Skip To Main Content

EUAA Annual Energy Conference

Delivering consumer value at pace

01 May 2024

Good morning, everyone. Wow, what an act to follow. 

I’d like to start by acknowledging the traditional owners of the land on which we meet today – the Wurundjeri and Bunurong people – and pay my respects to elders past and present.

I’m very pleased to speak to you today about the important work we’re doing at the AEMC and how it will help consumers, large and small, meet the challenges and capture the opportunities of the energy transition. 

I’ll start by talking about our role and the important change in the national energy objectives that requires us to take emissions into account in our decision making. 

I’ll update you on progress on the reforms our Chair outlined to you last year. 

And finally, I’ll give an overview of developments, challenges and opportunities that we are currently, or will be working on. 

AEMC’s role 

Firstly, our role at the AEMC. 

We’re an independent statutory body responsible for making and reviewing the national energy rules and advising Ministers. 

It’s our job to make sure all the bits and pieces come together and keep working effectively. We also ensure changes are subject to appropriate governance, including consultation. 

I think of the AEMC as the steward of our market system. 

Dictionary.com defines stewardship as the responsible oversight and protection of something considered worth caring for and preserving. 

Protection doesn’t mean avoiding change. Quite the opposite. Protecting something you care about involves keeping it safe from harm, while building resilience so it can adapt to change.

The national energy frameworks must adapt to:

  • manage the unprecedented uncertainty and complexity of change occurring in the sector, and
  • harness the potential opportunities for consumers. 

The technical and economic characteristics of our energy system are changing as we strive to achieve our emissions targets. And the pace of change needed is much greater than we have experienced to date. 

As an industry, we must act quickly to deliver the change needed. 

As the rule maker, we must do things differently to achieve the pace required, while remaining a responsible steward. 

At the AEMC, we’re looking at ways we can move more quickly and be more effective. 

We’re consulting, collaborating and communicating more to encourage change from industry, consumers and government partners. 

We’re in a unique position. We see how all the pieces fit together and we want to take advantage of this to increase the pace and impact of what we can do. 

This will mean being more vocal and proactive about issues as they arise and partnering to deliver reforms that unlock value for consumers. 

The lines between participants in the industry are blurring. Changing economics and technology are eroding the once highly protected segregation of roles and responsibilities between generators, networks, and retailers. We need to ensure our processes don’t unnecessarily reinforce barriers that are no longer helpful. 

Welcoming new players that can innovate new products and services for customers leads us to consider the protections and opportunities for customers and their role in the market. 

We want consumers to take advantage of these opportunities – but we don’t want important protections to become less effective as those products and services change. This may mean rethinking the scope and model for how consumer protections are provided. 

Energy consumers are our most valuable asset. As our Chair puts it, consumers are the hero on the road to net zero. They will play a critical role in delivering a low-emission, low-cost, secure, reliable and safe energy system. We want to hear from you on what needs to be done and how we can do it better and faster. 

As service providers delivering energy, and market bodies responsible for making the market work, we must work together to achieve the low-cost system consumers deserve.

Emissions reduction 

We all care about reducing emissions. The challenge is how we get there as quickly as we need to while maintaining reliability and minimising consumer costs. 

We need more investment. New generation must be available before coal exits to maintain a secure and reliable system. But there’s a gap in the economics and the timeframe is uncertain. 

Government support provided through avenues such as the capacity investment scheme and renewable energy zones will help bridge the gap. However, these schemes are not a substitute, nor should they displace or distort our future market system. 

One way to ensure our market system delivers the right outcomes to consumers is to embed the value of emissions reduction in our decisions. 

Last year, we were able to include this new tool in our toolkit, with the inclusion of emissions reduction in our energy objectives.

This gives us the ability to formally and explicitly consider emissions reduction in our work.

AEMO and the AER must also take this into account when developing the optimal development plan and assessing proposed network investments. 

This year, this tool becomes sharper. The Ministerial Council on Energy has released a statement outlining a methodology and interim values of emissions reduction. 

We have updated our guide on how we will apply these new tools in our rule-making process and when making recommendations in reviews. 

This includes how we take into account the value of emissions reductions in a quantitative cost benefit analysis. 

Update from last year’s address

I’m now going to look at some of the work we’ve been doing and what it means for you.

I’ll start with the areas our Chair, Anna Collyer, talked about at last year’s conference, namely:

  • Transmission Access Reform,
  • Market price settings, and
  • Consumer Energy Resources.

