Keynote: Supporting consumers’ journey to net zero: no hero walks alone

12 June 2024

Anna Collyer, AEMC Chair

Australian Energy Week, Melbourne Convention Centre, 12 June, 2024

Introduction

I, too, acknowledge the traditional owners of Naarm, the Wurundjeri Woi Wurrung people of the Kulin Nation, and thank them for their care and custodianship of this land by the river for many thousands of years.

I pay my respects to their Elders, past and present and hope that, together, we can build a new national energy system that benefits us all.

The story:

On a recent sunny Sunday afternoon in Melbourne, I was standing with some other mums on the sidelines of our daughters’ Aussie Rules game.

In between enthusiastic barracking, we were chatting – as you do – and, without them knowing anything about my job, the mum on my left, Clara, was talking about some house renovations they’re doing. They wanted to include solar panels in the deal, but the decisions were, frankly, doing her head in.

The mum on my right, Jane, chimed in: ‘Don’t talk to me about solar! We got panels last year and Brett - (her husband) - is still completely obsessed with the app’.

And so, I ‘fessed up and said to them: ‘This is actually what I do for a living – it’s so interesting to hear about your experiences!’

Clara, the one with the reno, immediately asked me to recommend the best brand of panels because it was all so baffling but, alas, I definitely wasn’t the right person to ask about that!

And then Jane, the one with the energy app husband, kind of rained on my parade even more by saying: ‘Honestly, I couldn’t care less about the solar. I just want to run the dishwasher without a drama.’

It turns out, in Jane’s house, Brett carefully programs the dishwasher to run in the middle of the day so it’s free from the sun.

Then, two things happen:

The kids put their breakfast things in the dishwasher – good teenagers, very good parenting: right? But then,
If they don’t click the dishwasher door shut, it fails to run at lunchtime –bad teenagers! Major parenting drama!

Thinking about it after the game, I pictured Jane’s and Clara’s households as running the full gamut of our highly valuable, but highly diverse, population of CER tech owners and would-be owners:

In Jane’s home, we have the opposite ends of this continuum – from the new energy fanatic of flexible load on one side, all the way over to those who really have other things on their mind.
And in Clara’s home, we have the confused middle ground between those two extremes. People who want to make the right choices, but are lost in the confusion of so many competing yet similar options.

In other words we have those who are obsessed, those in a mess, and those who – completely understandably – just couldn’t care less.

As a postscript…

At the girls’ match the following week I caught up with Brett, who immediately pulled out his phone and showed me exactly how many kilowatts every one of his panels were punching out right that moment.

Jane rolled her eyes, and said, ‘Look, I’m happy to save money, I’m happy to save the planet, I just don’t want to talk about it anymore… Have you got any gossip instead?’

CER context

Now, CER’s definition certainly covers Australia’s 3.5 million rooftops with solar, but it’s so much more. CER is also domestic batteries, electric vehicles, pool pumps, hot water heaters and, yes, it’s even Brett’s programmable dishwasher.

CER can be anything that you own in your home or small business that produces or stores energy.

But more run-of-the-mill or ‘dumb’ appliances can also be a consumer energy resource: because we are interested in anything where you have a choice about when and how you use energy.

Rooftop solar is a powerful element in that CER list, but it’s a mistake to think it’s the only tool we have.

While we expect around one in two Australian homes will have solar panels by 2040, that still means about half of Australian homes won’t.

The half that do have panels will be tremendously helpful in getting us to net zero by 2050, if we get the set-up right now.

But the real challenge is to build a reduced-carbon power system that integrates those millions of tiny rooftop generators, and also captures the rest of the list. That means EVs, pool pumps, hot water systems, clothes dryers, washing machines, dishwashers and more.

It also means, importantly, how and when customers choose to use energy. Because that is the way we will be able to ensure that people living in homes without a lot of fancy CER kit can benefit, too.

Regulating for innovation and disruption

And, like so often in this extraordinary period we find ourselves working through, the answer to our problem must be innovation. To paraphrase Albert Einstein: we won’t solve new challenges with old ideas.

It might sound strange coming from a statutory authority, but innovation, and even disruption, are very much what we have in mind when we put our thinking to new frameworks for the energy transition.

This is especially true for CER.

Australia is leading the world in growth and adaptation of CER technology.

The amazing thing is this means we have an immense resource to help us get to net zero if we integrate it well. The hard thing is that almost every choice we make as a sector is being made here, by us, for the first time, before anywhere else.

This is the new reality. This is just business-as-usual now.

And if your thinking, or your company’s strategy, is still about modifying what you’ve always done rather than creating a better way: you need to catch up.

You need to be the Uber, not the taxi; Apple, not Kodak.

And I’ll return to this point at the end.

We are all working at the intersection of two enormous revolutions: environmental, and technological.

In times like these, agility and courage count for a lot, and that is hard. But one of my personal mottos comes from the old movie, Ben Hur: to rise, you must do difficult things.

The blue sky piece of the puzzle

I spoke to this conference last year about putting the energy transition puzzle together.

I talked about ways of thinking and working that can bring together many different and unknown pieces on the table, and how we need to keep a wide view and check in with other players if we’re going to finish this work with net zero emissions from energy by 2050.

I’m returning to our jigsaw puzzle this year.

However, instead of the whole picture – which others today will cover admirably – I am going to zoom-in to this one, tricky, section of how we can make CER work for everyone.

You might want to think about it as the ‘blue sky’ of the energy transition puzzle.

The AEMC is working on four very specific and interconnected puzzle pieces that all have critical milestones in the next few months, and, together, set up a framework of opportunity. Opportunity to innovate, opportunity to disrupt, and opportunity to be the business that is smart enough to give customers what they need, before they’ve even realised they wanted it.

These four pieces of work include rule changes and a review, and they include some typical AEMC titles so let me get that out of the way right now.

The rule changes are:

And then the fourth is the new review, with a working title of Electricity pricing for a consumer-driven future.

I’ve tied these four pieces together because they will work so closely to create that opportunity framework and be a platform for innovation – by you.

This is, if you like, our chance to support you, on your own hero’s journey.

Consumers who invest in CER kit like solar panels and home batteries want at least two things: lower bills and lower greenhouse emissions. Their degree of passion for each of those things may vary, but paying less and doing something good for the planet and their grandkids are consistent themes.

And the consumers who can’t invest in this kind of CER tech? Unsurprisingly, they also want lower bills, and to help the planet.

You only have to think about how we have embraced recycling our garbage to see how willing people are to do their bit when we make it easier for them.

With the right support and rewards, appliances in our homes that can be used flexibly will become a resource that’s equally valuable for consumers and the grid.

These four puzzle pieces are designed to help you to help them.

I have previously put forward consumers as the hero on the road to net zero, but no hero makes the journey alone.

What we recognise with this regulatory work is that energy service providers can and should be the Buzz Lightyear helper to Toy Story’s Woody, as the Australian consumer: Woody may have the special cowboy boots with Andy’s name on them, but you’ve got the wings, and it’s up to you to help him fly.

Let me show you how we see this coming together for consumers, for you, and for the grid.

Smart meters

Firstly, accelerating the smart meter rollout is a crucial enabler of the transition in Australia.

Smart meters are the digital foundation for a modern, connected, and efficient energy system.

We need many more of them than we have now, and we need them soon, and we need them to work as we hope they will: turning power into knowledge for the benefit of everyone from AEMO and distributors, through to tenants in homes without solar.

And we’re not starting from scratch. Australia’s millions of rooftop PV systems already use smart meters and inverters that talk to the grid.

The meters are a physical point of connection and information about how to save money, and they offer access to new kinds of retail products that can create further savings.

New retail offers, like time-of-use tariffs, might interest anyone with a smart meter.

Once you can see how your home actually uses electricity, it’s easier to choose energy-saving moves like programming different run times for your pool pump or getting a plug-in timer for your old washing machine.

Both our smart meter review – and this related rule change to implement the rollout – considered additional customer protections including:

providing notice of changes in tariffs,
information on the impact of changes,
preventing upfront installation costs,
and privacy.

However, in this round of consultation, we have heard ongoing concerns for customers seeing unexpected changes to their tariffs when smart meters are installed.

Now, it is critical to the success of the rollout, that we work through concerns raised about how retailers may be applying demand and time-of-use tariffs in unexpected ways.

And we expect we will need to push back the final determination to give us time to do this well.

This does not mean we are stepping away from smart meters, or away from the importance of accelerating the rollout.

It does mean that we are aware of the fears arising from some customers’ early experiences and that we do not want to blindly push ahead without considering what more we can do to address concerns and avoid a multiplier effect.

Pricing review

I mentioned a pricing review, and while this will be broader than the smart meter concerns, it will commence in parallel with our work on tariffs linked to the accelerated smart meter roll out.

We will be extremely mindful of how any changes we make in the context of the smart meter rule change will need to transition to a future world we are still considering.

That rule change needs to ensure we maintain the social licence to undertake the accelerated smart meter rollout, because any future tariff design will depend on customers having the data that smart meters provide.

The traditional thinking around tariff reform is sound: we want to reduce the peak demand because we have to build our infrastructure to the peak. So, if we can reduce the peak, we can have less infrastructure and lower costs for all.

One way to do that is that is if people can change how much energy they use during the peak, and the traditional way to prompt customers to do that is to make their energy more expensive then, and less expensive at other times.

But, is that traditional thinking working now?

Are the signals actually getting through that tariff maze, and all the way to customers?

What's the role of retailers in all of this?

Will it work at all once we have half the customers with solar panels and batteries, and half without?

And – importantly – what is it that the customer really wants?

Well, there is no one customer, we all know that. We have Janes and Bretts and Claras and many others besides. Different categories of customers who want different things. So, what’s the best way to achieve those things for all of them?

The pricing review will step back to examine some of these structures, and whether they work now and into the future.

This piece of work is one where the journey is as important as the destination and there will be many opportunities for engagement, so I’d encourage you to get involved.

Unlocking CER benefits through flexible trading

The next piece in this bit of the puzzle, meanwhile, is our Unlocking CER benefits through flexible trading rule change, which is heading towards its final determination.

This is the one that is designed to allow for ‘flexible’ CER loads, like EVs, and potentially expanding to other things if we want to get more sophisticated.

It means your flexible load can be separately metered away from your ‘passive’ loads such as lights and fridges.

This is a first step in creating more options for consumers in households and businesses to be able to use and manage flexible loads, as they choose.

It opens up a new way to develop and access innovative retail offers, for everyone.

In fact, for commercial and industrial customers, we’re looking at how they can also choose a different service provider for those different loads.

They’re already doing it now, using a workaround, so we’re considering formalising those rules to make sure they work for everyone.

It means you, as the retailers of today or the household energy management companies of the future, can develop ways to give consumers the option to use their CER in the grid, and be rewarded for it without having to think about it too often or too hard.

Integrating price-responsive resources into the NEM

And this rule will work alongside the next related rule change, Integrating price-responsive resources into the NEM, which is up to the draft determination stage.

This reform provides greater integration to the wholesale market of price-responsive resources like community batteries and virtual power plants, as well as the ways customers may want to use energy but where they don’t want to formally sign up to something like a VPP.

Now, this is an area where many retailers are already doing innovative work (as we have already heard this morning).

Virtual power plants are growing alongside domestic battery take-up, and there are many retail opt-ins rewarding customers for responding to peak demand.

Like, maybe your retailer sends you a text, offering enticing credits for reducing usage in a specific hour or day.

But this is currently invisible to AEMO, who asked us for this rule change. The market operator is currently doing its planning on both a five-minute-by-five-minute basis, and on a long-term basis, without the benefit of all of this additional information.

If we have more integration of those activities back into the wholesale market, then the operator can take them into account more seamlessly, be able to plan more effectively, and that will save both money and emissions for everyone.

Zooming out on the puzzle

Let me zoom out again.

We expect the combined strength of Australia’s CER will deliver at least 20 per cent of our energy transition solution by 2050 – and that’s just based on the technologies and behaviour choices we know about today.

And if we can get this right, there are big, big savings to be made that deserve to be shared more widely. A range of highly credible studies now estimate that the net benefit of effective integration is at least $1 billion and as much as $6.3 billion by 2040.

I admit that, towards the end of last year, I was concerned that CER was a long way from getting the percentage of our collective attention it deserves.

Happily, I believe that has turned a corner.

In March this year, after considering the final work of the Energy Security Board on CER, all energy ministers committed to reforms under a National CER Roadmap that will deliver:

new consumer protections,
greater integration into the grid, and
nationally consistent technical standards, including enabling vehicle-to-grid technologies.

This is new and noteworthy for the sector, in that there is agreement, direction, and high motivation to complete this highly complex and interdependent mosaic of work.

The taskforce charged with the roadmap will build on a large body of existing and ongoing work by the AEMC and other market bodies. And we will all continue to drive interrelated reforms that aim to integrate CER into the grid and realise its full potential.

And of course, it’s not only government bodies working on CER integration and capability.

A quick glance at ARENA’s website, for example, or almost any university, displays the many innovations being developed and tested by commercial and academic bodies.

Conclusion

So now I look ahead, to another Sunday afternoon sideline watching some future Aussie Rules game with Jane and Clara – maybe one of our daughters has made it all the way to the AFLW!

In this future Sunday picture, the AEMC has clicked the four immediately essential CER jigsaw pieces into place in the larger energy puzzle, and we have opened the way to that framework of opportunity for you energy service providers to take up.

What I want to know, is who will be the space-savvy Buzz Lightyear, powerful and technically astute, ready to make things easier and more successful for our consumer hero, Woody?

Which of you will disrupt the sector, innovate the sox off the platforms we build for you, and give customers a reason to choose to share their CER kit or the way they use their flexible load for their own benefit, and the lasting benefit of the NEM?

I’m just imagining things here, but: which of you takes up our CER flexible benefits rule change and makes it incredibly simple for our footy mum, Jane, to change her power use without once having to look at Brett’s app?

Who finds a way to get timers out to people with old appliances, so they can share in the benefits of time-of-use tariffs, in contrast to the stories we are hearing lately?

Who develops a system that offers versatile tariffs to nurses, and fire-fighters, and FIFO workers that match their shifting hours at home?

Who, among you, are the disruptors who take the chance to break the old ways of thinking and leap ahead in this sector as a result?

Will you be the Apple… or will you be the Kodak?

Thank you.

