Building a broad dialogue on power system transformation

31 July 2018

Anne Pearson

Australian Energy Market Commission

Presented at Australian Clean Energy Summit, 31 July 2018, Sydney Australia

Thank you to the Clean Energy Council for inviting me to be part of today’s panel discussion.

As this historic move to a lower emissions energy system continues, the concept of social licence is more relevant than ever.

Of course a critical aspect of the social licence relates to how impacted communities may react to new energy infrastructure in their area. The best practice charter released yesterday is to be encouraged, reflecting that energy service providers need to do more than comply with legal requirements.

But I see social licence in energy as a bigger concept. Moving beyond the affected communities, it’s also about energy consumers generally having confidence that the challenges of the transition are being addressed. Because energy is an input to every aspect of our personal and working lives. We need it to live comfortably and to support our livelihoods – to do all the things we take for granted – such as keeping us warm and in work.

Consumers want to know that while our generation is becoming cleaner through this technological transformation, it will still be secure, reliable and safe, and affordable.

That was brought home to me this morning when I attended the NSW Energy & Water Ombudsman’s ‘bring your bill’ day in Campsie, Sydney. From 8.30am there was a steady stream of consumers coming through the community centre doors. They were all seeking assistance to understand their consumption, how they could manage it better and how they could manage their bills. The social licence needs to cover these consumers too.

Part of that responsibility falls on governments and regulators –

to remove barriers to new and innovative technologies, and to provide predictable processes for investors – while maintaining appropriate protections for consumers.
But importantly, the other part of that responsibility lies with industry – particularly those offering innovative and exciting, but also disruptive, products.

For new technologies and business models to succeed, the power system and the energy market needs to deliver for all customers.

It’s no good offering the latest, greatest technology if the power system is not resilient enough to deliver it to consumers. It’s no good having the perfect niche product, if the market is not competitive, or customers are not empowered to choose it. Just as an aside at the ‘bring your bill’ session this morning a number of energy service providers also attended, providing direct assistance to consumers on the spot, addressing their concerns. The look of relief on the faces of some individuals after they left the retailers was really something, very powerful indeed. A great way to gain social licence indeed.

This is important. Your success will spring from the successes of the power system and energy market more generally.

As governments and regulators do their bit to create a stable investment environment, you – the industry – need to be part of the big picture discussions and actions to help the power system transform from what it is today, to what we want it to be in the future.

Australian households and businesses are in the midst of these major changes that are underway.

And no longer are they a homogenous group of passive consumers.

Consumers can manage and monitor their consumption and alter their behaviour in response to price and other signals.

They can be power producers – and in the future they will also be able to contribute to strengthening the power system to which they are connected.

But this can only happen if policy and regulatory bodies work with service providers to make consumers feel confident enough to venture into and be part of this new world. There is still a very wide range of experience in the market, whether as an active participant in the way I just outlined, or as a passive consumer in the traditional sense, and sadly there are still the disempowered, most vulnerable consumers which have been of great concern to us.

Consumers need to know that the power will be there when and where they need it because energy is so fundamental to our lives.

To win consumers’ confidence we must change how we manage the system.

We need to make sure that the engineering or the technical operation of the power system can accommodate the rising level of renewable.

That isn’t easy or straight forward.

That is not to say that change is not welcomed. Just because something is hard doesn’t mean it’s not a good idea. However, we always need to be careful about how we manage change so least cost solutions can be put in place so consumers don’t pay more than necessary for certainty of their power supply.

The appeal of simplistic solutions over pragmatic actions based on rigorous analysis can be strong when things are changing quickly.

And that’s where the AEMC plays an important role.

We adapt the regulatory frameworks so that consumers are protected and the cost of transition is kept as low as possible.

We recognise the power system is changing and we are working through what the power system needs to support this.

We are also going through the rules to remove any barriers to new technologies and business models.

We’ve done a number of things recently – through new rules changes and review - to support this transition and help build consumer confidence that our power system can transform in a way that won’t compromise security, reliability and affordability.

