Climate

News Topic ID
16

NSW networks workshop on connecting local generators

17 September 2015

More local businesses in the market today are choosing to generate their own power from renewable sources. These local generators may want to connect to the network for back-up power or to sell their excess electricity to the grid.

New rules have been made by the AEMC to give embedded generators new connection choices to suit their business.

The New South Wales Department of Industry, Resources and Energy Division held a connections workshop on 15 September providing an opportunity for local generators, network companies and government to exchange detailed information on the new connection processes.

The AEMC presented to the workshop.

Papers prepared by the AEMC for the workshop are available here.

The information pack covers the different options available to business and residential consumers when seeking to connect a generator to a distribution network.

It also provides a step by step guide to each of the processes available.

Media: Communication Manager, Prudence Anderson 0404 821 935 or (02) 8296 7817

A consumer driven market

19 September 2014

SPEECH BY COMMISSIONER JOHN PIERCE AT 2014 NEM FUTURE FORUM

A consumer driven market: the next chapter in a national productivity improvement story

19 September 2014

DOWNLOAD PDF VERSION

Thank you for being here today to discuss the future of the National Electricity Market.

Before we begin, I’d like to acknowledge the traditional owners of the land on which we meet and pay my respects to their elders both past and present. I’d also like to acknowledge:

  • Keith Orchison, our Chair today, and
  • All our other speakers.

I’ve been asked to speak about where the national energy market is now, and where it’s headed in the future.

As a Commission, we are in a sense quite agnostic about the future. We are not in the business of making forecasts of demand, prices, relative costs and technologies.

In performing our role, we don’t need to, because ultimately it will be consumers doing what consumers do – making consumption decisions based on the price and service options available to them – that will drive the way the sector develops.

But where we are now?

The National Electricity Market has been on a fairly consistent reform path over the past 25 years or so.

I don’t intend to give a history lesson today, but briefly: the reform of the energy sector was part of a major period of economic reform kicked off in the 80s, which included reforming a set of capital intensive utility services such as energy, communications, transport and water, whose performance was not supporting long term economic growth to the extent that it could.

These assets were state owned, centrally organised and monopolistic.

Since then, the story in our sector has been one of separating policy and regulatory functions from industry; industry restructuring; and bringing competition to the sector.

A key characteristic of the old industry structure – and one that makes what we have today in the competitive generation and retail sectors different – is where demand and investment risks fall and the way they are managed.

It is in fact how these risks are allocated between consumers and businesses that determines whether ‘what we have’ deserves to be called a market at all.

Numerous reports and reviews dating back to the 1986 McDonell and 1988 Curran inquiries in NSW, through to the Western Australian Economic Regulatory Authorities’ report on that State’s wholesale electricity market published last year, show that wherever you have a central authority determining how the sector is to develop – how much investment is to occur – how much capacity is to be built or procured based on fallible forecasts of the future – the costs of getting these decisions wrong rests with consumers.

For the future of the sector to be driven by consumers deciding what is of value to them, one of the prerequisites is that demand and investment risks are managed by businesses, operating in a workably competitive market.

You don’t need to believe – though you may choose to – that people making investment decisions based on forecasts of the future working within an AGL or Origin or Alinta, are any better at foretelling the future than people – possibly the same people – working within a central authority. The point is the risk allocation, the way it’s managed and the associated incentives are different.

We have come a long way but there is, of course, work to be done.

We have clearly commenced a new stage where the NEM’s development is driven by consumers making choices about the way they source and use energy.

The measures set out in the Commission’s Power of Choice reform package, and the reviews of retail competition, which included proposals to address the way distribution tariffs are structured that are now at the Draft Rule stage, are about facilitating consumers move from the “back seat” to the “driver’s seat” – giving them better information and tools to make informed choices about their energy consumption.

A key question though is will they find it a comfortable seat and a pleasant experience?

Consumers – that is, people – need to be as comfortable making choices about energy as they are picking items off the supermarket shelf.

When you think about the process of choosing products at a supermarket, a consumer is able to scan a shelf, run their eye past the Tim Tams, the Iced Vovos, the Mint Slices (a personal favourite), the Scotch Fingers, and all the while weighing up taste, quality, price, your attempt to be virtuous with respect to diet. And pretty quickly narrowing it down to a couple of options – the Iced Vovos and the Mint Slices – and buy both.

Granted energy is a little more complicated than that, but fundamentally we want to get to a place where consumers are as comfortable making decisions about energy as they are other products and services, where competition and choice is taken for granted.

And to do that people need information; they need tools; they need to be engaged; they need a reason to be engaged; and they need the price they pay for energy to reflect the cost of supplying them, as individuals.

Together, the AEMC’s Power of Choice reforms and the lessons from our reviews of retail competition are key to achieving these objectives.

One of the Power of Choice building blocks is the distribution network pricing rule change, which aims to have network prices paid by individual consumers better reflect the cost of providing network services to them.

Currently, even if the total costs of network services is at efficient levels, many individual consumers pay more than the costs caused by their usage, because of the way network prices are structured. Other consumers, in particular those that use a greater proportion of their energy at peak times, pay less than the costs caused by their usage.

Existing network price structures over-recover for off-peak use of the network and under-recover for peak use. In the draft rule determination, we include a number of case studies to explain this.

By way of example a consumer using an average size north facing solar PV system will save themselves about $200 a year in network charges compared with a similar consumer without solar.

