Skip To Main Content

Retail

News Topic ID
28

Initiation of fourth AEMC retail energy competition review

22 December 2016

The AEMC today invited stakeholder feedback on our approach to the 2017 review on the state of competition in retail energy markets in the Australian Capital Territory, New South Wales, Queensland, South Australia, Tasmania and Victoria.

This is the fourth annual review carried out for the Council of Australian Governments’ Energy Council to support the commitment made by all states and territories to deregulate retail energy prices where effective competition can be demonstrated.

The review focuses on small customers in retail energy markets, which includes residential and small business consumers. It will consider how competition is evolving and provide an overview of the current state and future development of retail competition across the National Electricity Market (NEM). It will also identify and discuss any NEM-wide issues affecting competition. 

The AEMC has published an information sheet on the proposed scope and approach for the review. While we are not seeking stakeholder submissions, we welcome comments on our scope and approach. Comments can be provided by contacting Alan Rai or Lisa Shrimpton by 15 February 2017 (contact details below):

AEMC Director, Alan Rai (02) 8296 0600 or alan.rai@aemc.gov.au

AEMC Senior Advisor Lisa Shrimpton (02) 8296 7876 or lisa.shrimpton@aemc.gov.au

The Commission’s final report is due to be published by 30 June 2017.
 

New version 6 of the National Energy Retail Rules

23 June 2016

The Australian Energy Market Commission today published Version 6 of the National Energy Retail Rules, which incorporates National Energy Retail Amendment (Meter read and billing frequency) Rule 2016 No. 1, which takes effect today, 23 June 2016.

The AEMC publishes a new version of the National Energy Retail Rules when changes to the rules commence operation.

For further information, contact:

Communications Manager: Prudence Anderson, 02 8296 7800

New version of National Energy Retail Rules published

26 November 2015

The Australian Energy Market Commission today published Version 4 of the National Energy Retail Rules, which incorporates Schedule 3 of the National Energy Retail Amendment (Expanding competition in metering and related services) Rule 2015, which take effect today, 26 November 2015.

The AEMC publishes a new version of the National Energy Retail Rules when changes to the rules commence operation.

For further information, contact:

Communications Manager: Prudence Anderson, 02 8296 7800

New version of National Energy Retail Rules published

08 September 2015

The Australian Energy Market Commission today published Version 3 of the National Energy Retail Rules, which incorporates Schedules 2 and 3 of the National Energy Retail Amendment (Customer access to information about their energy consumption) Rule 2014.

The new amendment makes it easier for customers to access information about their energy consumption and billing history, and includes changes to the model terms and conditions for standard connection contracts.

The Commission publishes a new version of the National Energy Retail Rules when changes to the rules commence operation.

For further information, contact:

Communications Manager: Prudence Anderson, 02 8296 7800

New version of National Energy Retail Rules provide for clearer energy contracts

01 May 2015

The Australian Energy Market Commission will today publish Version 2 of the National Energy Retail Rules, which incorporate the National Energy Retail Amendment (Retailer Price Variations in Market Retail Contracts) Rule 2014 which comes into effect from 1 May 2015.

The new rule was made last October in response to a rule change request submitted by the Consumer Action Law Centre and the Consumer Utilities Advocacy Centre. 

It clarifies that energy retailers must tell consumers clearly if prices can change during their retail contracts and clearly discloses details on when they notify customers about price changes.

The new rule applies to all new market contracts entered into after 1 May 2015 in states and territories which have adopted the National Energy Customer Framework: South Australia, Tasmania, New South Wales and the Australian Capital Territory.

The Commission publishes a new version of the National Energy Retail Rules when changes to the rules are to commence operation.

For further information, contact:

Communications Manager: Prudence Anderson, 02 8296 7800

Australia’s experience of retail pricing reform: Paul Smith’s speech at the International Energy Conference

15 January 2015

SPEECH BY CHIEF EXECUTIVE PAUL SMITH AT IEA WORKSHOP

Network investment and regulation: Australia’s experience of retail pricing reform

14 January 2015

DOWNLOAD PDF VERSION

Introduction I’ve been asked to discuss Australia’s experience in retail pricing reform.

Naturally that means I’d like to spend part of my presentation talking about the emergence of retail competition, which has been a necessary pre-cursor to retail price deregulation in Australia.

And although previous speakers have already spent considerable time discussing network pricing reform – in particular cost reflective distribution tariffs – I feel it would be remiss of me not to touch on Australia’s experience in this area, as it is one of the most significant areas of energy market development the Australian Energy Market Commission has progressed in the past 2-3 years.

Australia’s National Electricity Market – the NEM – covers six of our eight states and territories on the eastern seaboard and in the south.

That’s an area larger than Western Europe and supports around 19 million energy users.

Western Australia and the Northern Territory are not part of NEM as they are not interconnected to the rest of the grid.

The Australian Energy Market Commission is an independent agency, responsible for:

  • Making the rules for the National Electricity Market and gas markets.
  • Providing advice to all Australian governments – state, territory and federal via COAG EC.
  • Reviews on specific energy market issues.