Solving the energy puzzle, together

20 June 2023

Australian Energy Week, Melbourne, 20 June 2023

Anna Collyer, Chair AEMC

*check against delivery

Thank you, Daniel. And thanks to all of you for the welcome.

I also acknowledge the traditional owners of Naarm. The Wurundjeri Woi Wurrung people of the Kulin Nation. They have met, shared stories, and built relationships on this land by the river for many thousands of years.

I respect the knowledge and care that Elders past and present of all First Nation communities hold for the lands and waters that we now rely on to generate and transmit our power system.

Every jurisdiction in Australia is in some way working to bring indigenous peoples’ unique needs and ideas into the energy transition.

I hope we see this participation grow ever more meaningful in the future – I believe the transformation will only be stronger as a result.

Now, I know what is top of mind for everyone here today are the challenges facing consumers from cost-of-living pressures, including ongoing increases we’re seeing in retail energy prices.

I’m sure this conference will give us an opportunity to talk about immediate actions that can help alleviate those pressures and what more we can do to support all customers, right now. At the same time, these real challenges provide us with an important focus as we transition to a net zero grid.

The conference theme is achieving the transition at least cost, not any cost – something I hear regularly from my friend Andrew Richards at the EUAA. This concept is the basis for my opening remarks today. I want to talk about the enormous and complex challenge of getting Australia to net zero and doing it in a way that minimises costs for energy consumers.

And – if you’ll pardon my pun – I plan to use a puzzle analogy to bring the pieces together.

Like many of you, I have a fond family tradition of jigsaw puzzles. Whether it’s holidays, sick days, or the dreaded lockdown days, most of us can remember working on a jigsaw at least once.

My family’s most recent effort was a picture of that war effort factory icon, Rosie the Riveter, but I’ll get to my gender equity piece later this morning! For now, I’ll apply the universal jigsaw experience to the enormity of the energy transformation in Australia.

Our challenge – while far more serious than any puzzle – does have similarities.

When you begin a jigsaw, you know exactly what you’re making: that’s the picture on the box. In this case, the picture shows Australia at net zero carbon emissions by 2050.

A common start to jigsaws is to place all the edges before getting stuck into the middle. Sometimes, though, edge pieces remain hidden until you make enough progress to reveal them among the unplaced pieces. For a time, you just have to accept the gaps and look for other wins.

Without stretching this analogy too far: in energy terms, there are many unknowns still ahead of us, so we can’t yet detail every single step of the plan between now and 2050. We’re working hard to turn over all the puzzle pieces – but in areas like operational security, for instance, we really must expose more knowledge before we can commit to the next steps.

What we do have joined up, is the bottom edge that is anchoring this energy puzzle. That’s the unprecedented alignment of Australian governments based on our plans to get to net zero. With that baseline edge completed, we can more confidently fill in plans – the outside edges if you will – for all energy stakeholders.

There are other similarities between jigsaws and our work in energy, like:

being worked on by people who find solutions from different angles, and
featuring leaps of genius from unexpected players (in my case my 82-year-old mother!) who walk by and instantly spot that one connecting piece you’ve been hunting forever...

The good news for my energy analogy is that – with a puzzle on this scale, and so many connections and discoveries still waiting for us – there are more than enough pieces for everyone to play a part.

So let me move on to some highlights from the AEMC and the ESB – soon to be the Energy Advisory Panel – that connect with the sector. As I do, I hope you’ll identify places that your own puzzle pieces could add to the ever-growing picture.

This year I’m using three themes to help capture the many interrelated activities underway. Those themes – transformation, resilience, and innovation – will shape the rest of my talk today.

Transformation

National energy objectives

To begin with transformation: the introduction of emission reduction objectives to the national energy objectives is one of the most significant changes in the history of our energy markets. In fact, this is the first change of any kind to the objectives in 15 years. We’re expecting the amendments sometime this year.

So, what will this mean?

Well, for clarity: emissions reduction won’t form a separate, additional objective. It will be incorporated into each of the three national objectives – for electricity, for gas, and for energy retail markets.

This brings a new dimension to the Commission’s decision-making. In future, we will balance emissions reduction outcomes in the same way that we currently balance the existing elements: price, quality, safety, reliability, and security.

But – also for clarity – this doesn’t mean emissions reduction trumps the other elements in the objectives. We’ll continue to balance all criteria on a case-by-case basis, and to look for the most efficient and affordable way to achieve our energy objectives, including in relation to emissions reduction.

In the Commission’s most recent strategic reset, we recognised the critical role of emissions reduction as the context in which all our work was being undertaken. This gives us a welcome, additional structure in which to consider emission reduction.

But before that begins, we have work ahead of us! And we will need your input on the framework to embed emissions targets into our workstreams. Please, keep an eye out for draft papers later this year.

Another transformative change is how we approach the massive task of expanding transmission with the greatest possible efficiency and effectiveness.

If I return to the puzzle analogy – transmission is less about pieces of the puzzle, and more like the concept of interlocking shapes that hold a jigsaw together. Without those connecting tabs and sockets on each piece, the puzzle would fall apart. I’m sure you’ve all heard the line: there’s no transition without transmission!

The Transmission Planning and Investment Review we have just completed focused on getting those new connections funded and built.

Rule changes to apply those recommendations are underway, with more to come. You’ll also be hearing from Daniel Westerman shortly, about where AEMO is at with its planning process.

Transmission Access Reform

Meanwhile, the ESB’s work on Access Reform is about getting the maximum usage and value from new and existing transmission. Or, to put it colloquially – how do we get the biggest bang for our buck?

The existing transmission network was designed to serve a relatively small number of traditional generators, located close to fuel sources, be that coal, gas, or hydro.

In contrast, our myriad new renewable generators are typically spread over large open areas with high levels of sunshine and wind.

They must be complemented by dispatchable plant – including storage and, potentially, flexible load. And the whole lot must be connected, as efficiently as possible, with at least 10,000 km of new poles and wires.

Another consideration – given the nature of our energy markets – is that those connections should also work across state borders. This has been highlighted recently by the rise of state government Renewable Energy Zones.

We absolutely welcome the contribution and the benefits that jurisdictions bring to their REZ schemes in terms of jobs, growth, and reaching our net zero goals. But we also need these Zones to be part of a wider, coordinated plan that avoids excessive and inefficient construction, funded by consumers in their energy bills and taxes.

Access reform aims to send signals to investors on:

first, the best place to set generation, storage and dispatchable assets, so we only build essential transmission and other assets
and second, the best way to bid into the market – so that we get the least cost combination of assets contributing at any point in time.

The reform’s purpose is to have the market support decisions that give better outcomes for everyone when deciding where to build and how to bid.

National access reform would support Renewable Energy Zones in ways such as:

stronger incentives to invest in these schemes
confidence that investment cases won’t be undermined by subsequent projects outside a REZ
and, providing for a mix of assets within REZs, particularly storage, that maximise the value of investment.

We think this can build value in REZs, and, ultimately, get energy to customers as efficiently and affordably as possible. We presented this to Ministers in February, and we’re about to take the next stage of the work back to them.

In terms of our jigsaw puzzle – this is one of those times when there is room for every kind of approach. State-driven renewable energy zones are welcome participants, and this also speaks to the strength and value of our national partnerships.

And that brings me to my next theme today: resilience.

Resilience

Resilience can mean a lot of things to different people. Today I’ll use it in relation to the reliability of our power system.

With winter upon us and 12 months on from the market suspension, in addition to affordability, reliability is also at the top of our minds.

Last year when I spoke at this conference, I said I would always now measure my time in the energy sector in two sections – the time before, and the time after, June 15, 2022. There are people who still wince when you bring up the suspension – I might have just spotted a couple of you in the audience!

The pain was very real – but, so was the response, which was managed incredibly well, particularly by Daniel and our colleagues at AEMO.

I’m not going to be the person who jinxes us by talking up the solutions since that time, but I will say that there are structural changes in place that stand us in good stead if we were to face similar circumstances.

These include:

the Government’s introduction of coal and gas caps in response to global commodity changes
the Commission’s changes to emergency price settings so more generators can meet their costs within the administered price cap regime, and
the ongoing compensation claims process and the significant communication effort around that work.

This all means that, if the same situation arose, we’d expect to see more generators would continue without disruption.

Rethinking reliability

In years to come, the 2022 suspension will show up in uni exams, and give energy veterans that ‘where were you on the 15th of June’ moment at conference dinners. But, looking ahead, we do have a broader suite of actions underway to support the resilience of the system in the short, medium, and longer terms.

Speaking immediately, we’ve extended the application of the interim reliability measure to both the Retailer Reliability Obligation and to AEMO’s ability to enter into long-term reserve contracts. This wasn’t popular with everyone, but it ensures we have some conservative signals in place as we work towards more enduring outcomes.

In the medium term, we have a number of jurisdictional schemes like the NSW Road Map and the Commonwealth Capacity Investment scheme that will do a degree of the heavy lifting on getting replacement assets in place – but not necessarily the whole task.

This brings me to our Reliability Panel’s recommendation on the market settings for the period 2025 to 2028.

The Panel proposed a gradual increase in the market price cap over this period. We see that as – potentially – a complementary measure to the work jurisdictions are doing to promote investment.

We have confidence in the Panel’s analysis and judgment but that doesn’t mean the decision is pre-determined. We’re conscious there were divergent views on the Panel and the Commission needs to test the proposals in a wider context.

We will carefully consider, when balancing reliability and affordability, whether there are net benefits to customers of increasing the market price settings.

And then in the longer term, how are we going to keep incentives flowing for investment in the assets the sector needs?

That’s why the Reliability Panel has now kicked off its next major review – looking at whether we can apply the current standard to make judgments about reliability in this new kind of power system? The hypothesis is: it’s no longer fit for purpose.

A standard for reliability that is based on average outages isn’t very helpful in the new paradigm of an energy sector comprising such an eclectic mix of assets, and increasing variability in the weather caused by climate change.

This review looks toward the end of this decade and asks:

what form could a new standard take?
what targets would we attach to the new standard to measure performance?
and – what tools could the market employ to give that standard effect?

We also assume governments don’t want to keep investing indefinitely. We want to get back to an equilibrium where the market can send the kind of signals that result in the assets it needs.

And of course – you can’t talk about reliability without affordability. The balance of those twin desires will guide the new standard discussions, just as it does all our work in this area. And on that note, I also refer you to AER Chair Clare Savage’s speech this afternoon about protecting consumers.

DIY reliability

And let’s not forget, there’s a quiet kind of ‘DIY reliability’ revolution underway on millions of Australian home and business rooftops. Increasingly, customers are self-funding reliability to some degree.

We are now nudging 3.5 million small solar PV panel systems; a world-leading per capita level of generation. And some solar installers report that recent growth in EV sales is adding even more interest in rooftop PV. Prospective buyers, they say, are adding potential petrol savings to the usual calculations around reducing power bills.

Even more interesting, our AEMC economists have shown the tipping point in domestic battery affordability will land in 2025, much sooner than expected. In fact, we’ve found some battery brands are already priced to deliver payback within eight years, which is the standard we use for affordability.

And there’s more.

Today only 72,000 or so homes and small businesses in Australia have batteries. Our analysis says that if installation only continues at the rate of the past three years – we will see more than 1 million homes with batteries by 2030. That’s about 10% penetration of the domestic market.

This doesn’t include the expected boom in household charging from EVs – which you can also think of as ‘mobile batteries’. Looking to the 2030s, we may see home battery installations slow down, replaced by the convenience of two-way EV charging.

Innovation

And that brings me to my third theme for today. As an optimist, this is my personal favourite: innovation.

Consumer energy resources like rooftop solar, electric vehicles and batteries are a rich field for innovations of both the technical and behavioural variety. We need both kinds to reach our net zero goals.

In jigsaw puzzle terms, consumer energy resources are like those highly detailed sections that you gradually complete and bring together to help join up the whole. You know that moment? Where you suddenly discover there are in fact six different shades of blue that can help you nut out the puzzle!

Those connections are complicated – but very rewarding, and best completed with many participants. We have significant work to do to make sure those connections are possible.

AEMO’s step change scenario relies on a five-fold increase in contributions from distributed solar resources, much of it from consumer-generated energy. We need tools and incentives that can enable and inspire millions of consumers to choose to share the power they generate in such a way that it supports the overall grid.

If we can do this well, we can save by needing to build fewer large-scale assets. We can share the benefits of consumer assets in a way that reduces – not increases – the energy divide.

I said before, there’s no transition without transmission. I might also add, the consumer is the hero on the road to net zero.

At the Commission we have four key pieces of consumer energy resource work in front of us:

First, our review of CER technical standards is nearly complete. I’ve said it before – we have an extra 3.5 million tiny generators on our rooftops, but we don’t have 3.5 million tiny engineers up there to service them!
Secondly, we’re also close to completing our review of smart meters. If knowledge is power, smart meters literally turn power into the knowledge consumers need to decide if, and how, they participate in the new energy markets.

And then I want to touch on two more:

One is underway. It aims to unlock the benefits of consumer energy resources through flexible trading. This opens up new management options for householders and businesses.
The next one will commence soon. It’s called the Scheduled Lite Mechanism, which just describes a low-cost, light-touch way to participate in the markets.

Seen together, these reforms present a platform to allow customer assets into the system, at a time and in a way that they can have the most impact. From both a large and small consumer’s perspective – we need to understand which incentives and safeguards would encourage participation.

And for the aggregators and other businesses that will be instrumental in this platform, we’ll work out what are the clearest signals that they can follow to know what the market needs and to create the best outcomes for their clients and the system.

The groundwork for a two-way market has already been laid, of course, with many pilots underway. Just a few examples you might want to look up are:

a joint venture VPP project between Vicinity and EnelX
an ARENA-funded flexible load project led by Shell Energy Hub, enlisting supermarkets and others
and both AEMO’s Project EDGE and Ausgrid and Reposit’s Project Edith – for which I have a soft spot as it’s named for a pioneering female electrical engineer.

Trials like these are great opportunities for us to learn by doing. At their best, they also help pinpoint regulatory, operational, and commercial barriers so we can refine the market design solutions we need.

There are many innovative projects out there right now. There will not be one single way to solve a puzzle of this scale, we need every good lead we can get.

Conclusion

Diversity and inclusion

Which brings me back to Rosie the Riveter, in a roundabout, puzzle-solving way.

