News Topic ID

Strategic priorities for energy market development

16 October 2013

AEMC Chairman, John Pierce, presented a speech at the Energy Users Association of Australia. His speech discussed the AEMC’s strategic priorities for energy development, as well as two future rule changes that have direct relevance for consumers – a proposal to reform distribution pricing arrangements and a proposal to implement a demand response mechanism.

Annual EUAA Conference 2013 – Empowerment through participation

AEMC Chairman, John Pierce, Speech

Where: Royal on the Park, Cnr Alice and Albert Sts, Brisbane

Date: 16 October 2013

Topic: Strategic priorities for energy market development

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Speech

Introduction

My thanks to the Energy Users Association of Australia (EUAA) for the invitation to speak today. I should start by introducing my organisation for those who are not familiar with us.

The Australian Energy Market Commission was established in July 2005 as a national body with two principal functions: we make and amend rules for the National Electricity Market and for elements of natural gas markets. We also provide market development advice to the Standing Council on Energy and Resources. So our work consists of assessing rule changes, which can be initiated by anybody except ourselves, and carrying out reviews, which are commissioned by SCER.

The energy prices and other outcomes that we see as consumers are a combination of what happens in the competitive generation and retail sectors, what happens in the regulated network sectors, and of government policies which impact the energy sector. Think of the carbon price, RET and Feed-intariffs, for example.

One of the things we do each year is publish a report on the drivers of expected price movements. This shows that network prices and the combined effect of governments’ policies have been major drivers. At the end of 2012 major changes were made to the Rules governing the economic regulation of network businesses. The AER is currently developing guidelines to give effect to these rule changes, and the first regulatory determinations to occur under the new rules will be in NSW and ACT in mid-2014. For Queensland, the first determinations will be in place by mid-2015.

At the beginning of this Rule change process and numerous times since we have said that network price outcomes were a function of the Rules, how the Rules are applied and the corporate governance of the network businesses. It is also a function of how reliability standards are determined. The Commission has recently published advice on a national framework for determining reliability targets for distribution networks and is close to finalising advice dealing with the transmission sector.

This morning I would like to talk about the AEMC’s strategic priorities for energy development, which we have developed in consultation with industry and consumers, and will underpin our advice to SCER and our approach to rule making.

I would then like to focus on two proposed rule changes that have direct relevance for consumers, including large energy users like those represented here today — a proposal to reform distribution price structure arrangements and a proposal to implement a demand response mechanism.

Strategic priorities for energy market development

The topic of your annual conference also resembles one of the AEMC’s three strategic priorities for energy market development that we proposed in a discussion paper in April this year. That discussion paper set out a consumer priority, a gas priority and a market priority.

We aimed to build as much consensus as possible as to what the key priorities for energy market development should be. This involved a series of well-attended stakeholder workshops, a public forum and a discussion paper. We talked to a range of stakeholders – including individual consumers and consumer representative bodies – about their key concerns for the sector to help identify priority areas for our future work program.

We are due to publish the final report next week where we will confirm our three priorities. In brief:

The consumer priority is about strengthening consumer participation in energy markets. This includes providing greater opportunities for consumers to effectively participate in the monopoly network sector (through participation in regulatory processes, for example – I believe Andrew will talk more about that after the tea break) and to participate in competitive retail and generation markets, perhaps more directly. The two rule changes I will talk about shortly are part of our work program under this priority.

The gas priority is about the development of gas market trading mechanisms, the need to examine the efficiency in downstream market arrangements. That is, it is about the mechanisms through which gas is traded (the means of exchange), rather than upstream supply issues, which are outside of the AEMC’s remit. Though the two are obviously related.

At the end of September the AEMC published a gas market scoping study, which provides an overview of changes in the east coast gas market. The study revealed that the existing gas market and regulatory arrangements have served us well, but that the scale of the changes which are occurring in the gas sector means that it is now important to evaluate whether they continue to be well suited to the new environment in which they are now placed, taking into account the commercial and practical needs of participants.

The market priority, is somewhat of an overarching priority, concerned with the way market, regulatory and policy environments interact and impact prices and investment. This reflects the importance of predictable but flexible market arrangements, and of open and transparent processes for change. This priority emphasises the importance of policy decisions taking account of impacts on all sectors they are likely to affect. We are most likely to get integrated policy outcomes when decisions are take in a transparent manner and after full consultation with all affected parties.

Overlaying all of these things though is the underlying rationale for the market and regulatory arrangements that we have – productivity growth in a sector that is so vital to Australia’s longer term potential economic growth.

