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John Pierce AO

Redrawing the boundaries between regulation and competition in new energy services markets

08 August 2016

Richard Owens, AEMC Senior Director, Transmission and Distribution Networks, spoke at the Energy Networks Association (ENA) Regulation Seminar 2016.

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Good afternoon and thank you for inviting the AEMC to speak on such a topical issue.

Apologies for the fact that most of you were no doubt expecting to hear from John Pierce rather than me. Unfortunately John is attending Matt Zema’s funeral in Melbourne today, which he obviously couldn’t miss given how devastating Matt’s death was for many of us.

A century ago, a safe and reliable source of energy was the wonder of the world. Today consumers take it as given and our economy relies on it.

Now, once again, another energy revolution is happening, in renewables, in storage, in information management services, and in the increasingly multidirectional flow of energy.

What’s new in this latest chapter of the energy story is that technological change is allowing consumers to choose how their energy is delivered and used. Technology is enabling a devolution of decision making with consumers increasingly driving the development of the sector through the choices they’re making.

Electricity networks are very much on the front line of this shift and this is reflected in the work the ENA is doing in their Electricity Network Transformation Roadmap. Importantly, the Roadmap is taking a very deliberate customer-centred approach, recognising that ultimately, it’s consumers exercising their growing energy choice – and not the technologies themselves – that are driving the transformation.

With recent events in South Australia, we are seeing a high level of interest in the transformation of our electricity system and, in particular, the implications of higher levels of renewables, both grid scale and distributed, on wholesale energy prices and power system security.

As we know, these are not new – or unforseen – challenges. However, as our Chairman John Pierce noted last week at the Clean Energy Summit, much of the current debate is still inwardly focused – and all about industry. It should instead be going beyond renewables alone, because the change we’re seeing in the market is increasingly led by consumers, and the focus should be enabling consumers to make the choices that are best for them so they have greater control over how they source, manage and use their electricity.

To that end, much of the AEMC’s efforts over the past few years have been in providing more opportunities for consumers to make informed choices. Whenever possible, we start from the premise that the best judges of what’s in consumers’ interests are consumers themselves. And where there are barriers or constraints to consumers exercising their choices, our preference is to address those barriers to choice rather than use regulatory instruments to impose technology-based solutions on consumers. Importantly, we do not try to pick winners.

The reforms flowing from the AEMC’s Power of Choice review have laid the foundations for an energy system that is positioned to deploy new technologies in response to the choices consumers make. This is why we have focused on changes such as network pricing reform. We all know networks have been preparing for the introduction of cost-reflective pricing from 1 July 2017, with the tariffs that have been proposed in the current tariff structure statement process being just the first tentative step in a journey towards truly cost-reflective network prices that better reflect the consumption choices of individual consumers.

Another example is our competition in metering reforms, where we have opened up metering services to competition. The focus of the metering rule change was not the meters themselves or promoting consumer choice in metering technology. It’s about advanced meters as an enabler for new products and services that can deliver benefits for consumers. The metering reforms were also the first significant example of a reconsideration of where to draw the line between services that are competitive and services that should be regulated. A decade ago it was simply assumed that metering for residential customers was a monopoly service that could only be provided by the DNSP and therefore needed to be regulated. But our recent rule change showed that there is no reason for that to be the case, and instead network businesses, retailers and independent metering businesses should all be able to compete to provide metering services on an unregulated basis.

But if network businesses want to be involved in the competitive metering space, they must comply with the AER’s ring-fencing requirements.

So why do we need ring-fencing for network businesses that want to compete in the provision of competitive services like advanced metering?

To answer that question, you first need to be clear about the purpose of ring-fencing. It’s not just about avoiding cross-subsidies between regulated and non-regulated services. That’s important, but it’s just part of the broader aim of facilitating the development of a competitive energy services market. In the customer-centred future that we envisage for the energy market, the long-term interests of consumers will be best served by retailers and other energy service providers innovating and experimenting to offer products and services that consumers value.

That objective requires effective ring-fencing that means that network businesses can’t discriminate between their network business or related entities and third party service providers. The AER is currently implementing ring-fencing through the new national distribution ring-fencing guidelines, which I’m confident will go a long way towards achieving this objective.

In addition to ring-fencing, the regulatory framework also needs to support this objective through a range of other measures including:

  • providing clarity around which services are regulated and which are not;
  • creating incentives for the efficient investment in, and use of, assets such as storage that can provide both regulated and non-regulated services, so that the full value is obtained from those assets;
  • having robust cost-allocation and shared asset regimes for circumstances where a network asset is used partly to deliver a regulated service and partly to deliver a nonregulated service; and
  • having strong efficiency and investment tests that require and incentivise networks to procure services from the competitive market where it is more efficient to do so rather than investing in the assets to provide those services using regulated revenues and rolling them into the RAB.

The rules already contain a lot of these features, and we are expecting to receive a rule change request from the COAG Energy Council later this month proposing enhancements to some of these measures based on the recommendations from our Integration of Energy Storage Report. I also understand that other stakeholders are working on potential rule changes in this area and I encourage them to submit them soon so that we can consider and consult on all of the proposals in a coordinated fashion.

Our preference for competition over regulation and our desire for a clear separation between the regulated and competitive sectors isn’t just an issue of ideology. It reflects our concerns about the potential damage to the long-term interests of consumers from a lack of such separation.

To give the issue some context, I thought it would be useful to work through a few examples of current issues that illustrate why a lack of an effective separation between regulated and competitive services could prevent the emergence of a strong, competitive energy services market and could mean that customers miss out on the benefits that competition can bring them in terms of increased innovation and choice and lower long-term prices.

There are four current examples I’ll use to illustrate these concerns:

1. The first example is battery storage.

The AEMC made a number of recommendations in the Storage report we released in December last year. Our analysis focused on storage as an example to shine a light on potential regulatory issues that could apply to a range of technologies, in particular technologies that can be used to provide both regulated and competitive services. While many of the specific functions that storage performs are not new, it’s the potential for storage to generate multiple value streams for multiple players – including consumers, networks and generators – that makes it so interesting.

One of the key issues we considered was “who should control the storage device when it’s behind the meter”? Should it be the consumer, the energy services company, the retailer or the network business?

In a consumer-controlled model, we’d see consumers themselves buying batteries directly, along with optimising software so the battery can store power at times of low prices or store power from the consumer’s solar system, and then discharge at times of high prices. Or an energy-service company could manage the device on the consumer’s behalf.

A retailer-controlled model could see retailers providing storage services to consumers through an arrangement where the consumer effectively gets a cheaper electricity price while the retailer controls the device to hedge against wholesale and distribution prices.

Under either model, the retailer or an aggregator on the consumer’s behalf could also sell services to network businesses to allow them to use the battery at certain times for network support.

All of these models are compatible with the idea of a competitive energy services sector.

Then there’s the network-controlled model. One example is where the network owns the storage asset behind the meter and socialises some or all of the cost across all customers on the basis that the battery is helping provide regulated network services.

Our concern is that network-controlled storage is likely to act as a barrier to the other models. For example, how could a retailer or energy service company compete on price if the network can smear some or all of the costs across all consumers in the state but the retailer or ESCO has to recover the full cost from the individual consumer? And would networks have an incentive to do things like make connections for competing providers onerous and costly if they have a business interest in providing network-controlled storage?

Although networks may rightly argue that using storage in this way enables them to operate the network more efficiently, this model would damage the development of a competitive energy services sector, which gives consumers the best opportunity to decide which product or service best suits them.

To be clear, we believe network businesses should be able to buy storage services from competitive providers or ring-fenced affiliates where it is more efficient than network augmentation and other demand management options to meet network requirements, or where it can help networks maintain the stability of the grid. The rules already allow this, and have incentives for network businesses to implement non-network solutions, including the use of storage.

2.To help illustrate that this issue isn’t just about storage, my next example is micro grids and stand-alone power systems.

The AEMC is currently doing some research and thinking on this issue, as we see it as a significant emerging issue where there appear to be gaps in the current regulatory framework at the Electricity Law and Retail Law level.

A number of network businesses have said that in remote parts of their networks, when a line reaches the end of its life, it’s likely to be more efficient not to replace the line but to instead serve the customers through a micro grid or stand-alone power system. I agree that this approach should be allowed as it could have significant cost savings for consumers, as well as reliability and bushfire reduction benefits in certain areas.

However, major issues arise regarding which services become regulated and which remain competitive. The proposal that was put to me recently by one network business was that it should be able to disconnect customers at the end of long rural lines and instead supply them using a stand-alone power system of solar, storage and a diesel generator. That idea has a lot of merit, but does it necessarily flow that, as proposed by the DNSP, the network business should become a regulated monopoly supplier of not only the network service but also the solar panels, storage unit and diesel generator and even deliver the customer’s diesel on a regulated monopoly basis? Or should some of those services be provided to the customer on a competitive basis? Or if that’s not possible, should the network business be required to procure the inputs to this service from the competitive market rather than own the assets itself?

3. A third example is sharing staff and equipment.

In their submissions to the AER’s current ring-fencing guidelines process, several network businesses argue that they should be able to use under-utilised field staff and trucks etc from their regulated business to provide competitive services, on the basis that cost-allocation will allow them to reduce regulated charges and also provide the competitive service more cheaply than if they had to have stand-alone staff and equipment for each of the regulated service and the competitive service.

This is probably the best example of the tension inherent in this issue, as networks are right that in the short term this will lead to lower prices for consumers of both regulated and competitive services.

But will it mean that competition never emerges in markets for new services, as no one else will be able to compete with the network business’ prices? In the long term, is that likely to result in less choice and higher prices for competitive services?

4. I’ll finish with an example about marketing of competitive products

 I am aware of one network business that is currently advertising solar and battery services on the website for its regulated DNSP activities.

The advertising is next to the “electrical faults and emergency” numbers. It’s above the “connect your power” information, which you need to click on if you want to buy solar or storage from any other company and connect it to the network. If a customer wanting to have solar or batteries purchased from a competitor clicks on the “Connect your power – solar and other generation” link to find out how to get the panels connected to the grid, they get more advertising for purchasing panels and batteries from the network business.

Does all of this risk undermining a level playing field for the provision of competitive storage and solar services? Will consumers be led to believe that they will get additional benefits by purchasing these services from their DNSP, for example a quicker and easier connection process? Would the network business agree to provide similar free advertising on its website to unrelated competitive providers?

These examples illustrate why the Commission is concerned that allowing regulated entities to enter competitive markets is unlikely to support the development of a competitive energy services market. The ability to leverage regulated revenues, information asymmetries and the ability to discriminate in areas like connection processes would give regulated entities an unfair competitive advantage.

 

Being clear about where regulated networks can play and where they can only compete through a ring-fenced affiliate is not to suggest that the AEMC does not recognise that the integration of distributed energy resources is a key challenge – and opportunity – for network businesses as they seek to maintain grid stability while also reducing network costs.

The last thing I want is an outcome where the regulatory framework makes it too hard for networks to innovate and use new technologies as a lower cost alternative to building poles and wires. I’ve spent much of the last few years at the AEMC working on rule changes that are designed to incentivise networks to do the exact opposite of that.

The analysis being undertaken through the ENA Network Transformation Roadmap project in this area, including consideration of the future directions for electricity policy and regulation, is useful initiative and I’ve enjoyed the opportunity to participate in several of the workshops so far.

The AEMC is also continuing its technology work program and one of our main projects looks at how the role of distribution networks may need to evolve to enable consumers, service providers and network operators to optimise the value of distributed energy resources. This is currently an internal research project but we will be engaging publically towards the end of the year, resources allowing.

We also expect to shortly receive terms of reference from the COAG Energy Council for a new annual monitoring and review project on the effectiveness of the electricity network regulation regime in responding to increased uptake of decentralised energy supply.

All of these different work streams are important if Australia is to capture the significant value that a consumer-led transformation of the energy sector can bring. Many jurisdictions are grappling with these same questions and no-one has all the answers yet. Many voices and ideas need to be heard on these topics if we’re to deliver resilient and robust responses. The AEMC looks forward to being involved in this journey with you.

Thank you.

Smart Regulation for a 21st Century Energy System

27 July 2016

Chairman Australian Energy Market Commission John Pierce Speaking points for Clean Energy Council Summit Wednesday 27 July 2016 at 2pm Hilton Hotel, Sydney

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Thank you to the Clean Energy Council for inviting me to be part of today’s panel discussion. First let me briefly outline the role of the AEMC in helping to transform Australia’s energy markets.

The Commission is a national body responsible to the COAG Energy Council of energy and resources ministers from the Commonwealth, states and territories. We have two main jobs:

We provide advice to the COAG Energy Council on developing energy markets in ways that will benefit energy consumers.

The redesign of the east coast gas market that we are releasing tomorrow to free up gas trade is an example of this work;

We have a statutory role where we make rules under the national electricity, gas and energy retail laws that govern how energy markets operate.

The rule-making process is democratic – any individual or organisation can request a rule change.

The Commission is unable to propose rules itself in order to ensure that absolutely impartial decisions are made . . . based on evidence . . . . focussed on making sure consumers continue to get reliable, secure energy at the best price possible.