An exciting thing for me personally this year was to be appointed one of Australia’s first Global Energy Equality Ambassadors. Energy – you may be shocked to learn – has one of Australia’s lowest female representations of any industry. The only lower sectors are construction, and mining.

One of the scheme’s objectives is to reach gender equality in this sector by 2030 – the Equal by 30 initiative. Currently, many government and renewable energy organisations are close to that mark, but sadly it’s more like 20% for the rest of the sector and far worse than that in the trades and senior leadership.

This is a cause very dear to me. There are some practical solutions that I’ll happily speak to at length another time. But for now, something else about gender diversity struck me early in my ambassadorial tenure.

I was listening to Canadian diplomat Isabelle Hudon speaking of the enormous task ahead of us in the energy transformation. Isabelle says:

‘we must harness all possible talent to discover the breakthrough solutions that will transform energy and the world’

It was the ‘all’ that struck me. ALL – possible – talent. Not only including women. To finish this tremendous puzzle in front of us and match the net zero pictured on the box, we have to seek the broadest possible range of skills, ideas, and actions.

We have a lot of very complex problems to solve. If you’ve heard me speak before, you know how strongly I believe in bringing together and really listening to different perspectives.

That means diversity. Diversity and inclusion, because without inclusiveness, diversity alone can form a very lonely path.

Whether it’s gender, culture, age, ethnicity, education or life experience, countless studies show we get better solutions when we embrace a wider range of perspectives in our work.

I can think of several times since I started with the Commission that a dissenting stakeholder view led us to a much better solution than we’d have found without being challenged in our thinking.

It’s part of our strength. We are continuing to work on ways to improve our inclusiveness both with staff and stakeholders, and I’d like to see that approach embraced more widely in the energy sector.

So, before I say goodbye to Rosie the Riveter, let me just say to those expressing fears about workforce shortages blocking the energy transformation’s construction rollout – perhaps this is one case where we can learn from lessons of the past

Millions of women around the world proved themselves capable of reskilling and operating in a vast range of electrical, mechanical, scientific, and industrial roles during both World Wars.

We have another massive national and global effort ahead of us, and it might be time to think differently about what staffing an energy workplace looks and feels like. I really hope we’re not leaving up to 50% of our potential workforce on the sidelines for the sake of:

setting meaningful recruitment targets
guaranteeing safe work environments
and – at the very least – when we do actually hire women in the field, getting some female portaloos out there too!

And so, like a jigsaw puzzle, the energy transformation will keep challenging us to fill in problematic blanks by uncovering:

new ways of thinking
new ways of looking at our sector
and new ways of collaborating and drawing in fresh talent.

As in a jigsaw, sometimes we make huge headway in one sitting, other times a single small piece fitted in place is an almighty achievement. The key is – we all have pieces to contribute.

One day, you’ll look back at the completed energy puzzle, in all its vast complexity. You’ll each know the satisfaction of pointing to the pieces you placed. And you’ll see how you helped to match the picture on the box, which shows we reached net zero by 2050.

Thank you, and enjoy your conference!

Implementing the ESB’s post-2025 market design reforms

07 June 2022

Australian Energy Week, Melbourne Convention and Exhibition Centre

Anna Collyer, AEMC & ESB Chair

Thank you and good morning – it’s a pleasure to be here

I acknowledge that we are on the lands of the Wurundjeri people who have been custodians of this land for thousands of years, and acknowledge and pay my respects to their Elders past and present

I know this morning there are many reasons to fix our gaze on the current environment – a change of government, some big movements in the sector, a lot of anxiety the magnitude of current prices.

But despite – or actually, because of – those immediate, urgent concerns, it feels even more important for me to draw our focus back out to the big picture.

Because it’s the longer-term reform that’s crucial if our sector is going to serve the community the way we must, to reach Net Zero by 2050.

That means more renewables, firmed up by storage and transmission.

It means implementation moving along at a cracking pace so we give some relief to the short-term issues at the same time as building long-term solutions.

It means delivering the capacity mechanism, congestion management model, and transmission planning and investment review, with a host of interdependent work, and balancing – throughout – the benefits for consumers.

We live in a very volatile world, and we are trying to land the most significant transformation of the energy sector this generation. Today’s crisis is something we need to learn from and prepare for the next problems we face. It’s an example of why we need to speed up reform, not slow down. And to speed up – we have to do it together.

There was a stage, not too long ago, when the phrase ‘post-2025 market design’ might have sounded futuristic.

Right now, however, there are fewer than 1000 working days until January 1, 2026.

P2025 implementation is a day-to-day practical exercise taking place in a complex environment:

The stakes are high – implementation aims to set Australia firmly on the road to decarbonisation.
There are four substantial workstreams, but between them and within them there are myriad links and interdependencies.
There are countless customer touchpoints in businesses, governments, institutions and homes – no one will be unaffected by this work.

So despite the topic of my speech – I’m not here to talk about what the AEMC or ESB are doing to implement the P2025 market design reforms. I’m here to talk about how we are implementing them – market bodies, governments, businesses, investors, advocates, media, academics, customers. All of us.

Because we are all in this together. I’ll say it again: we are all in this together.

Working together is how we can implement these ambitious and essential reforms to reshape our magnificently complex energy market in time for 2025, for 2030, for 2050.

Working together will give us the balanced approach we need to deliver good outcomes for our whole community.

But I’m not stepping away from the guiding, designing and constructing roles that the AEMC and the ESB and our colleagues bear in this process.

We employ many strategies to ensure we can meet the reform goals, and there are three important tools that I’ll cover this morning:

Firstly, how the creation of new markets becomes a mechanism driving innovation and greater efficiency in the focus and timing of your investments.
Secondly, how you contribute to consultation with us directs implementation in ways that we value highly, and which you may not yet fully appreciate.
Thirdly, how establishing social licence underpins implementation in so many ways – like agreement on decarbonisation targets and changes in personal energy consumption.

One thing that marks our reform implementation journey more than any other is that we know – usually – where we are going, but we don’t always know the best way to get there. What we do know is that market-based solutions are often the quickest, smartest way to work that out.

That’s why our reform program is around ‘market design’. We are seeking to address future problems that we can’t even define yet. Once we do – or come close - we can write the rules that create new markets, rewarding participants for solving those problems.

This is what we mean when we talk about creating a ‘space’ where innovation can occur.

We also often remind people that we are technology agnostic – we don’t pick winners. And this is true. But putting in place market frameworks that encourage innovation effectively lets the consumer pick the winner, and that has long been central to everything we do, both at the AEMC and the ESB.

As I said at the start – today’s problems are an example of why we need to move quickly, together to put in place a market design that will help us with more renewables and what is needed to firm them in the market through storage.

At its heart it will be offering rewards for providing something we need in the transition to net zero.

First, it seeks to provide confidence that we will have enough capacity as we see the massive retirement of the old fleet. The scale of the new build required is enormous and a clear signal to guide that will support better outcomes for customers.

Secondly, it’s ensuring that we have the right mix of capacity to ensure a seamless service for customers. We’re building capacity with the growth of variable renewables, but we need other resources and methods to come out on those cloudy, still days.

Batteries, pumped hydro, demand response and potentially hydrogen may all play a part, and, of course, the better we get at describing the problems we’re going to face, the better the solutions that emerge.

Because, in very simple terms, we can define a need for these services without defining how they will be delivered, or by who. That falls to the market, and the freedom to innovate, and this is the ‘space’ we create by designing rewards for those who come up with solutions.

Another example is that shortly we’ll begin work on a rule change requested by the Australian Energy Market Operator, AEMO, to look at flexible trading arrangements for consumers.
This could mean allowing ‘sub-meters’ to be added to household and business meter boxes – just microchips really – so consumers could choose to let a third party manage the power use of specific equipment, like their air conditioning or pool pump. On a public equipment level, it could apply to contracting out the power management for streetlights or phone kiosks.
The rule change, if it proceeds, would create a ‘space’ where brand new business models could step in and offer benefits to customers and the power system, while being rewarded for it financially.

A challenge for many of you today may be picturing yourselves, your established businesses, plunging into a new market like that. As an incumbent of the current market, particularly a very large operator, one of the hardest things is to innovate against yourself.

I do understand that when we create new markets, to gain innovative solutions to the problems we see coming, it can be hard to break away from the traditional successful business model. In some ways, though, we’re doing you a favour by giving you the competition you need.

How so? Because we’re also creating new ways that you could be rewarded.

Incentives for service innovation are just one way to be rewarded by participating in the new markets we need. Another way is by responding to signals to invest in infrastructure, when and where we need it.

We know in the transition we are going to need more storage and more transmission. Not one – or the other – but more of each – in a way that is efficient for consumers.

Two ways we are looking at this is through our work on the Transmission regulatory framework and modernizing the regulatory framework so it’s fit for purpose for how storage actually works.

Combining innovation and investment signals, we recently completed our Integrating energy storage systems into the NEM rule change.

The rule facilitates innovative business models that deliver efficient market solutions to address the needs of the transitioning energy system.

It’s a first step along the path to a two-sided market, sending signals that we need more participation from demand-side resources and are looking for solutions to enable it.

The rule change created a participant category called the Integrated Resource Provider.

This category enables storage and hybrids to register and participate in a single category.

Compliance with dispatch can also be measured at the connection point.

This means hybrid facilities such as load with co-located generation will be able to consume energy behind the connection point when there is congestion on the network.

And that means lower cost energy during periods of congestion, rather than limiting on-site generation, which is what currently occurs in these situations.

The rule change also allows aggregators of small generating and storage units to move into the new category, which will allow them to participate in the ancillary services market.

This change would send clearer investment signals by allowing aggregators to provide more services.

It is a relatively low-cost change that will allow more participants access to more revenue streams, and deliver services the market needs. Essentially, this change is about providing greater flexibility for customers to get the best value out of their energy assets.

And, last week, we released a draft report and recommendations from stage 2 of our Transmission Planning and Investment Review. The draft recommendations would allow variations to the depreciation profile for big network investments in the grid, removing some financing obstacles for major construction projects.

As an audience like this knows, it’s not enough just to invest in more renewable energy generation. We have to transport it, too, and often from locations very different to the historic generator hubs near coal mines and gas fields.

Our current transmission network was built in a time so foreign to our own that it might have been for a different country. It’s an area ripe for the right kind of investment, and we hope we’ve taken steps towards that with our recommendations last week.

Of course, reports like the Transmission Review don’t just appear. Many of you here, or your colleagues, may be actively involved in discussions and submissions on a raft of these papers that are moving us towards P2025 reforms.

We don’t have all the information needed to complete the implementation reform process yet. No one does. That’s another place where you come in – where we’re in this together.

As businesses, advocates, governments, consumers and researchers, we call on you time and again to consult, consult, consult.

Just this month, the AEMC will receive submissions on five projects, release four more papers for fresh consultation, and hold three public forums and many more meetings with stakeholders drawn from every part of the energy sector and government.

We rely heavily on stakeholder engagement to guide our decision-making, not just to endorse it.

But when yet another call goes out from AEMC and other market bodies for you to write a submission, attend a forum, respond to a consultation question, we also know it can spark exhaustion at best, cynicism at worst.

We get it! Both AEMC and the ESB are small organisations and we try to contribute as much as we can to the consultation calls from other bodies too.

We took a necessary decision at the end of 2021 to re-sequence our work program for this year, which gave us all some breathing space around the most significant consultation projects.

Even so, the pace is relentless and we ask that you keep on reading our work, writing your thoughts, attending the forums, and helping drive the implementation forward.

I thought I’d share an example of why it’s so important:

The ESB began consultation on its Congestion Management Model – CMM – with a solution we thought was a good starting point.

Putting it bluntly: our stakeholders hated it and we thank them – you – for that.

Because – when we then asked you for alternative models we got a much clearer articulation of the problem, and 8 or 9 possible solutions. Two of the four new models being considered came directly from you.

That’s a particularly crisp example of how genuinely we seek your views, how highly we value the additional perspectives and critiques you bring.

We are all in this together, and we don’t have much time. We could have put a great deal of effort into developing, alone, an alternative to our original CMM. Thanks to the willingness of this sector to contribute in consultation for all our benefit, we didn’t have to.

Along with innovation and investment, your imagination and experience is helping to speed the implementation of the P2025 market design reforms.

While the CMM example emerged when we took an open-minded approach to traditional consultation, I’d like to share a less conventional example of consultation from the ESB. This is the Customer Insights Collaboration, which is changing the way we think about consumer outcomes.

Consumer Energy Resources (CER – our preferred term for DER like rooftop solar) are at the pointy end of this focus on consumer outcomes, in part because it’s arguably the area of the transition in which customers are most engaged.

Ensuring we are designing a system that works for the full spectrum of customers is central to the ESB’s Customer Insights Collaboration.

So what are we doing differently?

We know we have to start with customer preferences and behaviour and see how we can ensure the system works for consumers (not the other way around).

This started life as the maturity plan but through the pilot we did last year, we realised that the actual value of the work was bringing together key stakeholders to talk about the issues from a customer viewpoint.

While we may think it’s exciting to contemplate electric vehicles as batteries on wheels, most customers buy an electric vehicle because it’s a really cool car that goes from zero to 100kph in 2.7 seconds.

And in a pop quiz I took recently at a CEC dinner, where we had a higher proportion of people with EVs than at your usual gathering, I found a range of philosophies and strategies for charging, and none of them related to the value they could provide to the grid.

So if we want to understand how customer behaviour will impact the system, and how to design a system that works best for all customers, we need to start with the customer.

What we learned when we did the pilot was that starting with the customer gave us a meaningful way for all participants to engage on complex issues and find common ground.

That’s regardless of whether they were from industry, retail, government or consumer organisations.

When we put the focus on what most benefits customers, we created a shared language and purpose.

Our current vision is for this program to run with 6 monthly releases over the next 3 years to gain insights into customer perspectives on a range of key issues.

The idea is we can then share those insights across the range of market bodies and other institutions working in this area so they can take them into account in their work.

We’re part way through the first release – barriers and enablers to customers getting the most out of their flexible demand. The 2 key barriers/enablers which we’ve identified are recognising the diversity of customers and trust.

While these aren’t surprising the collaborative work in highlighting them and commitment to sharing and using these knowledge-sharing reports provides a better basis to ensure they are given the necessary consideration in our work.

And in mentioning ‘trust’, I land at the third area I want to discuss regarding the way we’re implementing market design reforms. Initially, I called it a tool, but really it’s more like the door to the toolshed – you need it to be open before you get to work.