Just last week we released a package of reforms that deals with the ‘nuts and bolts’ stuff that doesn’t grab headlines, but is nevertheless vital to supporting the changing generation mix so everyone can be confident about the certainty of electricity supply.

We’ve also released a package of consumer protection rule changes designed to deliver more affordable energy by giving consumers more control over their energy bills and their plans. And we know how important these changes will be for consumers. Our 2018 Retail competition review, released in June, found consumers are increasingly motivated to change the way they use and access energy to take control of their bills. And they now have the tools to do it.

Also, on 1 July we saw a number of retailers passing on falling wholesale prices – very positive to see but clearly just the start of what retailers need to do to regain the trust of their customers.

Our competition review showed consumer trust in the energy sector at historic lows, driven not just by price but a lack of transparency over pricing.

More broadly, the AEMC’s review is a reality check that everyone involved in the energy sector – market bodies, governments and industry (new and established participants) – all need to work better, faster and more creatively to deliver for consumers.

For the AEMC, it highlights why we must remain focussed on the bottom line objective of providing the best outcome for consumers in all of our rule changes and reviews, and we need to avoid introducing measures that impose unnecessary costs on families and businesses.

So that’s point one. Building consumer confidence across all aspects of the energy supply chains, builds social licence – it’s a necessary foundation for it.

This brings me to point two.

As the rule maker, a key part of what I believe underpins our social licence to operate in energy markets is stakeholder engagement.

Stakeholder engagement is at the heart of the AEMC’s work.

In this rapidly changing environment, the information we gain through effective stakeholder engagement enables us to be more creative and flexible in the way we adapt our frameworks through rule making.

While many of the issues we deal with are undoubtedly complex and granular in the technical sense, it is vital that stakeholders understand how the energy market operates, why it is regulated the way it is, and the reasons for our decisions and recommendations. This helps inform their feedback to us.

To do this, we aim to show how our work fits into the bigger picture, and how it aligns with work being undertaken by the other market bodies – the Australian Energy Regulator, Australian Energy Market Operator and the Energy Security Board.

We strive to present our advice and reports in ways that are clear, concise and easily understandable.

This makes it easier for stakeholders to challenge and test our thinking – which we encourage them to do.

Given our statutory role, the AEMC must provide a fresh, evidence-informed voice in the public conversation about energy. Responding to stakeholder feedback, we are communicating in ways which are more accessible such as webcasts, workshops, infographics, twitter.

It’s also worth drawing attention to the fact that our system here in Australia offers everyone the opportunity to help design new rules for energy markets. Indeed it assumes that will be the case.

Anyone, from industry to governments, to private individuals, can submit a rule change request.

In fact, a number of our consumer protection rule changes were submitted by private individuals.

And one of the most fundamental changes to the rules - Five minute settlement - was proposed by Sun Metals, a zinc refinery.

There are two things that I would say to any stakeholder:

If you see a problem with the rules and you think you have a solution – put in a rule change request. Even better, ring us and talk to us about it first so we can give you a sense of the type of reasoning and evidence that helps us assess whether the changes requested would be in the long term interests of consumers.
Second; get involved in our consultation processes.

Your involvement helps us develop better and longer lasting frameworks it’s a much richer, informed process when we have your diverse input. The process relies on stakeholders to highlight issues, explain technicalities and offer up solutions.

With the help of your critical input, we continue to adapt the regulatory framework to reflect the sector’s experience and growing knowledge about innovations like demand management options and the ability of virtual power plants to improve the stability of electricity supply.

In the same way, we get consumer groups involved in making rules about consumer protections.

This open, transparent and consultative framework was set up to give everyone an opportunity to be involved in reform.

It has the added bonus of providing a level of investment certainty – everyone knows we’re not going to secretly go and change the rules.

And while not everyone will always agree with the final decisions we make, we will always justify these so you know why we’ve landed on a specific outcome tailored to address specific problems in least cost ways.