In recent times however, many of the things impacting the energy sector have of course originated from outside the national gas and electricity market governance structures of the COAG Energy Council and its market institutions.

In particular, the Commission and others have been pointing to the consequences of a lack of integration between energy and emission reduction policies. So the recent appointment of a Commonwealth Minister for Environment and Energy is a welcome development. Especially as it follows a request by the COAG Energy Council for our advice on the impact of emission reduction policies on the energy sector in order to facilitate better integration.

The achievement of traditional energy policy objectives, such as system security, reliability and price, and a policy to achieve a specified reduction in emissions from this sector, need not be seen as mutually exclusive.

It is not helpful to position a discussion of how to reduce emissions separately from how to maintain secure and reliable electricity supply as if they are. Especially for consumers who already find the pace of change to be quite confusing.

The role of the traditional, centralised energy supply model is changing due to new products and services, including renewables like wind and solar. But much of the current debate is still inwardly focused on the industry when it should be going beyond renewables alone – because the change we are seeing in the market is increasingly led by consumers; and all about making sure consumers can make the choices that are best for them so they have greater control over how they manage and use their electricity.

A framework based on consumer choice

Much of our efforts over the past five years have been in providing more opportunities for consumers to make informed choices about the way they use electricity based on their own assessment of the benefits that end-use services provide to them.

The AEMC does not try and pick winners. We do not judge success by the penetration of any particular technology.

Rather we aim for a set of market and regulatory arrangements that can adjust to whatever the future may bring…….say with respect to the level or pattern of demand, business models, technology or relative costs of fuel sources and so on.

That is to say, we try and avoid success in meeting policy objectives being dependent on bets or forecasts of how these things will work out in reality.

Whenever possible we start from the premise that the best judges of what is in consumer’s interests are consumers themselves.

So that the choices consumers make drive the way the sector develops, the technologies that get deployed and the business models that succeed.

And where there are barriers or constraints to consumers exercising their choices our preference is to address them directly rather than use regulatory instruments to impose solutions.

We can all see that there is an energy revolution happening around us……in clean energy technologies, distributed generation, in storage, in smart devices and information management, electric vehicles and the like. These technologies are enabling changes in how consumers potentially participate in energy markets.

However, we need to look beyond the “widgets” to focus on the function they perform and where necessary adjust the regulatory and market processes to accommodate them. Many of the functions they perform are not new – pump storage hydro systems and batteries are both at times a load and at other times a source of energy - what is new is that the technology allows these functions to be performed much closer to, and within the control of, consumers.

Given this trend of decentralisation or disaggregation of decision making, our goal becomes to allow consumers to decide when the value to them of using energy services is greater than the efficient costs to the system of producing it.

In particular, the reforms flowing from the Commission’s Power of Choice review have laid the foundations for an energy system …or more precisely an energy eco-system … that is positioned to adopt these new technologies in response to the choices consumers make.

This is why we have focused on changes such as network pricing reform – from 1 July 2017 networks will be required to structure their prices to better reflect the consumption choices of individual consumers.

Another example is our competition in metering reforms, where we have removed the regulatory barriers to competition in metering services. In removing the networks’ monopoly, we want consumers, via their participation in the competitive retail services market, to be able to choose the products and services enabled by advanced metering technology that they value.

These developments have also triggered a re-think of where the line is drawn between which parts of the sector are subject to economic regulation and where competition can be effective, and of the dominance of and reliance on, the traditional centralised power system.

But of course the transition that the sector is going through is a long way from being completed. As regulators we are a long way from being able to “set and forget.” Our recently released competition review and consumer research showed that the biggest barrier to the adoption of new technologies is consumer confidence, knowledge and understanding of what they offer to them.

Many consumers find new technologies appealing but there are significant gaps in information about what they mean for them, confidence in consumer protections and being able to compare options. The review made a number of recommendations to the jurisdictions that would address these issues.

A flexible and adaptable energy market framework

More broadly, there are a number of ways that we can help market and regulatory frameworks evolve appropriately – keeping in mind that we are not intending to second guess the market but rather transition the market alongside the changes in technology and consumer preferences.

Firstly, the AEMC in its role of adviser to the Energy Council conducts a strategic priorities exercise every two years. That process is designed to highlight the key areas of policy focus to help shape the Council’s agenda and the work of the energy market bodies, particularly the AEMC. So that’s a good way to really draw attention to the types of changes we’re seeing in energy markets and start to consider whether any changes to the law, rules, guidelines or procedures are required.

Secondly, the existing governance framework in the Australian energy market – where anyone can submit a rule change request to the AEMC for consideration – is a way for the market and regulatory frameworks to keep pace with the needs of consumers and market participants. If a consumer group or business sees a problem in the market, they can ask the AEMC to look at it, and subject to our decision making framework under the National Electricity and National Gas Objectives, we can revise the rules. It’s a great way to put the market more in control of its own development.

Thirdly, the AEMC and the other market bodies are undertaking a range of work, outside of business as usual processes, that looks at the implications of market changes. The AEMC initiated a technology-related work program back in 2014 and some of you may have been involved in one of the public consultations we undertook related to the Integration of Battery Storage.

Storage technologies like batteries are a good example of how new technology more broadly can lead to changes in the regulatory framework. It is the potential for storage to perform a number of functions and possibly generate multiple value streams that makes it particularly interesting.

The AEMC’s work program in storage and other technology-related areas is continuing. This month we initiated a review into whether market frameworks are suitable to complement the increasing volumes of renewable energy and to maintain power system security as the industry transforms.

The impact of renewable energy on system security was highlighted in the AEMC’s Strategic Priorities as an important focus in the coming years and this review has been initiated to continue our work in this area. The review will provide recommendations to the COAG 4 Energy Council on changes required to the wholesale market arrangement and supporting regulatory frameworks to meet these power system security challenges, with an interim report due to the nation’s energy ministers by the end of this year.

Integration of energy and environmental policies

I will conclude where I began.

It is our view that greater integration of environmental and energy policy is required to maintain and enhance an efficient, safe, secure and reliable energy system that keeps prices as low as possible for consumers.

Environmental policy, which has tended to be developed externally to the energy market, can directly influence movements in wholesale and retail prices, changes to investment incentives and risk allocation, as well as the level of consumer engagement with the market. So, while governments’ role is to determine environmental outcomes, such as emissions levels, the mechanism used to achieve them needs to be compatible with how markets operate.

The AEMC’s role lies with providing advice on these mechanisms and seeing them implemented in a way that supports the efficient operation of the energy market and the long-term interests of consumers.

The effective integration of energy and environmental policy helps to create policy sustainability that, in turn, contributes to the regulatory certainty that is critical for all investors in the energy sector – including renewable energy. That’s why we are working to support the greater integration of environmental and energy policy – and why it is one of the AEMC’s strategic priorities.

I look forward to today’s discussion and, as always, listening to your views on the evolution of a flexible and resilient energy market – something which we all have a stake in.

Thank you.

Two sides of the energy coin: electricity and gas reform in Australia today

15 March 2016

John Pierce Chairman Australian Energy Market Commission

A speech delivered at the WA Power & Gas Conference, 15 March 2016, Perth Australia

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Introduction

Thank you. And good afternoon ladies and gentlemen.

It’s a pleasure to be with you - not the least because of the imminent inclusion of the WA electricity network regulation to the national framework. To support this work, the AEMC is participating in a number of working groups with Dr Challen’s team at the Public Utilities Office and has seconded one of its network regulation specialists. But it’s not all one-way – this involvement also informs the AEMC of the context, the challenges within this jurisdiction, and that there is not a one-size-fits-all approach to energy markets.

If electricity is one side of the energy coin, the other is gas. The is much to be learned from the West Australian experience because in many ways, it has already faced some of the challenges that are now being experienced on the East Coast, given the structural changes to domestic demand and supply dynamics, increasingly driven by the new LNG export industry.

So today, I think it’s a good opportunity to share the AEMC’s thinking about the direction and context of developments in sector – both gas and electricity - and some of the implications for managing reform processes of this magnitude.

Energy Council Vision for the creation of a liquid wholesale gas market

Back in late 2014, COAG’s Energy Council, of which Western Australia is of course a member, decided on a destination for the East Coast gas market and then asked the AEMC to draw the roadmap to get there.

Its vision for the creation of a liquid wholesale gas market was:

  • one that provides market signals for new investment,
  • where trade is focused at a point that best serves the needs of participants,
  • where an efficient wholesale reference price is established to allow for the development of risk management tools, and
  • producers, consumers, and trading markets are connected to infrastructure that enables participants the opportunity to readily trade between locations and arbitrage trading opportunities.

The Victorian Government also asked us to look specifically at changes to the Victorian wholesale market to improve price and investment signals so that benefits in trading, risk allocation and lower transaction costs could flow through to consumers.

An important aspect of the work the AEMC has been asked to do in laying out a gas market development path towards the COAG Energy Council’s Vision, is that it’s not dependent on being in some part of the commodity cycle, or the economic cycle, or for that matter, the specific economic challenges of the day.

It's about something far more fundamental.

  1. That consumers can see whether the price they are being offered for gas is a reasonable market price, and
  2. That the gas that is available goes to where it is valued most, thereby making a greater contribution to the value of Australia's economic output.

For a range of reasons, there is only have a relatively small window of opportunity to adjust domestic gas market arrangements towards that vision - and make lasting change.

The AEMC’s final report to COAG’s Energy Council is due in May. In the event that the roadmap is accepted, the focus would then shift to implementing the recommendations endorsed by COAG. In reality, there would be several staged phases to guide the development of the market and regulatory arrangements over a number of years.

That’s the scope of the task and the commitment required.

Today, I’d like to share the AEMC’s thinking on this roadmap, the issues that are driving the desire for change and possible solutions. Some of the issues driving changes in the East Coast gas markets may be very familiar and in that sense, the proposed package of reforms may be of some interest as Western Australia’s market adapts to the inevitable changes impacting ‘internationalised’ gas markets over the coming decade.

Rationale for changes in East Coast market

It is of course, the changing supply dynamics that are driving the rationale for reform on the East Coast. The structural changes ushered in by LNG exports, with impacts on patterns of gas flows and wholesale gas prices, are fundamental and irreversible changes to the Australian market. We can expect to see more volatility generated by these large loads and the coal seam gas fields that supply them. These changes are expected to significantly affect the East Coast gas market in two ways:

  • The pattern of gas flows – large volumes of gas from Queensland and South Australia will supply the LNG export plants with end users in these states likely to source increasing volumes of gas from Victoria
  • The volatility of flows and prices - market participants may want to transport large volumes of gas into the southern states for sale when the LNG export plants are unable to absorb supply due to an LNG train being taken offline, for example.

The best outcome would be the domestic market realising the benefits of this supply, by having gas transported to those users who value it most. But to do this, we need the right kind of pipeline transportation arrangements and wholesale trading markets in place, supported by appropriate levels of market information, to allow the sort of short-term trading response that would be required.

At the moment the East Coast has 3 different sets of facilitated wholesale market arrangements – a market in Victoria, a market around Wallumbilla in QLD and short-term trading markets in Adelaide, Brisbane and Sydney. All of these markets operate under different trading arrangements and to date, none have been sufficiently liquid to allow the development of risk management tools such as financial derivative products.

Now, in a market where the price of gas is low and stable, and producers and users are happy to enter into long term bilateral contracts, you might not need more tools to manage gas price and volume risks. But when there is uncertainty about where gas prices might go in the future, with increasing international linkages through LNG markets, or when producers are simply unsure about whether they will have the gas to fulfil contracts, you start to see those bilateral contract deals changing.

Contracts get shorter and less flexible and perhaps there is a greater price premium built-in. This leaves users with more risk to manage and without access to a well-functioning wholesale market, limited tools to manage their gas portfolio.

In Western Australia, the market has responded to the need for more short-term trading through the establishment of various trading platforms and brokerage services. Like the East Coast, however, the trading volumes in these markets have been small. The fragmentation of these markets limits the liquidity in the market and hence the development of meaningful, transparent wholesale gas prices.

Stakeholders on the East Coast have told us that access to pipelines, particularly for periods under 6 months, is greatly impacting their ability to trade gas in the short term. Specifically, the search and transaction costs in secondary capacity trading can be high, negating the commercial value that could be achieved through trading. The process can take weeks: it means finding a shipper that has spare capacity to trade. And unless their contract with the pipeline operator has exactly the right combination of receipt and delivery points, and type of service (for example, front haul, back haul) required, then the underlying gas transportation agreement must be opened up. The price at which this capacity is offered can also be high and as there is no market mechanism to help establish a price, it can be hard for smaller players or those not using the gas markets regularly to determine a ‘fair’ price. These kinds of arrangements, which I refer to as ‘market mechanics’, are not going to work in a market that is increasingly volatile in the short-term.

Finally stakeholders across the board have also said they don’t have enough information about the market to be able to trade effectively. Well-functioning markets are, or course, underpinned by information that helps address information asymmetries between incumbents and new entrants, but also between the demand and supply side.