In terms of transmission access reform, we have just released a consultation paper outlining progress and next steps implementing priority access and a congestion relief market for the transmission system. 

Priority access will provide an additional risk mitigation tool to encourage efficient location decisions and avoid cannibalising the value of generators when subsequent generators connect. 

The congestion relief market will provide incentives for generators to bid more cost effectively and achieve more efficient dispatch. 

These reforms will encourage more renewable generation where it’s efficient, reducing the need for new transmission infrastructure and total costs to consumers. 

We’ll make final recommendations to Energy Ministers this year.

On market price settings, we made a final rule at the end of last year to amend these settings in the NEM from 1 July 2025 to 30 June 2028.

The revised settings will:

  • support investment in a mix of supply options, including storage, demand response, and gas generation, and
  • help decarbonise the NEM and address reliability risks at the lowest possible cost to households and businesses. 

While the changes could result in relatively small short-term cost increases for consumers, they will deliver lower bill costs and higher reliability over the long term. Additional investment supported by the government’s expanded capacity investment scheme may also reduce the cost impact.

And on Consumer Energy Resources, we made a draft recommendation in February to better integrate flexible CER into the power system and unlock value for consumers.

Large customers will be able to choose multiple energy service providers for their premises. 

Flexible CER such as rooftop solar, batteries, and electric vehicles can be metered and managed separately from more passive loads, while in-built measurement capability in technology such as streetlights and EV chargers reduces the need for additional meters.

Consumers, particularly large consumers, will benefit from different products and services, reduced consumption charges and be rewarded for changes in behaviour and behind-the-meter assets.

Another couple of projects worth mentioning are the retailer reliability obligation and smart meters. 

We’ve made recommendations to improve the operation of the retailer reliability obligation, or RRO, aimed at reducing retailer – and consumer – costs while maintaining reliability. 

And we made a draft rule to accelerate the deployment of smart meters to all energy consumers by 2030.

Smart meters enable consumers to take charge of their power generation, usage and storage. They also encourage retailers and other intermediaries to provide innovative products, services and pricing arrangements. 

The roll-out of smart meters will facilitate lower network, metering and generation costs to benefit all consumers.

These recommendations include important safeguards to protect consumers from changes in charges and upfront fees.

We expect to release our final rule in the second half of this year.

Next steps 

While much has been achieved, there is still much to do.

We must consider all opportunities to increase low-emission capacity in the system while maintaining security and reliability. 

Government programs such as the capacity investment scheme and renewable energy zones are designed to encourage more grid-scale generation. They aim to improve revenue certainty for investors and better coordinate planning and connection processes. 

We’re keeping an eye on these schemes to understand their impact on the market and advise on their design, so they work to address the gaps. Experience with these schemes can also teach us a lot about refinements to the rules to better support our energy future. 

We’re progressing rules associated with our transmission planning and investment review, transmission access reform and providing clarity and certainty in regulatory and connection processes. 

Our recent financeability and concessional finance rule changes will facilitate quicker investment decisions and ensure the benefits of concessional finance flow to customers. 

However, a significant source of low-cost low-emission generation capacity sits with consumers and is yet to be fully utilised.

I spoke earlier about our rule changes which aim to enable consumers to benefit from flexible CER. But an even greater opportunity exists by making these resources visible and dispatchable. 

This will enable AEMO to take these resources into account more reliably when forecasting capacity needs – and offer this capacity into the market. 

Leveraging this load reduces the need for additional investment in grid-scale generation and networks, reducing the costs to all consumers. It also enables consumers to earn revenue in the market, should they choose to participate. 

The more consumers that participate, the more likely costs of additional infrastructure can be avoided. 

We expect to make a final rule on this in July.

What is on the horizon? 

While we continue to look to the horizon to stay ahead of the game, there are some challenges currently before us.

Significant issues are brewing in the gas sector. As we realise our ambition to reduce emissions, the future of natural gas becomes clearer. 

The fact is jurisdictions are making policy decisions that will reduce the use of natural gas for households, industry and electricity generation. 

But it remains uncertain how we’ll manage this transition. 

Coal exits highlight the continued need for gas-fired generation to maintain reliability and security of supply.

But fewer customers will pay more to maintain increasingly underutilised assets. 

This has implications for critical industries reliant on gas with no viable or commercial substitutes.

A lot of thought is going into this challenge. 

