Electricity Network Economic Regulatory Framework Review

Networks are the single largest contributor of costs in the power system. Right now, the Commission has found that the current framework gives them the right tools and sufficient flexibility to manage changes such as increased rooftop solar. The Commission has an annual review process in place to ensure regulation is fit-for-purpose and delivers the best outcomes for consumers in the future. This will include consideration of other ways in which network regulation may need to change in the future to support a grid with significantly more multi-directional energy flows. 

Promoting efficient investment in the grid of the future so consumers’ needs can be met at least cost

The 2018 Economic regulatory framework review is the Commission’s second annual review under a standing terms of reference from the Council of Australian Governments’ Energy Council.

The terms of reference request the Commission to monitor market developments in decentralised supply options as well as relevant developments in new products and services that may affect the future role of electricity distribution network service providers. Drawing on the results of this monitoring the Commission was requested to consider whether the economic regulatory framework for electricity networks is sufficiently robust and flexible to continue to support the long term interest of consumers in a future environment of increased decentralised energy supply.

2018 economic regulatory framework review published on 26 July

With more people connecting distributed energy resources like solar PV, batteries and price-responsive appliances, the regulatory framework must support a grid with more decentralised, local generation and storage.

The 2018 review found that the regulatory framework is currently flexible enough to support integration of these distributed energy resources, especially as major changes in recent years have reduced network costs and introduced cost-reflective pricing so households and businesses can make the most of their investments.

However, the Commission is monitoring the need for more changes to support likely future scenarios where there is a much higher penetration of distributed energy resources and more multi-directional energy flows. To this end, the report analyses how financial incentives for network businesses need to change over time so networks embrace new technology where it is the cheapest way to help manage the grid. This work also fulfils a Finkel recommendation to analyse capital expenditure bias in the current regulatory framework.

The report found incentive-based regulation continues to be the right approach for deciding how much revenue a network can recover from consumers. But as new technologies offer more non-network solutions as alternatives to ‘poles and wires’ investment, the method of expenditure assessment and remuneration may need to change in the future.

The Commission will start analysis of networks’ capital and operations expenditure assessment before the the end of 2018 so that the regulation continues to provide the appropriate framework for efficient investment, whatever the future scenario may be. 

The report also looks at how the regulatory framework may need to change more broadly to support a grid with more distributed energy resources. The Commission will work with the Australian Energy Market Operator, Energy Networks Australia and other stakeholders on potential models for the optimisation of distribution-level markets.

A competitive distribution market would enable consumers to optimise the value of their investments in distributed energy resources, but it will require considerable time to build. In the meantime, there are a number of first steps that networks can take right now to better understand how to integrate more distributed energy resources while continuing to meet their electricity service obligations to consumers.

As part of the review, the Commission monitored how network businesses have performed overall in terms of efficient investment. The report notes the key trend of a plateauing of the networks’ regulatory asset base in recent years. This has been driven in part by reforms giving the Australian Energy Regulator additional tools and more discretion when setting network revenues. Looking forward, our 2019 review will look at broader powers for the Australian Energy Regulator to review imprudent capital expenditure. 

Background: network regulation

Electricity networks, like water services and rail services, are a natural monopoly. The significant cost of extensive networks of electricity poles and wires means that grid services in a particular region can be most efficiently provided by a single (monopoly) supplier.

The National Electricity Rules enable the Australian Energy Regulator to set the maximum revenues that electricity network businesses can charge. The Commission has made a number of changes in recent years to the rules to keep costs as low as possible. These changes include:

Changing the energy landscape with new rules for networks 

The Commission has had a long-term reform program underway to strengthen network regulation so that everyone from heavy industry to small customers are able to make clearly informed decisions about how they use electricity. 
The Commission has made new rules so network prices reflect the different ways people are using electricity and the actual costs of providing it.

In 2014, the Commission made rules covering how individual households should be charged for their network services. They required network prices to reflect the cost of providing network services to individual consumers. These rules put consumers in the driving seat for the first time – to keep pace with modern lifestyles. When prices reflect how much it costs to use electricity at different times all consumers are able to make more informed decisions so they can choose energy services that are right for them – whatever technology changes lie ahead in the future.

Before that in 2012 the Commission made new rules about setting revenue allowances for networks using a regulatory approach based on business efficiency so that consumers don’t pay higher network charges than necessary for the reliable supply of electricity and gas. These rules gave the Australian Energy Regulator additional tools and more discretion when setting network revenues. This included an enhanced approach on setting the rate of return; more tools to determine efficient costs for each regulated business; and incentives to improve business efficiency. These changes applied from the current regulatory period (from 2014 to 2019).

Read more about network regulation.