I’m referring to social licence, which is a phrase you’ve been hearing more and more in the energy sector as the transition increases in pace.

The term ‘social licence’ has been around for many years. In some contexts it’s synonymous with consumer confidence, or, simply, trust. Businesses and governments can operate legally without social licence, of course, but typically not over long periods, or wide territories, or with resounding success.

And when we talk about the changes we need to implement P2025 market design reforms, to meet the targets of 2030 and 2050, we do need long, broad, stable trust and agreement from the community.

We need social licence at many levels to implement the reforms. We need people to be willing to change their behaviour, adopt new technologies, allow access to properties, and invest in innovative solutions.

- Let’s talk about the link between innovation and risk. I spoke earlier about the importance of innovation to help us implement the market design reforms. However, in terms of social licence – or consumer confidence – product and service innovation also poses some challenges.
- When a consumer invests in a product or service they are told will be good for them and also the planet, they expect it to work as it should. If it doesn’t, at present, they should be able to seek remedy.
- But the very new nature of some energy-related goods and services means the consumer isn’t always going to find it easy to make a complaint to traditional authorities, or get action when they do.
- We’ve had some interesting discussions lately with state-based Energy and Water Ombudsmen’s offices and where they see the gaps and potential loss of public trust, of social licence.
- A question to consider is whether the Ombos’ remit could and should be expanded so our customers have somewhere to go for dispute resolution, the way they do for traditional energy products?
- It might seem odd to want more ways for people to complain, but it makes sense if our ultimate goal is to build confidence in the new things we want people to buy, the new services we want them to employ.

It’s not only that consumer laws might take time to catch up to the very new innovations coming to the energy sector, it’s the sheer scale of what we’re moving towards.

Right now, and for all our history in electricity networks, the number of generators in Australia has been manageable in the literal sense. They could be counted, monitored, tested. Types could be matched to standards, maintenance could be mandated.

With the rise of CER, however, we’re looking at a future where consumer confidence in Australia relies heavily on 3 million tiny household generators – and they won’t be managed by 3 million tiny engineers!

We’ll need ways to ensure a level of quality in household generation – CER – that balances consumer needs and the power system’s requirements.

AEMC, ESB and AER each are considering standards and consumer protections within our respective scopes. Strong, enforceable quality standards encourage consumer confidence and social licence, and that in turn may enhance the implementation of some of our reforms.

The second stage of the AEMC’s Transmission review also highlights building social licence as a significant issue. It notes that obtaining community – and landowner – acceptance of major transmission projects is critical for their timely and efficient delivery.

The draft report found that existing regulatory obligations for stakeholder engagement are largely appropriate for TNSPs to build and maintain social licence. This doesn’t mean a TNSP can call it ‘job done’ with a tick and flick adherence to the regs.

The task of gaining trust, of building social permissions and not just legal ones, is larger than any rules we could write.

The current issues in the sector are bad for all of us – in particular – consumers.

We know we need to move quickly to get in place reforms that reduce the risks that we see materialising today.

To get to net zero we need more renewables, firmed by storage and the transmission to get electrons where they are needed.

The title of this speech – Implementing the ESB’s post-2025 reforms – could be misleading. These reforms are not just the ESB’s. They belong to all of us.

A capacity mechanism may not be your preferred energy market model, but we need you involved in how we design it, define it and refine it. Continued uncertainty at a policy level just increases the risks of consumers continuing to be on the receiving end of outcomes we see today.

The implementation process is not a typical government-down approach. Neither are we leaving the field wide open, because the National Energy Objectives ensure that consumer interests will always be at the forefront.

What we are discovering in the implementation process, alongside you I hope, is that placing consumer benefits at the front of our considerations helps everyone.

When consumers are our focus, we create stronger markets that naturally reward innovation and encourage investment because there are customers waiting for those solutions.

When consumers are our focus, our consultations are more effective and deliver more meaningful and direct ideas to our work programs.

And when consumers are our focus, it’s of course easier to build social licence because we are always thinking about what will attract them and repay their trust.

We are all in this together, and it’s a great pleasure to be on this implementation path with every one of you.

Thank you.

Australian Energy Week: Keynote Speech

25 May 2021

Melbourne Convention and Exhibition Centre

Anna Collyer, AEMC Chair

Introduction

Thanks Mathew and good morning everyone. It’s a pleasure to be here with you this morning, both in the room and virtually.

I’d also like to acknowledge the traditional owners of the land where we’re all respectively meeting today, and pay my respects to elders’ past, present and emerging.

After having the privilege of advising many of you in the audience over the past 20 years, I’m thrilled to be talking to you today as the new chair of the Australian Energy Market Commission. I’ve had a whirlwind few month - I’ve met with stakeholders, contributed to the ESB P2025 work, got up to speed on a raft of rule changes and spent time getting to know our team.

I’m excited to have made the leap from my role as a partner at Allens law firm advising Governments and industry participants, to one where I can make a different kind of contribution to the evolution of the sector. And what a time to be able to do that!

While I don’t underestimate the challenges for one minute, I also see the huge opportunity for all of us working together to create something new which will deliver great outcomes for energy customers.

It’s also an honour to be one of your first plenary speakers at this conference and what I’d like to do is take the opportunity help set the scene. I know that we’ll be spending the next few days discussing and debating the challenges and opportunities I’ve just mentioned. So rather than me focussing on ‘what’ should we be doing, I’d like to spend some time with you this morning talking about ‘how’ we can best work together to achieve these outcomes for energy customers.

I’m going to start by telling you a bit about the photo that is on screen.

I took the photo a couple of weekends ago at my daughter’s Lacrosse match. She had an away game and as it turned out the grounds were next to the Gardiner’s Creek urban wetlands that my husband James had been involved in designing and planting back in the 1980s. So, the two of us took a walk while the team was warming up to have a look.

For completeness I’ll note that on this beautiful Autumn Melbourne morning, our older teenage son was still at home fast asleep in bed.

I originally took this photo as the wetlands had to be built around the transmission tower and I wanted to show how well that had been done.

We all have our strengths and I would suggest that photography isn’t one of mine. Luckily, market design isn’t done in photographs.

What you can’t see in my image, which I’ll ask you to imagine, is a wonderful landscape of Australian native plants, complete with wetlands, ducks, a bird hut and lots of walking trails. It was developed as part of the extension of the south eastern freeway. Melbournians in the room will be familiar with that freeway and the south eastern suburbs it passes through. The vision for the wetlands area was for it to be more than just a buffer but to create this kind of urban sanctuary and it involved a lot of planning and plain hard work to turn that vision into a practical reality.

And so, after taking the photo I started to make some links with what I intend to share with you today, which centres around collaboration, innovation and pragmatism.

We’ve already reflected this morning that our energy sector is going through a fundamental transition. The grid is decarbonising at a rate of knots. We are working on complex changes to the way we deliver energy. Customers are getting more actively involved in the energy system through changes in the way they like to produce and use electricity.

And of course, we don’t have a single homogenous customer. I’m sure there are people in this room or who have solar panels and home batteries and use their app regularly to see how much it is saving them. However, we also have families for whom energy is a significant and challenging part of their household budget. We have huge users like aluminium smelters and steel mills, who have to compete internationally to sell their products. And I’m sure you can think of many more.

All of us in this room have a collective goal, and a responsibility, to make the energy transition deliver successful outcomes for energy customers. The pace of change is greater than any of us predicted, our work is complex and urgent and there is an enormous amount to do.

In this context, I want to talk to you about how I see the AEMC working with our market body colleagues, with jurisdictions, with all of you and most importantly with customers, to deliver the best possible outcomes for customers.

At the AEMC we’re shifting our ways of working to meet the current challenges. And the way we want to work with you can be characterised in a similar way to the design, planting and development of the urban wetlands you can’t quite see in my photo. There’s three things we want to do.

First, we want to be more forward thinking – we need to have a vision of the future and design towards it

Second, our solutions need to be more pragmatic – solutions that will deliver the outcomes we’re looking for, and we need to be prepared to change if something is not working

Third, we want to be more collaborative – we need to listen to and learn from the vast range of perspectives on these issues, which will contribute to coming up with better solutions.

I’m going to illustrate this with examples of some of the most important things we’re working on at the moment: Essential System Services and Distributed Energy Resources. And, as these three objectives are also pretty resonant with a good innovation process, I’ll also draw on some of my recent experience as head of innovation at Allens.

Forward thinking

As I’ve been meeting with stakeholders and asking what they want from the AEMC, this is the one that comes up the most often. How did the rules get so out of date with what is actually happening in the system? What we really want from the AEMC is to be more forward thinking in its approach.

Of course, this isn’t necessarily easy in such a rapidly changing system. And energy is certainly not on its own here. One of the initiatives I was most proud of as head of innovation was a partnership Allens formed with the UNSW law school: the Allens Hub for Technology, Law and Innovation.

A group of academics had come together to consider exactly that question – how can the law get better at dealing with rapid changes in technology and the innovation that goes along with it?

They were looking at things like the development of increasingly intelligent AI and how to manage the huge proliferation of data we are now able to gather. Whenever I had the chance, I would always say that the energy sector is in exactly the same boat. The changes in technology and customer preferences and the opportunities for innovation are the hallmarks of many other sectors that have been through the kind of disruption and transformation we’re seeing now.

So how can we try and get ahead? How can we be more forward thinking?

I’ll use essential system services to illustrate how we’re thinking about this objective. I believe it’s the most important thing AEMC is working on right now. These are a suite of services we have defined, that are necessary to keep the system stable as we shift from our traditional generation fleet to new technologies.

As with our wetlands example, I think the starting point for us to be forward thinking is to have a shared future vision of what we are trying to achieve.

You could call it the light on the hill. Without a light on the hill, it’s easy to get stuck in the weeds, to lose your way in the dark or take the longer road.

In this case, setting that shared future vision is the role the ESB has played in developing the P2025 report. I believe the outcome of this work will provide us with that high-level picture of where we are heading. From an ESS perspective, the ESB work has done the heavy lifting in unpacking something that was simply part and parcel of producing energy by synchronous machines to defining this suite of inter-related services that we are now working on.

Forward thinking applies as much to implementation as it does to planning. Once the design work is done, the activation takes time – not as a fault but as a necessity of sequencing.

The wetlands vision was achieved through designing and then methodically planting many different species over time – if you’d done it all in one go, various aspects would have failed, with not insignificant consequences that could have been avoided.

As with the energy market, we’ll be making constant step changes towards achieving our vision. As Kerry Schott has said, we can’t do it all at once in a big bang. So while the ESB’s P2025 program continues, we’ve been working in parallel to deliver the most urgent ESS changes – because they just can’t wait.

At the moment we have multiple inter-related changes on the go There are also other related changes in play which impact on our work, such as the reliability part of the P2025 work. We’re very conscious about how much is going on for stakeholders and we’re trying to balance working in manageable individual pieces, while still keeping hold of the bigger picture and how it all fits together. We want to make this easier for you and will keep working on ways to demonstrate how we are moving towards the long-term vision as we work on each piece of the jigsaw puzzle.

Another way to be more forward thinking is to ensure our rule changes allow for innovation. Defining the suite of essential system services was a critical step in moving towards our future state. The reason we have done it this way is so that our frameworks will allow those services to be provided by new technology in the future, without us knowing exactly what that is today. By defining the outcome, we want rather than the precise way it is to be provided, we’re encouraging innovation in order to allow for the best way of delivering those services to develop over time.

The final thing I want to mention in relation to how we can be forward thinking is the idea of putting rules in place before we need them. Although this sounds obvious, I’ve quickly discovered it can be a hard thing to do. We’ve got a couple of rule changes on the go at the moment where the feedback we’ve had from stakeholders is that we don’t think we need those changes yet.

With the fast-paced change of this energy transition, I can see why some stakeholders feel uncomfortable about the uncertainty of any challenge emerging. Conversely, if those challenges do arise, they’ll do so very quickly, and it may not be possible to develop a solution in time.

So, we are balancing two risks here. The first is the risk of making a potentially significant and costly change which is not eventually needed. The second is we don’t make a change and when the circumstances arise where it is needed, we don’t have it. So, we’ll be aiming to be forward thinking while balancing these 2 risks and we’re looking at different mechanisms like trials, transition periods, trigger mechanisms and other devices to do this. This is something that will be important for us to continue to grapple with as the pace of change accelerates.

Pragmatic

Which leads me nicely into my second objective which is for the AEMC to adopt a more pragmatic approach to its work.

In a period of rapid change, many of the issues we’re trying to solve do not have one right obvious answer – and I’ve been heartened that many of the stakeholders who I have met have agreed on this.

We are predicting both the future problems as well as the potential solutions to those potential problems. And sadly, none of us has a crystal ball. Modelling and data and analysis can give us a lot of insight but at the end of the day we need to make judgement calls on what we think is going to happen. We also need to be prepared to take stock and change tack when things aren’t working.

If I draw you back to the wetlands again, they started with a mathematical formulation of what species should be used, in what combinations, to deliver the optimal outcome. Funnily enough, the people doing the actual planting had to get a lot more pragmatic than that as they worked with the reality of digging, planting, ground conditions, weather conditions, you name it.

Then, over time, species which were planted may have thrived, or not. Where they weren’t doing well, instead of being sentimental or fixated on one solution, the approach was again pragmatism. They would take out what wasn’t working, observe what was working and use this knowledge to try something different.

I’m going to illustrate our thinking about being more pragmatic by our work on metering. My old Allens team will be laughing at me talking about metering. It’s something I’ve worked on for many different clients over many years. And it’s not easy to convince a junior lawyer that metering is a fun and interesting thing to work on. However, as I would tell them, and as we all know, metering is all about data, which is absolutely fun and interesting, and important.

Data is a key ingredient for our future market. Smart meters can help unlock the potential of batteries, rooftop solar and electric vehicles. Data can help new service providers, with appropriate customer protections, help customers get the most out of their assets. Data can help us with better forecasting and predicting the future and support better choices and policy design.

In 2014 the AEMC made the Power of Choice rule change which was designed to use competition to drive a greater uptake of smart meters. I think we would all agree that we haven’t seen the results we would have hoped for. So, we’re currently undertaking a review which will relook at our objective and how it can be achieved.

And we’re going to do some things differently this time.