Three key elements of the roadmap for future market development

The AEMC has recommended a package of reforms in 3 areas that mutually reinforce each other:

  1. Changes to wholesale gas trading markets will concentrate trading at 2 points to reduce complexity and enhance liquidity
  2. Changes in pipeline access arrangements that will improve the access to pipeline capacity by introducing market pricing mechanisms and trading platforms,
  3. Better provision of information with an expanded Bulletin Board.

New ways of buying and selling gas

To achieve the Energy Council’s vision of a liquid wholesale gas market, we need to create a self-reinforcing loop that encourages both buyers and sellers to participate in facilitated markets. More participants and greater traded volumes lead to more meaningful pricing signals, reflective of underlying demand and supply conditions, giving sellers and buyers confidence that the market can support their needs. As trading volumes increase, financial risk management tools can be developed, further strengthening confidence in the market.

We have therefore recommended that trading be concentrated at a ‘northern hub’ around Wallumbilla and a Southern hub utilising the existing Victorian market. These two areas reflect key intersections of demand and supply with different fundamentals that will drive the need for short-term trading.

In Victoria, we are proposing to augment the existing hub and transition from the compulsory trading model, where today over 80% of the gas flowing through the system is simply participants selling gas to themselves, and move to a voluntary, exchange-based trading model similar to Queensland’s Wallumbilla market.

In this type of market, only those participants looking to buy and sell gas are required to use the exchange – posting bids and offers to buy and sell gas over various time horizons depending on their requirements. This would allow the publication of a ‘market price’ on the exchange that is not affected by any ex-post deviations. Over time, as confidence in the market increases, this exchange price can be used as a reference price in bilateral contracts and can also form the basis of hedge instruments.

Wholesale commodity trading of gas is already happening at Wallumbilla in Queensland and we believe it’s the best location for the development of a liquid northern trading hub, given the intersection of many pipelines connecting many producers, users and facilities like storage. Although the northern hub would initially be a physical hub, trading arrangements would be harmonised across the two markets, laying the foundations for a virtual hub at a later date if required.

Improving pipeline arrangements

Of course, liquidity in wholesale markets will never be improved unless you can get gas to and from those markets. So we’ve also suggested three main reforms to improve the transparency of pipeline arrangements and lower the search and transaction costs associated with trading pipeline capacity. The Gas Access Regime under the National Gas Law is applicable to Western Australia and will be directly relevant to WA pipelines over time.

The first reform is to establish an auction mechanism for contracted but un-nominated capacity – commonly called as-available capacity. This is capacity for which shippers have already paid the pipeline operator, but which reverts to the pipeline operator if not used by the shipper. We are suggesting that a market-based mechanism should be introduced to allow this capacity to be offered up to whoever values it the most – but with a reserve price to be established independently through a methodology approved by the Australian Energy Regulator (AER).

The second area of reform is the development of standardised capacity contracts and products that can be traded through a compulsory trading platform. It would not be compulsory to use the platform for the transaction itself but it will be a requirement that information about the capacity trade is placed on the platform. Standardised products and a place to trade them, should greatly reduce search and transaction costs, and price transparency of historical trades should give the market more confidence that it is getting a ‘fair’ price for that capacity.

Finally, continuing the theme of transparency, we are suggesting that more information be published on the price at which primary capacity is sold.

While these changes to pipeline access arrangements do represent significant changes for the Australian market, they are very much in keeping with requirements for pipeline operators and shippers in other countries that have recognised the key role that pipelines play in supporting a liquid and competitive wholesale gas market.

Better information

The last area of reform in our package of recommendations is enhancing the information provided to the market participants. The purpose is to allow easier access to the information needed to make informed decisions. This is one area in particular, where we’ve learnt a lot from the WA experience and the degree of information transparency provided by the IMO website. Now I know the journey to greater information transparency was not necessarily an easy one. By incorporating information on large users, more detailed information on actual flows and capacity outlooks, while addressing confidentiality concerns, the market here has been better able to respond to changing market dynamics than the East Coast markets.

Staying the course

So the gas reform agenda on the East Coast is substantial. It goes without saying, however, that any major policy implementation is difficult. The National Electricity Market didn’t happen overnight. Neither did the WEM (2006). A key success factor for both the NEM and WEM were governments having consistent positions over time on policy outcomes. This is important work - the creation of resilient gas and electricity energy markets that are transparent, flexible and can adapt to whatever the future may bring.

Experience tells us that major reforms with long-lasting benefits need to be implemented carefully and take time. The detail matters. There needs to be a well thought-out plan, with the right sequencing and a dedicated team to follow it through with a clear idea of the outcome. And the ability to be responsive and flexible when moving through the various stages.

The challenge is maintaining the commitment, staying the course for as long as it takes to land economic structural reform. Setting policy objectives is of course, the role of governments. It was their vision for the creation of a liquid wholesale gas market. Similarly, it was the WA government’s concern that the electricity market was not functioning as well as it could, that has driven the electricity market review and the reform agenda.

The AEMC’s role lies with the mechanisms used to achieve the reform agenda set by COAG’s Energy Council, and seeing it done in a way that supports the efficient operation of the energy market and the long-term interests of consumers.

These will be the same criteria that will be used when the AEMC begins making decisions that impact Western Australia’s gas and electricity markets.

Overall, we believe that the biggest gains for electricity markets will come from pricing reforms, although we are mindful of the significant challenges in WA and the cost of supplying remote areas of the state. Linked to this, and dependent upon the successful management of the pricing reform process, is facilitating innovation and the development of a competitive energy services market. While retail competition is not yet a reality in WA, we support the careful consideration that is being given to its potential. In East Coast markets, it is consumer decisions that can drive investment, innovation and technological development in new products and services. Those decisions, rather than decisions made by networks or regulators, are most likely to deliver the best outcomes for consumers.

Closing remarks

Let me finish by saying that this is a great time to be part of the dynamic energy sector – both electricity and gas markets - for this state, the eastern states and the nation.

Delivering successful outcomes for consumers will take the efforts of all; it will take time, and some give and take.

The AEMC continues to offer its support for the WA reform agenda and invite you to engage with us, to help us shape our thinking and request change when it’s needed.

Thankyou

~ENDS~

Designing a resilient wholesale gas market

08 March 2016

A paper presented at Australian Domestic Gas Outlook 2016 8 March 2016, Sydney Australia

John Pierce, Chairman, Australian Energy Market Commission

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Introduction

Thank you.

And good afternoon ladies and gentlemen. Today, we’ve heard a number of presentations on preparing and responding to changing gas market dynamics including; the role of gas in the domestic energy mix and the policy context in transitioning to a low-carbon economy. All of these perspectives, and the many others that will follow this afternoon and tomorrow, provide valuable insights into the challenges and complexity of the structural shifts underway and ‘pain points’ for both gas producers and consumers.

An important aspect of the work the AEMC has been asked to do in laying out a gas market development path towards the COAG Energy Council’s vision, is that it is not dependent on being in some part of the commodity cycle, or the economic cycle, or for that matter, the specific economic challenges of the day.

It's about something far more fundamental.

  1. That consumers can see whether the price they are being offered for gas is a reasonable market price, and
  2. That the gas that is available goes to where it is valued most, thereby making a greater contribution to the value of Australia's economic output.

For a range of reasons, some of which have been canvassed during today’s discussions, we only have a relatively small window of opportunity to adjust our domestic gas market arrangements towards that vision - and make lasting change.

An opportunity to take the reform steps necessary to create a resilient wholesale gas market, one that is transparent, flexible and can adapt to whatever the future may bring. A wholesale gas market that is efficient, secure and reliable for the long-term interests of consumers.

It will take the commitment of everyone involved in the sector, and some give and take, to get us there.

Energy Council Vision for the creation of a liquid wholesale gas market

Back in late 2014, COAG’s Energy Council decided on a destination and then asked the AEMC to draw the roadmap to get there.

It published its vision for the creation of a liquid wholesale gas market:

  • one that provides market signals for new investment,
  • where trade is focused at a point that best serves the needs of participants,
  • where an efficient reference price is established to allow for the development of risk management tools,
  • and producers, consumers, and trading markets are connected to infrastructure that enables participants the opportunity to readily trade between locations and arbitrage trading opportunities'.

The Victorian government also asked us to look specifically at changes to the Victorian wholesale market to improve price and investment signals so that benefits in trading, risk allocation and lower transaction costs could flow through to consumers here. Our recommendations for Victoria form a significant part of reforms to east coast markets.

In December, we published our draft reports and recommendations to deliver the Energy Council’s Vision. These recommendations drew on substantial and valuable contributions from a wide range of stakeholders and we are looking for further very specific feedback with 2 more discussion papers released last week.

One focuses on the next layer of detail for a new Southern Hub gas trading market in Victoria with an entry-exit system for capacity allocation. The other concerns for recommendations reform of the contract carriage arrangements for gas transportation on the east coast of Australia. The closing date for submissions is March 29 and I encourage you to continue to help shape our thinking.

Our final report to COAG is due in May. In the event that the roadmap is accepted by the Energy Council, the focus would then shift to implementing the recommendations endorsed by it. In reality, there would be several staged phases to guide the development of the market and regulatory arrangements over a number of years.

That’s the scope of the task and the commitment required.

So, what does the roadmap for future market development look like?

Key elements of the roadmap for future market development

We have recommended a package of reforms in 3 areas that mutually reinforce each other.

  1. Changes to wholesale gas trading markets will concentrate trading at 2 points: the Northern Hub at Wallumbilla in Queensland and the Southern Hub in Victoria, to concentrate trading liquidity at key points of demand and supply on the East Coast. These will be voluntary markets that deliver a clean wholesale reference price, and which, over time provides a meaningful tool for managing a gas portfolio.
  2. Changes in pipeline access arrangements that will improve the access to pipeline capacity by introducing market mechanisms and trading platforms, and
  3. Better provision of information with an expanded Bulletin Board.

A liquid wholesale gas market, with many parties buying and selling gas establishes an efficient and transparent reference price for gas. It will decrease barriers to entry, increase competition and promote the efficient allocation of gas to where it’s most valued. It will also act as a credible alternative source of supply to long-term bilateral contracts and consumers will know if the price they are being offered for gas reflects underlying demand and supply, and a reasonable market price.

The reform package is designed to allow the flow of available gas more freely throughout the interconnected system. We recognise that many of you are concerned about the impact of supply from gas fields and we share those concerns. So while issues relating to gas production and land use planning or levels of competition in the production and pipeline sector largely fall outside the AEMC’s remit, we are, however mindful of their impact on consumers and are consulting with others, in particular the ACCC, so the context for our proposals is understood.

The need for reform: 2 major drawbacks of the current Victorian situation

It is, of course, the changing demand and supply dynamics that are driving the rationale for reform of the way gas is bought and sold. I won’t spend too much time on this because it’s been discussed earlier today, but the structural changes ushered in by LNG exports, with impacts on patterns of gas flows and wholesale gas prices, is a fundamental and irreversible change to the Australian market. We can expect to see more volatility in the market generated by the LNG loads and the coal seam gas fields that supply them.

The best outcome would see gas transported to those users who value it most. But to do this, we need the right kind of pipeline transportation arrangements and wholesale trading markets in place to allow the sort of short-term trading response that would be required.

Reform roadmap: a staged approach

So where to from here?

To achieve the Energy Council’s vision of a liquid wholesale gas market, we need to create a self-reinforcing loop that encourages both buyers and sellers to participate in facilitated markets. More participants and greater traded volumes lead to more meaningful pricing signals, reflective of underlying demand and supply conditions, giving sellers and buyers confidence that the market can support their needs. As trading volumes increase, financial risk management tools can be developed, further strengthening confidence in the market.

We want market participants driving investment decisions and bearing the associated risks. To do this wholesale trading markets need to be accessible, easy and low cost to use and be supported by information that allows efficient decision making.

The transfer of ownership and pricing of gas takes place at defined locations on a gas network called hubs, which can be physical or virtual.

The problem with multiple physical hubs, and therefore the need to source pipeline capacity to transport gas to and from hub locations, is that not all participants are able to access all physical points on the network. It can also have a negative impact on trading liquidity and hence not provide meaningful price information associated with a liquid ‘market’. We have heard from stakeholders that this is currently an issue with accessing the physical hub at Wallumbilla. They would like to trade there but cannot get access to pipeline capacity to get their gas to or from the hub.

On the other hand, virtual hubs allow for title transfer of gas anywhere within the definition of the hub, and hence provide participants with greater trading flexibility and promote liquidity. The current Victorian market design is an example of a virtual hub. These hubs, which can account for the entire gas transmission of a country in Europe, need a system for allocating transmission capacity into and out of the hub area and can be more complex to balance.

In the Australian context we can see benefits in both physical and virtual hubs and so have tailored our recommendations to the characteristics of the existing markets. Our roadmap for improvements to the Victorian market is centred on augmenting the existing market arrangement to create a virtual ‘Southern Hub’ for trading gas. This involves transitioning from the compulsory trading model today where over 80% of the gas flowing through the system is simply participants selling gas to themselves, to a voluntary, exchange-based trading model more similar to that in place in Queensland’s Wallumbilla market.

