Why Australia's energy retailers could be facing the same profitability cliff as print media

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Australia’s energy industry is about to undergo a massive transformation, akin to the changes the internet era wrought on print media.

And that means the monolithic electricity retailers we currently know – think Energy Australia, Origin, AGL – could be severely disrupted or even vanish as shifts in technology open the door for the likes of Google, Apple, Volvo and LG, according to Sydney startup Mojo Power.

Mojo CEO and co-founder James Myatt is a 30-year veteran of the sector. His previous energy startup, ASX-listed Australian Power & Gas, launched in 2007, sold to AGL in 2013. This time he’s back with Darren Miller, whose private equity background included Packer family’s investment companies. The pair met at solar company Sungevity Australia (rebranded as RoofJuice last year), and recently installed former News Corp boss Kim Williams as Mojo chairman.

They’re hoping their pioneering approach to energy retailing will position them to become a dominant player over the next 10 years, believing the sector is capable of delivering what Atlassian has become to project management software. The company has lodged an international patent on its model.

Mojo considers itself a disruptor and wants to upend the way energy is sold in Australia, driving down the cost in the process. Like banks, taxis and the music industry before it, technology will drive those changes.

The way Mojo plans to build its customer base is simple enough. They sell households power at wholesale rates, without the typical 30% retail markup. The business model is based completely on subscriptions, starting at $30 a month. At at its core, Mojo is a data analytics company, planning to analyse energy usage in homes and help consumers manage their usage more effectively, on better rates.

James Myatt (L) and Darren Miller (R) co-founders of Mojo Power. Photo: Supplied.

“We see ourselves as a digital company primarily,” says Myatt.

“We just provide energy as a service. We think big data analytics is going to be the foundation of this business.”

It’s a dramatic shift to digital at a time when the traditional players are still sending out estimated bills because they can’t always manage to get someone around to read the meter.

Mojo’s technology means you’ll be able to look at your home power usage on your phone.

“No other energy company is performing proactive analytics around usage. We’ll be able to send you alerts for energy usage, and predictive analysis to give you an idea of what your bill will be at the end of the month,” Myatt says.

As part of analytics they’ll be able to suggest the best tariff to buy – time of use, or block.

By Mojo’s calculations, their savings will kick in when your annual power bill is above $1500. Above that figure and you’ll save 20 cents in the dollar they claim. The average bill is now closer to $2000 a year. Spend around $3000 and the saving is between $415 and $630, depending on your retailer, Mojo claims.

The biggest difference will be for homes with air conditioning and swimming pools.

For now the company is only in NSW, but plans to move into Queensland in October and Victoria in early 2017.

The big shift

But this isn’t a story about saving a few dollars on electricity, especially after prices rose by around 10% at the start of July. Mojo wants to be at the forefront of a seismic shift in the industry, with batteries set to transform power supply the way the internet has brought about the rapid demise of print media.

Myatt and Miller are banking on solar and batteries changing the game fundamentally. They believe a tipping point is coming in the next 2-3 years, driven by Chinese and Indian demand, with Australia leading the way on the technology front.

“The industry in 2026 will be fundamentally different,” says Myatt. “It’s going to be data, it’s going to be technology, it’s not going to be about coal-fired plants.”

He believes Australia won’t see another coal-fired station built here.

“Who would invest in one? It would be a tough investment decision and there’s so much pressure on the big institutions in terms of what they’re investing in,” he said.

While Elon Musk’s savvy spruiking for the Powerwall home battery is grabbing plenty of headlines, at around $9000, it’s a plaything for designer loving millionaires, like an Hermès-branded Apple Watch.

But it did set a benchmark price and already others, like South Korean electronics giant LG, are already pushing down the cost. Simon Hackett’s local player, Redflow, is just hitting the market with its product too.

Solar panels are also dropping in price.

“There’s been a massive drive into solar in China and Japan and the cost of panels is now a fraction of what they were 4-5 years ago,” says Miller.

He believes that when the critical mass comes, the change will be rapid.

Tesla’s Powerwall and batteries like it are going to transform home energy use. Photo: Kevork Djansezian Getty Images

“Energy in the future is going to be very different to what we see as energy today,” Miller says.

“The grid might become a shadow of itself in a decade. Most of the energy will come from technology, which is the photovoltaics (solar panels), and batteries, which shift energy around and optimise it.

“And all of that requires good understanding of usage and the patterns around it, like the kids coming home at 4pm. All that big data/machine learning will come into energy in a big way.”

The problem for traditional players, he argues, is “bigger retailers are vertically integrated and slaves to volume”.

“Over time, as people start to generate their own energy, those assets are going to become harder to move volume on,” Miller says. “It won’t take a lot of battery penetration to make a big difference.”

The Mojo duo are not alone in their view. Investment bank Morgan Stanley released analysis of the market last month that predicts one million Australian households will be using battery storage by 2020. That’s 10% of the market.