First, we want to be clear that we do have a shared objective of what we should be aiming to achieve. We’re going to be working closely with Energy Consumers Australia to engage with consumers in a different way on this review. We’re not going to ask them what they think about metering. I think we all know what customers think about metering. In fact, I’m ashamed to say that I live in Victoria and do not actually know where my smart meter is located. However, what we do think customers can tell us about is how much they value the things we think smart meters can deliver.

Second, we’re going to apply more pragmatism in our analysis of the problem and potential solutions. Sound economic principles and technical precision will remain our starting point.

However, we want to give more focus to practical realities – like the fact that metering is the last thing most consumers want to think about - as well as weighing up the benefits we want to achieve with the costs of pursuing those benefits by a particular means.

This is another area where I’ve had a lot of stakeholder feedback as something that needs to be a critical component of our thinking. On all our reforms we’ll be working closely with AEMO so we can get the best understanding of system costs, and will look for your input on this too.

And third – in the same way that the wetlands team was not sentimental or attached to a species that wasn’t working, we will be pragmatic and be prepared to do something differently if our original solution isn’t working. Of course, our first best option is to make the right call on all of our work. But given the pace of change around us, I want us to not to get hung up on making a change if it becomes clear that’s the right thing to do. On metering, we do have to start where we are, as we don’t have a sheet of blank paper. However, within those boundary conditions, we’re absolutely open to finding a different solution which will get a better outcome for customers.

You can expect that we’ll be applying this type of pragmatism to all of our future work as we sharpen our primary focus to that work that delivers the best outcomes for customers.

Collaborative

Last but certainly not least is collaboration. Solving complex problems requires different perspectives.

After nearly 4 months of meeting stakeholders I’m very clear on two things: first, everyone in the energy sector is passionately committed to improving the energy sector, and second everyone in the energy sector brings a different perspective to the best way to do that.

Now, I don’t have any insights to offer on the work that went on to develop the extension to the south eastern freeway or how that led to the development of the Gardiners Creek wetlands. But I’m guessing if I went back in time I’d find some decisions that had to be made taking into account a range of strongly held diverse points of view. You can imagine people at the end of the extension may have had a different view to the residents of the suburbs it had to pass through.

In the same way as we have strongly held diverse points of view on the best approach to something like facilitating greater integration of solar panels. So I’m imagining that it was a collaborative approach considering those diverse points of view that resulted in something that ultimately provided benefits to all stakeholders. Which is the same thing we’d like to aim for here.

In our context let’s look specifically at how we’ve been taking a collaborative approach on distributed energy resources.

Starting with customers, the AEMC has always been committed to a customer focus. However, what is changing is that the nexus between Australia’s energy rules and mum and dad energy customers is getting closer. Many of those customers are now generators as they sell their excess solar back to the grid, which gives them a direct linkage that wasn’t there before.

So in terms of collaboration this is going to have to look very different.

We’re going to stop those activities that aren’t adding value and look for other and better ways to engage with customers.

Those involved in customer engagement will tell you the science of how to do it has really shifted in recent years and we’ll be aiming to modernise our processes.

Engagement with customer advocates is invaluable to us and we derive enormous benefit collaborating with Energy Consumers Australia, for example of the metering work I’ve referred to earlier, as well as our current DER Access and Pricing reforms.

This is in fact a great example of broader cross sector collaboration. Last year a group of four proponents requested that we consider reforms to DER – they were St Vincent De Paul, The Australian Council for Social Services, the Total Environment Centre and SAPN. They were brought together by ARENA’s Distributed Energy Integration Program. The proponents all want to integrate and enable more distributed energy but from slightly different angles – equity, keeping the network stable and decarbonisation.

The collaboration the ARENA program engendered in seeing industry, consumer groups, and governments work together on these issues is something we wish to learn from and continue to bring to all our work.

I also want to mention jurisdictions in this context – states, territories and the Commonwealth are also key to our collaborative approach. You don’t need me to tell you that the environment the energy sector is in is radically different to the one in which the NEM was established. However different it is, the value of national frameworks, interconnectedness, learning and improving from one another in a Federal system still hold true.

Right now, Australia’s energy system is changing faster and more substantially than anywhere else in the world. All Governments are deeply concerned about how we manage that and cope with those changes to deliver for consumers.

While each state and territory has slightly different priorities, goals and risks in terms of price, reliability and emissions that doesn’t prevent reform as long as we are pragmatic, collaborative and forward thinking. Our work and that we do with the Energy Security Board is absolutely critical in that. The support Ministers are providing for the Post 2025 work is fantastic and repeated to me every time I meet with an Energy Minister around Australia.

It may go without saying but collaboration with our market body colleagues in AEMO and AER is critical. We each have a distinct and important role in the energy sector and in the energy transition. The best outcomes will be achieved by collaborating effectively with each other. We have some great examples of how we’re doing this already. On all of the ESS work we have been working closely with AEMO, given the critical perspective of the system operator on how to solve these issues. On our DER access and pricing work we’ve worked closely with the AER, given their critical role in implementing decisions under that reform. In each case we believe we got better outcomes by working through the issues with our different points of view. I’m really looking forward to working with Daniel and Clare and their teams as we move forward.

Last but of course not least is all of you. As I said, I’ve met a lot of you in the last few months and all of you do have different perspectives and strongly held views. However, I do like the phrase that none of us is as smart as all of us. We think part of our role at the AEMC is to hear all of those perspectives and navigate through those disparate views. We hope you agree that the AEMC has always been committed to extensive consultation to deliver rigorous rules and advice.

Your input is vital for is in our work, and we’ve heard from you about the sense of change fatigue you’re experiencing. We’ll keep trying to find new methods of collaborating with you, whether it’s through working groups like we have set up for our system services work, ad hoc roundtables which were really beneficial on our current DCA rule change or using technology to make our forums much more accessible and efficient like we did last week for DER access and pricing.

We’re also keen for one on one opportunities with you as we know how important this is to build trust. And for those of you who have offered lunch and learns for our teams, our response will always be ‘yes please’.

Conclusion

Let me come back to my photo now and our enjoyable Sunday morning. As we were walking in the park, a woman who was also taking a walk through the area stopped and smiled at us. She didn’t know us and certainly had no idea James had been involved in the development of the wetlands. However, she was just wanting to share with someone, which turned out to be us, that she had never been there before but that it was a wonderful experience and she was so happy to have discovered it. As you can imagine that was also pretty wonderful for my husband to hear.

Wouldn’t it be fantastic if that’s how our customers felt about the energy services they were receiving? That they were surprised and delighted to realise what a great service they were getting without perhaps having thought too much about it. I know the delight of walking through a beautiful urban sanctuary on a sensational Autumn morning may be too high a bar for energy services, but we do want customers to be happy and pleasantly surprised about how easy new services are to access and use, to not worry about their bill impacting their weekly budget or their international competitiveness and to appreciate perhaps without noticing how we’ve gone about ensuring we can facilitate decarbonisation of our grid.

We’d like to work with all of you to deliver those outcomes for customers. Just like the wetlands team 30 years ago we recognise we need to be forward thinking and have that picture of the future, we need to be pragmatic and get our hands dirty and do what works and we need to collaborate as we recognise that it’s not just one person or one voice that solves problems in times of complexity. Its how you harness the wisdom and abilities of many to get to that long-term future. That’s my aim as chair of the AEMC - and I’m looking forward to working with all of you to deliver great outcomes for customers.

AEMC priority areas of reform

12 June 2019

John Pierce AO

Presented at Australian Energy Week, 12 June 2019, Melbourne Australia.

Download a PDF version of this speech

***

Thank you, Elise, for that kind introduction. As I tell most groups, I'm not in the forecasting business but, nevertheless, we can have a bit of a stab at a few things.

It's certainly a pleasure to be with you all today as it gives us an opportunity to talk about some of the issues and indeed the opportunities that the sector faces and the role that the Commission has in that. But before doing so it is perhaps worthwhile reminding ourselves of a bit of the broader context in which we are operating.

Last Tuesday evening, following the Reserve Bank's announcement of a lowering of the cash rate to the remarkably low 1.25 per cent, the Governor of the Reserve Bank, Dr Philip Lowe, gave a widely reported speech in which he reflected on Australia's general broad level of economic performance, but in particular the role of what's referred to as structural reform policies.

That is - policies that drive innovation, lift productivity, these being key determinants of sustainable economic prosperity.

It was the logic of this relationship that saw the decentralisation of key operating and investment decisions in the electricity sector, where that was possible, during the 1990s, not only because of the need to lift the sector's own productivity, which it did for many years, but because of the flow-on consequences to the rest of the economy.

So as we address the questions posed by today's policy objectives, technologies and consumer choices – the relationship between competitive markets, innovation and productivity and economic prosperity needs to be the backdrop to the answers we provide to today's questions.

But before I turn to the issues we see facing the market today I will just say a few words about the role of the Commission.

First, we provide advice to governments on market developments but, secondly, perhaps more importantly for today, we are the rule maker for Australian electricity and gas markets. We adapt market and regulatory frameworks as the world around us changes, specifically by making amendments to the National Electricity Rules, the National Gas Rules and the National Energy Retail Rules – and this is the important bit – in response to proposals that can be submitted by anybody.

Anybody that is except the AEMC itself.

This is a significant responsibility. We are effectively delegated law makers, and the AEMC Commissioners and I take that role extremely seriously, particularly as we are operating in times of sweeping change.

Through all that change we are focused on what's best for consumers and how change can be brokered at the lowest cost to families and businesses.

At times like these, there are certainly great opportunities for entrepreneurs and innovative thinkers to deliver great benefits to the community as a whole, often leveraging off the promise of the new technologies.

But there are also challenges, and it must be said people talk their own book.

So in the Commission's work we are deeply consultative and stand for evidence based decision making. All the change coming from industry, from policy changes, from the Commonwealth, the states and territories must be dealt with in our work program.

But our advice must not shift from finding the lowest cost options to just managing these changes for consumers. We are required to make decisions about proposals to amend these rules that are submitted by stakeholders, customers, consumer groups, peak bodies, market participants, some market bodies, governments and indeed from civil society.

And it’s really because of this today I wish to give some guidance as to the areas that the Commission believes deserve particular focus.

I would like to nominate five priority areas that the Commission will be focusing on in the coming year.

Just to be clear, we are required by law to address all rule change proposals that are sent to us as soon as practical. But, with the volume of rule changes being submitted to the Commission and the call from many stakeholders to address issues and problems that the national electricity market (NEM) is facing, we believe it's necessary to provide some guidance around the types of rule changes the Commission will prioritise.

The NEM of course is a rather complex beast, or system, that delivers electricity to homes and businesses from Far North Queensland to Tasmania and to South Australia. It was set up in a way to allocate the risk of investment to commercial market participants rather than taxpayers and consumers.

Protecting consumers from these risks and costs is one of the Commission's key objectives when making decisions that are in the long-term interests of consumers.

Perhaps as we manage the issues and the sorts of transitions we are going through at the moment it's never been more important to focus on making energy policy that’s in the long-term interests of consumers.

What does that mean? It means delivering secure, reliable, low cost power for Australia as the system changes to incorporate these new technologies, new behaviours and new expectations on the part of consumers.

Technology and consumer choices, consumer decisions, and consumer preferences of course change continuously. Right now new technologies, perhaps more than anything else, are changing the way the electricity system operates.

A couple of big things worth noting are really the shift from large geographically concentrated electricity generation to smaller perhaps more modular renewable investments; along with widespread adoption by households and businesses of solar PV generation and increasingly of battery storage; and the digitalisation of consumer interactions or the means of those interactions.

Our priority areas of reform will accommodate these and indeed any future changes and disruptions because that's our job, to change the rules as the world changes - but always in ways that deliver what consumers want and need.

So what are these areas?

The first of our priorities is generation access and transmission pricing.

This needs to be reformed because we are moving, as I said, from a small number of large generators concentrated in regions usually with access to nearby coal - to a large number of small generators that are far more geographically dispersed to places where the wind blows or where there is room for solar arrays.

The sheer number of new generators coming on line and the lack of coordination between connecting generators and transmission businesses means generators are being built in places where there is not enough transmission infrastructure to get the generation to the market.

This trend will continue with the decline in the costs of renewable technologies, and changing patterns of electricity demand that will also require complementary – often gas-fired, pumped hydro, energy storage sorts of technologies, plus investor concerns about carbon risk.

There's around 8,000 megawatts of new power generation currently under construction or at financial close, and in the coming years this should place downward pressure on prices.

We are understandably considering how best to support this transition so we can get the best outcome for consumers.

The Integrated System Plan completed by the Australian Energy Market Operator provides a useful starting point for thinking about what the grid may look like in the future. Within the Commission our coordination of generation and transmission investment review, which goes by the very attractive title of COGATI, is considering how to reform the way generation gains access to the market.

Our present access and transmission pricing arrangements presume that transmission is built for and in effect used by consumers -and hence consumers pay for transmission. If the changing nature of generation technology investments means that people are starting to argue that transmission needs to be built for generators, it seems reasonable to ask what transmission investments should be paid for by generators and how.

If we don't reform generator access and transmission pricing on access arrangements, then consumers or indeed taxpayers may end up footing the bill for transitioning towards the grid of the future. Hence we will prioritise rule changes that seek to reform generation and transmission frameworks to try and address these access issues.

The second of our priorities is system security.

Reform is needed in this area because the levels of such things as inertia, frequency control, and system strength have been deteriorating as the generation mix changes - that is the stuff that keeps the system ticking along within its technical limits.

Significant investment in new forms of generation has been positive in that it reduces greenhouse gas emissions from the sector. But the types of generation being installed have different technical characteristics from the types of generation that have been retiring; as referred to before, the coal-fired stations.

Services that were once provided as a by-product of the technology that was producing energy, the sort of positive production externalities, aren't being provided to the same extent anymore.

The system needs these services to continue to operate in a secure state. So there needs to be incentive for participants to invest in the sort of technology and kit that provides these services.

It is this deterioration in system security that actually keeps me awake at night.

This is primarily because, unlike reliability gaps that can be evaluated many years ahead, system security tends to be a rather binary thing: you either have it or you don't.

The statement of opportunities reports and indeed market participants' own forecasts give people fair warning about emerging reliability gaps, and the COAG Energy Council’s retailer reliability obligation will require retailers to address those reliability gaps as they emerge.

But a secure system is one that operates within a fairly narrow band of technical parameters constantly, and there will always need to be the right amount of frequency control, voltage management, inertia, system strength et cetera.