For those that have been around long enough to recognise the relationship between the microeconomic and competition policy objectives and the domestic energy sectors; - perhaps many of the issues that have arisen in the sector over the last few years owe their origin to those links not being front of mind.

Rule changes

The rule changes I would like to focus on today fall into the two areas where the AEMC has most influence, namely the regulated and competitive sectors.

The first relates to how network costs are reflected in price structures. The second represents a greater opportunity for users to directly offer demand reductions into the wholesale market at the prevailing spot price.

These two projects are yet to commence and they represent an opportunity to engage with the AEMC over the coming months as we consult on whether and how to implement the changes. We will be asking for views and information from any interested stakeholder about how we can better promote the long term interests of consumers through these rule changes.

Both projects were recommendations of the AEMC’s Power of Choice review, which presented a package of recommendations to Commonwealth, state and territory ministers in November last year. The package focuses on supporting consumers of all sizes to actively participate in the energy market. It offers a suite of options to help consumers manage their electricity consumption and, in turn, their electricity expenditure. It short, the objective is consistent with the theme of your conference on “Empowerment through participation.”

Flexible pricing

The AEMC’s Power of Choice review made a series of recommendations to move towards more efficient and flexible pricing. A key part of this involves changing the way distribution networks structure their tariffs. We have made changes through the network regulation rule change that will affect the size of the distribution cost pie. How the resulting pie is then sliced between consumers depends on the way in which network tariffs are structured. The rule change request from SCER on distribution pricing arrangements is designed to tackle this latter issue.

Distribution tariff reform

SCER submitted the rule change request last month after considering the evidence that there are significant costs and foregone opportunities arising from the absence of clear price signals to consumers.

The rules currently provide a framework and guiding principles for how network businesses should structure their network tariffs. The proposed rule change would amend these principles and other provisions to encourage more efficient network price structures. It would require network charges to be based on the drivers of network costs as far as possible so that consumers are paying prices that reflect the impact of their consumption decisions on network costs.

The SCER rule change also seeks to build in greater consultation between distributors and their customers in structuring their prices. Part of this would involve distributors consulting with consumers in developing a pricing structure policy to accompany the distributor’s regulatory proposal. In assessing the rule change, we will be considering how to include a conversation about the structure of tariffs throughout the regulatory process, rather than the structure just coming out at the end of the process.

It is important that, when distributors develop new pricing structures and charges, consumers are engaged and have an understanding of any changes so that they can make informed choices and decisions. The AEMC recognised this in the Power of Choice review, and proposed that there should be a greater role for consumers and retailers to review pricing options set by network businesses. This has also been raised by IPART in a separate rule change request to the AEMC, which we will be considering in tandem with the SCER request.

The main benefits of changes of this nature may be felt over the medium to long term. They could shrink the size of the pie further, as changing consumption patterns in response to new prices will focus infrastructure investment where it is needed and valued most. But consumers with a flat load profile or those who have some flexibility to respond to the new prices will also tend to benefit in the shorter term by shrinking the size of the slice they have to pay for.

We plan to publish a consultation paper early next month and I encourage you to provide submissions to inform us of your views on these important issues. I would also note that this rule change is part of a broader package. SCER is pursuing a wide range of reforms aimed at ensuring that network infrastructure is built, priced and utilised effectively.

Demand response mechanism

Power of Choice offered another recommendation which could provide opportunities for large energy consumers to reduce their expenditure. We recommended the introduction of a new demand response mechanism, which would allow consumers, or third parties acting on consumers’ behalf, to directly participate in the wholesale market and to receive the spot price as a reward for reducing demand.

Some consumers find it feasible to physically adjust their consumption in response to spot prices under specific contractual arrangements such as interruptible tariffs, spot pass-through and scheduled demand. However, these involve a degree of risk, transaction and ‘hassle’ costs that are difficult to manage for many commercial and industrial users.

Under our proposed mechanism, demand resources would be treated in a similar way to generation, and would be paid the wholesale electricity spot price for reducing demand.

At the request of SCER, AEMO has been tasked with drafting a rule change proposal to give effect to the mechanism.

AEMO has developed a detailed design proposal covering the design principles including metering, the baseline consumption methodology, settlement and prudentials, reporting and governance. The document is available on the AEMO website.

We anticipate that AEMO will submit the rule change proposal to the AEMC by December 2013. The EUAA has recognised the benefits a mechanism like this could offer for consumers and I would encourage you to participate in the AEMC’s process on this rule change, as the proposed mechanism could provide a significant revenue stream for businesses that have some flexibility in their electricity use.