Working together with consumers, industry, government and market bodies may help us develop a sensible plan with appropriate support programs that minimise customer costs and impacts. 

An area we’re about to look at is the role and opportunities of network and retail pricing reform in the transition. Pricing is arguably one of our most underutilised tools and understandably so. 

It’s almost universally agreed that more effective use of pricing and incentives can improve the infrastructure, location and use decisions of energy delivery service providers and consumers. 

The theory suggests that utilised effectively, efficient pricing can reduce the overall costs to consumers. 

However, there are many barriers to introducing an improved pricing and incentive system. There will be winners and losers. But managing the consumer impact and ensuring appropriate targeted support can be less costly than ignoring this valuable tool.

There is much work to do to understand what pricing and incentives can do, how signals should be provided and what we mean by more efficient tariffs anyway. 

The interface between network and retail tariffs is important but do customers need more complexity?

This work can also help guide the integration of electric vehicles so that we start tackling this issue the way we want to finish, avoiding new problems for the future. 

We are developing terms of reference for this important piece of work and will need all stakeholders to work together to achieve change. 

A final challenge worth noting is how we make better use of data, which could unlock even more value from existing assets and improve planning for future needs. 

Improved access and use of data can support better decisions across the sector and by consumers. It can reduce system costs while identifying and unlocking value for individuals.

We have made recommendations on this in our smart meter review and look forward to receiving a rule change request on access to real-time data so customers can access the full suite of benefits that smart meters offer. 

These issues lend themselves to the collaborative process.

They present opportunities for participants like yourselves to do better from the new energy market and shape the transition.

We want to ensure consumers can maximise the benefits of engaging in the market – while also making the transition work for those consumers who do not.

Conclusion 

So finally, to recap. 

We recognise the significant work that needs to be done, and at pace, to achieve net zero. 

We are continually testing whether we can increase the pace at which we work while ensuring a low-emission, safe, reliable and secure energy system is delivered at lowest cost. 

We also want to enable customers to engage directly with the energy system, without needing or expecting them to do so.

We want to do better, more and faster and look forward to your help to do this. 

Thank you.

Helping us to help you: opportunities for large energy users in the transformation

16 May 2023

EUAA Conference Keynote, Melbourne, 16 May 2023

Anna Collyer, Chair AEMC

*check against delivery

 

Thank you, Brian.

I, too, would like to acknowledge the Wirundjuri People of the Kulin nation, on whose lands we are meeting today, and pay my respects to their elders past, present, and emerging.

It’s a timely reminder that the enormous work of the energy transformation is now, and will continue to be, crossing over First Nations lands.

Thank you also to the EUAA team for asking me back to this important event.

I’ve been thinking about last year’s conference and reflecting on the difference a year makes…

Although – and I’m sure you’re feeling this too – these days, one year ago is almost like ancient history so perhaps we need a new measure of time to mark the pace at which the transition is moving along? Something like the concept of ‘dog years’ might help us capture the acceleration of the change.

Back in 2022, I spoke to this conference about some of the major works underway at the AEMC, the ESB, and across the sector. I focused on the infrastructure-enabling Transmission, Planning and Investment Review, and the reliability-enhancing Essential System Services workstreams.

I spoke about the need to get the balance right between the reforms and investment we need to reach net zero targets with a reliable and secure energy system, and delivering it all at the right time and as cost-effectively as possible for both small and large consumers.

A great deal has happened in those projects I discussed last year. Our transmission review is completed, for instance, and rule changes are already in progress, but I can assure you that the need for balance will continue to be at the front of our minds throughout the transition.

Balance is also an important aspect of another major change since last year, the inclusion of emissions reduction targets in the national energy objectives. This is a fundamental reform proposed by the energy ministers. It will significantly change the way we work at the AEMC, because all our decisions have to meet the relevant energy objective.

The three national objectives, as you know, cover electricity, energy retail, and gas. The emissions reduction component of the energy objectives will be one of several considerations the AEMC will be required to balance in making its decisions. The other considerations are the existing elements of price, quality, safety, reliability, and security. All of these are to be balanced in the best interest of consumers.

We support this change and we’re currently developing a proposed framework to embed emissions targets into our workstreams. We are also updating our internal decision-making framework and determination templates.

Once the legislative work is done, we will be consulting with you on the guidelines, later this year.

With so much underway, and so many interrelated and interdependent projects, we find it helps to organise the bigger picture under themes. Our three themes this year are transformation, resilience, and innovation.