So in my view, it’s a combination of things that build social licence in the energy sector:

We have to build confidence in energy markets by delivering what consumers want, and what the system needs, as the power system changes.
And we have to actively engaging with stakeholders on how the market develops.

This will underpin community acceptance of the changes underway and ultimately the social licence to operate to provide that fundamental building block of modern life – a stable energy supply.

Thank you.

Ends
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ACCC/AER Regulatory Conference 2017 – Panel Remarks by AEMC Chief Executive

28 July 2017

In a breakout panel session on day two of the ACCC/AER Regulatory Conference in Brisbane, AEMC Chief Executive, Anne Pearson, spoke about the Commission’s support for markets when the evidence shows they deliver the best outcomes for consumers.

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

Ms Pearson acknowledged however that markets suffer when there is information failure, inadequate competition, or other factors that distort price and other important signals. She gave examples of the regulatory tools the Commission uses to address energy market failures, saying it’s all about balance:

“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.”

Full speech

Anne Pearson Chief Executive, Australian Energy Market Commission

ACCC/AER Annual Regulatory Conference

Day two: Panel session

Download a full version of the below.

Achieving the electricity industry of the future 28 July 2017

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Markets facilitate change

Faced with a regulatory-dominant audience, I wonder how many of you share my sense that ‘market’ is becoming a somewhat unpopular word. In response to any scepticism about the role of markets, I would agree that questioning what they can achieve on their own is valid.

Markets do have limitations – or failures as economists would say. It was ever thus.

So I do risk repeating messages that you may have heard before from the AEMC and many others.

Our role at the Commission is to keep regulatory frameworks up to date so energy markets can evolve in a way that delivers the best outcomes for customers, over the long term. Our approach adopts a few key principles:

supporting effective consumer choice;
promoting competition where it is possible and well-designed regulation where it isn’t;
creating signals to drive efficient investment; and
acknowledging uncertainty, so that instead of trying to make things happen we create an environment to let things happen if they deliver the best outcomes.

In our experience to date, markets offer the most efficient and lowest cost way of discovering what technologies and services work best for consumers, and shepherding change in that direction.

We can see evidence of this today with new energy service providers entering the market taking advantage of an increasingly wide range of technologies, products and services so that customers can get what they want. Yesterday I went through some of what is available by the likes of GreenSync, Power Ledger, Telstra and Honeywell, as well as the traditional energy retailers.

We have an energy market that puts consumers in the driver seat if that’s what they want and we set up a regulatory framework around them so it supports what they choose rather than dictates what they are given.

Markets are not perfect

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

We have been doing that for many years in energy. And the same approach applies in other regulated markets such as financial and telecommunications.

Like I said at the start, markets tend to offer the most efficient way of evolving…Of discovering the things energy consumers want, in the quantities they need, and delivering these at the lowest cost.

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. And we do use them. I have some examples that highlight the Commission’s approach.

We use information and reporting requirements to even-out the playing field and increase transparency – recently we’ve done this for transmission.
We facilitate interactions between participants to minimise the likelihood of disputes and stalemates – Again recently done in the context of transmission - we have introduced an. But one of the more obvious and very successful interventions is the creation of industry ombudsman schemes
Short term regulatory obligations can be used as a stepping stone to transition to market mechanisms over time.
Finally, transition periods more generally are a good way to manage expectations and risks.

A recent example of these last two approaches can be seen in our current work. System security – the ability of the power system to remain stable as demand and supply fluctuates – is a hot topic. We have proposed short term regulatory obligations for inertia and system strength to keep the light on now, but with an intention to transition to market mechanisms in time.

Ideally, we’d use a market mechanism to value, buy and sell these security services, to keep the power system stable – whether that be inertia from large spinning generator or fast frequency response services from new technologies like batteries. But the variety and depth of technology to required provide these services is not there yet -. So we have put in place a regulatory fix – a minimum level of inertia - until the range of technology develops for a market mechanism to take over.

We are also considering future changes to align dispatch and settlement in the NEM in our five minute settlement rule change. While the genesis for this rule change was different, the proposal is relevant in light of the changing generation mix. More intermittent generation requires certain technologies to provide system security. It is increasingly important that the market design provides the right signals to value these technologies.