Concluding remarks

I have focussed on these two rule changes as they are still somewhat in the formative stages, and both have the potential to materially affect the electricity expenditure of end users. I would of course encourage you all to engage with the AEMC’s consultation processes for these two rule changes once they are initiated.

We expect a consultation paper on distribution pricing principles to be published in November. A consultation paper for demand response mechanism will likely be published later in 2014, depending on the outcome of AEMO’s processes.

The rule changes form a part of the Commission’s wider work program, all of which is aimed at improving long term outcomes for energy consumers. Our rule change and review processes represent an important opportunity for energy users to get involved in shaping future outcomes in the market. The value of our work will be greater if we are exposed to a variety of views in assessing proposals against the national electricity, retail and gas objectives.

Thank you again for the opportunity to address you all today.

Competition is delivering benefits to consumers in NSW

03 October 2013

Review of retail competition in NSW – Final Report

Today the AEMC released its final report on the effectiveness of competition for small electricity and natural gas consumers in New South Wales (NSW).

We have found that competition in NSW retail energy markets is delivering discounts and other benefits to small consumers with more than 60 per cent of electricity and gas consumers already on market contracts.

Consumers have a choice of retailer and a choice of product or service, and many are taking advantage of the choices they have.

AEMC Chairman, John Pierce, said the Commission is confident that competition in NSW is sufficiently robust to promote choice and provide benefits to consumers.

"Consumers are voting with their feet and switching to competitive market contracts in large numbers, and our competition review clearly points to opportunities to make it even easier for more people to understand and compare different retailer offers.

"Substantial discounts are available right now depending on where consumers live, how much energy they use and how they prefer to manage their bills," Mr Pierce said.

"Around 60% of small NSW electricity consumers and 70% of small natural gas consumers have chosen a competitive offer, and 21% of electricity consumers and 14% of natural gas consumers switched their retailer in 2012 in pursuit of a better deal.

"In these competitive retail markets, the regulated price is not the best price, as customers are finding every day when they switch to market offers.

"It’s important to remember the reasons for recent power price increases. Price pressure has come from outside the retail sector and was largely due to the regulated network sector.

"The regulated price is no longer needed in this environment of effective competition, -- removing retail price regulation is expected to lead to more innovation, product choice and competitive pricing.

"Maintaining consumer protections is a key part of our recommendations.

"We are also recommending ongoing market monitoring of competition in NSW, with the ability to reintroduce retail price regulation if needed in the future," Mr Pierce said.

The review’s final report proposes a package of measures to enhance competition, including removing retail price regulation, improving information for consumers, maintaining consumer protections, and ongoing market monitoring.

"We will be releasing a supplementary report at the end of the month with recommendations to give consumers information and support to find a deal that suits their needs" Mr Pierce said.

Key points

Promoting consumer choice

- The regulated price is not the best price. Substantial discounts are available in the market right now depending on where consumers live, how much energy they use, and how they prefer to manage their bills.

- We are confident that competition in NSW is sufficiently robust to promote choice and provide benefits to consumers. In our report, we recommend removing retail price regulation and expect it will lead to more innovation, product choice and competitive pricing.

Maintaining consumer protections

- We recommend ongoing market monitoring of the state of competition. This should be accompanied by the ability to reintroduce retail price regulation if required.

- The National Energy Customer Framework (NECF), which the NSW government enacted on 1 July 2013, provides protections for consumers, such as requiring energy retailers to offer hardship programs and regulating some contract terms and conditions. In implementing NECF, the NSW government chose to provide some additional protections that will continue should retail price regulation be removed. For example, under the NSW NECF modifications, limits are imposed on who may be charged early termination fees.

Next steps

We will release a supplementary report by the end of October 2013 with recommendations to give consumers information and support to find an energy plan that suits their needs.

The supplementary report is focussed on making it easier for consumers to understand and to compare offers.

In preparing the supplementary report, the AEMC has undertaken thorough social research and consulted widely with consumer groups, retailers, small business, and people working on behalf of vulnerable consumers to identify community needs in terms of the information and tools to participate in retail energy markets.

For information, contact:

AEMC Chairman,

John Pierce (02) 8296 7800

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

3 October 2013

Taking stock of Australia’s east coast gas market

27 September 2013

AEMC releases gas market scoping study report

AEMC Chairman, John Pierce, today released a report into factors influencing the development of the east coast gas market.