Because most of the solar energy is generated at non-peak times, it reduces the network’s costs by $80, leaving other consumers to make up the $120 shortfall through higher charges.

The same consumer could reduce network costs considerably and align with the savings they receive, by facing their panels west, generating more energy 4 at peak times when it is most needed. That is, less energy in total, but more when it is most valued.

Under the existing network pricing arrangements, the consumer has no incentive to do so as they benefit more by generating more total energy throughout the day.

Equally, a consumer using a large 5kW air-conditioner in peak times will cause about $1,000 a year in additional network costs compared with a similar consumer without an air-conditioner.

But the consumer with the air-conditioner pays about an extra $300 under the most common network prices. The remaining $700 is recovered from all other consumers through higher network charges.

In both examples, some consumers are paying more than it costs to provide services to them, and others less.

The objective of the changes set out in our recent Draft Determination is that network prices paid by individual consumers better reflect the cost of providing network services to them, as individuals.

This will allow consumers to make more informed choices about what energy services they value.

It will also give consumers the information they need to decide what technologies might work best for them to manage their usage, and help reduce their energy charges.

From a market and overall system point of view, it will mean consumers' choices are the driving force behind market development and investment and provide the conditions for a more effective and competitive energy market.

Of course it’s one thing to create the market conditions for choice, but consumers also need the tools to respond to market price signals.

Another important Power of Choice building block is creating opportunities for a competitive energy services market.

It goes without saying that consumers use of technology will be a huge part of the process in driving change and market development in coming years.

We don’t necessarily know which technologies or how they will be used, which is precisely why the Commission’s policy work is agnostic about technological development, but we know they will drive innovation and change and the system must be flexible enough to respond to that change.

The rule change to promote competition in metering and related services; the open access and common communications standards framework for smart meters; arrangements to allow multiple trading relationships at the consumer’s connection point; and measures to improve the switching process – these reforms will all work together to help the energy services market evolve in a way that supports consumer choice.

So how might we predict the future for the National Energy Market?

My advice is to follow the consumer.

They’re in the driving seat and technology is propelling them very quickly in relatively unpredictable ways.

Increasingly, they’re expecting engagement. Not only to be consulted on industry and regulatory activity but to actively participate in the energy market.

So in terms of how the Australian Energy Market Commission sees the energy market of the future, we don’t plan to bet on any single possible future.

Instead, we want a system which is flexible enough to respond to the increasingly sophisticated and diverse demands of consumers, which allows their choices and preferences to drive market development.

But, we won’t get there if we start fiddling with the way energy is bought and sold (the means of exchange) or if there are policy interventions in the market that undermine its operation and the ability of price to reflect underlying demand and supply conditions.

So let’s talk about capacity (so called) “markets”.

There has been increased chatter in recent times suggesting that there may be a case for a fundamental redesign of the wholesale energy market – a move to a capacity (so called) “market”.

This, at least in part, appears to be motivated by the current disconnect between wholesale and retail prices and generation oversupply.

The WA energy market is a good local example of the problem with capacity markets and the WA Government is currently grappling with what to do about the problems they cause – predominantly higher risk and generally higher prices for consumers.

The WEM is typical of other capacity markets in that it relies on a central authority to predict and procure generation capacity.

If your system requires an omnipresent, all knowing being – let’s call him or her ‘god’ – to understand a system completely, have perfect powers of prediction and to know what capacity should be set to match future demand, the only thing you can perfectly predict is that god will be wrong.

In reality, typically in capacity markets our omnipresent, perfect bureaucrat will contract or regulate for too much supply, because that is the rational thing to do given the incentives god faces.

And when he or she gets it wrong and over contracts, the consumer pays.

That is certainly the case in WA. It was the case in the “olden days” of the state-based utilities. The consequence of this type of structure is that demand risks fall on consumers.

We’ve well and truly moved away from this era in the NEM – indeed as I’ve spent most of today’s speech talking about, we are headed in exactly the opposite direction.

So the message to those intending to fiddle with the development of a consumer driven energy market and revert to the risk allocation of the old days is a simple one – you are heading in the wrong direction.

Part of the underlying issue here of course, is the impact of bringing together the way the energy market works with the particular way the Renewable Energy Target is designed.

In effect, because the RET sets a specific GWh target, its risk allocation is the same as a capacity (so called) “market”.

These issues of the interface between the two have always been there, but have only become more evident with the drop off in demand growth.

Governments legitimately have a range of policy objectives in addition to the traditional energy policy objectives.

That’s why we have elected governments to specify policy objectives. But in achieving these different objectives we must be careful, wherever possible, not to jeopardise the achievement of one to the benefit of another.

When contemplating the effective integration of energy and environmental policy, it is important to design a mechanism to achieve an emissions reduction objective that preserves the means of exchange and allocation of risk in energy markets. Because these are the characteristics that make the energy market, a “market” in the first place.

For the NEM to be an effective market, it must be able to respond to changes in demand driven by consumer preferences, changes in technology and other factors, like relative prices, which cannot necessarily be predicted.

For a policy to be sustainable there needs to be a reasonable opportunity to adapt to material changes in market conditions, in a consistent manner.

Robust policy positions should not be predicated on one particular view of the future.

For environmental policy like the RET to be sustainable, investors also need a level of confidence that policy objectives can be met and are sufficiently robust to adjust to changes in market conditions.