We’re one of three energy market institutions – the other two are responsible for regulation and compliance with the rules we make (AER) and operating the market (AEMO).

Reform of Australia’s electricity retail market

The reform of Australia’s electricity markets over the last 25 years is a useful case study, in part because we have followed a fairly clear and consistent trajectory.

Integral to the reforms we’ve made in the last 2-3 decades has been our experience of retail pricing reform, which goes back to the early days of the establishment of the NEM in 1991.

The Council of Australian Governments which includes the state governments who have regulatory oversight of energy, and the commonwealth, took the decision to move toward a competitive electricity market in response to a report that found potentially significant increases in Australia’s GDP could be realised by reforming the electricity market, along with a number of other utility services.

A common feature of these sectors was that they were dominated by publicly owned enterprises often with a monopoly industry structure.

A central authority was effectively determining how the sector developed.

It owned the regulatory functions.

It owned the capital and labour,

And it owned responsibility for the investment decisions – how much capacity is to be built or procured… based on its own forecasts of the future.

Prices did not reflect efficient costs and investment decisions were centrally directed.

Which meant the cost of getting these investment decisions wrong – usually by procuring too much energy – rested with consumers and tax payers.

Since then, the reform story in our sector has been one of:

  • separating policy and regulatory functions from industry;
  • industry restructuring with vertical separation of generation and retail from the natural monopoly elements of transmission and distribution; and
  • bringing competition to the sector.

And underpinning the reform story, in all three of these areas, is the reallocation of demand and investment risks from consumers to electricity businesses and investors.

Retail price reform is clearly an important part of this transformation. Customer choice in electricity supplier across the NEM, initially for large customers, was a first step in the transition to full retail competition and the deregulation of retail pricing.

Full retail competition is important because it creates competitive pressure in the wholesale electricity market by exposing consumers to the actual cost of electricity, generating a demand response which sends effective price signals to the wholesale market about required investment.

Competition was gradually introduced to the retail sector across the NEM, with Victoria and NSW the first to move in 2002. The other NEM states and territories have since followed and all jurisdictions now allow for competition in retail markets.

The next important step is the deregulation of retail prices.

In 2004 the Council of Australian Government committed to deregulate retail energy prices where effective competition could be demonstrated.

To support that commitment, the Council also asked the AEMC to assess competition in NEM jurisdictions each year to advise whether competition was effective.

The AEMC’s competition reviews have proved important in the move toward retail price deregulation, giving jurisdictions evidence on which to base their policy decisions.

  • Our 2008 reviews in Victoria and South Australia led to these states becoming the first to deregulate prices, although South Australia did not proceed until 2012.
  • Last year, our review of retail competition in New South Wales found competition was effective, paving the way for price deregulation in that state.
  • Also last year, we completed our first full NEM-wide retail competition review which advised that retail competition was effective in South East Queensland. Shortly after the review was released, the Queensland Government announced it would deregulate retail prices from July 2015.
  • The ACT and Tasmania – our smallest jurisdictions – are yet to deregulate retail prices, along with regional Queensland, and these markets have a little way to go before we would regard competition as being effective for that to take place.

So while there is some unfinished business, the Australian electricity retail sector has matured – at least in the National Electricity Market jurisdictions – and can now be described as a broadly competitive market.

One of the strengths of our retail competition reviews is the broad approach to assessing competition.

We make significant use of consumer research to help inform our findings, including a NEM wide survey of several thousand consumers.

We also draw on evidence from consumer groups, retailers, regulators, ombudsmen and representatives of community groups.

Of course, it is difficult to identify a single objective measure that can capture the dynamic nature of retail energy markets.

We examine a number of different indicators that highlight both the behaviour of retailers and the responses of customers.

And we focus our assessment on whether retail markets in NEM jurisdictions are providing outcomes that are consistent with effective competition.

Specifically, the "competitive market indicators" we use are:

  • the level of customer activity in the market;
  • barriers to retailers entering, expanding or exiting the market;
  • the degree of independent rivalry;
  • customer outcomes; and
  • retailer outcomes.

The 2014 NEM wide review found that Australian consumers are shopping around and are generally happy with their retailer experience.

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

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 providers during 2013.

The other regular, yearly, report the COAG Energy Council asked the Commission to prepare is our Residential Electricity Price Trends report, which looks at the key factors driving electricity price movements in each NEM jurisdiction – those being retail prices and wholesale costs, transmission and distribution network costs and environmental policy costs.

Part of the reason retail price deregulation and the establishment of retail competition is so important is that helps ensure price signals flow up and down 5 the supply chain in a way the generates efficient investment in the energy sector, and efficient energy use.

Prior to the introduction of retail contestability and price deregulation, some residential price structures set by governments benefited from a cross-subsidy from business to household customers and were therefore not always cost reflective.