“The gas market scoping study complements other work being undertaken by jurisdictions on aspects of the gas sector as well as the joint Gas Market Study being carried out by the Department of Industry/Bureau of Resources and Energy Economics.” Mr Pierce said.

The study examines the changes underway in the east coast gas market and identifies potential areas of improvement in both the market and regulatory frameworks.

The AEMC considers that the current gas market and regulatory arrangements have served us well, with substantial investment in production and pipeline capacity occurring over the last 10 years.

Nonetheless, changes are rapidly occurring due to the establishment of an east coast LNG export industry. This has resulted in a period of structural adjustment in the market and a renewed focus on the efficiency of the gas supply chain.

In this environment, the AEMC considers it important to review the adequacy of our gas market frameworks to ensure they continue to meet the needs of market participants and promote the efficient supply of gas for consumers.

“The Commission’s view is that the structural change in the eastern gas market raises the need for a forward-looking strategic plan for gas market development focussed on the next 10-15 years.

The Commission will continue to work with governments, other energy market bodies, consumer groups and market participants on a pathway to support the development of Australia’s gas markets.”

The gas scoping study was prepared by K Lowe Consulting, with Farrier Swier Consulting.

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

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

27 September 2013

The Hitchhiker’s Guide to the National Electricity Market: What was the question again?

14 August 2013

AEMC Chairman, John Pierce, presented a discussion paper and addressed the attendees at the Maddocks Energy Signature Lunch on 7 August 2013. His speech addressed market achievements and challenges; revisited reasons for the NEM’s development; and outlined priorities for further improvements.

Title: The hitchhiker's guide to the NEM: What was the question again?

Location: Maddocks Energy Signature Lunch

7 August 2013 Sydney, Australia

John Pierce Chairman, AEMC

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Speech

Introduction

Thank you for the opportunity to speak here today.

When I was a Treasury Secretary, it was not unusual when sitting around with my colleagues from other jurisdictions for the conversation to turn to the relationship with our various Auditor Generals. Similarly when I was an Australian Government Departmental Secretary I attended two days of bi-annual talks between Australian and Canadian Government Department heads from all portfolios. As people were taking their seats on the first day I whispered to an Australian colleague, “Fifty bucks says we don’t get to afternoon tea without a collective whinge about Provinces and States.” We didn’t make it to morning tea.

So it was not surprising when sitting down with a group of Canadian and US utility regulators a few months back that the conversation turned to comparing notes on their relationship with government, consumer and environmental groups and the businesses they regulate. Basically they were discussing the difference in the perceptions and objectives of these groups and the difficulties that these differences posed for them as regulators.

At one point in the conversation I said …“You should read Plato’s Republic”… I was met with blank looks “….You know, the Allegory of the Cave…….” Finally a regulator from Ontario said "Are all Australian regulators so nerdy?” Keen to dispel such notions I replied “…..Well Hitchhikers Guide to the Galaxy then.” There were signs of recognition but still uncertainty as to the relevance to the topic under discussion.

The story goes something like this……

“A race of hyper-intelligent beings build a super computer called Deep Thought…our energy systems….to find the answer to the Meaning of Life, the Universe and Everything…..the public interest test often given to regulators in North America or the long term interests of consumers in Australia.

When Deep Thought says that the answer is 42, the hyper-intelligent beings can’t relate the answer to the question so they build another computer…the Earth… another Inquiry…to find the question that will give meaning to the answer. It seems to me that different people come up with different answers because they are answering different questions. Might be useful if we agree on the question up front, don’t you reckon?”

When viewed in an international context Australia’s national electricity market – or “NEM” – is rather unique and somewhat enviable. For most of its 15 year history, the NEM has performed well against a range of indicators including price, timely investment, reliability, safety and security. More recently, sharply rising retail prices, falling demand, low average but volatile wholesale spot prices, and other developments have caused some to question whether the system is still performing well. Check against delivery Check against delivery 3

I have heard suggestions that the wholesale energy only NEM design should be reconsidered in light of the Renewable Energy Target whose design has more in common with so called capacity “markets”, where the quantity of generation investment is determined by a central authority rather than by the balance of demand and supply with its associated risk allocation.

There has been a lot of discussion around the way transmission and distribution networks are regulated in the wake of price increases flowing from past regulatory determinations, and various aspects of the retail sector’s operation.

And of course the gas sector is going through its own series of “questionings”.

Now in pondering further changes to the energy sector or assessing its performance, it is important to recall “what was the question again?” without which we risk getting an answer we don’t want or understand. This includes questions around what we want our energy system to do; the underlying cause of current concerns; whether existing institutional and governance arrangements will develop solutions; and the relationship with broader policy and external regulatory settings and institutions, including for instance those designed to address emission levels.