In this type of market, only those participants looking to buy and sell gas are required to use the exchange – posting bids and offers to buy and sell gas over various time horizons depending on their requirements. This would allow the publication of a ‘market price’ on the exchange that is not affected by any ex-post deviations. Over time, as confidence in the market increases, this exchange price can be used as a reference price in bilateral contracts and can also form the basis of hedge instruments.

To support this new form of trading, we propose to transition the market carriage model and associated limited pipeline transportation rights, to a system of entry and exit rights for capacity allocation. This type of capacity allocation mechanism helps to provide better signals for investment in a ‘virtual market’ like the DTS because market participants bid for firm transportation capacity rights, and have to pay for that capacity, they also bear the risk of any over-investment. Price signals are improved because the price of capacity will rise with demand as signalled through auctions used to allocate capacity at each entry and exit point.

Wholesale commodity trading of gas is already happening at Wallumbilla in Queensland and we believe it is the best location for the development of a liquid northern trading hub, given the intersection there of many pipelines connecting many producers, users and facilities like storage. Although the northern hub would initially be a physical hub, trading arrangements would be harmonised across the two markets laying the foundations for a virtual hub at a later date.

I want to touch on the Short Term Trading Markets which have provided an effective and competitive gas balancing service and have contributed to price transparency on the east coast. These markets provide flexibility to new entrant retailers and large industrial users of gas who can choose to buy some or all of their gas requirements through the market instead of directly from producers or retailers. This lowers barriers to entry and promotes competition, creating benefits for consumers.

Over time as the Northern and Southern Hubs and in- pipeline capacity trading develops, we would expect the Short Term Trading Markets to purely support transparent and competitive balancing. This will reduce transaction costs for participants who have to engage with these markets on a daily basis, while still preserving the flexibility the Short Term Trading Markets have provided in recent times.

Encouraging growth in liquidity and a meaningful reference price at the Northern and Southern hubs, along with reforms to pipeline access and information provision, will provide participants with greater flexibility for buying and selling gas. Because of this, there will not be a strong requirement to trade at the demand centres and the benefits of retaining the STTM hubs as independent pricing points is likely to be outweighed by the costs to participants.

A key part of the transition away from the use of STTMs is therefore improvements in pipeline access arrangements. Indeed all the wholesale market changes will be undermined if the reforms to the pipelines are not implemented successfully.

We suggested three main reforms to improve the transparency of pipeline arrangements and lower the search and transaction costs associated with trading pipeline capacity. Stakeholders had told us that capacity trading in the shorter term, that is less than six months, was difficult and high cost – often involving contractual negotiations that would negate the commercial opportunity of accessing the capacity.

  1. The first reform is to establish an auction mechanism for contracted but unnominated capacity – commonly called as-available capacity. This is capacity for which shippers have already paid the pipeline operator, but which reverts to the pipeline operator if not used by the shipper. We are suggesting that a market-based mechanism should be introduced to allow this capacity to be offered up to whoever values it the most – but with a reserve price to be established independently through a methodology approved by the Australian Energy Regulator (AER).
  2. The second area of reform is the development of standardised capacity contracts and products that can be traded through a compulsory trading platform. It would not be compulsory to use the platform for the transaction itself but it will be a requirement that information about the capacity trade is placed on the platform. Standardised products and a place to trade them, should greatly reduce search and transaction costs, and price transparency of historical trades should give the market more confidence that they are getting a ‘fair’ price for that capacity.
  3. Finally, continuing the theme of transparency, we are suggesting that more information be published on the price at which primary capacity is sold.

While these changes to pipeline access arrangements do represent significant changes for the Australian market, they are very much in keeping with requirements on pipeline operators and shippers in other countries who have recognised the key role that pipelines play in supporting a liquid and competitive wholesale gas market.

I mentioned earlier that we had just released a discussion paper that provides further detail on these reforms including options for auction design, key elements of capacity contracts that would require standardisation etc.

The last area of reform in our package of recommendations is to enhance the information provided to the market.

Market participants must have easy access to the information they need to make informed decisions about the prices they expect to see from a competitive market. In gas markets, this means not just one specific data point but a range of information about production and consumption levels, transportation flows and investment levels in both the short and longterm. We know there are information gaps across the sector that affect the price discovery process and the way that gas and other resources are allocated. Trading and other decisions must currently be made on the basis of incomplete, inaccurate and/or asymmetric information.

We are recommending that the coverage of the Bulletin Board be expanded so that a wider range of information is provided and the reporting and compliance frameworks strengthened. Specifically we are looking to include information on reserves, large user demand and hub services. We are well advanced in this work and should be in a position to make specific recommendations for implementation that are able to be progressed immediately, in our Final Report in May.

Benefits of reform

What we’re really talking about with this package of reforms is deriving economic benefit from the interconnectedness of the system.

For Victoria, the benefit of reform means gas could be traded anywhere in the system, leveraging easy to use markets which minimise transaction costs, which should be reflected in end prices to consumers.

For the East Coast of Australia as a whole, the benefit of reform is a liquid wholesale gas market that is resilient and able to trade and mitigate the effects of increased volatility and shocks to the sector.

For Australia, the benefit of reform is in overcoming the challenges of a small number of market participants dispersed over a very large geographic area. It means getting the mechanisms right so that we can respond to any changes in supply across the country, whether LNG gas exports are high one month, or low with the supply pushed south, the next.

What we want is that gas consumers know that the price they pay for gas is the reasonable market price. They may not necessarily like the price they are paying, but at least they know that the price is being driven by market fundamentals, and is the same or similar to that being paid by the next person.

Staying the course

It goes without saying that any major policy implementation is difficult. The National Electricity Market didn’t happen overnight. And it’s easy to forget just how much has changed over the past 30 years of energy market reform.

Experience tells us that major reforms with long-lasting benefits need to be implemented carefully and take time. The detail matters. The challenge is maintaining the commitment, staying the course for as long as it takes to land economic structural reform. Setting policy objectives is of course, the role of governments. It was their vision for the creation of a liquid wholesale gas market. The AEMC’s role lies with the mechanisms used to achieve the reform agenda set by COAG’s Energy Council, and seeing it done in a way that supports the efficient operation of the energy market and the long-term interests of consumers.

It will take the efforts of all of us to do it; it will take time, and some give and take.

I invite you to join us on this journey of future development of the east coast gas market.

Thank you

~ENDS~

New technologies: re-drawing the line between what is subject to economic regulation and what is competitive

23 February 2016

John Pierce Chairman Australian Energy Market Commission

A paper presented at the Electricity Energy Storage Future Forum, 23 February 2016, Sydney Australia

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Introduction

Thank you. And good afternoon ladies and gentlemen.

No doubt one of the things that brought us all here today is the stake we share in how our energy sector develops.

The energy market and its associated regulatory arrangements are of course always changing and adjusting to new ideas, technology, the relative prices of inputs, consumer behaviour, and government policy positions. What’s different now, is that it’s happening much closer to consumers.

While we have market mechanisms and institutional arrangements designed to respond to these developments, along with every other aspect of life it seems, the scope and pace of change seems to be accelerating, which leads some people to prophesise that we are on the verge of an energy Armageddon, while others based on the same observations herald the eminent arrival of an energy nirvana.

So today, it’s a good opportunity to share the AEMC’s thinking about the direction and context of developments in the sector and some of the regulatory implications.

In short, new technologies and business models, coupled with consumer-led development of the energy sector, mean the biggest gains will come from network tariff reform and redrawing the line between what is subject to economic regulation and what is competitive.

The AEMC has a clear objective in the face of changing technologies, business models and consumer preferences. It is a resilient energy market, one that is flexible and can adapt to whatever the future may bring. One that is efficient, secure and reliable, keeping prices of energy services as low as possible for consumers. How this is achieved, however, will no doubt be radically different to the past because of these changing market dynamics.

1.Consumer choices are driving the application of new technologies including storage

Let’s start where all our discussions should rightly start – with consumers who are increasingly at the centre of the energy system and increasingly driving change.

Starting with the proposition that generally speaking, it’s consumers themselves who are in 2 the best position to decide what works for them, much of our efforts over the past five years have been in driving more opportunities for consumers to make informed choices about the way they use electricity based on their own assessment of the benefits that end-use services provide to them.

The Power of Choice reforms in particular have laid the foundation for the energy system to be positioned to respond to new technologies in a way that’s in the consumer’s interest. These technologies are changing how consumers participate in energy markets and include battery storage but also microgeneration, smart devices, electric vehicles and connected home products and services.

However, we need to look beyond the widgets to focus on the function they perform and adjust the regulatory and market processes to accommodate them. Many of the functions they perform are not new – what is new is that the technology allows these functions to be performed much closer to, and within the control of, consumers.

Battery storage technology is a great example of this. Batteries can be thought of as simply a generator with electricity as a fuel source – it can be thought of as no different to pump storage hydro. At times it’s a source of energy, at other times it’s a load on the network. The difference is how close the technology is to the consumer.

We label this the ‘consumer-led transformation’ of the energy sector. This is part of a process whereby…if you will excuse the pun …the power to determine how the sector develops is becoming disaggregated. Before the National Electricity Market, the focal point for decision-making was with the generators, it then shifted towards retailers and is now increasing resting with consumers, with flow on consequences for networks and how they are regulated.

Given this trend of decentralisation, the goal for policy makers and regulators becomes consumers being in a position to decide when the value to them of using energy services is greater than the efficient costs to the system of producing it. To arrive at this state of the world, a number of conditions naturally need to be satisfied.

The need for pricing reform

In 2014, one of our first major rule changes under Power of Choice was changes to the distribution network pricing arrangements. So while the 2012 rule changes dealt with the determination of network revenues, the 2014 changes tackled the way those revenues are turned into price structures.

In recognition of the disaggregation or de-centralisation process that is underway, with distributed generation, solar PV, batteries, electric vehicles, energy management software, greater diversity in consumption patterns and the like, determining the efficient level of network revenues only gets you so far.

We also need retailers, third party service providers and where appropriate, consumers directly, to be provided with price structures that reflect the efficient costs of providing network services to them at that time, at that place.

If consumers, through the choices they make, are driving the way the sector develops, then 3 the development of a competitive energy services market and providing energy services at the lowest possible cost to the consumer will depend on how network prices are structured.

For networks, that means tariff reform …having network prices structured to reflect the efficient costs of providing network services to individual customers.

Linked to this, and dependent upon the successful management of the network tariff reform process, is facilitating innovation and the development of a competitive energy services market.

Facilitating the development of a competitive energy services market, including storage technologies

Companies are now competing to offer energy services not just energy. I note from this morning’s press that AGL has released a new App for instance. This shift has been brought about by changing consumer preferences in how they source and use energy, new technology and new business models, and is driving a re-definition of where the lines are drawn between functions that are subject to economic regulation and those that can be provided through competition.

It is also redefining the relationship between different parts of the sector, where they potentially compete and the circumstances under which they co-operate.

This has important implications for how competition for retail energy services develop, how we think about the role of the retailer, the evolution of networks, in particular, at the distribution level, and when considering deployment of energy storage technologies.

Distribution businesses are evolving from one-way energy delivery systems in an expected growth environment, into managers of multi-directional flows of energy … and information.

The regulatory framework must evolve to support these innovations in a way that clearly distinguishes between those that relate to the natural monopoly functions of the network and hence are subject to economic regulation and those that belong in a competitive energy services market. The recent rule changes designed to support the development of a competitive metering services market is an example.

Where and how the line between economic regulation and competition is drawn, and the nature of the relationship between network operators and those providing energy services at the retail level, depends somewhat on what you perceive the long-term interests of consumer to be and hence the objective that is trying to be achieved.

If their best long-term interests lie in the development of a competitive energy services market, it means regulated network businesses being unable to use either the financial resources provided by regulated network revenues, or information that they gather as network operators, in a way that limits the growth of competition in energy services.

This has been central to our thinking on how network regulation should evolve in response to energy storage technologies.

What we are particularly wary of are proposals that seek to use regulation to impose solutions or particular technologies on consumers. Imposed solutions generally come at the expense of competition which means they also tend to result in consumers, rather than energy businesses, bearing the risks of technology deployment.

For example, we don’t think it’s appropriate for networks to put storage behind the meter as part of providing regulated network services.

Our approach is to support the development of a competitive market in energy storage technologies. One that encourages efficiency through businesses competing to provide consumers with the energy services that they value.

Under this approach, storage would only be installed where consumers want the services that energy storage can provide. This could include potentially cheaper electricity, back-up power, environmental benefits, and the opportunity to sell excess energy – all at a price that the individual consumer is willing to pay.

Example: removing the network’s monopoly – competition in metering reforms

An example of this approach is our Competition in Metering reforms where, in response to a rule change request, we have removed the regulatory barriers to competition in metering services. In removing the networks’ monopoly, we want consumers, via their participation in the competitive retail services market, to be able to choose the ‘smart meter’ products and services they value.

We believe these metering reforms will allow investment, innovation and technological development in response to consumer preferences - guided by price signals - rather than the network operators’ preferences and solutions imposed by regulation.

In effect, the new technologies now available to us, of which storage is but one example, provide us with the opportunity to redraw the lines between economic regulation and competition. It will be companies operating in this competitive retail energy services sector that will need to find the combination of services and technology that best meets consumers’ needs.