With the introduction of full retail contestability and price deregulation, retailers now compete for consumers by offering a range of contracts that should reflect the cost of supply and provide signals that lead to efficient decision making.

AEMC research from July 2014 shows that there are anywhere from 8 to 19 unique electricity retail offers available to meet the different needs of consumers across the east coast.

These contracts include different pricing structures depending on how much energy is consumed and the time of day, as well as pay on time discounts and incentives such as reward points and sporting memberships.

With the roll out of smart meters, retailers are also beginning to offer innovative deals such as “free power on Saturdays”.

With the greater prevalence of choice driven by market liberalisation and the emergence of smart meter technology, our recent work has focussed on ensuring that consumers have the awareness and tools to engage in the retail market and choose an offer that best meets their individual needs.

One issue our price trends report highlights is that the wholesale and retail components only make up an average 40 per cent of the cost of supplying electricity to homes and families.

Around 50 per cent is the cost of maintaining and upgrading the regulated transmission and distribution network.

This means network costs are a key driver of retail prices.

Most network prices include a fixed daily charge and a variable consumption charge. The fixed charge is largely the same for all of a retailer’s consumers within a distribution network area, whereas the variable charge can change with a consumer’s level of electricity usage.

The fixed component makes up between 15 and 26 per cent of the total retail price in South Australia, Victoria, New South Wales and Queensland.

Since the fixed charge is paid irrespective of energy consumption, consumers who decrease their usage may not see a comparable decrease in the network component of their retail bill.

The higher the proportion of the total bill relating to the variable charge, the more changes in energy consumption will affect the level of revenue recovered by network businesses.

Hence, under the current pricing structures, when energy consumption declines, networks are likely to recover less revenue.

Given that a high proportion of network prices relate to past investments, any under-recovery due to declining consumption would need to be offset by higher network prices.

Network pricing reform

In order to have cost reflective prices which send efficient price signals up and down the supply chain, we also needed to embrace cost reflective network pricing.

A rule change the Commission made in late November moves the National Electricity Market to cost reflective distribution network tariffs.

Under the price structures that have operated in Australia to date, energy users paid the same network price even if the costs of such usage vary by location and time, regardless of how or when they are using power.

Effectively network prices over-recovered revenue for off-peak use of the network and under-recovered for peak use.

This meant energy users who use most of their energy at off-peak times were paying more than it costs to supply network services to them – while those using energy at peak times were paying less than it costs.

Analysis undertaken for the Commission highlighted a number of perverse outcomes we saw under the old rules.

Example 1: Solar PV

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 by facing their panels west, generating more energy at peak times when it is most needed.

But 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.

Example 2: Air conditioners

A residential 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 energy user without an air-conditioner.

But the residential consumer with the air-conditioner paid about an extra $300 under the most common network prices.

The remaining $700 is recovered from other consumers, big and small, through higher network charges.

In both examples, many consumers are paying more than it costs to provide services to them.

The same analysis estimated 70-80 per cent of consumers would face lower network charges in the medium term under a cost reflective capacity price.

What this boils down to for residential consumers is lower average network charges of between $28 and $145 per year.

Based on Victorian trials, we also found a small business could save up to $2,118 or 34% of its total annual electricity network charges by using less electricity at peak times for just 20 hours per year when networks are congested

The new arrangements will see more efficient price signals emerge, removing cross subsidisation and giving energy users the information they need to decide what technologies might work best for them to manage usage, and help reduce their energy costs.

The network pricing reforms will work together with greater competition, retail pricing reform and a range of other measures to support an energy market which:

a) gets risk allocation right – i.e. where risk is allocated to those best placed to manage those risks; and

b) sends the right price signals up and down the supply chain.

And ultimately this is about creating the right environment for investment to respond to changing patterns of consumer demand and changes in relative prices brought about by innovation, new technologies and the opportunities for improved productivity.

Conclusion

Key to the success we have had in Australia in terms of enduring microeconomic reform in the electricity sector is a new alignment of risk and 8 investment decision-making and the establishment of a workably competitive industry structure.

A distinguishing feature of the National Electricity Market is the way that risks associated with forecasts of future demand are managed and allocated.

In the National Electricity Market, competing generators make these investment decisions based on their own expectations of future demand.

If they overinvest, prices fall, consumers benefit and only the generators’ shareholders bear the risk in the form of lower returns.

Our experience in Australia has taught us that competition and market signals generally lead to better outcomes for consumers than systems that depend on centralised decision-makers.

And if we are relying on price signals to guide investment, production and consumption decisions, we need to make sure that the signals are efficient – that is, broadly cost-reflective and not distorted.

I hope Australia’s experience is useful in thinking about issues emerging in other part of the world.

ENDS

Australia’s experience of retail pricing reform

14 January 2015

SPEECH BY CHIEF EXECUTIVE PAUL SMITH AT IEA WORKSHOP

Network investment and regulation: Australia’s experience of retail pricing reform

14 January 2015

DOWNLOAD PDF VERSION

Introduction I’ve been asked to discuss Australia’s experience in retail pricing reform.