It is due to the divergence in the risk allocation mechanisms in the energy market on the one hand, and the current RET design on the other, that we proposed, in our submission to the RET review, moving the RET to a floating 20 per cent target in 2020, as opposed to a fixed GWh target.

The important point is not even the level at which the target is set – let’s call the target “X” – it’s that it is “X per cent” of whatever demand happens to be.

This would shift the allocation of demand risk away from consumers and more appropriately share it amongst investors – renewable and thermal – who are better placed to manage such risk and profit from efficient decisions.

While consumers are going to drive much of the change we experience in the energy market in the coming years through their demands and preferences, we also have to make sure the benefits flow to all consumers.

And we must ensure some consumers don’t get lost in the change and the increasing diversification of the sector. This involves a massive communications challenge.

In May this year, the Commission held its first strategic priorities forum with consumer representatives in order to deepen our relationships with consumers and their advocates as we consider the agenda ahead of us.

Consumer engagement was right at the top of the list of issues we are dealing with, particularly ensuring they having full information about contracts, offers and changes related to new flexible pricing structures.

Equally significant to consumer groups was the impact of energy prices, along with the importance of consumer protections, particularly those that support more vulnerable and low income consumers.

So we need to be able to respond to those concerns about ensuring all consumers benefit from greater competition, and respond to concerns about the necessary consumer protections needed into the future.

Many consumers need the information and confidence to become more engaged in shopping for energy. Our Consumer Engagement Blueprint for the review of competition in NSW energy retail markets recommended strategies to achieve this, including:

  • providing information to consumers that uses different channels to target specific consumer segments as well as the broader community,
  • refinements to existing comparison tools so that consumers have a trusted source of advice that allows ‘apples for apples’ comparisons, many of which are already being considered by the AER, and
  • providing additional support to consumers that need it.

And many of these reforms are being rolled out with some good results.

For example, it was encouraging to see in our recent report on competition in retail electricity and gas markets that 90 per cent of all consumers were aware they could choose their energy company, up to 40 per cent had actively investigated options, and up to 28 per cent had actually switched during 2013.

Consumers are shopping around for better gas and electricity deals more often than they are switching insurance companies, or phone and internet providers.

New retailers are entering markets and winning customers with discounts and other incentives, with conservative estimates of savings from $60 to $240 or more a year, depending on where they live and how much electricity they use.

The other aspect of the communications challenge is to understand that there are an increasing number of already engaged consumers – energy literate consumers – who want an entirely different energy product compared with what has been provided to them in the past.

So as we embrace the challenge of responding to diverse needs – from highly energy literate consumers, to more traditional consumers, to vulnerable consumers – it will be important to have a market that is flexible and able to respond to diversity and range of possible future scenarios.

In the years to come, the structure of the energy sector may be quite different to the one we see today.

The increased interest of new technology providers in our sector has the potential to reshape the way we think of an energy services provider.

The increased use of electric cars, the uptake of home energy management systems and technologies, and other possible demand game changers, which may work in completely opposite directions.

All this has the potential to change the face of the energy sector.

The focus of the AEMC – the agnostic AEMC – is to care deeply about the future and develop the NEM into a market that is flexible and able to respond to whatever the future holds.

Thank you for listening and enjoy what promises to be a fascinating day’s discussion.

ENDS

A consumer driven market

19 September 2014

SPEECH BY COMMISSIONER JOHN PIERCE AT 2014 NEM FUTURE FORUM

A consumer driven market: the next chapter in a national productivity improvement story

19 September 2014

DOWNLOAD PDF VERSION

Thank you for being here today to discuss the future of the National Electricity Market.

Before we begin, I’d like to acknowledge the traditional owners of the land on which we meet and pay my respects to their elders both past and present. I’d also like to acknowledge:

  • Keith Orchison, our Chair today, and
  • All our other speakers.

I’ve been asked to speak about where the national energy market is now, and where it’s headed in the future.

As a Commission, we are in a sense quite agnostic about the future. We are not in the business of making forecasts of demand, prices, relative costs and technologies.

In performing our role, we don’t need to, because ultimately it will be consumers doing what consumers do – making consumption decisions based on the price and service options available to them – that will drive the way the sector develops.

But where we are now?

The National Electricity Market has been on a fairly consistent reform path over the past 25 years or so.

I don’t intend to give a history lesson today, but briefly: the reform of the energy sector was part of a major period of economic reform kicked off in the 80s, which included reforming a set of capital intensive utility services such as energy, communications, transport and water, whose performance was not supporting long term economic growth to the extent that it could.

These assets were state owned, centrally organised and monopolistic.

Since then, the story in our sector has been one of separating policy and regulatory functions from industry; industry restructuring; and bringing competition to the sector.

A key characteristic of the old industry structure – and one that makes what we have today in the competitive generation and retail sectors different – is where demand and investment risks fall and the way they are managed.

It is in fact how these risks are allocated between consumers and businesses that determines whether ‘what we have’ deserves to be called a market at all.

Numerous reports and reviews dating back to the 1986 McDonell and 1988 Curran inquiries in NSW, through to the Western Australian Economic Regulatory Authorities’ report on that State’s wholesale electricity market published last year, show that wherever you have a central authority determining how the sector is to develop – how much investment is to occur – how much capacity is to be built or procured based on fallible forecasts of the future – the costs of getting these decisions wrong rests with consumers.