Our approach to Five Minute Settlement recognises the disruption a move from 30 to Five Minute Settlement in the spot market would bring, for example:

existing IT systems,
infrastructure such as data recording devices and
hedge contracts.

So our initial view is that, if we make the rule, to provide a transition period of three years to minimise these costs and risks.

Balance

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.

We also have to allow time for developments or interventions in the market to be understood before layering on further measures.

Going back to the key questions, can markets deliver, or do we need regulatory intervention to get us to move to a better future? The answer is yes to both.

Markets are a low cost way of shepherding change while encouraging innovation.

Are they perfect? No. And carefully designed and implemented regulation is the answer to that.

ENDS.

ACCC/AER Regulatory Conference 2017 – Speech by AEMC Chief Executive

27 July 2017

ACCC/AER Annual Regulatory Conference 27 July 2017

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There are two, seemingly contradictory, stories to tell about innovation in energy. To quote from Dickens’ A tale of two cities: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…”

At the large scale generation level, we have seen substantial retirements in SA and Vic, much of it baseload with properties that help keep the power system stable or secure; and providing a source of hedge contracts which help support investment and manage risks.

However, new generation is entering the market underpinned by schemes such as the RET. And currently, the characteristics of this new generation are different from those associated with the exiting generation; particularly in terms of system stability and hedge contracts.

We are addressing the former.

Our security and reliability work involves the development of markets and other mechanisms to provide a whole suite of services to support the changing mix of generation. This work is being done in close co-operation with the other market bodies to deliver the required regulatory reforms.

But this will not address all of the gaps. The absence of certainty around emissions reduction policy is challenging for investment. This environment has caused Governments to feel increased pressure to step in to underwrite investment in some way, and we have seen recent examples of such action.

The other end of the supply chain tells a different story. The smaller scale generation/distribution end is vibrant, dynamic and multi-dimensional.

The flourishing of diverse energy services and products being offered to, and taken up by, consumers is building an emerging landscape of grid flexibility.

However, a note of caution, the unresolved gaps may threaten the progress being made, and the benefits that consumers may receive.

But my focus for today will be on our market design initiatives to support the smaller scale generation and distribution side. This work continues to deliver a greater focus on consumer outcomes through supporting:

effective competition;
efficient investment; and
transparent price signals.

We can all see the difference in how we engage with services available through our mobile phones compared to when telephony was a copper wire land line service.

In the same way, energy service providers can give interested consumers more opportunities to engage and make choices about the energy services that suit them, i.e., consumers, best.

We are told that our car choices reflect our personality. I would suggest that in the not too distant future, our energy choices will do the same. Energy service providers understand that.

They are targeting their offers to reflect the way we want to access, use, generate and store electricity; and, increasingly how we, as consumers, want to feel about all of this.

Embedded networks offer an interesting case study into the new ways of providing basic energy services. Embedded networks are smaller, private networks within a larger network – traditionally a caravan park or shopping centre.

As a long term resident of Sydney, you’ll forgive me for a real estate digression. Many new residential developments are embedded networks.

Increasingly, the marketing emphasis for these developments is less about the number of bedrooms, or Caesar stone kitchen bench tops, and more about the opportunity to be part of a community. The opportunity to choose a sustainable life style with water-recycling and renewable generation on site, sharing power, harnessing energy from the sun, and so on goes the marketing.

Ten years ago, we would not have imagined that a transaction as dry as electricity supply could be used as a key selling feature in real estate. It demonstrates why we design the market rules the way we do – so consumer choice and not the limits of our imaginations drive market development!

Consistent with my own observations, our report released this week on the level of competition in energy retail markets, found that new energy entrepreneurs are offering customers more varied products and better priced deals.

This is forcing traditional retailers to compete not just on price, but with more innovative products and services.

Energy consumers have more choices to manage their energy use and are looking to take up new technology options:

20% of consumers now have solar panels
21% are likely to adopt battery storage in the next two years
18% are likely to take up a home energy management system in the next two years.