2. Adaptable regulatory framework to accommodate new businesss models

Example: who controls storage behind the meter?

One issue that will be close to your hearts is who should control the storage device when it is behind the meter? Should it be the consumer, the energy services company, the retailer or the network business?

In a consumer-controlled model, consumers themselves may buy batteries directly, along with optimising software so the battery can store power at times of low prices (or from their own solar PV), and then discharge at times of high prices.

Or an energy-service company could manage the device on their behalf.

A retailer-controlled model would see retailers providing storage to consumers through, say, a lease or power purchase agreement. The consumer gets a ‘less than socket’ electricity price while the retailer controls the device to hedge against wholesale and distribution prices.

All of these are compatible with the idea of a competitive energy services sector.

Then there’s the network-controlled model. One example is where the network owns the storage asset behind the meter and socialises the cost across all customers.

The concern is that network-controlled storage would act as a barrier to the other models. For example, networks may have an incentive to make network connections onerous and costly if they have a competing business interest in network-controlled storage.

3. Drawing the line between what is contestable space and what is subject to economic regulation

The ability of storage to generate multiple value streams is central to our thinking about which services should be contestable and which should be regulated.

Example: Trial of energy storage in SA

Let me give you a recent example to illustrate this.

Phase 1 of a trial of energy storage has been completed on ElectraNet’s transmission network in South Australia. There will be a more detailed case study on this at tomorrow’s session with Rainer Korte from ElectraNet but for now, let me take you through the AEMC’s perspective on this.

ElectraNet is part of a consortium that includes AGL energy. AGL is an electricity generator and a retailer. The consortium wants to trial a storage device on ElectraNets’ network to provide network support as an alternative to network augmentation to address network capacity issues.

If Phase 2 goes ahead, it will be located near a major wind farm and it’s hoped the trial will show how storage can help the network cope with integrating an increasing amount of renewable generation.

In providing network support, which is a regulated service, the project also has other potential contestable value streams.

Wholesale energy revenue is one of them. With wind generation often occurring at night when demand and prices are low or negative, the storage device could store energy when prices are low and release electricity when prices are high.

Another contestable value stream is reducing losses when the network is congested. The storage device could be used to store energy when the network is congested and capture energy that would otherwise be lost. It would then release its stored energy when capacity is freed up again.

A third contestable value stream is in ancillary services support. Storage can help maintain key technical requirements of the power system like frequency and voltage. These services are acquired by the Australian Energy Market Operator on a competitive basis as part of the wholesale spot market.

So we want market and regulatory arrangements capturing these multiple value streams so that there is strong separation between the regulated and competitive services provided by the storage asset. We would want to see the benefits of the value stream accruing to the right market participant. In this South Australian example, this would mean benefits accruing to AGL including:

  • The market trading benefits
  • the ‘saved’ energy benefits during periods of network congestion because AGL is owner of the wind farm
  • And the ancillary services support benefits because AGL is operating the device.

To be clear, we believe network businesses should use storage where it is more efficient than network augmentation or other demand management options to meet network requirements. And the regulatory framework already has incentives for network businesses to adopt non-network solutions, including demand management and energy storage.

What we are intent on doing, is drawing the line between what is subject to economic regulation and where competition can be effective, in a way that enhances competition in the contestable energy services sector. This means regulated network businesses being unable to use either the financial resources provided by regulated network revenues, or information that they gather as network operators, in a way that limits competition in energy services.

To use a sporting analogy, every player on the energy sector playing field should understand the position they are playing.

The whole team suffers if a forward decides to simultaneously take over the fullback’s position.

Where to from here?

So where to from here?

  • Networks need to effectively manage the tariff reform process and demonstrate how they’re going to partner with people competing in the energy services space to help them respond effectively to consumer demands,
  • Retailers on product development and
  • Market institutions on adjustments to the market and regulatory frameworks that remove barriers to innovations that benefit consumers and effective competition.

Governments quite rightly see the need to focus on the energy-specific consumer protection 7 frameworks, and how these may need to evolve. In doing so, the relationship between energy specific consumer protections and the more general Australian consumer law is one issue that would benefit from clarification. In doing so, we would expect that they approach it through the lens of continuing to promote effective competition for the provision of energy services.

Conclusion:

Let me finish by saying that these are exciting times in the dynamic energy sector.

Energy storage is one technology that is generating a lot of interest in its ability to transform energy systems.

The ‘consumer-led transformation’ of the energy sector shows no sign of abating with new technologies bringing the market much closer to, and within the control of, consumers.

We remain committed to market and regulatory arrangements that create an environment for business evolution that promotes the long-term interests of consumers. This means that the regulation of network revenues must continue to evolve.

We are mindful, however, of the importance of where to draw the line between what should be contestable and what should be subject to economic regulation and the imperatives of tariff reform as a pre-requisite for a successful energy services market, including storage technologies.

Thank you and I am happy to take your questions and comments.

~ENDS~

Designing a resilient gas market, not just for our times but for the future

19 February 2016

John Pierce, Chairman, Australian Energy Market Commission

A paper presented at the Committee for Economic Development of Australia (CEDA) Gas markets: Policy and investment outlook, 19 February 2016, Melbourne Australia

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Introduction

Thank you. And good afternoon ladies and gentlemen.

It's a pleasure to be here today and to see so many who have a stake in the future of our energy markets.

Whether you believe it’s more a curse or a blessing, we, in the energy game, are living in interesting times. A time of enormous upside potential: positioned as we are, on the doorstep of Asia, as the world transitions to a low carbon economy. But it’s also a time of uncertainty, given the structural changes to domestic demand and supply dynamics, increasingly driven by the LNG export industry, and changes to prices driven by international influences.

To appreciate just how rarely these opportunities arise, we'd have to go back to the late 1960s with the discovery of oil and gas reserves in Bass Strait, or perhaps back further to the 1950s when Hancock stumbled upon iron ore in the Pilbara, or maybe even further back to the 1850s gold rush. What I’m saying about the situation we find ourselves in is less about the size of the opportunity, and more about its frequency - these opportunities don't come along very often in our lifetimes.

While we can marvel at the scale of this – a multi-billion dollar East Coast domestic and natural gas export market, we should also recognise the sobering reality that we only have a relatively small window of opportunity to adjust our domestic gas market arrangements to this major structural shift.

A window of opportunity to make lasting change.

To develop a resilient wholesale gas market - not just for our times, but for the future.

An opportunity to take the reform steps necessary to create a resilient wholesale gas market, one that is transparent, flexible and can adapt to whatever the future may bring. A wholesale gas market that is efficient, secure and reliable for the long-term interests of consumers.

And it will take the commitment of everyone in the sector to get the best out of this opportunity.

In this endeavour, the AEMC’s work is being guided by the COAG Energy Council’s vision for the creation of a liquid wholesale gas market, which they published in late 2014:

  • one that provides market signals for new investment,
  • where trade is focused at a point that best serves the needs of participants,
  • where an efficient reference price is established to allow for the development of risk management tools,
  • and producers, consumers, and trading markets are connected to infrastructure that enables participants the opportunity to readily trade between locations and arbitrage trading opportunities'.

The Energy Council decided on a destination, and asked the AEMC to draw the roadmap to get there, given the new LNG industry market dynamic. The Victorian government also asked us to look specifically at changes to the Victorian wholesale market to improve price and investment signals so that benefits in trading, risk allocation and lower transaction costs could flow through to consumers here.

In December, we published our draft reports that outlined proposals for delivering the Energy Council’s Vision. Submissions on these draft reports closed last Friday and we were pleased to receive substantial and valuable contributions from a wide range of people. There was also strong participation across a series of forums where many views were openly shared.

Issues relating to gas production or levels of competition in the production and pipeline sector largely fall outside our remit, we are, however mindful of their impact on consumers and are consulting with others, in particular the ACCC, so the context for our proposals is understood.

Our final report to COAG is due in May. In the event that the roadmap is accepted by the Council, the focus would then shift to implementing those recommendations endorsed by the Energy Council. In reality, there would be several staged phases to guide the development of the market and regulatory arrangements over a number of years.

That’s the scope of the task and the commitment required.

The gas market development path we have laid out is not dependent on being in some part of the commodity cycle, or the economic cycle, or for that matter, the specific economic challenges of the day.

It's about something far more fundamental.

  1. That consumers can see whether the price they are being offered for gas is a reasonable market price, and
  2. That it goes to where it is valued most, thereby making a greater contribution to the value of Australia's economic output.

So, what does the roadmap look like?

Two major drawbacks of current Victorian situation

Let's start with the current situation here in Victoria. We see two main issues with the current system: the inability to manage price and volume risks, and a lack of market-driven investment in the pipeline system.

Since it was established in 1999, the Declared Wholesale Gas Market (DWGM) in Victoria has largely been effective in supporting retail competition and encouraging a diversity of supply and upstream competition.

But we are now at an inflection point - as we've seen, Victoria is not immune to the structural changes ushered in by LNG exports with impacts on patterns of gas flows and wholesale gas prices. We can expect to see more volatility in the market generated by these large loads and the coal seam gas fields that supply them. There will be times when LNG export plants are unable to absorb supply. Some of these events will be known like planned maintenance outages and can be managed, but lots of events cannot be planned for – lots of things all have to go right for an LNG vessel to be filled and leave port right on schedule. If an LNG ship is delayed, due to bad weather, for example, large volumes of gas will need to go somewhere. The best outcome is for the domestic market to see the benefits of this supply by having that gas transported to Victoria or whichever users value it the most. But to do that we have to have the right kind of pipeline transportation arrangements and wholesale trading markets in place to allow the sort of short-term trading response that would be required.

These developments, and the volatility they are likely to bring, also mean it’s critical that the Victorian gas market design has the flexibility to accommodate structural changes in demand and supply dynamics so that participants can actively manage the price and volume risks they face. However, the preconditions necessary for the development of financial risk management products do not exist in the Victorian Declared Wholesale Gas Market. This has the potential to deter market entry and result in consumers paying more than is necessary.

The prices in the Victorian gas market largely reflect short-term imbalance positions of participants and the ex ante pricing developed before the actual gas day is subject to uplift and deviation payments. The difference between the ex ante price and the ex post price means that it's unlikely financial trading can develop in Victoria with the current market design, meaning that market participants must hedge these risks through physical trades outside the market. This may not have mattered much in a stable market but it is increasingly costly and difficult in a more dynamic market.

To date investment in the Victorian Declared Transmission System and other pipelines outside the DTS has seen pipeline transportation evolve into an interconnected network, physically linking Victoria with the rest of the East Coast. This interconnectedness makes it increasingly important that there is a meaningful price signal of underlying supply and demand conditions to promote efficient decisions regarding flows of gas to and from Victoria and further investment in the future.

This leads me to the second area that we were asked to address – the lack of mechanisms for market-driven investment in the Victorian pipeline system. What we see is investment occurring mainly through the regulatory process where costs are recovered from consumers.

Currently, there is little incentive for shippers to underwrite investments in the pipeline because they do not have exclusive rights to use any extension or expansion in the DTS. This means we have a 'free rider’ problem because all shippers would benefit from a capacity expansion, whether they fund it or not. It also means that if investment does occur on the back of shippers’ demand, but that demand does not materialise, it is consumers who end up bearing the cost of that over-investment. The need for a more dynamic market response means that any impediments to market-led investment will become increasingly costly to Victorian gas users.

Possible solutions

So where to from here?

To achieve the Energy Council’s vision of a liquid wholesale gas market, we need to create a self-reinforcing loop that encourages both buyers and sellers of gas to participate in facilitated markets. More participants and greater traded volumes lead to more meaningful pricing signals, reflective of underlying demand and supply conditions, giving sellers and buyers confidence that the market can support their needs. As trading volumes increase, financial risk management tools can be developed, further strengthening confidence in the market.

We want market participants driving investment decisions and bearing the associated risks. To do this wholesale trading markets need to be accessible, easy and low cost to use and be supported by information that allows efficient decision making.

Our roadmap for improvements to the Victorian market are centred around augmenting the existing market arrangement to create a ‘Southern Hub’ for trading gas. This involves transitioning from the compulsory trading model today where over 80% of the gas flowing through the system is simply participants selling gas to themselves, to a voluntary, exchange-based trading model more similar to that in place in Queensland’s Wallumbilla market. In this type of market only those participants looking to buy and sell gas are required to use the exchange – posting bids and offers to buy and sell gas over various time horizons depending on their requirements. This would allow the publication of a ‘market price’ on the exchange that is not affected by any ex-post deviations. Over time, as confidence in the market increases, this exchange price can be used as a reference price in bilateral contracts and can also form the basis of hedge instruments.

To support this new form of trading, we propose to transition the market carriage model and associated limited pipeline transportation rights, to a system of entry and exit rights for capacity allocation. This type of capacity allocation mechanism has been utilised throughout Europe and helps to provide better signals for investment in a ‘virtual market’ like the DTS. It also helps pool market participants because you only require capacity to enter and/or exit gas from the market rather than point to point capacity rights. Furthermore, because market participants bid for firm transportation capacity rights, and have to pay for that capacity, they bear the risk of any over-investment. Price signals are improved because the price of capacity will rise with demand as signalled through auctions used to allocate capacity at each entry and exit point.