A series of reviews and other focused investigations have already taken place or are underway. The improvements identified in recently completed work or work underway will help leverage the benefits offered by Australia’s liberalised

electricity sector. This is a program of work that will move towards completing the reform of the electricity sector that was started by creating the wholesale NEM in the first place.

So what was the question again?

The design of the NEM largely began in the early part of the 1990s. This was a period of substantive microeconomic reform across the Australian economy largely in response to Australia’s poor relative and absolute economic performance. I hardly need to remind you of this as many of you played a large part in the reforms and we are all old enough to have lived through it.

You will recall that with electricity a vital input to a range of industries, and evidence of the costs of over investment and poor operational performance in generation being passed on to consumers, improving the efficiency of the electricity sector was viewed as a key ingredient in lifting Australia’s overall economic performance.

The resulting transformation of the sector can be described in many ways and from different perspectives. However, a fundamental question that was answered then and remains just as relevant in today’s discussions is “How do you the want risks to be allocated?”

A different risk allocation is perhaps the defining feature that distinguishes the NEM from the vertically integrated utility industry structure of old and the

capacity “markets” found in some other jurisdictions. In the latter, an “authority” plans investment based on expectations of demand and by necessity the costs are passed onto consumers. And so are the risks. If forecasts turn out to be inaccurate, and as we have seen this tends to be the case, and there is over investment, prices rise and consumers pay.

In the wholesale NEM design, generation businesses in competition with one another make these investment (and it must be said dis-investment) decisions. They may be no better at forecasting the future than were the utilities, however over investment results in lower prices and equity bears the cost of the decision – which is a very different risk allocation and very different incentives for efficiency.

I would suggest that any discussion of how to improve the NEM or how the NEM is affected by policy or regulatory changes needs to explicitly address this question of how risks are allocated…and we need to be comfortable with the answers.

Policy and regulatory decisions should be guided less by forecasts or projections of the future and perhaps more by how you want the resulting risks to be allocated.

Strategic priorities

In thinking about our particular universe, I have found it useful to divide it into three parts – and it’s important to know which part you’re in, in any point in time.

Competitive retail and generation
Regulated network sector
Policy interventions from outside the sector that materially impact upon it

The effectiveness of the electricity sector frameworks that make up the first two parts is a topic the Commission has given considerable thought to in our current strategic priorities review. The Commission has proposed three priorities: I will focus today on the two proposed electricity sector priorities, which relate to effective market and regulatory arrangements and empowering consumers.

Our third proposed priority focuses on the implications of major changes in the gas sector on the east coast of Australia with the development of substantial LNG export capacity. The Commission will be releasing a gas market scoping study in the coming months.

Improvements to existing frameworks

I want to take a moment though to reflect on our processes. Change will always be a feature of energy markets and policy and regulatory arrangements, but it is important that the manner in which change is managed is transparent, based on clear objectives and relatively predictable.

In managing these changes, Pierce’s consistency theorem applies.

The consistency theorem states that, if a change is going to meet its objectives and not set you on a course of putting band aids on band aids, a necessary but not sufficient condition is that the:

economic or policy implications;
commercial and financial impacts; and
technical and operational aspects

need to be aligned or consistent with one another.

There is no point…in fact it could be quite dangerous…addressing an operational problem by a means that creates an unintended or unmanageable financial risk and vice versa.

The rule change and review processes administered by the AEMC are highly transparent, predictable and consultative. Nonetheless, we are always eager to identify process improvements that satisfy the consistency theorem. The

Productivity Commission raised in its recent report concerns that the rule change process can often take too long, and in particular, those that follow from reviews undertaken by the AEMC for SCER. The Commission has also been conscious of this concern through discussions we have had with stakeholders.

The Commission is considering options that might be available to improve timeliness of the rule change process without undermining the features of the rule change process that stakeholders tell us very clearly they value – extensive consultation, an opportunity to scrutinise the detailed rule drafting and a clear explanation by the AEMC of the reasons for our decisions. I am particularly keen to explore how we can move more effectively from the conclusions of our reviews to rule changes that implement the recommendations accepted by SCER.

I would encourage you to talk to us over the coming months with ideas on how we can improve the rule change process. We are very much at the stage of exploring options and ideas, and will be open to discuss any suggestions that can improve the process.

Effective market and regulatory arrangements

A recent example of what we mean by effective market and regulatory arrangements are the changes we made last year to the rules governing the economic regulation of networks.