The bank’s even more bullish than 12 months ago, when it said 40% of households would have battery storage by 2035, revising its 2.4 million households prediction to more than 3 million in 20 years.

“We think the market continues to underestimate the potential for household battery uptake and the resultant reduction in demand for grid electricity,” the Morgan Stanley analysis says.

“The preconditions are in place with a highly urbanised, high-income society facing some of the highest electricity costs in the world.”

In other words, the sector is ripe for picking. And old energy stocks are in jeopardy.

With rooftop solar already on 1.4 million homes (15%) – “one of the highest per capita solar installation rates in the developed world” the bank says – it looks like the writing is on the wall, even if the traditional players aren’t reading it.

“Cost-effective battery storage will be the game-changer, perhaps even independent of regulatory reform,” Morgan Stanley says.

“Once at critical mass, distributed battery storage can reduce peak grid demand, which means less network investment will be required, lowering long-run (transmission and distribution) costs through greater system efficiency.

“The impact on the major listed generators is less clear, with demand for stationary generation likely to fall, potentially leaving assets stranded and lowering pool prices.”

The problem, says Myatt, is profit under the existing business model comes from encouraging customers to use more energy.

“With the market normally increasing all the time, that model was OK for the last 100 years or so because there was no substitution threat,” he says.

“Then we started to see the feed-in tariffs really drive solar penetration very heavily, so all of a sudden we now had a substitution threat that was coming into consumption.”

Because Mojo doesn’t make money from consumption, its focus shifts to demand management and efficiency, using the technology to find the better rates. But the focus is also on the future of solar and Myatt says it simply doesn’t make sense for traditional energy companies to promote solar into their existing customer base.

“If someone puts solar onto their roof, they can generally drop their consumption by 30-40% and so from a retail perspective, your gross margin drops by a similar amount,” he says.

Add batteries and grid consumption is likely to fall by 70-80%.

“All of sudden, traditional retailers won’t be able to make margin out of their products,” Myatt says. “It’s the death of the retailer”.

So what will happen to them?

“I think they’re just going to scramble to get what they can out of rapidly declining revenue base.”

The shift to data will also attract new players.

“We know Telstra’s looking to step in,” Myatt says.

“It’s data and that’s what lot of the telcos are. Electric vehicles are going to be a massive part of this space. I reckon you’ll see Volvo and Mercedes-Benz, along with Tesla. They’re going to see the battery as just an element that provides the transportation, and is also power.”

Mojo has its own vision to become an electric vehicle supplier.

The future: distributed generation

Carsten Koall/Getty Images

It also plans to offer solar and battery packages, which households can either host, buying the power as it’s used, or co-own.

“Once we’ve got the customers and analysed their data, we’ll make them a subsequent offer solar system and battery storage system,” Myatt says.

But there’s an even bigger play in mind.

Mojo’s goal is to become a distributed generation company, creating a network of homes whose batteries feed into the grid to power other homes.

The current system is a bit like the hub on a bicycle wheel – a generator, in say the Hunter Valley or Victoria’s Latrobe Valley, sends out power over vast distances. Distributed generation is more like pebbles in a pond, with multiple ripples heading out over smaller distances.

To do that, technology will manage the batteries in each house as part of this mini-grid.

“It won’t be an individual household playing in the market, but if you have 10,000 or 1000 units you’re controlling, you’re basically operating as a fragmented generator,” Myatt explains.

“We see a long term future for the grid. Think of it as a roads network. No one’s going to go off the grid in an urban environment because it could be cloudy for a week. You’ve still got these elements to get over.”

Battery’s moment may come soon with the energy regulator looking at changes to the way wholesale energy is priced. Last week, the Australian Energy Market Commission announced “a new review on whether wholesale energy market frameworks are suitable to complement increasing volumes of renewable energy and to maintain power system security as the industry transforms”.

The potential of battery is that it’s instantaneous. Even a gas-fired power station requires 5-10 minutes to fire up once required. If the market moves from a 30 minute to a 5 minute pricing system, batteries will come into their own.

“We’re the test market for a distributed generation environment,” says Myatt.

The one thing missing, he says, is a proper vision from the federal government. While prime minister Malcolm Turnbull talks of innovation, one of the most critical parts of the economy, energy, doesn’t appear to have any strategic direction. Even the renewables sector itself has been in flux in recent years via policy shifts by previous PM Tony Abbott.

James Myatt believes the country needs a road map as the energy sector braces for structural change.

“We haven’t seen any visioning documents from government. And we’re not seeing a lot of policy set saying what we want to do in 20 years,” he says.

But for now, Mojo Power, just two months old, is looking to build its own vision. The pair say the company is already performing well.

And earlier this year it received $5 million from the Southern Cross Renewable Energy Fund, a joint-venture between the Australian Renewable Energy Agency (ARENA) and Softbank China Venture Capital, to accelerate its battery storage business.

Details on Mojo Power are here.

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