Naturally that means I’d like to spend part of my presentation talking about the emergence of retail competition, which has been a necessary pre-cursor to retail price deregulation in Australia.

And although previous speakers have already spent considerable time discussing network pricing reform – in particular cost reflective distribution tariffs – I feel it would be remiss of me not to touch on Australia’s experience in this area, as it is one of the most significant areas of energy market development the Australian Energy Market Commission has progressed in the past 2-3 years.

Australia’s National Electricity Market – the NEM – covers six of our eight states and territories on the eastern seaboard and in the south.

That’s an area larger than Western Europe and supports around 19 million energy users.

Western Australia and the Northern Territory are not part of NEM as they are not interconnected to the rest of the grid.

The Australian Energy Market Commission is an independent agency, responsible for:

  • Making the rules for the National Electricity Market and gas markets.
  • Providing advice to all Australian governments – state, territory and federal via COAG EC.
  • Reviews on specific energy market issues.

We’re one of three energy market institutions – the other two are responsible for regulation and compliance with the rules we make (AER) and operating the market (AEMO).

Reform of Australia’s electricity retail market

The reform of Australia’s electricity markets over the last 25 years is a useful case study, in part because we have followed a fairly clear and consistent trajectory.

Integral to the reforms we’ve made in the last 2-3 decades has been our experience of retail pricing reform, which goes back to the early days of the establishment of the NEM in 1991.

The Council of Australian Governments which includes the state governments who have regulatory oversight of energy, and the commonwealth, took the decision to move toward a competitive electricity market in response to a report that found potentially significant increases in Australia’s GDP could be realised by reforming the electricity market, along with a number of other utility services.

A common feature of these sectors was that they were dominated by publicly owned enterprises often with a monopoly industry structure.

A central authority was effectively determining how the sector developed.

It owned the regulatory functions.

It owned the capital and labour,

And it owned responsibility for the investment decisions – how much capacity is to be built or procured… based on its own forecasts of the future.

Prices did not reflect efficient costs and investment decisions were centrally directed.

Which meant the cost of getting these investment decisions wrong – usually by procuring too much energy – rested with consumers and tax payers.

Since then, the reform story in our sector has been one of:

  • separating policy and regulatory functions from industry;
  • industry restructuring with vertical separation of generation and retail from the natural monopoly elements of transmission and distribution; and
  • bringing competition to the sector.

And underpinning the reform story, in all three of these areas, is the reallocation of demand and investment risks from consumers to electricity businesses and investors.

Retail price reform is clearly an important part of this transformation. Customer choice in electricity supplier across the NEM, initially for large customers, was a first step in the transition to full retail competition and the deregulation of retail pricing.

Full retail competition is important because it creates competitive pressure in the wholesale electricity market by exposing consumers to the actual cost of electricity, generating a demand response which sends effective price signals to the wholesale market about required investment.

Competition was gradually introduced to the retail sector across the NEM, with Victoria and NSW the first to move in 2002. The other NEM states and territories have since followed and all jurisdictions now allow for competition in retail markets.

The next important step is the deregulation of retail prices.

In 2004 the Council of Australian Government committed to deregulate retail energy prices where effective competition could be demonstrated.

To support that commitment, the Council also asked the AEMC to assess competition in NEM jurisdictions each year to advise whether competition was effective.

The AEMC’s competition reviews have proved important in the move toward retail price deregulation, giving jurisdictions evidence on which to base their policy decisions.

  • Our 2008 reviews in Victoria and South Australia led to these states becoming the first to deregulate prices, although South Australia did not proceed until 2012.
  • Last year, our review of retail competition in New South Wales found competition was effective, paving the way for price deregulation in that state.
  • Also last year, we completed our first full NEM-wide retail competition review which advised that retail competition was effective in South East Queensland. Shortly after the review was released, the Queensland Government announced it would deregulate retail prices from July 2015.
  • The ACT and Tasmania – our smallest jurisdictions – are yet to deregulate retail prices, along with regional Queensland, and these markets have a little way to go before we would regard competition as being effective for that to take place.

So while there is some unfinished business, the Australian electricity retail sector has matured – at least in the National Electricity Market jurisdictions – and can now be described as a broadly competitive market.

One of the strengths of our retail competition reviews is the broad approach to assessing competition.

We make significant use of consumer research to help inform our findings, including a NEM wide survey of several thousand consumers.

We also draw on evidence from consumer groups, retailers, regulators, ombudsmen and representatives of community groups.

Of course, it is difficult to identify a single objective measure that can capture the dynamic nature of retail energy markets.

We examine a number of different indicators that highlight both the behaviour of retailers and the responses of customers.

And we focus our assessment on whether retail markets in NEM jurisdictions are providing outcomes that are consistent with effective competition.

Specifically, the "competitive market indicators" we use are:

  • the level of customer activity in the market;
  • barriers to retailers entering, expanding or exiting the market;
  • the degree of independent rivalry;
  • customer outcomes; and
  • retailer outcomes.