For the future of the sector to be driven by consumers deciding what is of value to them, one of the prerequisites is that demand and investment risks are managed by businesses, operating in a workably competitive market.

You don’t need to believe – though you may choose to – that people making investment decisions based on forecasts of the future working within an AGL or Origin or Alinta, are any better at foretelling the future than people – possibly the same people – working within a central authority. The point is the risk allocation, the way it’s managed and the associated incentives are different.

We have come a long way but there is, of course, work to be done.

We have clearly commenced a new stage where the NEM’s development is driven by consumers making choices about the way they source and use energy.

The measures set out in the Commission’s Power of Choice reform package, and the reviews of retail competition, which included proposals to address the way distribution tariffs are structured that are now at the Draft Rule stage, are about facilitating consumers move from the “back seat” to the “driver’s seat” – giving them better information and tools to make informed choices about their energy consumption.

A key question though is will they find it a comfortable seat and a pleasant experience?

Consumers – that is, people – need to be as comfortable making choices about energy as they are picking items off the supermarket shelf.

When you think about the process of choosing products at a supermarket, a consumer is able to scan a shelf, run their eye past the Tim Tams, the Iced Vovos, the Mint Slices (a personal favourite), the Scotch Fingers, and all the while weighing up taste, quality, price, your attempt to be virtuous with respect to diet. And pretty quickly narrowing it down to a couple of options – the Iced Vovos and the Mint Slices – and buy both.

Granted energy is a little more complicated than that, but fundamentally we want to get to a place where consumers are as comfortable making decisions about energy as they are other products and services, where competition and choice is taken for granted.

And to do that people need information; they need tools; they need to be engaged; they need a reason to be engaged; and they need the price they pay for energy to reflect the cost of supplying them, as individuals.

Together, the AEMC’s Power of Choice reforms and the lessons from our reviews of retail competition are key to achieving these objectives.

One of the Power of Choice building blocks is the distribution network pricing rule change, which aims to have network prices paid by individual consumers better reflect the cost of providing network services to them.

Currently, even if the total costs of network services is at efficient levels, many individual consumers pay more than the costs caused by their usage, because of the way network prices are structured. Other consumers, in particular those that use a greater proportion of their energy at peak times, pay less than the costs caused by their usage.

Existing network price structures over-recover for off-peak use of the network and under-recover for peak use. In the draft rule determination, we include a number of case studies to explain this.

By way of example a consumer using an average size north facing solar PV system will save themselves about $200 a year in network charges compared with a similar consumer without solar.

Because most of the solar energy is generated at non-peak times, it reduces the network’s costs by $80, leaving other consumers to make up the $120 shortfall through higher charges.

The same consumer could reduce network costs considerably and align with the savings they receive, by facing their panels west, generating more energy 4 at peak times when it is most needed. That is, less energy in total, but more when it is most valued.

Under the existing network pricing arrangements, the consumer has no incentive to do so as they benefit more by generating more total energy throughout the day.

Equally, a consumer using a large 5kW air-conditioner in peak times will cause about $1,000 a year in additional network costs compared with a similar consumer without an air-conditioner.

But the consumer with the air-conditioner pays about an extra $300 under the most common network prices. The remaining $700 is recovered from all other consumers through higher network charges.

In both examples, some consumers are paying more than it costs to provide services to them, and others less.

The objective of the changes set out in our recent Draft Determination is that network prices paid by individual consumers better reflect the cost of providing network services to them, as individuals.

This will allow consumers to make more informed choices about what energy services they value.

It will also give consumers the information they need to decide what technologies might work best for them to manage their usage, and help reduce their energy charges.

From a market and overall system point of view, it will mean consumers' choices are the driving force behind market development and investment and provide the conditions for a more effective and competitive energy market.

Of course it’s one thing to create the market conditions for choice, but consumers also need the tools to respond to market price signals.

Another important Power of Choice building block is creating opportunities for a competitive energy services market.

It goes without saying that consumers use of technology will be a huge part of the process in driving change and market development in coming years.

We don’t necessarily know which technologies or how they will be used, which is precisely why the Commission’s policy work is agnostic about technological development, but we know they will drive innovation and change and the system must be flexible enough to respond to that change.

The rule change to promote competition in metering and related services; the open access and common communications standards framework for smart meters; arrangements to allow multiple trading relationships at the consumer’s connection point; and measures to improve the switching process – these reforms will all work together to help the energy services market evolve in a way that supports consumer choice.

So how might we predict the future for the National Energy Market?

My advice is to follow the consumer.

They’re in the driving seat and technology is propelling them very quickly in relatively unpredictable ways.

Increasingly, they’re expecting engagement. Not only to be consulted on industry and regulatory activity but to actively participate in the energy market.

So in terms of how the Australian Energy Market Commission sees the energy market of the future, we don’t plan to bet on any single possible future.

Instead, we want a system which is flexible enough to respond to the increasingly sophisticated and diverse demands of consumers, which allows their choices and preferences to drive market development.

But, we won’t get there if we start fiddling with the way energy is bought and sold (the means of exchange) or if there are policy interventions in the market that undermine its operation and the ability of price to reflect underlying demand and supply conditions.

So let’s talk about capacity (so called) “markets”.