Network regulation rule change

The new rules better equip the AER to develop methods and processes to achieve robust outcomes when setting revenues and prices for consumers in a number of areas. They focus on the importance of providing regulation that is adaptive to changing circumstances, without losing sight of the objective.

The new regulatory arrangements were the subject of a recent survey of investors by the Royal Bank of Canada. The survey found that the stability of the regulatory regime was the most important aspect of regulation for investors, followed by consistency of decisions and the predictability of outcomes. The same survey found that overwhelmingly investors viewed the changes to the rules as positive with 79 per cent of investors surveyed agreeing that the changes will improve regulation.

The AER is now in the process of developing the guidelines required by the rules on how it intends to apply the new rules in consultation with consumers and industry - the “better regulation” program. These new arrangements will impact on network prices as the next determinations commence. The first businesses in NSW will all have determinations under the new rules with effect from 1 July 2014. From the following year, 1 July 2015, the new rules will apply to the determinations of Energex and Ergon in Queensland and SA Power Networks in South Australia.

As the AEMC stated at the beginning of the rule change process, enhanced rules may be necessary to increase the ability and incentives to achieve efficient network prices but they are certainly not sufficient. The AER’s “better regulation” program and approach are critical. Moreover, how the Australian Competition Tribunal interprets the new rules will also have a bearing on the outcomes for consumers. The SCER recently announced that changes to the limited merits review process that will focus the decisions of the Australian Competition Tribunal on the long term interests of consumers. And of course, the corporate governance of network businesses is an important aspect in determining efficient prices. The outcomes are a function of at least three variables ─ the legal and regulatory framework, the application of the framework by the regulator, and the corporate governance of the businesses.

Consumer participation - network regulation

As consumers ourselves, we have experience voicing demand through our choices. If we don’t like a price or service, we go to a competitor. But how do we as consumers demand better price and service outcomes in a monopoly regulated environment? And how do consumers engage in the increasingly complex regulatory process?

The SCER recently agreed to develop a national consumer advocacy body to strengthen the voice of consumers within the process. While there are a number of consumer advocacy organisations in place today, they have differing mandates and resources and generally operate at the state level.

Consumers can also contribute to the regulatory process by participating in the development of the regulated businesses’ investment plans. We introduced a change in the rules which explicitly requires the AER to consider how a network business consults with its consumers in reviewing businesses’ regulatory proposals. The work of SA Power Networks which has already launched a program which includes consumer workshops and an online survey is an early example of the initiatives being developed by networks.

Consumer participation - retail markets

And just as the role of consumers in the regulatory process is changing, so too is the role of consumers in retail energy markets. From both an industry and regulatory perspective, consumers are increasingly becoming more active participants in their energy use as opposed to passive users of a homogenous commodity, as it has traditionally been viewed.

The AEMC’s Power of choice review revealed that there are potentially material savings available across the system if consumers are provided with information, charges to reflect the value of using electricity at different times and technology to enable them to change their consumption behaviour.

And we are seeing retailers responding to consumer interest in their energy use by providing customised advice and information directly to customers via platforms, such as web portals and mobile phone applications. This kind of engagement and retailer responsiveness is most readily observed in Victoria, where retail price regulation was removed in 2009. Last year the South Australian government announced the removal of regulated prices. These changes move retail markets closer to the fully competitive retail markets that were envisaged when the NEM was developed.

NSW competition review

The Commission is now reviewing competition in the NSW energy retail markets. Its draft report was released in May which found that competition is effective as consumers have a choice of retailer and offer and are increasingly taking advantage of these choices.

Over 60 per cent of consumers have chosen to be on a market contract rather than the regulated price. Market contracts offer a range of discounts off the regulated price as well as choices such as different payment and contract terms or tariff structures.

Our market research found that consumers have a high degree of awareness of the option to choose their retailer – over 90 per cent – and switching rates are also high – 21 per cent of consumers switched suppliers last year. However, while high switching rates are an indicator of competitive market

activity, it does not necessarily follow that consumers are confident that they are making the right choices.

Indeed, consumers told us that while they were generally satisfied with their electricity supplier and there was a lot of information available – the information was confusing and complex. They also said the information was not the right type or in the right form to help them make a decision about an energy offer that suited them. So as part of the next stage of the NSW review the Commission is talking to consumers to further explore this issue.

Developing consumer engagement blueprint

The Commission has agreed with the NSW government to develop a consumer engagement blueprint. The objective is to encourage market outcomes where consumers are confident they have the right information to choose an energy plan that suits their needs.