We’ve also made recommendations in the broader East Coast review that should make it easier to move gas into and out of the Victorian market by improving access to contracted but unutilised pipeline capacity.

Let me turn now to an overview of the benefits that can be achieved by making these changes.

Benefits of reform

What we’re really talking about is deriving economic benefit for Victoria from the interconnectedness of the system.

For Victoria, the benefit of reform means gas could be traded anywhere in the system, leveraging easy to use markets which minimise transaction costs, which should be reflected in end prices to consumers.

For the East Coast of Australia as a whole, the benefit of reform is a liquid wholesale gas market that is resilient and able to trade and mitigate the effects of shocks to the sector.

For Australia, the benefit of reform is in overcoming the challenges of a small number of market participants dispersed over a very large geographic area. It means getting the mechanisms right so that we can respond to any changes in supply across the country, whether LNG gas exports are high one month, or low with the supply pushed south.

What we want is that gas consumers know that the price they pay for gas is the reasonable market price. They may not necessarily like the price they are paying, but at least they know that price is being driven by market fundamentals, and is the same (or similar) to that being paid by the next person. By progressively winding back barriers to the flow of gas, we can ensure it goes to where it is valued most.

Staying the course

So there are potentially large benefits from change but it goes without saying that any major policy implementation is difficult. The National Electricity Market didn’t happen overnight. And it’s easy to forget just how much has changed over the past 30 years of energy market reform.

Experience tells us that major reforms with long-lasting benefits need to be implemented carefully and take time. The challenge is maintaining the commitment, staying the course for as long as it takes to land economic structural reform. Setting policy objectives is of course, the role of governments. It was their vision for the creation of a liquid wholesale gas market. The AEMC’s role lies with the mechanisms used to achieve the reform agenda set by COAG’s Energy Council, and seeing it done in a way that supports the efficient operation of the energy market and the long-term interests of consumers.

Conclusion

Let me finish by saying, the opportunity to drive successful development of a liquid wholesale gas market, is upon us now.

An opportunity to take the reform steps necessary to create a resilient wholesale gas market, one that is transparent, flexible and can adapt to whatever the future may bring. A wholesale gas market that is efficient, secure and reliable for the long-term interests of consumers.

It will take the efforts of all of us to do it, it will take time, and some give and take. I invite you join us on the journey, support the need for reform and continue to help us shape our thinking.

The prize is a resilient gas market, not just for these interesting times, but for the future.

~ENDS~

Evolution of the energy market

26 November 2015

Speech by Chairman John Pierce at CEDA energy series - the nem in transition - “The restaurant at the end of the universe: Evolution of the energy market” - 26 November 2015

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Thank you and good afternoon ladies and gentlemen.

It’s a pleasure to be here today with so many who have a stake in the future of our energy market.

All of us are seeing accelerating change in the dynamics of the sector. A sector made up of diverse organisations, often with different world views – from competitive retail services and energy generation; to the regulated networks; government policy-making and regulatory agencies; and consumer and environmental organisations.

It is the interconnectedness among all of us that is remarkable.

What unites all of us is a shared stake in a resilient energy sector – one that is flexible and can adapt to whatever the future may bring. One that is efficient, secure and reliable, keeping prices as low as possible for consumers.

One of the main themes emerging from our extensive consultation has been the critical importance of policy integration. Environmental policy, which has tended to be developed externally to the energy market, can directly influence how effectively the market operates, and outcomes, including movements in wholesale and retail prices. Critically, the relationship between the two, and more fundamentally, changes to risk allocation as well as the level of consumer market.

Fundamentally, markets and regulatory arrangements can be thought of as mechanisms for allocating risks between the parties involved. In a sector such as energy, the ability of the system to operate effectively and ultimately, the outcomes for consumers, depends on 2 the various policy and regulatory interventions taking a consistent approach to risk allocation.

Setting environmental and social policy objectives is, of course, the role of governments. That’s what they are paid to do. Our role lies with the mechanism used to achieve the objective and in seeing it done in a way that supports the efficient operation of the energy market and the long-term interests of consumers.

Successful policy integration needs to satisfy three conditions:

  1. It is done in a way that supports the efficient operation of the electricity market and the long-term interests of consumers. For this to happen, it should be compatible with the pricing mechanisms used to trade electricity
  2. It must be consistent with the allocation of risk between, say, businesses and consumers that underpins an efficiently operating market.
  3. It should have the ability to meet an emissions target, and meeting its objectives whatever the future brings - in demand growth, technological changes and relative input prices. That is, it should not be dependent on today’s expectations or forecasts of these variables.

Integration of the tools used to control emissions with the energy market is really the only means of achieving both energy and emission reduction policy objectives.

But it’s not just policy integration that needs to be addressed. We are also seeing changes in:

  • technology on both sides of the meter
  • new business models based on offering energy services, not just energy, and
  • Consumer preferences in sourcing and using these services.

The simple truth is that change will always be a feature of energy markets, and hence, policy and regulatory arrangements. What’s important is the way that policy and regulatory change is managed – it must be transparent, based on clear objectives and relatively predictable.

To this end, we consult widely with the increasingly broad array of organisations that have a stake in the future of our energy market. We have just completed one of our key market development exercises and today I’m very pleased to be releasing the results of our stakeholder consultation on the Strategic Priorities for Energy Market Development. Looking around the room, I see many who gave valuable and considered input to our recommended focus areas for market development.

So let me give you some context around each of the three Strategic Priorities.

1. Consumer Priority: Enabling consumers to make informed decisions in competitive retail markets

The first is our Consumer Priority – enabling consumers to make informed decisions in competitive retail markets. Starting with the proposition that it is consumers themselves who are the best judges of what works for them, much of our work over the past five years has been driving more opportunities for consumers to make informed choices about the way they use electricity 3 based on the benefits that end-use services provide to them.

The Power of Choice reforms, in particular, have laid the foundation for the energy system to be positioned to respond to new technologies in a way that is in the consumer’s interests. These technologies are changing how consumers participate in energy markets and include battery storage, microgeneration, smart devices and connected home products and services.

These technological changes sometimes drive either predictions of achieving an energy nirvana or imminent Armageddon. Regardless, we need to look beyond the widgets to focus on the function they perform and adjust the regulatory and market processes where necessary to accommodate them. Many of the functions they perform are not new – what is new is that the technology allows these functions to be performed much closer to, and within the control of consumers.

We call this the ‘consumer-driven transformation’ of the energy sector.

Some of you might remember Douglas Adams’ trilogy of five books, ‘The Hitchhiker’s Guide to the Galaxy’. Consumers are increasingly sitting at the ‘centre of the universe’, not waiting to be served ‘in a restaurant at the end of it’.

While some may take the view that the best form of consumer protection is effective competition, the peculiarities of energy have meant that governments have in place an energy-specific consumer protection framework that places obligations on businesses that go beyond those required by the more general Australian Consumer Law.

Given changes in business models and the move from selling kilowatt hours to a broader range of energy services, the Energy Council is undertaking a review of the energy specific consumer protection framework including the jurisdictional derogations.

Successful implementation of the distribution network tariffs reforms that is currently underway, is a vital step in the development of an effective retail energy services market.

But these price reforms alone will not be enough.

People need information in a form that allows them to make informed choices.

So over the next two years, the Consumer Priority will focus on protection, engagement and participation so that consumers can benefit from the innovations in energy markets.

2. Gas Priority: Promoting the development of efficient gas markets

Turning now to our second priority: the promotion of efficient gas markets.

We saw the first LNG cargos exported from Gladstone in January this year - an historic moment for the east coast gas industry. The market has now entered a transitional period to a new supply and demand balance - by 2020, natural gas used for LNG production will account for over 70% of total east coast demand.

The Energy Council asked the AEMC to consider the direction that east coast gas markets should take, given the new LNG industry market dynamic and the Victorian government asked us to look in detail at specific arrangements for Victoria. We are guided by the Council’s Vision for Australia’s future gas market which will, over time, provide market participants with a more flexible and transparent way of buying and selling gas.

We are looking at some important issues in developing recommendations for the Energy Council, which will be released publicly next month. These include the extent to which different gas market development pathways promote trading and risk management, preserve signals for investment in pipeline capacity, and address new levels of complexity. Lower transaction costs and fewer barriers to entry will promote more competition in the wholesale markets which can be expected to benefit retail prices.

The focus over the next two years will be implementing those recommendations endorsed by the Council.

3. Markets and Networks Priority: Encouraging efficient investment and flexibility

Our third priority focuses on encouraging efficient investment and flexibility in markets and networks.

We are at an inflection point in energy markets with changes in the costs, technology, consumer preferences, patterns of demand and environmental policy. The pace of change is creating new opportunities for new business models to emerge that demand greater flexibility to maintain market resilience.

So it’s critical that market and regulatory arrangements create the right conditions for business evolution that promotes the long-term interests of consumers.

Companies are now competing to offer energy services, not just energy. They will manage an individual consumer’s energy needs:

  • managing the risk of buying energy in a more dynamically-priced environment
  • provide tools to respond to time-of-use pricing
  • optimise appliance settings
  • choose when to charge electric vehicles
  • And when to sell stored energy back to the grid.

This is driving a redefinition of where the lines are drawn between functions that are subject to economic regulation and those that can be provided through competition. It is also redefining the relationships between different parts of the sector, where they potentially compete, and the circumstances under which they co-operate.

This has important implications for how competition for retail energy services develop, how we think about the role of the retailer and the evolution of networks, in particular, at the distribution level. Distribution businesses are evolving from ‘one-way’ energy delivery systems into multi-directional ‘smart grids’. The regulatory frameworks must support these innovations in a way that clearly distinguishes between those that relate to functions of the network and hence are subject to regulation and those that belong in a competitive energy services market.

To use a sporting analogy, every player on the energy sector playing field should understand the position they are playing and the rules of the game.

To this end, we will continue our work program focused on technology and provide recommendations to the Energy Council where changes are required to the regulatory frameworks.

Let me finish by saying in the face of change, we are not operating with yesterday’s logic.

The intensive consultation that helps shape our thinking on Strategic Priorities for Energy Market Development, also helps us provide policy advice and changes to the regulatory frameworks that are adaptive to changing circumstances, without losing sight of the objective.

And that objective remains the same as it’s always been: a resilient energy sector – one that is flexible and can adapt to whatever the future may bring. One that is efficient, secure and reliable, keeping prices as low as possible for consumers and providing meaningful choices to help them manage their energy needs.

I invite you to continue to help us shape our thinking, to actively participate in our reviews and forums and to request change when it’s needed. I look forward to continuing the conversation.

Thank you.

ENDS

Preparing markets for technological change

18 November 2015

Speech by AEMC Chairman John Pierce at Energy Storage Australia conference on the integration of energy storage, 18 November 2015

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Thank you and good morning ladies and gentlemen. It’s a pleasure to be here with you today. And to see so many who are engaged with the future of our energy market.

All of us are seeing accelerating change in energy market dynamics.

The AEMC has a clear objective in the face of changing technologies, business models and consumer preferences. We want a resilient energy market, one that is flexible and can adapt to whatever the future may bring. One that is efficient, secure and reliable, keeping prices as low as possible for consumers. How this is achieved, however, will no doubt be radically different because of these changing market dynamics.

The role of the Commission is to make the rules that govern how the energy market operates. That is, the competitive wholesale and retail sectors and the way networks are regulated. An important part of market governance, and the way the rules keep pace with changing market dynamics, is that anyone, apart from the AEMC itself, is able to submit a rule change request. The rules are changed in response to requests brought to us by people like you - individuals, community groups, government, regulatory bodies and industry. So the power to change the market and regulatory arrangements that govern the sector is literally in your hands.

The AEMC also conducts market development reviews and advises the Energy Council of state, territory and federal ministers, under COAG. All of this work must be aligned to the legislated national energy objectives for electricity, gas and retail markets.

2 By itself, our work cannot lead to a resilient, responsive energy sector. How you as individual businesses and organisations respond, the strategies you pursue and the priorities you set are also a critical determining factor.

Consumer choices are driving the application of new technology

To this end, we consult widely with the increasingly broad array of organisations that have a stake in the future of our energy market. Every 2 years, we review the strategic priorities for development of the market. These priorities help guide the AEMC’s program of work, particularly how we develop new work-streams and consult with stakeholders. We would also hope it informs those of you who have an interest in the way the sector develops and may see a need to change the rules.

Next week, we will be launching the priorities for the upcoming period. During our public forums and discussions over the last few months, many of you agreed that there are 3 priorities, focusing on consumers, gas and market development.

Consumers are increasingly at the heart of the energy system and driving change.

Starting with the proposition that generally speaking, it’s consumers themselves who are in the best position to decide what works for them, much of our efforts over the past five years have been in driving more opportunities for consumers to make informed choices about the way they use electricity based on the benefits that enduse services provide to them.

The Power of Choice reforms in particular have laid the foundation for the energy system to be positioned to respond to new technologies in a way that is in the consumer’s interests. These technologies are changing how consumers participate in energy markets and include battery storage but also microgeneration, smart devices and connected home products and services.