There has been increased chatter in recent times suggesting that there may be a case for a fundamental redesign of the wholesale energy market – a move to a capacity (so called) “market”.

This, at least in part, appears to be motivated by the current disconnect between wholesale and retail prices and generation oversupply.

The WA energy market is a good local example of the problem with capacity markets and the WA Government is currently grappling with what to do about the problems they cause – predominantly higher risk and generally higher prices for consumers.

The WEM is typical of other capacity markets in that it relies on a central authority to predict and procure generation capacity.

If your system requires an omnipresent, all knowing being – let’s call him or her ‘god’ – to understand a system completely, have perfect powers of prediction and to know what capacity should be set to match future demand, the only thing you can perfectly predict is that god will be wrong.

In reality, typically in capacity markets our omnipresent, perfect bureaucrat will contract or regulate for too much supply, because that is the rational thing to do given the incentives god faces.

And when he or she gets it wrong and over contracts, the consumer pays.

That is certainly the case in WA. It was the case in the “olden days” of the state-based utilities. The consequence of this type of structure is that demand risks fall on consumers.

We’ve well and truly moved away from this era in the NEM – indeed as I’ve spent most of today’s speech talking about, we are headed in exactly the opposite direction.

So the message to those intending to fiddle with the development of a consumer driven energy market and revert to the risk allocation of the old days is a simple one – you are heading in the wrong direction.

Part of the underlying issue here of course, is the impact of bringing together the way the energy market works with the particular way the Renewable Energy Target is designed.

In effect, because the RET sets a specific GWh target, its risk allocation is the same as a capacity (so called) “market”.

These issues of the interface between the two have always been there, but have only become more evident with the drop off in demand growth.

Governments legitimately have a range of policy objectives in addition to the traditional energy policy objectives.

That’s why we have elected governments to specify policy objectives. But in achieving these different objectives we must be careful, wherever possible, not to jeopardise the achievement of one to the benefit of another.

When contemplating the effective integration of energy and environmental policy, it is important to design a mechanism to achieve an emissions reduction objective that preserves the means of exchange and allocation of risk in energy markets. Because these are the characteristics that make the energy market, a “market” in the first place.

For the NEM to be an effective market, it must be able to respond to changes in demand driven by consumer preferences, changes in technology and other factors, like relative prices, which cannot necessarily be predicted.

For a policy to be sustainable there needs to be a reasonable opportunity to adapt to material changes in market conditions, in a consistent manner.

Robust policy positions should not be predicated on one particular view of the future.

For environmental policy like the RET to be sustainable, investors also need a level of confidence that policy objectives can be met and are sufficiently robust to adjust to changes in market conditions.

It is due to the divergence in the risk allocation mechanisms in the energy market on the one hand, and the current RET design on the other, that we proposed, in our submission to the RET review, moving the RET to a floating 20 per cent target in 2020, as opposed to a fixed GWh target.

The important point is not even the level at which the target is set – let’s call the target “X” – it’s that it is “X per cent” of whatever demand happens to be.

This would shift the allocation of demand risk away from consumers and more appropriately share it amongst investors – renewable and thermal – who are better placed to manage such risk and profit from efficient decisions.

While consumers are going to drive much of the change we experience in the energy market in the coming years through their demands and preferences, we also have to make sure the benefits flow to all consumers.

And we must ensure some consumers don’t get lost in the change and the increasing diversification of the sector. This involves a massive communications challenge.

In May this year, the Commission held its first strategic priorities forum with consumer representatives in order to deepen our relationships with consumers and their advocates as we consider the agenda ahead of us.

Consumer engagement was right at the top of the list of issues we are dealing with, particularly ensuring they having full information about contracts, offers and changes related to new flexible pricing structures.

Equally significant to consumer groups was the impact of energy prices, along with the importance of consumer protections, particularly those that support more vulnerable and low income consumers.

So we need to be able to respond to those concerns about ensuring all consumers benefit from greater competition, and respond to concerns about the necessary consumer protections needed into the future.

Many consumers need the information and confidence to become more engaged in shopping for energy. Our Consumer Engagement Blueprint for the review of competition in NSW energy retail markets recommended strategies to achieve this, including:

  • providing information to consumers that uses different channels to target specific consumer segments as well as the broader community,
  • refinements to existing comparison tools so that consumers have a trusted source of advice that allows ‘apples for apples’ comparisons, many of which are already being considered by the AER, and
  • providing additional support to consumers that need it.

And many of these reforms are being rolled out with some good results.

For example, it was encouraging to see in our recent report on competition in retail electricity and gas markets that 90 per cent of all consumers were aware they could choose their energy company, up to 40 per cent had actively investigated options, and up to 28 per cent had actually switched during 2013.

Consumers are shopping around for better gas and electricity deals more often than they are switching insurance companies, or phone and internet providers.

New retailers are entering markets and winning customers with discounts and other incentives, with conservative estimates of savings from $60 to $240 or more a year, depending on where they live and how much electricity they use.

The other aspect of the communications challenge is to understand that there are an increasing number of already engaged consumers – energy literate consumers – who want an entirely different energy product compared with what has been provided to them in the past.

So as we embrace the challenge of responding to diverse needs – from highly energy literate consumers, to more traditional consumers, to vulnerable consumers – it will be important to have a market that is flexible and able to respond to diversity and range of possible future scenarios.

In the years to come, the structure of the energy sector may be quite different to the one we see today.

