by AEMC Chairman John Pierce
Published on 26 September 2019 in the Australian Financial Review

Australians are at the forefront of a technological revolution in energy – which has the potential to significantly improve our day to day lives and bring down power bills. 

Households and businesses are now able to produce and store energy through rooftop solar and batteries. Digital appliances and home automation are creating new and exciting opportunities for efficiently managing energy demand.

To maximise the benefits of these technological developments, the Australian Energy Market Commission has today made a package of recommendations through our Grid of the future review, undertaken at the request of the COAG Energy Council. 

At a high level, the Commission is recommending that the electricity network be fundamentally reoriented away from a one way supply chain model to a platform for energy production, consumption, storage and trading.  We are proposing to give energy businesses more tools and opportunities to understand the impacts of these new technologies on their networks.

Behind the meter, there has been a surge in solar PV and battery storage. More than two million homes are now energy producers as well as consumers. Unfortunately, networks still largely charge for energy consumed and not necessarily the services consumers will now require. 

But with the increased cost competitiveness of battery storage and the growth of electric vehicles, there is an opportunity to consider concepts of access pricing and cost-reflective or customer reward pricing. As an example, instead of paying for energy consumed, customers would pay for access to the services they need from the network and be rewarded where they can provide services back to the grid. Adoption of these types of pricing principles would allow consumers to benefit by storing excess power in the middle of the day and selling it into the grid or using it in the evening. 

Such a reform would not only benefit customers with rooftop solar and batteries. By more efficiently utilising the energy produced by embedded generation, the demand on the electricity network is reduced. Batteries can also provide network services that help improve reliability and security for everyone and the households that can provide these services should be rewarded accordingly. 

Over time, this would reduce the amount of money required to service peak demand and therefore reduce costs and prices for all consumers while maintaining reliability and security. 

Conversely, if we don’t make changes to the way networks operate, consumers will bear the cost of distributed energy resources being poorly integrated into the system. A market that does not give customers choice and rewards will drive up costs. For example, electric vehicles could add to peak demand instead of smoothing it, and low cost solar generation could be unnecessarily constrained off.

So while the potential is there for these technological advances to benefit consumers it is not inevitable. The AEMC’s recommendations are needed to convert potential benefits into actual ones.

The unprecedented technological change is not just a supply side story. There are dynamic shifts in technology occurring on the demand side. 

The digitalisation of homes and businesses means new business models are emerging that allow demand to respond in real-time based upon system conditions and pricing signals. A digitally-enabled appliance can be managed remotely in real time by customers or energy service providers on their behalf. There means a much greater ability for demand response to be used as a substitute for new supply.

Demand response and supply-side options are economic substitutes. At times of low demand where there is surplus generation capacity, it is generally more economic for generation to be used to meet customers’ electricity needs.

However, at times of high demand, the cost of supplying an extra unit of electricity is likely to be significant. It is very costly to invest in generation and network infrastructure when it is only used for a few hours each year to service peak demand. Therefore, the ability for customers to choose to manage demand in a manner that is suitable to them is an effective tool in the energy market’s toolkit.

Earlier this year, the AEMC made a draft determination to introduce a wholesale demand response mechanism into Australia’s national electricity market (NEM). This would allow customers to embrace digital and other technologies to bid demand reductions directly into the wholesale NEM. 

The benefits would be two fold – customers that offer their demand response can benefit from reduced energy bills – and all other customers would benefit from avoided expenditure on infrastructure to meet increased peak demand.

New technologies and business models are fundamentally reshaping Australia’s electricity markets. It is important that regulatory frameworks continue to evolve to ensure that consumers can maximise the benefits from this technology transition. To this end, we are working in partnership with the Australian Energy Markey Operator and the Australian Energy Regulator on options for reforms as part of the Energy Security Board’s post-2025 process. 

The AEMC’s recommendations for regulating electricity networks form a bedrock on which to move forward. Ultimately, the grid must transition in a way that meets the national energy objectives – the long-term interests of consumers.