And more consumers are more aware of the choices available.

So why would one in five of us say that they are going to make investments in these new technologies? What do they do?

Smart home products allow consumers to bundle products, control appliances remotely and monitor energy production and prices in real time.

New service providers aggregate the distributed energy resources (such as battery storage) from the community to feed back to the grid when it is valued the most.

These new products and services have the potential to help consumers manage their expenditure on energy. This is important at a time when prices are increasing. And Chairman Sims went through some of the causes for those increases earlier.

To quote one helpful article in The Australian on Tuesday morning:

“You can save money by reducing energy use. Smart home products by the likes of Telstra and Honeywell let you manage energy use by phone. Using meters that tell you power usage for each appliance can pinpoint where a power drain is”

These new offerings are possible because of the foundations that have been laid in the energy market rules to enable consumer choice to lead the way.

I’m talking about rules to make it easier to:

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

Rules commencing later this year, providing for competition in the provision of smart meters, will give consumers more information, and opportunities to take control of their energy use.

Smart meters are enablers – in many ways they are like airline points systems. They provide data on consumption patterns. This data can be used by energy service providers to reduce costs, increase efficiency, improve customer services and offer new services and tariffs targeted at specific segments of the market

For consumers directly smart meters are a stepping stone to realising greater benefits from energy resources like rooftop solar, batteries, electric vehicles, smart energy appliances.

Smart meters will buttress the next big step in the rise of the prosumer.

So, what is our role in this changing landscape? Our job is to manage the regulatory frameworks and keep them up to date in accordance with the objectives set out for us under the law. We want new technologies deployed in a way that maintains reliability, security and affordability. So we can keep the lights on at the lowest possible cost to consumers.

We want to maximise consumer choices but not undermine a network’s ability to manage its system. And this is where some interesting regulatory questions arise.

Technology is challenging our traditional notions of what constitutes a monopoly service. The line between what is provided by network businesses, and therefore economically regulated on the one hand, and what is provided by new service providers in contestable markets on the other, is becoming greyer. We are tackling some of these questions as part of rule changes at the moment.

Our Distribution Market Model project is also designed to promote dialogue on these issues by considering a future where investment in, and operation of, distributed energy resources is optimised to the greatest extent possible.

Our starting point is for consumers to get the most value out of their distributed energy resources - whether that’s using the resources themselves, or selling them to a third party aggregator.

However, the reality is that distribution networks were not originally configured to deal with distributed energy resources. Most existing, small distributed energy resources have limited capability to provide services to anyone beyond the premises at which they are located.

In addition, there isn’t much detailed analysis on the incremental impact for the network of these resources. We need to understand this better. Once understood, addressing the technical impacts of an increased uptake of distributed energy resources is critical for maintaining the safety, security and reliability of the networks.

To do this, market design and regulatory frameworks may need to be modified to provide consumers with clearer signals about the costs and benefits of their decisions, so that those decisions are as efficient as they can be. We are consulting on this at the moment.

And we also have a job in identifying consumers who need support to participate in, and benefit from, the delights of this new world.

In our retail competition review report we have identified a range of measures to support the increased involvement of consumers through information provision and campaigns – to build awareness of things like cost savings, concession schemes, comparison websites and other sources to help consumers choose the offer or product that is right for them.

We have suggested that there be targeted programmes to help vulnerable and disadvantaged consumers to be on the best deal they can. In the past we have recommended a detailed plan for how to do this.

We see that there is more work to do before going down the path of retail price regulation. Our work on the consumer protection issues and solutions associated with embedded networks will be the subject of advice to the COAG Energy Council later this year.

The unifying theme across all this work is that during periods of change and uncertainty, our focus remains on the end consumer.

We recognise that the energy market is transforming.

And as it does so, the non-negotiable end point for the Commission remains to deliver a secure and reliable energy system that keeps prices as low as possible for consumers.

We are working to have this remembered as an age of wisdom.

ENDS.

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?”.

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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