These technological changes sometimes drive predictions of achieving an energy nirvana or imminent Armageddon. Regardless, we need to look beyond the widgets to focus on the function they perform and adjust the regulatory and market processes to accommodate them. Many of the functions they perform are not new – what is new is that the technology allows these functions to be performed much closer to, and within the control of, consumers.

Battery storage technology is a great example of this.

We label this the ‘consumer-driven transformation’ of the energy sector.

What we are particularly wary of are proposals that seek to use regulation to impose solutions or particular technologies on consumers. Imposed solutions generally come at the expense of competition. And they also tend to result in consumers, rather than energy businesses, bearing the risks of technology deployment.

For example, we don’t think it’s appropriate for networks to put storage behind the meter as part of providing regulated network services. Although networks may argue that this enables them to operate the network more efficiently, in reality it would damage the development of a competitive energy services sector which gives consumers the best opportunity to decide which product or service best suits them.

It also enables network businesses to re-enter a competitive part of the market where – as natural monopolies – they do not belong.

So our approach is to support the development of a competitive market in energy storage technologies. One that encourages efficiency through businesses competing to provide consumers with the energy services that they value.

Under this approach, storage would only be installed where consumers want the services that energy storage can provide. This could include potentially cheaper electricity, back-up power, environmental benefits, and the opportunity to sell excess energy – all at a price that consumers are willing to pay.

An example of this approach is our Competition in Metering reforms, where, in response to a rule change request, we propose to remove the regulatory barriers to competition in metering services. In removing the networks’ monopoly, we want consumers, via their participation in the competitive retail services market, to be able to choose the ‘smart meter’ products and services they want.

We believe these metering reforms will allow investment, innovation and technological development in response to consumer preferences - guided by price signals - rather than the networks’ preferences and solutions imposed by regulation.

In effect, the new technologies now available to us, of which storage is but one example, provide us with the opportunity to redraw the lines between economic regulation and competition. It will be companies operating in this competitive retail energy services sector that will need to find the combination of services and technology that best meets consumers’ needs.

Adaptable regulatory framework to accommodate new business models

As we know, we are at an inflection point in energy markets with changes in the costs, technology, consumer preferences, patterns of demand and environmental policy. All these elements are conspiring to create opportunities for new business models to emerge.

So it’s critical that market and regulatory arrangements create the right conditions for business evolution that promote the long-term interests of consumers.

One issue that will be close to your hearts is who should control the storage device when it is behind the meter? Should it be the consumer, the energy services company, the retailer or the network business?

In a consumer-controlled model, we’d see consumers themselves buying batteries directly, along with optimising software so the battery can store power at times of low prices (or from their own solar PV), and then discharge at times of high prices.

Or an energy-service company could manage the device on their behalf. A retailer-controlled model would see retailers providing storage to consumers through, say, a lease or power purchase agreement. The consumer gets a ‘less than socket’ electricity price while the retailer controls the device to hedge against wholesale and distribution prices.

All of these are compatible with the idea of a competitive energy services sector.

Then there’s the network-controlled model. One example is where the network owns the storage asset behind the meter and socialises the cost across all customers.

The concern is that network-controlled storage would act as a barrier to the other models. For example, networks would have an incentive to make connections onerous and costly if they have a competing business interest in network-controlled storage.

Drawing the line between what is contestable space and what is subject to economic regulation

Thinking about the way that regulatory and market arrangements evolve, and the way that governments review consumer protection frameworks, we can see the need for a clear set of principles behind where the line is drawn between what is subject to economic regulation and what is contestable.

The ability of storage to generate multiple value streams is central to our thinking about which services should be contestable and which should be regulated.

Let me give you a recent example to illustrate this.

A trial of energy storage is happening on ElectraNet’s transmission network in South Australia. ElectraNet is part of a consortium that includes AGL Energy. AGL is an electricity generator and a retailer. The consortium plans to trial a storage device on ElectraNet’s network to provide network support as an alternative to network augmentation to address network capacity issues.

It will be located near a major wind farm and it’s hoped the trial will show how storage can help the network cope with integrating an increasing amount of renewable generation.

As providing network support, which is a regulated service, the project also has other potential contestable value streams.

Wholesale energy revenue is one of them. With wind generation often occurring at night when demand and prices are low or negative, the storage device could store electricity when prices are low and release electricity when prices are high.

Another contestable value stream is reducing losses when the network is congested. The storage device could be used to store energy when the network is congested and capture energy that would otherwise be lost. It would then release its stored energy when capacity is freed up again.

A third contestable value stream is in ancillary services support. Storage can help maintain key technical requirements of the power system like frequency and voltage. These services are acquired by the Australian Energy Market Operator on a competitive basis as part of the wholesale spot market.

So we want market and regulatory arrangements capturing these multiple value streams so that there is strong separation between the regulated and competitive 5 services provided by the storage asset. We want to see the benefits of the value stream accruing to the right market participant. In this South Australian example, this would mean benefits accruing to AGL including:

  • The market trading benefits
  • the ‘saved’ energy benefits during periods of network congestion because AGL is owner of the wind farm
  • And the ancillary services support benefits because AGL is operating the device.

To be clear, we believe network businesses should use storage where it is more efficient than network augmentation or other demand management options to meet network requirements. And the regulatory framework already has incentives for network businesses to adopt non-network solutions, including demand management and energy storage. Many have already embraced innovation allowances for storage projects.

What we are intent on doing, is drawing the line between what is subject to economic regulation and where competition can be effective, in a way that enhances competition in the contestable energy services sector. This means regulated network businesses being unable to use either the financial resources provided by regulated network revenues, or information that they gather as network operators, in a way that limits competition in energy services.

To use a sporting analogy, every player on the energy sector playing field should understand the position they are playing.

So where to from here?

Networks need to demonstrate how they’re going to partner with people competing in the energy services space to help them respond effectively to consumer demands.

Governments quite rightly see the need to focus on the energy-specific consumer protection frameworks, and the relationship between these and the more general Australian consumer law. In doing so, we would expect that they approach it through the lens of continuing to promote effective competition for the provision of energy services.

Conclusion

Let me finish by saying that these are exciting times in the dynamic energy sector.

Energy storage is one technology that is generating a lot of interest in its ability to transform energy systems.

We believe that new technologies bring the market much closer to, and within the control of, consumers.

We can be certain that ‘consumer-led transformation’ of the energy sector will continue unabated. And we remain committed to market and regulatory arrangements that create the right environment for business evolution that promotes the long-term interests of consumers.

In the pursuit of this, we are mindful of the importance of where to draw the line between what should be contestable and what should be subject to economic regulation.

Thank you and I am happy to take your questions and comments.

~ENDS~

 

John Pierce's speech to EUAA Conference

06 October 2015

Speech by chairman John Pierce at EUAA Annual Energy Conference, east coat gas market development, 6 October 2015

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Thank you to the Energy Users Association of Australia for the invitation to speak today.

First, a few words on what we do for those who may not be familiar with the AEMC.

We are an independent national body responsible to the members of the COAG Energy Council. We have two main jobs:

  • We provide advice to the COAG Energy Council on improvements to regulation and energy market arrangements that will benefit energy consumers; our so called market development role; and
  • We also have a statutory role where we make rules under the national electricity, gas and energy retail laws that govern how energy markets operate.

All of our work is guided by the three legislated national energy objectives: the national electricity objective, the national gas objective, and the national energy retail objective.

Each of these objectives requires us to assess everything we do in terms of how it will best benefit the long term interests of energy users with regard to price, quality, safety, reliability and security of supply of energy.

This is a time of immense change in the energy sector.

We’re seeing the development of a range of new products and services – battery storage, microgeneration and building control systems - which will fundamentally change how large users participate in energy markets, with increasingly rapid technological change driving even more innovation.

A common theme in much of the AEMC’s work – and no doubt in a lot of today’s discussion – is uncertainty: uncertainty about how quickly some technologies may be adopted, uncertainty about consumer responses, uncertainty about future investment requirements, and uncertainty about the pattern and levels of demand and supply in a carbon-constrained world.

While uncertainty and rapid change have been features of electricity markets in recent years, our gas markets have been experiencing their own level of upheaval.

As gas users in this room would be very aware, a fundamental structural change in Australia’s east coast gas market is underway.

This year saw the first exports of LNG from Gladstone. A gas market that was isolated is now linked to the international gas market.

This presents significant opportunity for Australia, with the investment and earnings from LNG projects boosting our GDP and employment.

But, this is also leading to unprecedented shifts in supply and demand, which are driving changes in gas flows and prices domestically, and fundamentally changing conditions for Australia’s gas consumers, with particularly stark effects for large users of gas who rely on it as a feedstock for manufacturing.

Out of our manufacturing sector – which currently accounts for nearly 9% of GDP and employs 1 million people - around 45 per cent of businesses use gas as their main source of energy. In addition, more than four million Australians use gas for heating and cooking.

With this significant transition underway in our east coast gas market, and being acutely mindful of the opportunities and challenges that this presents, we need to respond to these changes and develop regulatory frameworks that promote efficient outcomes.

In recognition of this COAG Energy Council has asked the Commission to review the facilitated gas markets.

Today I’d like to give an overview of the AEMC’s approach to gas market development in the two key areas of wholesale markets and pipelines.

The COAG Energy Council has set out a clear vision for Australia’s future gas market – one where market signals guide investment and supply.

This Vision – along with the National Gas Objective – guides the AEMC’s Gas Reviews, which are looking at how gas can get to consumers in the most efficient way.

Our work will set out a roadmap for developing wholesale gas markets and transmission pipeline arrangements which deliver greater flexibility and more options for market participants when buying and selling gas. It is this flexibility which will promote competition and efficient outcomes.

Since publishing our Stage 1 Report in July – which outlined a number of short term practical actions to boost the efficiency of the gas market – we have published:

  • a Wholesale Gas Markets Discussion Paper;
  • a Victorian Declared Wholesale Gas Market Discussion Paper;
  • a Pipeline Regulatory Frameworks Discussion Paper; and
  • multiple papers on information provision and the Bulletin Board.

Many of you have been involved and made submissions, and we thank the EUAA, and many of you here, for your continued engagement with us on these workstreams.

We will be working right up to the end of the year to deliver our second set of major reports to the Energy Ministers for their consideration in early December.

We are not undertaking this work in isolation. The AEMC is working with the Australian Energy Market Operator and we are also engaged with the ACCC as it conducts its Inquiry into competitiveness of the Wholesale Gas Industry. Although the ACCC’s final report isn’t due until April next year, we’re working closely with their project team so any relevant findings can inform our Review – and the Competition and Consumer Act enables the ACCC to share information with the AEMC on a strictly confidential basis.

Before I go further I’d like to clarify that the work being undertaken by the AEMC will not address upstream supply-side issues, such as moratoriums on coal seam gas exploration and development, which may be hindering gas supply. These are important issues – and we have encouraged governments to review their approach given that supply constraints only exacerbate the issues that changing market dynamics can bring.

We are confident, however, that our work to develop better functioning markets will apply regardless of the policy approach to supply-side issues, so our focus is on improving market flexibility and making it easier for participants to buy and sell the gas that is available.

In the past, the typical way of purchasing gas has been through longer term bilateral contracts. The pricing structure for these contracts was generally based on the cost of production plus an annual price escalator such as the CPI.

The bilateral contracting process has been fairly opaque, which is why it is difficult to establish if, or by how much, domestic gas prices have increased in recent times, or if the number of new gas supply offers to users has been declining.

Of course the ACCC is now shining a rather large spotlight on some of these arrangements.

The ACCC Chairman – Rod Sims – noted in a speech a few weeks ago that “gas users were largely right” in claiming that they are facing difficulties in securing new gas supply contracts.

For the AEMC, this highlights the importance of developing a liquid wholesale gas market to provide participants with greater flexibility alongside of long term contracts when buying and selling gas.

The ability to trade gas on a liquid wholesale market, on an equal basis to other players, and hedge price risk, lowers barriers to entry and promotes competition.

Trading gas through well-functioning markets is fundamental to consumers being able to know whether the gas price reflects underlying demand and supply, and basically, to know that they’re getting a fair deal, which in turn provides signals for the efficient allocation of gas across the economy.

In this sense, trading markets can complement gas users’ bilateral contracting activities by becoming a credible alternative source of supply. We know that many large gas consumers use the Short Term Trading Markets and the Victorian Declared Wholesale Gas Market to optimise their bilateral contracting positions. Gas users obviously want to be able to continue to access these markets and I’d like to reassure businesses that while we may recommend reforms in this area, the objective is to increase trading flexibility and liquidity, not reduce it.

A question in the AEMC’s mind is therefore, what type of gas market structure would best support the Energy Council’s Vision?

We don’t yet have a fixed idea about the exact market structure – for example the number and location of supply hubs or trading zones. We are also comparing physical and virtual hub designs – which both have their advantages and disadvantages.

These are issues we are currently working through – together with stakeholders.

Our overall focus is on options to enable gas to be bought and sold via a wholesale market that delivers a clear reference price that users can trade around and hedge.