The increased interest of new technology providers in our sector has the potential to reshape the way we think of an energy services provider.

The increased use of electric cars, the uptake of home energy management systems and technologies, and other possible demand game changers, which may work in completely opposite directions.

All this has the potential to change the face of the energy sector.

The focus of the AEMC – the agnostic AEMC – is to care deeply about the future and develop the NEM into a market that is flexible and able to respond to whatever the future holds.

Thank you for listening and enjoy what promises to be a fascinating day’s discussion.

ENDS

Submission to the Review of the Renewable Energy Target – Supplementary Information – Frontier Economics report

19 June 2014

Today the AEMC released a report by Frontier Economics that outlines the methodology, input assumptions, scenarios and key findings from the electricity market modelling included in the AEMC’s submission to the RET Review. 

Submission to the Review of the Renewable Energy Target

29 May 2014

The AEMC today published its submission to the Review of the Renewable Energy Target.

 

AEMC Chairman address to world energy forum in Quebec City, Canada

16 May 2012

AEMC Chairman, John Pierce, has addressed the World Forum on Energy Regulation in Canada. He participated in the session on environmental impacts of the current electricity generation mix (12.30am 16 May 2012 AEST).

 

AEMC Chairman address to world energy forum in Quebec City, Canada

16 May 2012

AEMC Chairman, John Pierce, has addressed the World Forum on Energy Regulation in Canada. He participated in the session on environmental impacts of the current electricity generation mix (12.30am 16 May 2012 AEST).

Chairman of the Australian Energy Market Commission, Mr John Pierce, has described the National Electricity Market as a model for successful transformation of stationary energy sectors in response to climate change.

The world’s energy markets are at a turning point, he said.

“It’s important to carefully consider the potential of market mechanisms to deliver major government reforms – especially as political focus shifts toward addressing the effects of climate change.

“We have important choices to make between different fuel sources, different technologies, different renewable fuel options, different approaches to demand management and between complex regulatory alternatives.

“Making good decisions will depend on our ability to make the costs of energy supply as efficient as possible to ensure the best results for consumers in the long term.”

Markets are moving away from the current fuel mix to produce electricity from less carbon intensive sources, Mr Pierce said.

“In a political context where environmental concerns are increasingly paramount, policy makers might criticise the market frameworks and call for more regulation or direct intervention. Such calls are understandable but excessive interference in market functions can have serious implications for market stability.

“The recent history of Australia’s national electricity market shows how major reforms can be implemented through careful market design and management,” Mr Pierce said.

“At the same time there are sectoral and structural challenges that will require creative thinking to resolve.”

Key points

    • South Australia has one of the world’s highest penetration levels of wind generation – although it tends to be available outside periods of highest demand.
    • Small scale solar rooftop generation produces more expensive abatement than that achieved by centralised large scale technology – although its effectiveness is increased when a carbon tax is in place.
    • Australia may be cutting overall electricity usage as the less energy intensive services sector grows as a proportion of the economy – although energy intensive household appliances continue to push peak demand growth at a faster rate than average energy demand.
    • Gas is the most likely candidate on the supply side to replace coal generation – although broader interlinkages between electricity and gas markets carry price and supply risks that will require careful oversight.
Installed capacity by fuel source 2000 to 2011

Read the J. Pierce conference paper

The Australian National Electricity Market: Choosing a new future. Conference Paper, World Energy Forum on Energy Regulation V, 13-16 May 2012, Quebec City, Canada

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

Media: Communication Manager, Prudence Anderson 0404 821 935 or (02) 8296 7817

Asia-Pacific Partnership on Clean Development and Climate

04 November 2010

Presentation to the Asia-Pacific Partnership on Clean Development and Climate (APP)

4 November 2010

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John Pierce Chairman Australian Energy Market Commission The Asia-Pacific Partnership on Clean Development and Climate (APP) brings together Australia, Canada, China, India, Japan, Republic of Korea and the United States of America to address the challenges of climate change, energy security, and air pollution in a way that encourages economic development and reduces poverty. This grouping represents around half of the world’s emissions, energy use, gross domestic product and population. It is an important initiative that engages key greenhouse gas emitting countries in the Asia Pacific region. This speech by Mr Pierce was presented to the 3rd Energy Regulatory and Market Development Forum held in Sydney, Australia on 3- 5 November 2010. This forum is a project under the Power Generation and Transmission Task Force of the APP.

Introduction

Good morning ladies and gentlemen and let me add my welcome to this rather unique forum, which brings together so many important policy makers and regulators in the energy sector, from the Asia-Pacific region and further afield.

The Asia- Pacific Partnership on Clean Development and Climate has been in existence for about five years, so this is a good time to reflect on what has been achieved, as well as challenges for the future.

The Partnership was formed to facilitate voluntary co-operation in the sharing and diffusion of technologies that promote achievement of each countries’ energy and climate change policies. There is an impressive list of projects being undertaken by the Partnership across the eight work areas. This illustrates the scope and benefits of sharing information and ideas on issues that underpin not just the energy sector but the direction and nature of economic development and its environmental impacts.

This Energy Regulatory and Market Development forum is one of the important projects within the Partnership that recognises the critical role that the market and regulatory frameworks play in the energy sector’s ability to efficiently achieve the goal of a more sustainable use of the environmental resource upon which we all depend.

