moves in grid electricity prices continue to motivate clients to look for alternative solutions.
ESG is a wonderful, all-encompassing term, but there are questions surrounding what it really means. What are you seeing from companies when they speak about ESG goals?
Clients are placing a lot of value on renewable energy certificates for renewable energy generated on site. Typically, we hand over all certificates generated by our systems, for larger customers. Clients are also serious about modern slavery and health and safety considerations in their supply chains.
Recyclability has not yet risen to the top as we are still in the early phases of the life cycle for most projects. We however see recyclability being a hurdle in due course. One advantage to the PPA solution that GPE offers is that we can come in and take care of recyclability risk at the end of life. We have found that at the front-end, clients want certainty on what will happen at the back end too, so we are competitive on cost but also take care of a lot of the risk elements that come with these types of transactions.
Why would you say that GPE is uniquely positioned to do this efficiently and give the best value to clients?
The value in our business is the client relationship. We have found that capital costs and internal approval are some of the biggest challenges facing clients. We are here to make transactions happen and satisfy client’s objectives around climate and sustainability as their needs evolve.
Over the last six years, we have encountered a broad range of commercial scenarios that we have had to develop solutions for. We can now pull these learnings off the shelf and refer back to them to solve future deals. We have been able to do this by building scale.
Is the solution largely the same on most sites so that you can rinse and repeat across transactions?
While we use standard template agreements to create efficiencies, different structures and solutions are often required for specific situations. This means that it is not as rinse and repeat as we might like, and it probably never will be. The idea is to use the overarching framework and adapt it to suit each client’s needs.
Do you have views on the low quality of installations that are often found on rooftops?
There’s a large spectrum of quality in terms of solar installations. You can easily get a system that is dangerous or underperforms if you don’t do your due diligence at the front end.
We have kicked the tyres on a number of existing small portfolios, and by and large, almost all such installations are of a low quality meaning that it is difficult to go in and fix the system, and often better to build a new one.
Structural considerations are central to GPE’s philosophy and we do structural reviews on every installation. Many roofs are just not constructed in contemplation of carrying substantial loads. This is something that we need to get right every time because if anything goes wrong, it could have serious implications.
As repeatability is important for our model to work, we have a high focus on quality. Some people in the industry think that we have onerous requirements, we think they are just appropriate. If the product is not working, we don’t make money.
We have an approved products list which is kept very tight. If something breaks and we’re relying on warranties, we need to know that we can call on equipment suppliers to remedy issues. We don’t work with any installer and have a rigorous onboarding process with high expectations on site and regarding quality and reporting.
As DER is contributing to energy security, does this lend itself to a need for greater regulation?
As DER becomes more important to the security of supply, there should be an increased focus on quality performance and control of these disaggregated systems. This probably leads towards consolidation of some form or potentially market structure changes.
Approvals may be easier to achieve for DER than in utility scale due to size. There are however rumblings of this changing. What would you like to see regulators do to ease uptake on DER-scale PPAs?
DER connection is easier than with utility scale, but it is still challenging in our space, particularly if there’s going to be substantial export volumes. The regulatory key to fully unlocking DER lies in facilitating energy sharing across distribution sites.
At the moment, if you have a large load (such as a manufacturer) across the road from a big supply (such as a warehouse with a large rooftop installation), it can be difficult if not illegal to connect the two sites. We had to abandon a recent transaction where this situation arose because we could not put a cable across a title boundary. It was obvious that the transaction should happen, but it wasn’t permitted to. The rules were not drafted with DER penetration in mind, so we need to evolve and keep up. We are seeing support from the top to adapt the rules to facilitate this, but it needs to go through the process. Scale unlocks capital, and so anything that can facilitate scale will unlock investors and accelerate the energy transition.
Do you see aggregation and orchestration of separate sites developing as a potential solution to this issue?
Retailers are the glue that can make that happen. Retail needs to be the interface between multiple sites and make it a simple customer proposition so that customers are getting one bill. That is why GPE partners with the incumbent retailers to deliver seamless commercial solutions.
What do you see as the next horizon for DER projects?
Currently, behind the meter storage is almost non-existent as the economics are not compelling. There is a long way to go, but it will make the Australian energy grid more secure and resilient if everything can be more islanded at the local level. There are a lot of stakeholders such as consumers, retailers and regulators and we need to find a commercial model in the middle where there is something in it for everybody to really unlock the market.
To really unlock DER, what would be on your wishlist?
A storage target would be good, but there seems to be little support for it at the moment. While ARENA is completing the community battery project, it does not solve the underlying economic challenges on a continuing basis. Support is therefore likely required for a period of time in order to kickstart onsite energy storage in earnest.
Finally, what excites you about this industry?
The thing that excites me most is the end game having massively positive implications for energy security across Australia. People are increasingly becoming aware of the risk that the lights can go out for extended periods, be that due to extreme weather events and/or equipment failures. Having a more distributed system where generation is closer to load is a smart play in a more uncertain world.
The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact, Matt Baumgurtel.