Different types of consumers, such as high and low consumption consumers, have a diverse set of needs. The essence of the benefits of competitive markets is the availability of products to suit those different needs. However, the proliferation of choice requires consumers to be able to choose which products suit their needs with confidence.

In developing our consumer engagement blueprint the Commission is talking to consumers through qualitative and quantitative research to find out what it

is they need to feel confident making choices. Specifically, we have assembled a number of focus groups as well as an online and telephone survey which can be used as a baseline to measure any changes in future.

We are also undertaking a separate stream of analysis that seeks to identify broad demographic characteristics of those consumers that are still on regulated tariffs. This will enable us to ascertain whether specific engagement or support programs are required.

The Commission will be delivering our final report and recommendations on the effectiveness of competition at the end of September. The consumer engagement blueprint will be delivered at the end of October.

One result arising from our initial research is that engagement is not necessarily just about picking an energy plan. That is, consumers that do not switch may still actively manage their energy use. It may be the case that by simply providing information in an appropriate form consumers will respond by changing their behaviour in a way that results in overall lower bills.

And as we found in Power of choice, enabling technologies such as smart meters and similar services empower consumers to control their energy use, but it also adds to complexity. The results of our research will inform the types of information and communication tools consumers want to aid their engagement within the market, with flow on consequences that support efficient investment decision making and competition.

Conclusion

And so in summary, the NEM and the broader sector have performed well over time, but further improvements need to be made and there is a work program in place to achieve this.

The Hitchhikers Guide to the NEM entry would read….

When assessing changes to competitive, regulation or policy sectors of the universe:

know what the question is that you are trying to answer ─ so you will know what to do with the answer;
always take your towel with you with “How are risks allocated?” printed on it;
manage the change process in a way that takes your fellow travellers with you – or at least have some idea of where you are going;
always apply the consistency theorem; and
remember consumers are at the centre of the universe, not waiting in a restaurant at the end of it.

Thank you.

AEMC Chairman outlines priorities for improving electricity market performance

14 August 2013

AEMC Chairman, John Pierce, has presented a discussion paper and addressed the attendees at the Maddocks Energy Signature Lunch on 7 August 2013.

The Hitchhiker’s Guide to the National Electricity Market: What was the question again?

The National Electricity Market (NEM) is approaching its 15th anniversary in December 2013. In this paper the AEMC Chairman, John Pierce, addresses market achievements and challenges; revisits reasons for the NEM’s development; and outlines priorities for further improvements.

John Pierce has described Australia’s National Electricity Market as “rather unique and somewhat enviable,” particularly when viewed in an international context.

The market has historically performed well, he said. More recently sharply rising retail prices, falling demand, low but volatile wholesale spot prices and other developments have led some to question whether the system still performs well.

“It is important to recognise that further improvements need to be made – and there is a work program underway to achieve this.

“We need to understand questions around what we want our energy system to do; whether existing institutional and governance arrangements will develop solutions; and address the impacts of broader policy settings including, for instance, those designed to address emissions levels.”

“If change is going to do good for consumers and not set us on a course of putting band-aids on band-aids then we need to make sure that economic and policy implications; commercial and financial impacts; and technical and operational aspects are understood, aligned, and incorporated. Robust processes will take all these into account.

Above all, he said, our conversations on how to improve the NEM need to explicitly address the question of how risks are allocated.

“In the NEM, generators plan investments instead of central authorities and investors bear the risks of investment decisions, not consumers – a very specific allocation of risk with strong incentives for effective corporate governance arrangements within businesses,” Mr Pierce said.

“When assessing changes to competitive, regulatory or policy sectors of our energy universe the hitchhikers guide to the NEM should read:

clarify the question – so you know what to do with the answer;
always take a towel with ‘how are risks allocated?’ printed on it;
manage the change process in a way that takes your fellow travellers with you;
when making changes, always align the economic, commercial and technical aspects; and
remember consumers are at the centre of the universe, not waiting in a restaurant at the end of it.

Key points

The National Electricity Market (NEM) and the governance arrangements of the sector were established in the 1990s as part of a broader suite of economy wide reforms. With electricity as a vital input for a range of industries, improving the efficiency of the electricity sector was viewed as a key aspect of lifting Australia’s overall economic performance.
The electricity sector reforms have worked well, delivering reliable supply at competitive prices for most of the NEM’s history.
The AEMC’s current strategic priorities review is considering a range of issues across the energy sector. This paper discusses two of our proposed strategic priorities for electricity market development – the first relates to the central role of the energy consumer; the second involves market and regulatory arrangements to support efficient investment.
This first priority – consumers – represents new opportunities for market development. A new and rather exciting area of the AEMC’s work program is the consumer engagement blueprint that we are formulating with the NSW government as part of the NSW competition review. As energy markets become more complex, it is important to provide ways to make it easier for customers to engage in the market to further enhance competition.

