First report on annual monitoring of electricity network regulation published

18 July 2017

The Australian Energy Market Commission (AEMC) today published its first annual monitoring report to assess the state of economic regulation for electricity networks in the face of energy market transformation.

The report considers how the economic regulatory framework can best support the continual evolution of electricity networks to facilitate consumer choices and the uptake of distributed energy resources like solar PV, battery storage and ‘smart’ household appliances that respond to changes in electricity prices.

The report finds that:

  • more consumers are adopting distributed energy resources as these technologies become cheaper and better. As a result, networks will increasingly need to support two-way flows of electricity as well as integrating a range of other decentralised energy resources into their operations.
  • the entry of new technologies and business models into the market indicates the framework is allowing the continual evolution of electricity networks
  • there are a number of examples where network businesses have used incentives under the current regulatory framework for non-network solutions, as an alternative to building more poles and wires.

The report also sets out aspects of the regulatory framework may need to be assessed moving forward so that it remains fit for purpose and network businesses can adapt as the electricity market transforms.  Key areas for future monitoring and analysis, using this report as a baseline, are:

Implementation of network pricing reform

Cost-reflective network tariffs require prices for network services to better reflect the actual cost of providing those services in a particular location at a particular time. More accurate information makes it easier for providers of embedded generation, demand response, and other innovative services to identify lower cost alternatives to network investment.

Cost-reflective network tariffs are also essential to providing consumers with more accurate price signals on investing in, and using, distributed energy resources.

The AEMC will monitor the implementation of the new pricing reforms through this annual review.

Networks’ incentives to deliver services at the lowest possible cost

The report found that network spending on new infrastructure has continued to increase in all jurisdictions. This is driven by factors including more stringent reliability and bushfire safety standards, and also technical upgrades to manage system security in a grid with more distributed energy resources.

While these factors drive costs to some degree, the report found they may not be adequate as a complete explanation for the growth in cost.

The regulatory framework has a range of incentives for network businesses to provide a safe and reliable electricity supply at the lowest possible cost. There have been a number of enhancements to the framework in recent years to address the risk of over-investment.  However, as large capital investments tend to be planned some years in advance, there may be a lag between more recent improvements to the framework and a reduction in costs.

The AEMC will undertake a review of the financial incentives for network businesses to see if the recent changes are working to support the most efficient investment. This will allow time for the improvements to start to flow through, including the new cost-reflective pricing reforms.  Our findings will be included in the 2018 edition of this report.

Development of a competitive ‘distribution market’

Future reports of this annual review will provide a platform for the AEMC to continue to explore the development of a competitive distribution market, as outlined in our June 2017 Distribution Market Model project draft report.

A competitive ‘distribution market’ would enable consumers to optimise the value of their investments in distributed energy resources. To underpin such a market, there are a number of key market and technical arrangements that may be needed in the future, with a range of implications for networks and how the economic regulatory framework may need to evolve.

Background

The COAG Energy Council tasked the AEMC to undertake this annual monitoring - recognising the importance of providing early warning of market developments that may need to be addressed by changes to the National Electricity Law/Rules.

The AEMC annual monitoring therefore reports on the regulatory framework’s ability to support continued efficient investment, operation and use of electricity services in the event of increased decentralised supply options.

EXPLAINER OF TECHNICAL TERMS

Distributed energy resources

Distributed energy resources include a range of 'smart' technologies, such as battery storage, electric vehicles an http://www.aemc.gov.au/News-Center/What-s-New/Announcements/Distribution-market-model-project-draft-reportd smart household appliances like refrigerators and dishwashers, which are able to respond to short-term changes in price signals.

These resources can provide services to different parts of the electricity market. For example they can:

  • help consumers reduce electricity bills
  • help electricity networks manage peaks in demand
  • compete in the wholesale electricity market by exporting electricity
  • provide services that help make the system secure, such as frequency control.

 

Media: Bronwyn Rosser, 8296 7847 or 0423 280 341