If these parameters are not within the appropriate narrow bounds in real-time the system becomes unstable and of course, as we have seen, some uncontrolled blackouts are indeed possible. We have been working hard with AEMO to address these issues and we have made some significant changes to improve system security frameworks in the last two years. But, even with the significant changes made, it remains a priority area of reform for the Commission and we will prioritise rule changes that seek to reform the way in which security is maintained into the future with our changing power system.

The third priority area is integration of distributed energy resources.

Reforms are needed in this area because consumers’ uptake of distributed energy resources is not just fast; it's exponential. More than 2 million homes are now energy producers as well as consumers. In the March quarter alone nearly 500 megawatts of small-scale solar PV have been installed. Batteries, electric vehicles are also set to be embraced in a greater numbers by households, as costs fall.

So the people that run the power system and distribution networks are coming to grips with understanding how these DER resources are impacting on grid operations and what the waves of change may mean as more and more distributed resources are being installed.

There is an opportunity for policy makers to focus on how these distributed resources can be utilised and how consumers can be rewarded through access pricing and cost reflective or – my preferred term – customer reward pricing. Because, properly implemented, network pricing structures that reward customers by leveraging rules that are in fact already in place would, for instance, allow customers with distributed resources to be rewarded when their resources are integrated in an operational sense with the rest of the system. That in turn would allow all consumers to benefit by lowering the average cost to serve to all consumers.

The Commission is considering a lot of these issues through its electricity networks economic regulation review. We will prioritise rule change proposals that come to us that seek to address the efficient integration of distributed resources into our networks.

The fourth priority area is the digitalisation of energy supply.

Reforms are needed to help consumers take advantage of these emerging technologies. Digital technologies in homes and workplaces are creating significant opportunities for consumers to self-manage their energy that was previously not possible. These smart technologies mean households and businesses can take advantage of things like demand response, and that means the power system can avoid the cost of more resources to service peaks in electricity demand for only a few hours of the year.

In this context the Commission is designing new frameworks to support efficient demand response, embedded networks and stand-alone power systems. Focusing on this priority will allow consumers, through energy service companies, both big and small, to respond in real-time and be rewarded for doing so in relation to what the system actually needs.

Hence we will prioritise rule changes that seek to empower consumers, particularly through the application of these digital technologies.

Finally, the fifth priority area is aligning the financial incentives that operate on market participants and the physical needs of the power system.

The market was set up to pay generators for making electricity when consumers need it. The design of many tools that have been used to achieve environmental goals have broken the link between demand and the financial rewards and costs faced by the generation we need for reliable and secure supply.

This is important because obviously electricity supply and demand needs to be balanced at all times, otherwise things break.

The incentive for sellers to generate electricity when consumers and the power system need it is when spot prices are high or low – this has been blunted. The NEM allows spot price volatility to drive the most efficient dispatch within the wholesale market of course, but generators and retailers manage that risk through the use of financial derivative products, hedging contracts.

Entering into wholesale hedging contracts obviously helps retailers manage their financial risks and have more certainty over their wholesale energy costs, hence allowing them to offer stable retail prices to consumers. They also increase the certainty for generators' revenue streams which then obviously has a flow-on effect to their funding of the business operations and investment.

But it is a particularly important risk management tool for generation companies seeking not only to build a new power station; they also provide very strong incentives for generators to be there when the system needs it most. A generator covered by a swap contract can lose in excess of $14,000 per megawatt per hour if they are not generating when the system needs them.

For a 500-megawatt set, that's the equivalent of in excess of $7 million or the equivalent of burning $7 million per hour for not generating when they are covered by a swap contract.

In other words, the interaction between the spot and wholesale contract prices links the physical needs of the system with financial outcomes. The emergence or the way in which a lot of production subsidies have been structured has broken the link between the physical needs of the system and financial incentives for generators.

As an example, the increased use of contracts that are structured so as to reward the seller for generating as much electricity as possible at any time is the sort of development off the back of these production subsidies that affects this link, this relationship between physical and financial.

We see the need to restore those links between financial outcomes and what the system physically needs. In fact, as an aside, the recent moves by Infigen to firm up their wind resources with a gas turbine to enable them to write swap contracts against a portfolio of resources is, I suppose, one company's response to this issue.

Therefore we will prioritise any rule change proposals that are put to us that seek to align financial incentives with the physical needs of the system.

So, in summary, over the next 12 months and perhaps beyond the Commission will seek to prioritise rule change requests within its broader work program that fit within one of these five areas. I would expect that each year the Commission may again express a view as to which are the priority areas for rule changes, again to provide guidance to people such as yourselves and other stakeholders when they are considering putting rule changes to us.

As I noted earlier, the Commission is required to consider all rule changes as soon as we can. In other words, we cannot and will not ignore rule changes that are made by any of our stakeholders, and certainly, those that come to us as urgent or critical for operational or other reasons will be addressed in a very timely manner. But the transition that's underway in the energy sector means we do need to prioritise our work program to make sure the right questions are addressed in the long-term interests of consumers.

Since the Commission's inception the market design has been subject to a constant process of review and adaption reflecting changing conditions, technologies and government policies. We will continue to do so in the years to come. Someone suggested that the fact that we are up to version 122 of the electricity rules, version 45 of the gas rules and version 17 of the retail rules is one indicator of how these frameworks are fundamentally different now than they were just a few years ago, let alone when the NEM started.

As we manage this change, I would like to suggest it's perhaps never been more important to continue to leverage off the disruptive nature of rigorous competition to drive productivity and, through that, lower costs to consumers.

By that I mean protecting and empowering consumers by ensuring that the commercial market risks associated with investments in these new generation technologies, business models and the like remain with the market participants rather than consumers.

I suppose for our part the Commission is and will continue to work as hard as we can with our counterpart market institutions, so the transition that's currently under way, and will inevitably continue, delivers on our national electricity objective, being the long-term interests of consumers. Thank you.

Laying out strategic priorities for the National Electricity Market

11 May 2018

John Pierce AO

Australian Energy Market Commission

Presented at Australian Energy Week, 11 May 2018, Melbourne Australia

Download a PDF version of this speech.

Thank you Minister, colleagues on the panel, ladies and gentlemen.

We’re all familiar with the technological revolutions that have changed our world: steam; the age of science and mass production; the digital revolution; and now . . . the internet of things . . . artificial intelligence.

What do they have in common?

They disrupt the status quo.

In every case, someone or something triggered innovation.

Edison of course . . . the first large-scale AC hydro power plant of 1895 designed by Edison’s acolyte Nikola Tesla . . . to Elon Musk and everyone in between.

And what are the lessons that we learn from these disruptors? That businesses come and go. Technologies come and go.

Indeed it is this very process that economists…always a cheerful lot…sometimes refer to as “creative destruction,” that is, the fundamental driver of lasting economic growth and progress.

So here we are . . . looking to seize the latest opportunities – from changing energy technology.

What that means is the structure of the energy sector will change along with the way capital is employed and businesses are organised.

This is what always happens when economic growth is driven by technological progress.

This process is of course not without its problems.

In order to manage we need effective institutional and governance arrangements – with regulatory and policy frameworks that put consumers first . . . deliver required protections . . . and then get out of the way of innovation and competition. Because that’s what delivers the services we want at lowest cost.

One of the virtues of workably competitive markets in our current circumstances is their ability to sift through the new ideas, technologies and business models to find the ones that best serve consumers’ interests.

I want to talk about four areas where the Commission is addressing challenges facing the national electricity market in this time of transitional change:

The first is the positive power of retail disruption
The second is using factfulness, a term I’ll explain later, to cut the cost of wholesale market transformation
The third is the need to define and understand the change the market is going through so we can look forward with a clear perspective
and finally, the need to stay the course on reliability reform for the sake of Australian consumers.

First, the positive power of disruption.

For some time the Commission has tracked electricity market trends through two annual reports – which after half a dozen years represent the most extensive body of longitudinal research on retail prices and competition.

Next month we release the 2018 review of retail energy competition. Six months later it will be followed by the annual price trends report. I have to say I take no pleasure in re-reading past volumes of this work and noting how prescient much of it has been.

Keith Orchison put his finger on it this week in his ‘power post’ when he described the context for this year’s Australian Energy Week as “the best of times and the worst of times.”

In a similar vein, the 2017 competition review talked about a “two-speed market.” On one hand, research showed consumers felt they had more choices to manage their energy use and bills – a definite trend flowing from the new retailers entering the market with new business models, more varied products and better priced deals.

Consumers were also optimistic about opportunities linked to new technology:

20% of consumers surveyed had solar panels
21% said they were likely to adopt battery storage in the next two years
18% said they were likely to take up a home energy management system in the next two years.

But while competition can drive innovation and new choices for consumers in the retail market – those benefits have been put at risk.

Why?

Well first, retailers are still too slow in building awareness of the cost savings, concessions, hardship schemes and other essential information that would help consumers pick the offer or product that’s right for them. Consumer awareness of the government’s energy-made-easy power-bill comparison website remains unacceptably low.
Second, because of the undermining effect in recent years of rising costs in the wholesale market which are driving retail prices up.

These two oil slicks are still spreading under the wheels of market transformation.

Staying with consumers for a minute – I’ve been thinking for some time that we need more disruptive leadership in energy retail.

As I said, technologies and businesses come and go and change. Remember, Origin sprang from the demerger of Boral Limited, a brick and construction company; ERM started out building gas plants and then got into retail; Alinta was a major player in Australia’s west, now it’s moved back east and is giving local retailers a run for their money. A couple of years ago who had heard of Powershop, Greensync or Flow Power?

Industry structures and technology will change.

If incumbents get complacent, others are more than willing to have a go at doing a better job for customers . . . as long as regulation doesn’t get in their way.

The impetus for change is strong. We’ve been talking about the acceleration of consumer-led market transformation since we started our power of choice work program in 2012. This redesigned framework helped families and businesses choose new ways to use electricity and manage their bills.

The right foundations for change are in place. The dynamic processes we need are underway. It’s a critical time for market participants to step up.

What you want in the market today is experimentation – and offers of new products and technologies that work for consumers – but what do we see?

Continuing confusion around retail price offerings means most consumers don’t grasp the opportunities on offer. Yet innovation in pricing and new products is starting to happen. New energy entrepreneurs and traditional energy retailers are starting to rise to the challenge.

But progress is at the margins, and not fast enough for consumers wanting to take action to reduce their energy bills.

Just over a week ago the Commission started work on a joint rule request from Minister Frydenberg and NSW Energy Minister Don Harwin. It would require retailers to notify customers in advance if their energy prices are going to increase. This is the fifth initiative from ministers since the Australian Government’s round table with energy retailers last year to help deliver more affordable energy for consumers . . . thank you Minister.

We’ve already made another rule in the ministerial consumer protection package. Since 1 February retailers must give consumers advance warnings to shop around before their energy discounts finish.

Also underway is the ministerial request which seeks to stop retail energy discounting on inflated base rates that can leave customers worse off. And there are two more on the table relating to maximum timeframes for meter installations and improving the accuracy of energy bills by allowing customers to have electricity or gas bills based on their own reading of the meter.

It’s important to have rule requests like these so the power system can respond without affecting the ability of competition to deliver.

But ours is a notoriously complex business. It wasn’t long ago that the UK introduced regulation to restrict the number of retail deals on offer to make their system simpler. Simple yes, but lots of people ended up paying more. It would be simpler to have a one size fits all system for, say, mortgages. A fixed rate mortgage for everyone – how would that go?

But there are areas where retailers can find inspiration.

The telco market has been deregulated for 20 years in retail price regulation. If you count the period of managed competition in mobile phones, it’s been deregulated for 24 years. Yes, that’s very much longer than any of the electricity regions have been deregulated across the states and territories.

Nonetheless, what disrupted that market was Vodafone, which leapfrogged its competition by importing simple plans from overseas and it was game on – giving consumers better deals.

What the electricity retail market needs is a disruptor like Vodafone – to cut the complexity away from retail offers, and make bills easier to understand and compare.

Of course the uptake of technology innovation has been dramatically faster in the telco world – but putting that difference aside, consumers have been very clear, for some time, on what they want and need.

The industry cannot let them down. Our competition review will have more to say on that in a few weeks.

Number two – factfulness and wholesale market recovery.

Have you come across factfulness? I have for a long time followed the work of Swedish statistician Hans Rosling. His last book Factfulness, why things are better than you think -- was published posthumously in April.

He says the mental picture in most westerners’ heads today is that the world is getting worse. He calls it the “overdramatic” world view – and misleading.

The facts say different. Hans concludes the facts of change reveal room for optimism about innovation and mankind’s ability to solve problems.

That resonates with me – especially because energy is a highly complex, deeply interconnected area -- so we need to avoid ideological stances and silver bullets -- to focus on the facts of economic and engineering realities.

In examining issues that are important to the future of the NEM, we have focused particularly on the growing level of intermittent power in the system – and the need to manage the system differently if we want to keep the lights on.

We started this work in advance of the South Australian blackout, and all the market bodies have been working together to make the system stronger, including:

new rules on managing the rate of change of power system frequency by requiring minimum inertia levels
managing power system fault levels by maintaining minimum system strength levels to keep the system stable and
improving guidelines for generating system models to give AEMO and networks the data to efficiently plan and operate the system.

Now there are folk who think just saying intermittent generation won’t affect system security makes it so. The market bodies are united in dealing with the facts of change. And the fact is that while technological disruption will throw up problems; it also brings with it innovation that will help us come up with solutions.

We have a plan in place and we are working with our colleagues at the AER and AEMO to change the way we manage the power system.

At all times we are focused on considering precisely how that transition should occur while keeping the lights on and consumer costs reined in – bearing in mind the more costs you put into the system, the more burden there is on consumers.

We are working through the Energy Security Board, with AEMO and the Australian Energy Regulator to facilitate the shift from a centralised fossil-fuel driven network to one dominated in the future by a decentralised, increasingly intermittent system.

Which brings me to number three: defining and understanding that change.

Defining and understanding the change so we can look forward with a clear perspective has never been more important.

The AEMC’s annual residential electricity price trends review that I mentioned earlier, has reported a roller-coaster effect for energy consumers that is unacceptable, and needs to be addressed by restoring the integrity of price signals in the market.