The 2014 NEM wide review found that Australian consumers are shopping around and are generally happy with their retailer experience.

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

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 providers during 2013.

The other regular, yearly, report the COAG Energy Council asked the Commission to prepare is our Residential Electricity Price Trends report, which looks at the key factors driving electricity price movements in each NEM jurisdiction – those being retail prices and wholesale costs, transmission and distribution network costs and environmental policy costs.

Part of the reason retail price deregulation and the establishment of retail competition is so important is that helps ensure price signals flow up and down 5 the supply chain in a way the generates efficient investment in the energy sector, and efficient energy use.

Prior to the introduction of retail contestability and price deregulation, some residential price structures set by governments benefited from a cross-subsidy from business to household customers and were therefore not always cost reflective.

With the introduction of full retail contestability and price deregulation, retailers now compete for consumers by offering a range of contracts that should reflect the cost of supply and provide signals that lead to efficient decision making.

AEMC research from July 2014 shows that there are anywhere from 8 to 19 unique electricity retail offers available to meet the different needs of consumers across the east coast.

These contracts include different pricing structures depending on how much energy is consumed and the time of day, as well as pay on time discounts and incentives such as reward points and sporting memberships.

With the roll out of smart meters, retailers are also beginning to offer innovative deals such as “free power on Saturdays”.

With the greater prevalence of choice driven by market liberalisation and the emergence of smart meter technology, our recent work has focussed on ensuring that consumers have the awareness and tools to engage in the retail market and choose an offer that best meets their individual needs.

One issue our price trends report highlights is that the wholesale and retail components only make up an average 40 per cent of the cost of supplying electricity to homes and families.

Around 50 per cent is the cost of maintaining and upgrading the regulated transmission and distribution network.

This means network costs are a key driver of retail prices.

Most network prices include a fixed daily charge and a variable consumption charge. The fixed charge is largely the same for all of a retailer’s consumers within a distribution network area, whereas the variable charge can change with a consumer’s level of electricity usage.

The fixed component makes up between 15 and 26 per cent of the total retail price in South Australia, Victoria, New South Wales and Queensland.

Since the fixed charge is paid irrespective of energy consumption, consumers who decrease their usage may not see a comparable decrease in the network component of their retail bill.

The higher the proportion of the total bill relating to the variable charge, the more changes in energy consumption will affect the level of revenue recovered by network businesses.

Hence, under the current pricing structures, when energy consumption declines, networks are likely to recover less revenue.

Given that a high proportion of network prices relate to past investments, any under-recovery due to declining consumption would need to be offset by higher network prices.

Network pricing reform

In order to have cost reflective prices which send efficient price signals up and down the supply chain, we also needed to embrace cost reflective network pricing.

A rule change the Commission made in late November moves the National Electricity Market to cost reflective distribution network tariffs.

Under the price structures that have operated in Australia to date, energy users paid the same network price even if the costs of such usage vary by location and time, regardless of how or when they are using power.

Effectively network prices over-recovered revenue for off-peak use of the network and under-recovered for peak use.

This meant energy users who use most of their energy at off-peak times were paying more than it costs to supply network services to them – while those using energy at peak times were paying less than it costs.

Analysis undertaken for the Commission highlighted a number of perverse outcomes we saw under the old rules.

Example 1: Solar PV

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 by facing their panels west, generating more energy at peak times when it is most needed.

But 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.

Example 2: Air conditioners

A residential 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 energy user without an air-conditioner.

But the residential consumer with the air-conditioner paid about an extra $300 under the most common network prices.

The remaining $700 is recovered from other consumers, big and small, through higher network charges.

In both examples, many consumers are paying more than it costs to provide services to them.

The same analysis estimated 70-80 per cent of consumers would face lower network charges in the medium term under a cost reflective capacity price.

What this boils down to for residential consumers is lower average network charges of between $28 and $145 per year.

Based on Victorian trials, we also found a small business could save up to $2,118 or 34% of its total annual electricity network charges by using less electricity at peak times for just 20 hours per year when networks are congested

The new arrangements will see more efficient price signals emerge, removing cross subsidisation and giving energy users the information they need to decide what technologies might work best for them to manage usage, and help reduce their energy costs.

The network pricing reforms will work together with greater competition, retail pricing reform and a range of other measures to support an energy market which:

a) gets risk allocation right – i.e. where risk is allocated to those best placed to manage those risks; and

b) sends the right price signals up and down the supply chain.

And ultimately this is about creating the right environment for investment to respond to changing patterns of consumer demand and changes in relative prices brought about by innovation, new technologies and the opportunities for improved productivity.

Conclusion

Key to the success we have had in Australia in terms of enduring microeconomic reform in the electricity sector is a new alignment of risk and 8 investment decision-making and the establishment of a workably competitive industry structure.

A distinguishing feature of the National Electricity Market is the way that risks associated with forecasts of future demand are managed and allocated.