I am sure that over the next two days we will find that while there is much that differs in the market conditions and regulatory structures in our countries, there are lessons we can all learn, and common themes that we can draw on, as we undertake our respective roles at home.

In addition to the members of the Partnership, the involvement of the UK and New Zealand in this forum is particularly welcome given their experiences of liberalising energy markets alongside tackling environmental challenges.

Over the last 15 to 20 years there have been major changes in the Australian energy sector that reflect, I suspect many of the themes that we will hear from each country over the next two days.

The reform program that created Australia’s National Electricity Market (NEM), and subsequently the emerging national gas market, has delivered substantial benefits to customers through more efficient risk allocation, productivity improvements, competition, continued strong investment and reliable supply.

This program however is not some mythical perpetual-motion machine. There are no ‘set and forget’ options. The laws of thermodynamics apply as much in the world of governments, policy makers and regulators as they do to the physical world.

The ability of our industry and regulatory structures to deliver the outcomes - the performance our populations value - requires a significant and continuous supply of time and effort by officials such as ourselves.

In the Australian context:

  • the State Government of New South Wales is currently in the process of selling a number of its main energy sector businesses;
  • an expanded Renewable Energy Target (RET) will come into effect next year;
  • the Prime Minister’s Task Group on Energy Efficiency has recommended a range of measures to deliver a step change in the take-up of energy efficiency measures;
  • various approaches to demand management and the application of ‘smart grid’ technologies are being trialled and applied; and
  • the Federal government has established a multi party parliamentary committee, which is due to report on the preferred form of a carbon price by the end of 2011.

These and other developments are occurring at a time when the Global Financial Crisis (GFC) and the subsequent impacts on the real economy have shaken the confidence of some in the resilience and effectiveness of markets and their associated regulatory structures to deliver affordable, reliable, efficient and environmentally sustainable supply and use of energy.

The Australian Energy Market Commission’s (AEMC) work however is based on the proposition that such objectives cannot be delivered without harnessing competitive markets and market incentives.

In the current context, this view applies most directly to measures that Governments adopt to address climate change and the achievement of emission reduction commitments.

Market incentives do not operate within a vacuum and to work effectively depend upon:

  • clear and consistent policy directions; and
  • clear and consistent governance and regulatory arrangements

This is particularly important when the forces of economics and finance need to be reconciled with the laws of physics.

Where does the AEMC fit?

Australia’s energy market governance framework is a reflection of:

  • our federal system of government and the dominate responsibility for the sector resting with the States; together with
  • recognition of the physical and economic interdependence of the States and the impact of the sector on the performance of the national economy.

Although the national electricity market started to develop in the early to mid 1990s, the current governance framework was established under an intergovernmental agreement signed in June 2004.

This agreement sets out the National Electricity and Gas Objectives as well as the role of the Ministerial Council on Energy and the institutional bodies that regulate and operate the markets.

The Australian Energy Market Commission was established as a statutory commission under its own Act to perform two principle functions:

  • to make and amend the National Electricity and Gas rules; and
  • to conduct reviews of the energy markets on behalf of the Ministerial Council.

Our statutory rule making and provision of advice is guided by the National Electricity and Gas Objectives which are also embedded in the National Electricity and Gas Laws.

These objectives are to:

“Promote efficient investment in, and efficient operation and use of, electricity and natural gas services for the long-term interests of consumers with respect to price, quality, safety, reliability and security”

The interests of energy users – current and future – are therefore paramount to our decision making and provision of advice to the MCE.

The Australian Energy Regulator (AER), whose Chairman will speak to you next, implements the rules relating to economic regulation of the monopoly network sector and rule compliance and enforcement and functions.

The Australian Energy Market Operator (AEMO) is the wholesale market operator and has various planning, co-ordination and market information provision functions.

The challenge of climate change policy

Australia is now a signatory to the Kyoto protocol and has committed itself to a 5% reduction by 2020. The considerable scale of the task can be seen by reference to the contribution of the stationary energy sector to overall carbon emissions from Australia and the heavy reliance on coal fired generation capacity.

As is the case in most places, the choice of generation technology is primarily a reflection of the relative price and availability of the primary fuel sources which in Australia’s case has lead to the dominance of coal. A complete technological transformation of the generation sector will be required if our emissions reduction commitments are to be met. Policies will therefore be required to effect this change, which will significantly test the responsiveness and robustness of energy markets.

The Australian Government is committed to ensuring that 20% of electricity comes from renewable sources by 2020. This is expected to require an additional 45,000GWh by 2020, or approximately 10,000MW of renewable generation capacity, against the level of renewable energy output in 1997. The Renewable Energy Target is divided between large and small scale generation, with a supplier or retailer obligation to achieve the target and an associated tradeable certificate scheme designed to promote investment in the most efficient forms of renewable energy.

Following the recent federal election the government has now appointed a multiparty parliamentary committee to advise it by the end of 2011 on how best to put an explicit price on carbon.

In addition to these federal policies we have a range of state based schemes, including for instance in New South Wales a base-line and credit emissions trading scheme, a gas target in Queensland, and in many parts of the country feed-in-tariffs for residential solar. There has however been some concern about the cost and efficiency of some of these schemes as a means to reduce emissions, and the burden they will place in the future on all customers.

The Prime Minister’s Task Group on energy efficiency has recently issued its report with a range of recommendations for improving Australia’s energy efficiency. Amongst the recommendations is an obligation on retailers to deliver a defined level of improvement in energy efficiency.