The power price rollercoaster is being driven by the changing mix of generation, with the proportion of weather-driven power supply rising fast and the closure of ageing coal stations. The failure to agree a mechanism that integrates energy and emissions reduction policy has broken the links that make the market work.

Appropriate investment signals, risk allocation and risk management tools are critical in achieving sufficient and timely investment in the technologies necessary to maintain reliability, security of supply and competition in the retail market.

The efficacy of the price signal is critical to market participants making efficient decisions. This is because short-term dispatch and long-term investment decisions are driven by derivative prices in the wholesale contract market. If this market is influenced by external factors, such as subsidies for particular technologies that are financed by mechanisms outside the NEM, the ability of price signals to coordinate investment and divestment decisions in ways that achieve reliable, secure and least cost supply is undermined.

So our final priority is the national energy guarantee and staying the course on reliability reform.

The national energy guarantee, guided by my colleague Dr Schott, is all about shifting energy policy back to its true focus – the consumer.

It aims to meet emissions reduction commitments set by our governments without putting cost burdens on households and the Australian economy that could be avoided with better co-ordination and more efficient practices.

We’re focused on creating the right investment climate for energy market transformation – and the national energy guarantee is central to that objective. A policy that can integrate emissions and energy policy and deliver transformation, at least cost to consumers, is very compelling.

It’s critical that the nation stay the course on that reform – to provide a mechanism which can adjust to change, whatever the future may bring at the lowest cost possible.

For us staying the course also means:

providing governments with the most sophisticated data-driven advice possible to support their decision-making
identifying least-cost solutions to key market transition challenges – and that list is a long one including responding to:
- world leading levels of renewable energy penetration
- renewable energy zones and connections
- consumer driven demand response in all its forms
- the rise of micro-grids
- smart metering and IT communication challenges
- addressing changing patterns of power usage including electric vehicles
- creating a market that can deliver energy at affordable prices and allow Australia to meet its global emission abatement agreements.
- all just the tip of the iceberg.

At the AEMC we address the here and now through new rules and look to the future through our reviews.

Another key piece of work due in June is the annual networks regulation review which explores options for the grid of the future.

It’s looking at how to support continued uptake of distributed energy resources like solar PV, battery storage and ‘smart’ household appliances that respond to changes in electricity prices.

The COAG Energy Council asked us to undertake this annual monitoring - recognising the importance of providing early warning of market developments that may need to be addressed by changes to the National Electricity Law or Rules.

The energy sector has been in transition before. We got through it with cooperation and clear policy objectives – after all, the national energy governance arrangements were introduced by governments in the first place to address a need for investment and manage the development of a market.

It wasn’t easy then. It won’t be easy now. It won’t happen overnight – but we will be guided by the long-term interests of consumers, analysis, and optimism.

Let’s stay the course.

Ends
Check against delivery

Australian Energy Week Conference 2017 – Speech by AEMC Chief Executive

21 June 2017

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Anne Pearson, Chief Executive, Australian Energy Market Commission Australian Energy Week, 21 June 2017, Melbourne

Introduction

Imagine a world without electricity. That is the line that stuck out for me when I was reading Dr Finkel’s blueprint a couple of weeks ago. And I’ve been trying to imagine it ever since.

I have lived in country where the electricity supply was neither secure nor reliable – the country was in the middle of a brutal civil war. Cutting off electricity supply was a deliberate strategy to wear people down. No power for lighting, elevators, television – nothing at all…and for weeks at a time. But that was Lebanon. And it was 30 years ago.

Trying to imagine the lives of most of us here in Australia today without electricity is harder. Without energy, what would my household be like most evenings? We use electricity and gas for cooking, heating, powering computers, charging iphones and the almighty ipad for essential viewing of the Octonauts and Charlie and Lola.

Electricity (and energy more broadly) plays a key role in the lives of every single Australian. Not just a “nice to have” role – it is essential. Other services – like health, education and banking – cannot exist without energy. Australian businesses depend on energy. In fact, secure, reliable supplies of energy distinguish the first world from the third. It underpins our lifestyles and drives our economy.

This is why it’s so important to have an energy sector that is resilient. And one that delivers what households and businesses want now, and in the future.

Which is a good Segway to my presentation topic for today: “are market mechanisms adequate to facilitate change” – specifically, can markets facilitate the transition to a lower carbon energy system.

The answer is yes….with a twist. But let me unpack that a bit.

Can markets facilitate change?

The changes we are seeing in the energy sector today seem big, but change in the sector is not new. In fact it’s one of the few constants. There is a lot going on in energy – a lot going on in the world.

A decade ago Australia’s population was nearly 20 million. Now it’s 24. The first smartphone was unveiled. Now there are 16 million in Australia alone.

In the NEM 10 years ago there were around 300 generators. Now there are 1.6 million. It cost about ten thousand dollars to put a PV system on your roof. Now you can buy one on your credit card.

2 Some changes have been slower and predictable. Others have not. But change across the economy and in the energy sector is continuous. It’s part of the human condition – to develop, improve, progress. As Benjamin Franklin, one of the American Founding Fathers said, “When you’re finished changing…you’re finished”.

We are never going to be able to predict exactly the types of technology that will “make it”, or how households and businesses will want their energy made, packaged and delivered. We can’t know exactly how consumer behaviour and new technology will impact the energy market. And that is okay.

But this element of uncertainty is why markets are so important.

It’s interesting…people often speak about the “market” like an intangible object that is separate somehow from the people that participate in or benefit from it. But the energy market is actually just a process that allows consumers to choose what they want, and a way of interacting with energy businesses, to get it.

When they are allowed to function correctly – markets deliver a whole range of information about what is needed, and the tools to deliver it. It’s “the market” that will invest to deliver the transition to a lower carbon energy system, and a lower carbon economy more generally.

In the absence of markets, we leave all the decisions to a small group of central planners. We let them decide what, and where to build generators and networks and we let them decide the types of energy services we receive.

Without a market, we also place all the risks (and the costs of any mistakes) on energy consumers or tax payers. Either way, it’s households and businesses that pay. And at the Commission we think that it’s better to avoid this. To use an example from another sector to illustrate the point: Remember the videotape format war of the 80s Beta versus VHS? Since then we have had Blu Ray, DVD, digital TV and who knows what’s next?! Think of the risk taken-on by investors in these technologies! And think of the taxpayer money saved by not subsidising any of them!

How the Commission shepherds change in the consumer interest

So what is our role at the Commission in facilitating this change to a lower carbon energy system? Put simply, we are here to keep regulatory frameworks up to date so that energy markets can evolve in a way that delivers the best outcomes for customers, over the long term. When we amend the rules and provide advice to governments we stick to a few key principles:

Supporting effective consumer choice - so consumers can decide when the value of using energy is greater than the cost of producing it;
Promoting competition where possible and well-designed regulation where it is not;
Creating signals to drive efficient investment;
Acknowledging uncertainty so that instead of making things happen, we create an environment to let things happen if they deliver the best outcomes.

Benefits our market has delivered

So how have these principles helped the market develop so far?

Before the NEM was established, governments were in charge of building enough generators to meet consumer demand. Had these arrangements continued, we would have seen the equivalent of two new Eraring-sized power stations built over the decade. That’s 6000-odd megawatts of generation sitting idle because forecast consumer demand never eventuated.

Instead, the market was introduced, and price signals from the spot and contracts markets drove just enough new generation investment where consumers wanted or needed it. As demand flattened in the early 2000’s, price signals would have slowed generation investment had it not been for various government schemes that supported specific technologies.

On the retail side of things, markets have created choices that would not have existed in a centrally planned system. New retailers, products and services, using an increasingly wide range of technologies, are appearing in the market because of two waves of reforms.

The first was the structural reform of the industry in the late 1990s where the vertically integrated industry was disaggregated and the competitive wholesale and retail markets were formed.

The second wave, was a set of foundations we laid in the energy market rules to drive innovation and consumer choice.

I’m talking about rules that have made it easier:

choose and switch retailers
access and understand consumption data and
receive and respond to price signals

I’ll give you a few examples:

If you’ve got a solar/battery set-up you can find retailers that will use your energy use and generation patterns to optimise your system in line with wholesale price signals.
If you have a swimming pool you can find a bundled offer for electricity, pool equipment and services, that automatically cleans your pool when electricity is cheapest.
There are retailers that will use your consumption data to find the best retail offer out there, and automatically switch you when savings are available.
If you’re a real energy junkie, you can sign up with a retailer that gives you real-time usage information so you can turn appliances on and off remotely from your smart phone.

Most Australian consumers can get all this and do all this because we have an energy market that puts them in the driver seat if that’s what they want.

By carving up the supply chain to encourage competitive generation and retail sectors, we are saying to energy businesses “consumers are paramount, go and fight for them”.

By regulating monopoly assets we’re saying – “be as efficient as possible so consumers can use you, but must not pay more than necessary for the privilege”.

By putting governments in charge of policy, but giving the rule making, system operation and regulatory functions to separate bodies, we’re saying “this sector needs to be able to adjust continuously and predictably, so here are some specialist agencies to make it happen”

By giving everyone – industry, consumers and governments alike – the ability to suggest and help design new rules, we’re saying “you all need to play your part to make this work, now and in the future.”

Markets shortcomings and overcoming them with careful use of regulation and good governance

But at the Commission we don’t just blindly accept markets. We support them when the evidence shows they deliver the best outcomes for consumers. And we make tweaks when they don’t.

Markets tend to offer the most efficient and lowest cost way of discovering what technologies and services work best for consumers, and shepherding change in that direction.

But we acknowledge that markets suffer when there is information failure, inadequate competition, or other factors that distort price and other important signals. There are a range of tools we can and do use to overcome these without wading in boots and all and taking over:

Information and reporting requirements can even-out the playing field and increase transparency.
Facilitating negotiations and interactions between participants to minimise the likelihood of disputes and stalemates
Also, Short term regulatory obligations can be used as a stepping stone to transition to market mechanisms in time.

You would have seen these mechanisms (and more) applied in our work at the Commission. For example:

We are making more information available on the gas bulletin board – and making that information easier to access and interpret.
We have introduced an independent expert into the transmission connections process, who will help solve issues between parties before they escalate.
In our system security work we are looking at regulating the level of inertia to maintain the stability of the power system in the short term until new services develop over time and the market can take over.

However, each time we use one of these regulatory tools, we have to think “how much extra cost, and how much extra risk will consumers have to bear as a result of this?”.

That’s the key trade-off: we could regulate everything, but it would be more expensive and it would stifle innovation……We could regulate nothing, and consumers would be completely exposed. So we have to strike a balance.

Going back to the original question – can markets deliver change? Yes. Markets are a low cost way of shepherding change while encouraging innovation. Are they perfect? No. So we use regulation when the market – for whatever reason – is not delivering outcomes that benefit consumers.

We have been doing that since energy markets started in Australia (and indeed regulation is used in similar ways to support many other markets).

Decision making processes

The question then becomes less about whether markets can deliver the necessary transition, and more about whether our market structure – which includes the decision making and governance processes – can deliver it.

Based on my experience to date, my answer is also yes.

Just as we have overcome technical and geographical challenges in the past, we are confident that the processes and decision-making responsibilities set out in our market structure will support the transition underway right now. But it relies on each of us playing our role and sticking to it.

Governments set the policy parameters. This is a critical function that they must do. Given the essential role that energy plays in our economy more generally, it is no surprise that the “energy experience” is, and must be, affected by things that sit outside the energy market rules, and outside the energy portfolio. And governments are in the hot seat when it comes to making these cross-portfolio trade-offs. It is their job, and they are best placed to do that.

Using energy market design to help deliver other objectives.

Over time we have seen how other policy objectives have affected how households and businesses get, use and pay for energy. In the past it has been social policy, and environmental planning. Right now it is emission reductions.

The way in which these external objectives are pursued, has implications for how effectively the energy market can work in the long term interests of consumers. As our markets have become more sophisticated, it is more critical than ever to think about how external objectives will impact energy markets.

That’s not to say external objectives should not be pursued. It is about how they are pursued. Let me unpack that it a bit.

If the instruments used to achieve social or environmental objectives are compatible with the way energy is bought and sold, the market can continue to deliver secure reliable energy at lowest cost.
If the risks of investing to meet that social or environmental objective are allocated to the parties most able to manage those risks, then customers won’t have to pay for other people’s mistakes.
If policy mechanisms used to meet these other objectives don’t depend on a single version of the future, then the energy market will find the best and lowest cost way to meet it, and meet consumer needs as well.

We call this “integration”: Using the fundamental elements of the energy market to help deliver other, clearly articulated objectives.

At the Commission, we consider that the market processes of experimentation and discovery can support the lowest cost transition of the energy sector even while pursuing other external objectives.

Working together to support the transition

It’s clear however that the challenges we are facing right now are complex. They are interconnected. Some of them are urgent. And some serious coordination across governments and energy institutions is needed to support the transition.

There is an expectation that regulatory frameworks will respond to change in a more timely manner. The three market bodies – the Commission, the Regulator and the Operator – are keenly aware of this. We have always worked together to deliver the reforms customers want and expect. But we recognise the need to do this better.

And so we’ve set up a formal structure for sharing information, identifying issues and coordinating responses to actions in relation to priority energy matters. Collectively we will be able to provide a whole-of-sector perspective, and enhance the quality of advice going to the COAG Energy Council.

We need your help.

But market bodies and governments are not the only ones with responsibilities. In Australia, we have a unique governance framework that provides a role for market participants, consumers and all other interested parties. Having moved away from the allknowing central planner model, you all play a role in helping our markets evolve to benefit consumers.

When the Commission was first established, we used to get a handful of rule change request each year and we’d work with an equally small number of stakeholders to make them.

We’ve now made more than 220 new rules, we have hundreds of stakeholders, and it is a consumer – not a government or market body – that has suggested one of the biggest changes we have considered in many years – a move to 5 minute settlement of the spot market.

On the practical side, the Operator is continually adapting the way they run the system to accommodate new technologies, incorporate new information and deliver the actual changes in the system that are contemplated by the regulatory changes.

The Regulator has had its role expanded over the years to correspond to the increasing engagement from consumers. They have taken on consumer protections, monitoring of the wholesale market and new responsibilities when it comes to network regulation.

None of this has been easy or straight forward. And nor should it be.

Conclusion

In conclusion my mind turns again to another American – I have just returned from the US! In relation to going to the moon President John F Kennedy said: “we do these things not because they are easy, but because they are hard. Because the challenge is one we are willing to accept. One we are unwilling to postpone.”