In the National Electricity Market, competing generators make these investment decisions based on their own expectations of future demand.

If they overinvest, prices fall, consumers benefit and only the generators’ shareholders bear the risk in the form of lower returns.

Our experience in Australia has taught us that competition and market signals generally lead to better outcomes for consumers than systems that depend on centralised decision-makers.

And if we are relying on price signals to guide investment, production and consumption decisions, we need to make sure that the signals are efficient – that is, broadly cost-reflective and not distorted.

I hope Australia’s experience is useful in thinking about issues emerging in other part of the world.

ENDS

Registration now open for sixth stakeholder workshop on competition in metering rule change

18 December 2014

Registration is now open for the AEMC’s sixth stakeholder workshop on the competition in metering and related services rule change.

The workshop will be held in Sydney from 10am to 3pm on 22 January 2015, and will provide stakeholders with an update on the Commission’s proposals regarding:

  • Access to Metering Coordinator services.
  • Remote provision of disconnection and reconnection services.
  • Network security issues related to load control.
  • Opt out arrangements.
  • The minimum services specification.
  • Timeframes and requirements for implementation.

To register for this workshop, please contact Claire Richards at claire.richards@aemc.gov.au or on (02) 8296 7800 by 16 January 2015.

Further information about the workshops is available on the project page.

Consultation on approach to the 2015 Retail Competition Review

31 October 2014

The Australian Energy Market Commission today invited stakeholder feedback on a consultation paper setting out the proposed assessment framework for the Commission’s second review of energy retail competition in National Electricity Market states and territories.

The AEMC undertakes annual NEM-wide competition reviews for the Council of Australian Governments Energy Council, to support the commitment made by all states and territories in 2004 to deregulate retail energy prices where effective competition can be demonstrated.

The AEMC’s first NEM-wide review was carried out last year and found effective competition in retail electricity markets in South East Queensland, New South Wales, Victoria, and South Australia. This review helped inform the Queensland Government’s decision to deregulate electricity prices in South East Queensland from 1 July 2015.

The review found that competition is more tempered in retail gas markets compared to electricity markets due to differences in market size, structure and design.

This second review provides an opportunity to check whether there have been any significant changes in the competitiveness of NEM energy retail markets over the last twelve months.

Submissions are invited on the proposed approach to the 2015 Retail Competition Review by Friday 28 November.

The review will assess the state of competition for small customers in retail electricity and gas markets in all NEM states and territories – the ACT, New South Wales, Queensland, South Australia, Tasmania and Victoria.

Stakeholder submissions will be considered in determining the Commission’s approach to the review and an approach paper will be published in December. At that point we will seek submissions on the state of competition in NEM states and territories.

The Commission’s final report is due to be published by 30 June 2015.

For more information visit the 2015 Retail Competition Review project page at www.aemc.gov.au

Commissioner Neville Henderson’s speech to EUAA Annual Conference: Power of Choice and other energy market reforms

14 October 2014

SPEECH BY COMMISSIONER NEVILLE HENDERSON AT 2014 EUAA CONFERENCE

Power of Choice and other energy market reforms

13 October 2014

DOWNLOAD PDF VERSION

I’d like to start by acknowledging the traditional owners of the land on which we meet and pay my respects to their elders both past and present.

Can I also thank Phil Barresi, CEO of the Energy Users Association of Australia for inviting the AEMC to address you today and pass on my apologies that Chairman John Pierce cannot be here.

When John spoke at this conference last year – which I’m sure many of you attended, he talked about some of the key drivers of electricity price rises in recent years – environmental policies and investments in the distribution network, principal among them.

He also talked about the strategic priorities of the Australian Energy Market Commission and some of the work under way as part of the Power of Choice reforms, which hold promise for both small and large energy users.

Twelve months later, there has been significant change for our sector in terms of policy and regulation which affect energy prices.

It can be helpful to think about those things which affect energy prices as grouped into three broad areas.

  • The competitive sectors in retail and generation;
  • The regulated distribution and transmission network; and
  • Other policies which sit in non-energy portfolio areas – mainly environmental policies – that impact on the energy sector.

In terms of the latter, the carbon tax has been removed and we are knee-deep in a public discussion about the future of the Renewable Energy Target.

In terms of the distribution network, the AEMC’s new rules governing how the Australian Energy Regulator will approve network revenue are starting to be implemented and we are seeing networks engaging with consumers, large and small, directly on their investment plans.

We have also just seen the Federal Government’s Energy Green Paper, which will no doubt see in some changes for the energy sector.

So reforms to the electricity market therefore continue to move forward and this has been helped by the governance model that has developed since the inception of the National Electricity Market.

As most of you know, the AEMC is the rule maker for most parts of the supply chain across electricity and natural gas.

We also provide advice to governments on energy market development, based on Terms of Reference provided to us by the COAG Energy Council.

We do not initiate our own rule change requests and instead rely on requests from governments, market participants and indeed any other party who sees an issue to be addressed.