Climate change policies and deregulated energy markets

A range of carbon related policy measures are therefore being brought to bear on achieving our international obligation to reduce emissions by at least 5% on 2000 levels. This will present considerable challenges to competitive energy markets to operate effectively under these policy developments and continue to deliver energy policy objectives at minimum costs to consumers.

We consider these challenges emerge in three key areas in particular:

  • Competitive investment in generation capacity.
  • Demand side participation.
  • Transmission investment and operation.

I expect these challenges are familiar to many of you in your particular countries.

Generation investment and adequacy

Both the electricity and gas sectors are entering a period when a higher level of investment will be required be that for adding to capacity replacing capacity approaching the end of its economic life or ‘re-tooling’ the emissions intensity of the existing capital stock. In the electricity sector, estimates of the required generation investment over the next five years are up to $1.5 billion per year. The global financial crisis and uncertainty over the scope and form of climate change policies may affect the volume and form of generation capacity entering the NEM. This can happen in two ways.

First, uncertainty over a future carbon price may encourage participants to delay investment and where they do invest, choose less risky smaller scale options, which do not require a carbon price to be financially viable. However, this may lead to a technological pathway which is higher cost once a more broad ranging carbon policy is introduced.

Second, capital market conditions as a consequence of the GFC, particularly when combined with uncertainty over climate change policies, may mean only large participants with strong balance sheets, or diversified portfolios, will be able to attract cost effective funding. This creates the risk of a less competitive market structure over time. In recent years investment in new generation capacity has been concentrated amongst a smaller number of larger vertically integrated companies, with relatively few projects undertaken by independent generators. If this trend continues it could have implications for the degree of competition in the market and the liquidity of the contract markets.

Another important issue is that a large proportion of the new low carbon investment requirement will come from intermittent capacity, such as wind. This will test system operation, but also more volatile prices may make some investment decisions more difficult. We have already seen periods of very high and very low, negative, spot prices as a result of wind penetration in the NEM.

The market in South Australia will be an important test case in this regard, since with 17% of overall generation capacity coming from wind it already has one of the highest penetrations of wind capacity in the world. We understand that only the Danish market currently has a higher percentage penetration.

All stakeholders, including Government, recognise that we need greater certainty about whether, when and how a carbon price will apply so that investors can enter the market with confidence.

Demand side participation

Thus far, demand side participation is an underdeveloped component of energy markets in many parts of the world, including Australia.

The benefits from more flexible demand may be higher when there is a greater level of intermittency in supply. A price on carbon will also increase the value of demand side participation (DSP) and energy efficiency. Demand side participation and energy efficiency measures have the potential to make a significant contribution to lowering carbon emissions. Importantly, the evolution of “smart grids” and two way communication systems between consumers and suppliers substantially increases prospects for demand side participation. Consideration of efficient approaches to the adoption of these technologies is therefore timely.

A number of state governments in Australia have already committed to requiring retailers to introduce smart meters into homes and businesses and the potential for smart grids is also being evaluated through a number of initiatives. However, without appropriate technical, contractual and regulatory arrangements, the full benefits of these technologies may not be harnessed. Similarly, there are a range of largely state based support schemes for small scale renewable energy projects, which are likely to encourage a significant increase in the scale of embedded generation. Although there have been changes to network charges to help ensure that such generation is appropriately rewarded for the reductions in network reinforcement that it helps avoid, it will be important to continue to ensure that the framework evolves to allow timely connection of such generation and provide appropriate financial rewards.

It is important to recognise that the potential value from demand side participation, being able to monitor and control individual loads in real time, runs right through the supply chain.

The key role for the AEMC is to identify and remove barriers to effective demand side participation across the supply chain, but in a more pro-active manner, to also identify the preconditions and actions that would need to be undertaken to improve the productivity and efficiency of the whole market. While the demand side represents an opportunity, it is important to recognise that demand side participation will only have a systemic and lasting impact if customers see value in it for themselves.

Network investment and operation

The RET will change the economics of generation and gradually move us towards a mix of plant that includes more renewable energy and less coal.

Renewable energy will generally need to locate in different areas compared to where generation has located traditionally, because of different fuel resource requirements. This will raise challenges for our transmission systems, given the geographical spread of the NEM and its existing transmission system.

The AEMC is currently reviewing the framework in Australia to identify areas where improvements to the co-ordination of generation and transmission investments could be made. We want to make sure that congestion and connection costs are kept at economically efficient levels from a total system perspective. We are looking at approaches to transmission in other countries to inform our review. We very much have an open mind at this stage. The current rules have connected a lot of wind generation in South Australia, so they can deliver additional connections, but we want to be sure that the framework will continue to minimise costs for customers.

Concluding remarks

The deregulation of Australia’s energy markets over the last 15 to 20 years has delivered competitive outcomes with reliable supply. Addressing climate change will require transformative change to the way energy is sourced, distributed and used, and will ‘stress test’ the ability of liberalised energy markets, its regulatory structures and institutions to continue to deliver efficient outcomes for consumers.

It is therefore vital that climate change policies are designed and most importantly - implemented - in a way that makes the most use of market incentives to deliver the investment, innovation and competition required to ensure that the climate change policy objectives are achieved in the manner that is in the best long-term interests of consumers.

Thank you.

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