I’m not suggesting we are going to the moon, but this quote is appropriate for many challenges. Change, transition, disruption - whatever word you want to use for it - will continue in the energy sector. Adapting the formal arrangements to keep up with the change is sometimes complex, its technical. It’s certainly interesting.

There are nine different governments, a good number of institutions, and many more stakeholders all trying to deliver the best outcomes for customers – and all with a different opinion of how to do it.We could go back to a more centralised model, allowing decisions to be made by a select few, with the rest of us just accepting our fate. It might be easier….

But the easy way out will not deliver the best outcomes for consumers, especially in the longer term. So, like JFK so aptly said: we don’t do things because they are easy.

We do them because energy is fundamental to our economy, to essential services, to jobs, businesses, households…to people’s lives. It’s worth making the effort…taking the harder path.

That’s what I think about every day. It’s what our 85 staff at the Commission think about.

It’s why we are intent on working with all of you to shepherd change through energy markets. To deliver the best possible outcomes for consumers, no matter what the future is.

Ensuring the regulatory framework facilitates competitive and efficient energy markets in a time of technological change

21 June 2016

Address by Australian Energy Market Commission Chairman Mr John Pierce delivered by AEMC Chief Executive Ms Anne Pearson Australian Energy Week 2016, 21 June 2016, Melbourne Australia

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Introduction

In 1879, Thomas Edison became famous around the globe. The American wrote his name into history by inventing a commercially viable version of the electric light.

Equally well known was Edison’s one-time employee and rival, Nikola Tesla, whose discovery of alternating current allowed for the safe transportation of electricity over long distances.

Tesla also designed the first large-scale AC hydroelectric power plant at Niagara Falls in 1895. This marvel of engineering provided consistent power to the city of Buffalo in upstate New York. Imagine the citizens of Buffalo - staring in wonder at the world around them - houses and public buildings lit up in the dark for the first time.

So why this glimpse back into history?

Because once again an energy revolution is happening . . . in renewables; in storage . . . in information management . . . and in the increasingly multidirectional nature of the flow of energy.

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.

Today there is an amazing and growing range of technologies and energy service options for consumers to choose from.

What’s new in this latest chapter of the energy story is that technological change is allowing consumers to choose how that energy is delivered and used.

What’s not new is technological change itself – which has been a characteristic of the sector since Edison and Tesla.

The major shift is that technology is enabling a devolution of decision making. It is providing consumers with options and choices. And how they exercise these choices is driving the development of the sector.

However, to take advantage of changing technology, the structure of the energy sector has to change. This means changing the way jobs are done; capital is employed; and businesses are organised. This is what always happens when economic growth is driven by technological progress.

We’ve experienced this in the past in the energy sector and we’re going through it again.

So with this in mind, my intention today is to explore with you:

why a consumer-driven market lies at the centre of all the AEMC does;
how Australia’s energy market framework has been designed and continues to evolve in response to choices made by consumers; and
where this framework leads us to when it comes to drawing the line between competition and regulation.

1. Why we champion consumer choice - an argument for markets

So decisions that drive investment and deployment of particular technologies are increasingly being devolved to consumers; and consumers are making choices based on their own interests or values – whatever those interests may be.

And the question becomes: what are the coordinating mechanisms that mean the sum total of all these choices leads to an efficient, safe, secure and reliable energy system?

It’s important to stress that the market is only able to embrace consumer choice and the current wave of technological change because of foundations laid in the 1990s by the design of the competitive wholesale market and more recently by the Power of Choice reforms.

How so? The fundamental change effected by the introduction of the wholesale market was a shift in the allocation of risk.

Before the wholesale market was established, generation investment risks rested with consumers because these investment decisions were made by monopoly utilities.

When monopoly utilities got it wrong they passed the cost of their mistakes on to consumers.

After its establishment, generation investment decisions became the responsibility of competing businesses.

Now the future is, by its very nature, uncertain.

Business may not be any better or worse than government in second guessing the future path of technology or levels of demand.

But competition transfers risk from consumers to business when competing businesses bear the responsibility for good or bad investment decisions – and bear the responsibility for subsequent success or failure of their business models.

It was these same basic insights that underpinned the 2012 Power of Choice reforms.

Specifically:

that market and regulatory arrangements are fundamentally mechanisms for allocating risks between parties;
that technological developments are enabling consumers to have more control over how their energy is sourced and used; and
that consistency of risk allocation between the wholesale commodity and retail services sectors is required in order to coordinate the emerging energy ecosystem so it is efficient, safe, secure and reliable.

The Power of Choice reforms are the fulcrum upon which a competitive retail energy services sector is able to develop.

2. How we have designed a framework based on choice

Let’s now turn to how the Commission has supported the COAG Energy Council’s development of a policy and regulatory framework that sustains consumer choice and technological transformation.

It’s important to start with some of the key principles that do enable choice. First and foremost this is all about establishing rules that neither favour nor prevent particular technologies from being used.

The Commission does not seek to pick winners. We’re agnostic on the question of whether any one technology is superior to another. Instead, our goal is to create a market framework that can respond to any future scenario in terms of energy demand, changes in technology, costs, and so on.

We’ve spent a great deal of time thinking about how to design a framework that is technologically neutral – one that can equally accommodate existing technologies and those not yet in existence, as well as environmental requirements determined by government.

These are now the focal point of a maturing market framework . . . designed to put consumers first.

But the reforms are designed to fit together. To finish the consumer-led transformation of the energy sector, we need to stay the course on the reform package in its entirety.

To extrapolate on what this means, let’s unpack three key reforms and look at how they interrelate.

The first piece of the puzzle involves network pricing reform.

From 1 July 2017, networks will have to structure their prices to better reflect the consumption choices of individual consumers.

For the networks, this means tariff reform. In other words, structuring prices to reflect the costs associated with providing a particular service to a particular customer.

For example, household A and household B might look the same on paper. They have likefor-like incomes, live in the same climate and have an identical number of family members. But because they have different appliances; lead different lifestyles; or even have different attitudes towards their household budgets; they are likely to consume electricity in very different ways.

Thanks to network pricing reform, these two households will be able to see the dollar value of their consumption choices.

The role of the networks is to provide cost-reflective pricing. The retailers’ role is to take wholesale costs, network charges and other potential energy services such as distributed generation or energy management systems, and package these up for consumers. In many ways, their job is to be the consumers’ agent for dealing with the rest of the system.

Successful retailers are those that offer the most attractive packages to consumers. And remember in this new energy environment, the term retailer means any business that comes to market offering energy services. Because consumers are so different, we should expect there to be great diversity in the products, services and tariffs offered and taken up.

Consumers choose between fixed and variable mortgages with different terms in the financial sector; and they choose from a range of mobile phone packages in the telecommunications sector.

Network pricing reform in the energy sector is about sending price signals to consumers – and more precisely to competing retailers – about the cost of using the network in different ways and at different times. This means consumers can make the consumption choices they want to, while allowing co-ordination of the various elements of the energy supply chain.

Our second key reform follows logically from the first.

To allow consumers to be provided with retail offerings they value, we need a coordinating mechanism that allows information to be passed between different players in the sector.

That’s why we instituted rules in November 2014 to make it easier for consumers to obtain information from networks and retailers about the electricity they’re using . . . and to obtain this information in a simple, affordable and timely way; because choice means nothing if consumers don’t understand the information they’re given.

Finally, consumers need tools to make use of the information now available.

That’s where the third piece of the puzzle – metering reform – comes into play.

This reform paves the way for the competitive provision of advanced metering services for residential and small business consumers.

This approach is guided by the principle that competition is more likely to drive innovation and facilitate deployment of advanced meters and services to consumers at the lowest possible cost.

More advanced metering technology gives consumers greater choice and control. With the right technology, information and price signals, they are better able to make decisions about what retail service offering they decide to take up.

To sum this up, the Power of Choice reforms are intended to ensure a resilient, technologically-neutral energy market is created . . . a market that can adapt to whatever the future might bring.

These reforms were difficult to institute.

But they were made possible thanks largely to the quality of the engagement on energy market reform, which is significantly more sophisticated than it was 20 years ago – or even 10 years ago.

The Commission provides all stakeholders interested in energy market reform with a unique platform to come together and debate the pros and cons of market rules. Any individual or organisation . . . public or private . . . any incumbent or new energy service provider . . . may request a rule change or participate in our consideration of stakeholder rule requests.

It is a robust process that rigorously tests not our thinking – and the thinking of everyone else who participates in the consultation process.

3. Drawing the line between competition and regulation

So Australia has made significant progress. More innovative products and services are being offered into the rapidly developing energy services market than ever before. Consumers are benefiting from the new options available to them.

For example, they can now monitor the electricity they are using in real time. Understanding time-of-use pricing is revealing new ways for them to save; phone apps are giving easy access to detailed usage data; and remote access technology is allowing them to turn their appliances on and off when they’re away from home.

And for those of us that want to keep it really simple and just pay a fixed amount per month, well that option is also available.

While consumer choice and protection must remain a focus, in the face of this transition we maintain a fundamental principle of the original reform program. It is only where competition cannot deliver consumer benefits that economic regulation should be contemplated.

Our country’s regulatory model draws a distinction between the operating space given over to the monopoly functions of the network – which should remain subject to an incentivebased regulatory regime – and the operating space that can be given over to competition.

If we agree that creating the most competitive energy services market possible is good for consumers, it follows that networks should not be able to use their financial clout, or the information they’ve gathered as network operators, or the timing of their access to that information, or the processes they control; to construct barriers to entry for potential competitors.

The Commission is especially wary of proposals that seek to use regulation to impose particular solutions or technologies on consumers.

Imposed solutions don’t just decrease competition. They also tend to result in consumers, rather than the energy providers themselves, bearing the risks associated with deploying technology.

For example, networks may have an incentive to make network connections onerous and costly if they have a competing business interest in distributed generation or storage.

So for the purpose of drawing the line between regulation and competition, storage, for example, should be considered a contestable service. (That is not to say that networks should be prevented from buying support services from battery operators where that is a lower cost solution than network investment.)

Storage technologies like batteries are a good example of how new technology more broadly can trigger re-thinking on where regulated functions stop and competition starts.

Batteries store and discharge energy. That’s not a particularly novel function (think about what a hydro dam does). What makes storage interesting today is its potential to perform a number of functions and possibly generate multiple value streams. This potential to be many things in the market is central to the thinking that underpins which services should be contestable and which should be regulated.

Let me illustrate this with an example.

Addressing the intermittency of renewable generation is one of the drivers behind storage facilities participating in the wholesale market.

This is an exciting development as we seek to successfully transform the electricity sector to result in a less carbon intensive future.

A project called Energy Storage for Commercial Renewable Integration, sought to test whether storage assets could be used to take advantage of the significant amount of energy generated overnight at AGL’s South Australian wind farms.

The project’s aims were to:

• support the National Electricity Market with frequency control services and black-start capability for coal-fired power stations;

• provide value to ElectraNet’s transmission network in South Australia by managing peak load or deferring potential transmission capital upgrades; and

• allow increased use of renewable generation within the network.

The project is a sophisticated example of collaborative, comprehensive testing which takes the right approach to investigating the possible benefits of grid-scale storage. As the network service provider, ElectraNet addressed how the proposed storage system would interact with the network and its regulatory framework while AGL assessed the wholesale and retail market benefits.

Today, new energy service providers are coming to market almost on a daily basis with offers of home battery systems.

Tesla, the California-based Enphase Energy, and Sydney-based Infratech are just some of the players we see emerging in the retail space or forming partnerships with developers to build housing developments that market the promise of cost savings from “energy autonomy.”

Given the range of players out there looking to develop products and services for consumers – and taking the risk on whether particular technologies and business models will be successful – there does not appear to be any market failure that would suggest you need regulated entities to be offering these products and services to consumers directly.

The mistakes made within our own sector in past decades have taught us that innovation is driven by competition. It was the Roman poet Ovid who said, “a horse never runs so fast as when he has other horses to catch up and outpace”.

Regulated entities, including networks, should only be allowed to own contestable products and services if this can be done in a way that enhances the development of a competitive retail energy services sector.

At this point I would have to say that this is a big “if”. It has yet to be demonstrated that network businesses are able to operate in this space without damaging the development of a competitive energy services sector that benefits consumers and has an appropriate allocation of risks.

The stakes are high in getting the line between regulated and competitive right. More than 1.5 million households in Australia now have rooftop solar. Combine this with the possibilities of battery storage, and Australians have the opportunity to produce and consume their own power – and participate in the energy market – like never before.

Given this situation, our objective should be to allow the competitive energy services market to expand and can continue to drive innovation and choice. This is a complex area, but more work is being undertaken in the coming months to provide stakeholders with clarity and guidance.

First, we’re expecting a rule change request from the COAG Energy Council that will ask us to clarify how the rules create separation between what is a regulated service and what is a contestable service.

Second, the Australian Energy Regulator has begun to develop an electricity distribution ring-fencing guideline that will apply across the National Electricity Market.

The AER has released a preliminary position paper, which includes case studies showing how the new ring-fencing guideline may be applied. It’s worth noting that the guideline will result in a move away from state-based ring-fencing arrangements towards a national approach.

Conclusion

Ladies and gentlemen, thank you very much for your interest and attention today.

In conclusion, I return to the title of this presentation - “a time of technological change”.

As a community, we’re not always good at fully comprehending the implications of change, especially when it is happening all around us.

It’s often only with the benefit of hindsight that things become clear.

For example, email usage only became widespread in 1996. Even then, there was no YouTube, Google, Twitter, Facebook or Wikipedia. Today, it’s hard for us to let a day go by without using these services.

Against this backdrop of technological change, the Commission has been – and continues to be – focused on facilitating competition to enable the adoption of change and the development of a flexible and resilient market framework.

We’ve acted to manage change as it happens. And we’ve adapted to ensure we are ready for changes still to come.

The industry has come a long way and, as already mentioned, recent reforms have built on the early foundations based on a consistent framework for risk allocation, competition and its associated efficiency benefits.

But who knows what awaits us? Who knows what technological breakthroughs in renewable energy, in storage, in electric vehicles, or in distribution might arise?

Whatever happens, with the AEMC working with the COAG Energy Council and all of you to support the successful transformation of the sector, we are confident that the settings are in place for winners to reveal themselves, driven by consumer choice.

Thank you.

END

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