So the remit of the AEMC and other market institutions, including the AER and AEMO, covers the first two of these three elements impacting prices – the competitive sectors and network regulation.

There are some clear advantages to this governance model, particularly in the clarity of roles and responsibilities across the different institutions. It does however mean that the delivery of rule changes can be tied to the timeframes and deliberations of other market institutions.

The Power of Choice reforms are a good example of what this means in practice.

The final Power of Choice report and proposed implementation plan were provided to the COAG Energy Council for their consideration in November 2012.

This included a range of recommendations to improve demand side participation in energy markets. The five rule change requests that came out of the Power of Choice Review took about a year to be agreed upon and submitted to the AEMC.

And once we receive the rule change requests we undertake a thorough process of consultation and engagement to make sure that all stakeholders have a chance to contribute to the debate.

This generally involves Consultation Paper, public forums, targeted stakeholder workshops with further consultation on a Draft Determination, before a Final Determination is made.

These sorts of timelines can sometimes frustrate those keen to see reforms progressed quickly.

The Commission shares the eagerness of many, including the EUAA to see the potential of the Power of Choice review realised.

The principle behind the review – to give energy users, including commercial and industrial consumers, choice, and allowing those choices to drive energy market development – continues to motivate the AEMC’s priorities and work program.

Today I’d like to focus on a few of the key reforms coming out of the Power of Choice review – changes to how distribution network tariffs are determined and expanding competition in metering and related services.

As I mentioned earlier, the overall amount of revenue networks are able to recover has been dealt with in earlier rule changes, particularly, the rule change in relation to Economic Regulation of Network Service Providers in 2012.

As you will remember, these changes related to the rules governing how the maximum revenue a network business recovers from all consumers is determined by the AER.

The changes included a new rate of return framework that is common to electricity distribution, electricity transmission and gas.

It requires the AER to make the best possible estimate of the rate of return at the time a regulatory determination is made, taking into account market circumstances, estimation methods, financial models and other relevant information.

The AER is required to undertake an open and consultative process at least every three years to develop its approach to setting the rate of return.

The new common framework also enables the regulator to take a range of different approaches to estimate the return on debt component, potentially allowing for reduced risk for debt financing for network businesses.

And importantly, it removes ambiguities regarding the powers of the AER to interrogate, review and amend capital and operating expenditure proposals submitted by network service providers.

The AER’s authority in this area has withstood Tribunal review, so you as consumers can feel confident that a robust regulatory mechanism is in place so that total revenues collected are appropriately determined.

Building on this, the rule change we’re working on currently – changes to distribution network pricing arrangements – looks at how that revenue is recovered. Making sure that the structure of network tariffs is helping to send efficient price signals back to consumers and in the process removing cross subsidisation between consumers.

Big energy users like many of your businesses tend to have a sophisticated understanding of their energy use largely due to the size and significance of that cost to running their business.

You’re probably also aware of the significant proportion of your bill that is made up of network charges.

Manufacturing, commercial and industrial, and electricity, gas water and waste services, are responsible for around 63 per cent of Australia’s electricity use.

Most if not all of you have interval meters so you are aware of how and when you use power. What has been missing is the ability to use the information you receive from your meter to influence that large bucket of network charges.

The price signals you currently receive are largely ‘muffled’ by a distribution network pricing structure which is not cost reflective.

Under current price structures, energy users pay the same network price even if the costs of such usage vary by location and time, regardless of how or when they are using power.

Existing network prices over-recover revenue for off-peak use of the network and under-recover for peak use.

This means energy users who use most of their energy at off-peak times are paying more than it costs to supply network services to them – while those using energy at peak times are paying less than it costs.

As an example, a residential 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 energy user without an air-conditioner.

But this residential consumer with the air-conditioner pays about an extra $300 under the most common network prices.

The remaining $700 is recovered from other consumers, big and small, through higher network charges.

Our Draft Determination on distribution network pricing will create the conditions for network prices paid by individual consumers and businesses to better reflect the cost of providing network services to them. It will allow more efficient price signals to emerge, removing cross subsidisation and giving 5 energy users the information they need to decide what technologies might work best for them to manage usage, and help reduce their energy costs.

We have analysed the impact of the changes to distribution network pricing arrangements on residential customers. That analysis estimates that up to 81 per cent of residential consumers would face lower network charges in the medium term under a cost-reflective capacity price and up to 69 per cent would see lower charges under a critical peak price.

The next piece of work, which we have recently commissioned, looks at the likely impact on business – particularly larger commercial and industrial energy users.

We do, of course, have some relevant experience to draw on – Ausnet already offers flexible pricing for network services in their distribution area in Victoria.

If you’re a business with a relatively flat load profile you should see lower network charges, reflecting the lower demands you place on the grid.

And some energy users will choose to respond to new network price structures by further reducing their use of the network at peak times, which will reduce overall network costs, with savings passed on to them.