Read the J. Pierce discussion paper

“The Hitchhikers Guide to the NEM: What Was The Question Again?”

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

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

14 August 2013

Final determination made on pipeline operator cost recovery processes rule change request

27 June 2013

Today, the AEMC published a final rule determination and final rule for the pipeline operator cost recovery processes rule change request submitted by the Australian Energy Regulator (AER).The final rule is a more preferable rule which incorporates several of the changes proposed in the AER’s rule change request. It also makes a number of additional amendments to further promote efficiency in the operation and use of the pipeline operator cost recovery provisions in the national gas rules (NGR).

The final rule will commence on 1 July 2013.

Final determination made on STTM Deviations and the Settlement Surplus and Shortfall rule change request

20 June 2013

On 20 June 2013, the AEMC published the final rule determination and final rule, which is a more preferable rule, for the STTM Deviations and the Settlement Surplus and Shortfall rule change request.

The final rule largely adopts the changes proposed by the rule change proponent, the Australian Energy Market Operator (AEMO), subject to some exceptions. This includes creating a set of principles and parameters in the National Gas Rules (NGR) to guide AEMO in the development of deviation pricing through future STTM Procedures changes and consultation processes.

The final rule will commence on 1 May 2014.

Commencement of consultation on Annual Network Pricing Arrangements rule change

06 June 2013

The AEMC has commenced consultation on a rule change request from the Independent Pricing and Regulatory Tribunal of NSW regarding the annual network pricing arrangements under the National Electricity Rules.

A Consultation Paper has been published to facilitate public comment. Submission close on 4 July 2013.

Final determination made on Market Operator Service – Timing and Eligibility

23 May 2013

On 23 May 2013, the AEMC published the final rule determination and final (more preferable) rule for the Market Operator Service (MOS) – Timing and Eligibility rule change request.

The Commission has decided to make a more preferable rule that largely adopts the changes proposed by the rule change proponent, the Australian Energy Market Operator (AEMO), in their rule change request.

The final rule reduces the MOS period to one month in the National Gas Rules (NGR) and broadens the MOS provider eligibility requirements to include trading right holders.

The final rule will commence on 1 April 2014, with the new monthly MOS period in effect from 1 June 2014.

Competition is delivering benefits to customers in NSW

23 May 2013

Review of retail competition in NSW - Draft Report

Today the AEMC called for public submissions on its draft report on the effectiveness of competition for small electricity and natural gas customers in NSW.

We have found that competition in NSW retail energy markets is delivering discounts and other benefits to small customers with more than 60 per cent already on market contracts.

Customers have a choice of retailer and a choice of product or service, and many are taking advantage of the choices they have.

However, more can be done to make it easier for customers to engage with the market.

AEMC Chairman, John Pierce, said the Commission would consult with customers, their representatives and other stakeholders before final recommendations are provided to the State Government in September.

“We’ll be looking at new ways to make it easier for customers to engage in the market.

“We will also seek to build on the findings of our Power of Choice review which showed that residential customers may make savings in the short term if they choose to change their retail price offers.”

“Ultimately, customers are in the best position to decide what works for them.

“The next stage of this review will focus on what measures may be necessary in NSW to give customers the information, choices and protection they need to engage in this market and enhance the competition that is already present,” Mr Pierce said.

Draft report key points

Promoting customer choice

- Customers should have tools and knowledge to better understand the market and how to compare offers. Targeted communication channels will need to evolve with the market and the review is seeking views on the best ways to achieve this.

- In our draft report we recommend that price caps be removed to encourage greater innovation and lead to more tailored energy products and services being available for customers.

Maintaining customer protections

- In our draft report we recommend ongoing market monitoring of the state of competition. This should be accompanied by the ability to reintroduce price caps if competition is no longer effective in the future.

- The National Energy Customer Framework (NECF), which the NSW government aims to adopt on 1 July 2013, provides additional protections for customers who will continue to benefit from regulation on some terms and conditions of retailers’ offers such as late fees and early termination fees.

Next steps

We will provide our final advice to the NSW Government by 30 September 2013.

Submissions on our draft report are due on 5 July 2013.

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

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

23 May 2013

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