This brings us to gas pipelines. A well-functioning gas market relies on gas being able to flow easily across the pipeline system to where it most highly valued. This requires ready access to pipeline capacity, at an efficient price.

The arrangements which have been in place to date have been good at getting infrastructure built. Since the early 1990s, the length and capacity of the gas transmission network in Australia has trebled and around $5 billion has been invested in new transmission pipelines and expansions since 2000.

Gas pipelines are big, long term investments. It is likely that increasing uncertainty will be a feature of gas markets over the next decade – and uncertainty obviously impacts on investment decisions. This context makes it even more important to understand how any proposed change to the regulatory framework could potentially impact on investment decisions.

Last month we released a Discussion Paper which considers whether the existing pipeline access arrangements are fit-for-purpose and will support more active short term trading of gas.

The paper also considers whether there are sufficient incentives for shippers and pipeline owners to trade, and facilitate trade, of pipeline capacity.

There are a range of practical reasons why shippers might not look to sell unused pipeline capacity. Nevertheless, there could be incentives for shippers to “hoard” capacity and refuse to sell spare that capacity to their downstream competitors. Our review will look at a number of elements that could address this type of potential market failure, for example by reducing transaction costs to make trading easier, or by reallocating unused capacity away from shippers.

We’re also examining the regulatory frameworks in relation to the way the potential market power of pipeline owners is mitigated through regulation. There has been consolidation of pipeline ownership in recent times – potentially reducing competition – which makes this part of our review particularly relevant.

Currently, most gas pipelines are unregulated. Whether a pipeline is regulated is determined by a test in the National Gas Law.

The test is similar to the National Access Regime test which applies to a range of infrastructure across the economy, and appears to be designed to address issues that might arise in vertically integrated sectors.

However, the gas sector is vertically disaggregated, and so the test may not be particularly well suited to assessing the degree of competition in gas pipeline services. Part of our review will look at whether the current test is working - or if it needs to be changed to make it more gas industry-specific.

For the pipelines that are regulated, we need to assess if the regulations are working effectively – that is, if there are appropriate arrangements in place for shippers to gain access to those pipelines at a reasonable price with fair terms and conditions.

Another potential improvement to pipeline capacity trading is to increase the amount of information available to the market. This includes establishing the Bulletin Board as a onestop shop for gas market data. We’ll consider the long term role and function of the Bulletin Board - the type of data needed, the timeliness and reliability of that data, and how compliance with data provision requirements should be encouraged or enforced.

We are mindful that we need a coordinated approach to wholesale gas market design and the pipeline regulatory framework. They are interlinked - the east coast gas market is one system and requires a coherent set of arrangements to support the needs of consumers.

For example, larger virtual hubs, with a regulated entry-exit regime for allocating capacity, may be required if it is unlikely that a liquid, transparent and competitive market to trade pipeline capacity and hub services will develop.

Our recommendations on wholesale market design and our recommendations for pipelines regulatory frameworks are being developed together to increase the likelihood of more efficient market outcomes overall.

The last topic I’ll cover is some general comments on trends in gas markets.

On the supply side, the Australian east coast gas market is one of the few energy markets in the world without substantial capacity overhang. The next six months will be telling as the LNG projects really ramp up. Some analysts have predicted that Australia will become the world’s largest LNG exporter, ahead of Qatar, by 2020.

While we can expect the global LNG market to continue to grow, the significant cost of new large LNG projects and tankers, along with increasing uncertainty in energy markets generally, may influence the speed and size of this development, making it difficult to predict the volume of Australia’s LNG exports over the coming years.

Turning to the demand side: with the exception of the global financial crisis, growth in global gas demand in 2014 was the weakest in almost 20 years, following the downward trajectory of oil prices, slowing Chinese growth and European substitution of gas with renewables.

Looking locally, gas-fired electricity generation on Australia’s east coast fell by nearly 8% in 2014/15 and domestic gas demand is expected to keep softening over the next few years.

Gas prices are likely to remain volatile – as you can see on the slide showing the gas supply hub daily price over the first half of this year.

What all this means is that it’s extremely difficult to predict where demand and supply will end up for Australia’s east coast, and we recognise this is a challenging environment for gas users.

High levels of uncertainty are not unique to the gas market. As I mentioned early, we see significant uncertainty as an ongoing feature electricity markets.

However, a lack of certainty about how the future may play out is not cause for alarm when our market frameworks are built on sound policy objectives, and when governance processes are in place for transparent and systematic review of market and regulatory outcomes.

Just as we do for electricity markets, we are focussed on developing gas market frameworks that are resilient and flexible, so they can adapt and allow a dynamic market response - and ultimately give gas users the flexibility they need to get gas in the most efficient way at the lowest possible cost.

~ENDS~

Towards Smart Regulation

28 May 2015

Speech by Chairman John Pierce at World Forum on Energy Regulation

Towards Smart Regulation: Efficient market outcomes in periods of transition

28 May 2015

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Good morning and thank you for inviting me to speak with such a distinguished panel on such a topical topic.

Smart Regulation may be interpreted as referring to good regulatory practice or more specifically, regulatory practice in the context of the smart grids and the technological developments that are revolutionising the energy sector.

At the risk of spreading myself too thin I will refer to key aspects of both, but as I hope you will see, they are related.

Of course whether any particular set of regulatory arrangements can be considered “smart” or not depends on both its objective and the context within which it is being applied.

In the provision of advice to governments on market and regulatory development, and when making the statutory rules that govern the sector, the Australian Energy Market Commission is bound by an explicit, focussed objective function:

To make decisions that are or are likely to be in the long term interest of consumers with respect to a defined set of parameters that we would all recognise as the traditional concerns of energy policy - price, reliability, safety, security of supply and the like.

Note that the term “consumers” is taken to refer to end users in general. We are not in the business of trading off the interests on one group of consumers against another.

2 And beyond being concerned with the efficiency of price levels and structures, affordability objectives of governments are handled by income policy instruments rather than through energy prices.

Environmental policy objectives and implementation are likewise handled by other arms of government. However with respect to those that have systemic effects on the energy sector, such as climate change policies I would suggest that while government can specify its objectives or outcomes - say an emissions target for the sector - energy market institutions are in the best position to design the means or instruments used to achieve them in a manner compatible with the mechanisms and means of exchange of energy markets.

For the mathematically minded, I would describe what we do as maximising an objective function subject to specified constraints. As far as possible we like to avoid giving institutions multiple objectives that require regulators and officials to “balance” things or trade objectives off against one other. This can only be done via subjective value judgements, and that’s what we pay politicians for and the political process as distinct from regulation, is designed to reveal.

The Australian National Electricity Market has the following characteristics:

  • A transparent and competitive energy only wholesale market with “over the counter” and exchange traded derivatives contracts;
  • A highly competitive retail sector, such that for most consumers retail price regulation has been removed; and
  • An ex-ante incentive based regulatory framework for the transmission and distribution network sector.

The outcomes experienced by consumers have been influenced not only by these three factors, but also by non-price, consumer protection regulations; network reliability standards; the service offerings of retailers, and the impact of government policies that are implemented outside of the energy market governance arrangements such as the Federal Government’s Renewable Energy Target and, at least in the past, state government feed-in-tariffs for residential solar panels.

We have been on a fairly consistent reform path over the past 25 years or so, as part of a broader microeconomic and competition policy reform agenda.

It started with widespread recognition of the relationship between productivity growth and the potential growth in economic output, and the contribution that domestic stationary energy made to that objective.

Within this part of the economy it commenced with a competitive generation sector which then supported development of a competitive retail sector.

More recently it has focussed on capturing the value of demand side participation and embracing a consumer driven transformation of energy 3 service. It will be the options available to consumers enabled by technology and the choices they make that drives the way the energy sector develops. This is challenging traditional business models, the way we divide the energy services supply chain into its components and hence where we draw the line between what needs to be regulated and what does not.

Demand for electricity traded on our National Electricity Market has fallen for each of the last three years and an average 1.7 per cent in the past five years. This underlying trend is projected to continue and is largely explained by a combination of three factors:

Solar PV –

Around 1.3 million households have installed solar PV systems (of around 9 million households).

Total installed capacity reached more than 4000 MW in 2015, equivalent to around 7.5 per cent of total installed generation capacity in the National Electricity Market. That’s a big change when you consider Australia had virtually zero PV capacity as recently as 2010.

Changing structure of the Australian economy –

This is part of a long term trend with average annual energy growth rates falling in every decade since the 1960’s. It was 9 per cent in the 1960s, 7 per cent in the 1970s, 5 per cent in the 1980s, 3 per cent in the 1990s, 2 per cent in the 2000s and, perhaps inevitably, negative in most years since 2010.

There are 120,000 fewer Australians employed in the manufacturing sector than there were 10 years ago, and its contribution to total Australian output is less than half what it was four decades ago.

Energy efficiency –

The Australian Energy Market Operator estimated total energy savings of around 10 per cent annually over the next three years, due to more energy efficient air conditioning, refrigeration and electronics.

As a result, it is expected that no additional electricity generation capacity will be required in our National Electricity Market for the next decade.

Despite this, almost 1200 megawatts of wind capacity has been added in the past two years and around 650 megawatts of committed projects remained committed at July 2014. You might ask what’s driving supply, if not demand: It is driven largely by Australia’s Renewable Energy Target, which has been the subject of much debate, with an awakening to the consequence of misaligned energy and environmental policy objectives.

I might come back to that a little later in our panel discussion.

Falling demand is matched in consequence by the increasingly sophisticated ability of consumers to actively participate in markets and the technological change that is supporting that participation.

So how are we most likely to achieve efficient market outcomes during this period of transition and change?

By having energy market and regulatory arrangements that are both flexible and resilient enough to respond, whatever the future may bring.

Flexible, responsive markets are characterised by market participants that have the information, tools and exposure to price signals which enable them to adjust. So that consumers, rather than regulators, are in a position to decide if the value to them of what they are being offered is greater than the costs to the system of providing it.

So what does that mean in practice?

Rapid advancements and widespread adoption of distributed generation, smart technologies and connected home products and services, as well as advances in storage are just a few of the game changers that allow consumers to decide for themselves what is in their own interests.

Retailers are evolving from managers of margins between wholesale and retail prices and volumes to suppliers of energy services and new energy service companies are entering the market.

The boundaries between what needs to be subject to economic regulation and where competition is viable are being re-drawn.

The energy regulator’s role then becomes to do no more than necessary to support the participation of individual consumers in energy markets.

And that’s really what Australia’s 2012 Power of Choice reform package is about. We’re about 3 years through this 5-year reform program.

My colleague Paul Smith, spoke in more detail about the Power of Choice reform package earlier this morning.

But briefly, the package includes:

Flexible cost reflective network pricing – Retailers and consumers cannot be expected to make efficient choices unless the revenues of network services are recovered via price structures that better reflect the cost consequences for networks of their individual decisions.

Breaking the monopoly on metering services –

5 A draft rule that the AEMC currently has out for consultation makes it clear we intend a market led approach to the deployment of new metering technologies. This means investment in metering services will be driven by consumers choosing products and services enabled by this technology that they value at a price they are willing to pay.

And we’ve been careful about the minimum specification of those meters because we don’t know where the technology will go in the future.

Giving consumers access to better consumption information –

And of course consumers need access to their data to figure out how these tools and pricing mechanisms can be of most benefit to them.

All of this has been designed as cohesive and integrated market wide reform program to increase demand side participation in our electricity market.

An important implication of this approach – “flexible markets which can respond to change” – is that regulators need not be wedded to one particular view of the future. We must be aware of and prepared for the changes in technology and business models that are on the horizon without placing bets on what will actually happen.

The AEMC has significantly increased the amount of time we dedicate to looking at emerging trends of significance to market development. We have new work-streams which are looking at:

  • How the consumer protection and regulatory environment needs to evolve to support the very different approach to energy retailing that is emerging – a range of new players, most with a very strong technology focus, are offering services similar to traditional retailers. We want consumer protection mechanisms that meet government policy objectives while not stifling innovation and choice.
  • How network businesses particularly may evolve into two way platforms for the flow of energy. As a first step we’re considering how storage may be integrated across the grid but that’s just part of a larger look at how network service provision may change over the next decades.

And of course, if we want to know where the energy market is going we need to better understand consumers themselves.

So I thought I’d finish briefly with a bit of a proposal.

The AEMC carries out an annual Retail Competition Review – which assesses the state of competition in retail energy markets across Australia.

Our colleagues in New Zealand carry out a similar piece of work but last year included a comparison of consumer activity and behaviour between New Zealand, Australia, Texas in the United States and Alberta in Canada.

Many of you would also carry out your own research and analysis.

And while we have some good international data on switching via the VaasaETT utility customer switching research project, I’d like us to consider what might be possible if more of us worked together on an international analysis of competition in energy markets that might cover a broader range of topics including aspects such as:

  • Barriers to retailers entering, expanding or exiting the market;
  • The degree of independent rivalry;
  • Customer satisfaction with market outcomes; and
  • Whether retail energy prices are consistent with a competitive market.

This would provide us with more insight into how markets are delivering benefits to consumers and in a more comprehensive and systemic way.

Many of us are facing similar challenges and the more we can learn from each other’s successes, the better.

ENDS

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