The AEMC’s draft rule also sets out new processes and timeframes for setting network prices to improve certainty, timeliness and transparency for consumers and retailers. This should help businesses plan their expenditure more effectively and avoid bill shocks.

The Commission fully appreciates the eagerness of this sector – the EUAA and its members – to see this rule change progressed.

There have been claims by some that no concrete action is planned for the short term. That is wrong.

A final determination on this rule change is due to be published in November. This will include a phased implementation plan to give industry and consumers time to adjust to the change, with the new rules to be implemented progressively between next year and 2017 in all jurisdictions, depending on when regulatory determination cycles occur.

Linked with the distribution network changes, is another Power of Choice building block, aimed at creating opportunities for a competitive energy services market.

We don’t necessarily know which technologies will develop in the future or how they will be used, but we know technology will empower all consumers and help drive innovation and change.

And it will do that best if there is competition in the market for these products and services.

The rule change to promote competition in metering and related services, along with the open access and common communications standards framework for smart meters, as well as arrangements to allow multiple trading relationships at the consumer’s connection point - these reforms will all work together to provide energy users a greater armoury of tools to respond to market signals and make decisions about the best and most efficient way for your business to consume energy.

A discussion paper on the competition in metering and related services rule change is currently online and we’ve just completed a series of stakeholder workshops as part of that consultation process.

I’d like to turn now to the third area I identified earlier as influencing energy market outcomes – the integration of policies outside the energy portfolio.

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

The Renewable Energy Target does not need to be designed in a way that negatively interferes with the goal of efficient markets.

The desire to encourage renewable generation need not be at the expense of the wholesale market.

The RET in its current form is not able to adjust to prevailing market conditions.

As demand has fallen, new renewable capacity has continued to be developed. Falling demand in an efficient energy-only wholesale market like the NEM would signal to generators that no new capacity is required. The RET however provides an incentive for additional build.

In this sense the RET has shifted the risk allocation in the National Electricity Market.

Prior to the RET, generators bore the risk of their assets being under-utilised by falling demand.

Generation built under the auspices of the RET does not bear that risk which instead has been transferred to consumers in the form of retailer compliance costs.

The effect of this has been to create a disconnect between retail and wholesale prices. So there is a wedge between retail and wholesale prices, where the former has increased given the obligation on retailers to procure renewable certificates, while the latter prevents the appropriate demand-side response and ultimately the efficient clearing of the wholesale market.

In our submission to the RET review, we proposed two possible solutions.

First, moving the RET to a floating target, as opposed to a fixed GWh target. 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.

The Commission believes this is a more sustainable approach, allowing the RET to better integrate with the structure of the National Electricity Market.

An alternative we put forward is to Transition the RET to an emissions intensity based scheme for the electricity sector.

This scheme could be designed in a number of ways, including where generators below a defined emissions intensity level create certificates that generators above the level are liable to purchase.

Retailers and other liable entities under the current RET scheme would not participate directly.

This type of approach would encourage all lower emissions technology options, not only renewable energy, and is therefore likely to meet any emissions reduction target at a lower cost – and that means lower energy bills for small and large consumers.

Both options would provide a viable path forward and greater certainty for large energy users.

Finally, I want to update you on the AEMC’s work in relation to gas markets.

Promoting the development of efficient gas markets is one of the AEMC’s strategic priorities.

There are major structural shifts occurring in gas as we ramp up to LNG exports from Gladstone.

Given these developments, last year the AEMC initiated a scoping study to consult with stakeholders and identify areas of potential improvement in the market and regulatory arrangements.

One of our key findings was the need for an integrated gas market development plan within which the industry can work towards achieving a mature and well-functioning market.

This would help build certainty around what the LNG export developments mean for the domestic market and the direction that gas market development should take in response.

An important part of this work will be to consider the future role and objectives of the gas trading hubs on the east coast, including possible reforms to trading hubs which might increase the ability for market participants to manage risk and in turn facilitate greater trading and liquidity.

Over time, we expect that this type of gas market development work will lower barriers to entry in these markets and promote greater competition by providing gas users with additional options for sourcing their gas.

We are engaging with governments and stakeholders to support a gas market framework which continues to promote efficiency and competition.

The last twelve months really has seen substantial change in the energy sector and there is much to be optimistic about.

Some changes to environmental policies are having an immediate dampening effect on energy prices. While others are still being determined but we are hopeful of a decision that supports efficient market outcomes.

I believe we are making headway in getting a more reasonable approach to approvals of distribution network revenues, and the removal of cross-subsidies in network tariffs.

Change can be good if it’s relatively predictable and its objectives widely understood.

Ultimately that is what I think the AEMC, through its work with governments and stakeholders, is trying to achieve – a pathway forward and a sensible and sustainable set of policies and rules which are predictable, coherent and work together, or integrate, to encourage competition in the energy sector.

I look forward to continuing to work with the EUAA and its members to promote the development of robust, competitive markets that will continue to support the vital contributions that your businesses make to the Australian economy.

Thank you.

ENDS

Subscribe to Retail