We must fundamentally transform the power system – as you are all experiencing that’s well underway. It comes in many forms but most noticeably in new infrastructure, with billions of public and private sector dollars pouring into the construction we need.

I was told recently that while energy projects have for many years sat at around 20% of the national infrastructure pipeline, within the next five years this will leap to 70% of the total national effort – it may even go higher.

But no matter how much we build, the system must work in new ways and the changes must be resilient. There are many ways to apply that word to the sector:

  • Market resilience, where supply and demand are well-matched, and few interventions are needed to provide efficient services.
  • Or policy resilience, where jurisdictions are in broad alignment and decision-makers have confidence in their advice and delivery.
  • And finally, social resilience, where consumer benefits are clearly paramount and include energy equity across all communities.

And the third theme, the element that’s got us this far, and needs to take us much further, is innovation. New ways of thinking, making, acting, and combining processes that accelerate the deployment of the massive changes we need to meet our goals.

So today I’ll use those themes to talk about some important work as it relates to large energy customers such as yourselves. These are all areas where we particularly value your input and participation.

I’ll share with you:

  • First, how Transmission Access Reform could support the energy transformation with a more efficient, coordinated approach to the vast amount of renewable energy coming online.
  • Second, some of the strategies we’re working on for market resilience, including the proposal we have received from the Reliability Panel to increase the Market Price Cap as an investment signal.
  • And third, how innovative reforms are opening the way for large customers to save money with Consumer Energy Resources or CER.

In each case, I want to reiterate that customers, and in particular large customers, are front of mind for us as we progress this work.  I also want to invite you to help us to help you, and I’ll be using these examples to draw out those opportunities as we go.

Transformation

I will start with Transmission Access Reform, as an enabler of the transformation.

This is a fundamental reform. It has been in the making for the lifetime of the NEM.

While our transmission review was about getting the transmission connections funded and built, Access Reform is about getting the maximum usage and value from the transmission we build in this new grid, where variable renewable energy is the primary power supply.

To set the scene, as you know, renewable energy appears in vastly more locations than thermal power stations. The existing transmission network was designed to serve traditional power stations, which were often located close to coal seams or urban areas.

In contrast, renewables are typically spread over large open areas with high levels of sunshine and wind. They also need to be complemented by dispatchable plant – including storage and flexible load. And the whole lot must be connected, as efficiently as possible, with 10,000 km of new poles and wires.

Another consideration – given the nature of the NEM – is that those connections should also work across state borders.

This is something that’s been highlighted by the rise of state government Renewable Energy Zones. (I did mention that we’re at an interesting stage…)

It’s a completely rational step for governments to be heavily invested in a transformation as significant as Australia’s energy transition. We absolutely welcome the contribution and the benefits that jurisdictions bring to their Renewable Energy Zone schemes in terms of jobs, and growth, and reaching our net zero goals. But we also need these Zones to be part of a wider coordinated plan to avoid excessive and inefficient construction with costs that will be borne by consumers in energy bills and taxes.

One way to understand the goal of Transmission Access Reform is to think about how roads work. We build roads to enable traffic, but we don’t build a separate road to connect every possible point A to every possible point B.

Why? Because roads are expensive to build and maintain, and we would create a wild scrabble of wasteful infrastructure. Instead, we plan and build commuter corridors and arterial connections to connect people to important sites like schools/hospitals.

If you’re a town planner or a property developer, the existence of various types of roads sends a signal about where to build new services and population centres.

In this analogy, Renewable Energy Zones are like regional towns. They contain a lot of useful services that people need at different times and in different ways. You might follow a highway to get close to the town, but you don’t then need a highway to reach each doctor, baker, or plumber that’s based there, when you want to access their services.

In the same way, as we shift from a few big thermal generators to lots of smaller renewable sources, no matter how they are organised, we want to avoid underutilised, expensive connections. Access reform is intended to send signals to investors on the best place to set generation, storage and dispatchable assets, so we only build the transmission we need.

Given the challenges that we have faced with transmission access reform, we have sought to work with industry to find a win-win solution, that will take us a step forward from where we are now.

Having presented this to Ministers in February, we have a preferred design, which we are seeking to refine for approval at the Ministers’ meeting scheduled for mid-year The preferred Transmission Access model combines priority access with a congestion relief market.

It would support Renewable Energy Zones in a number of ways, such as:

  • strengthening incentives for investors to participate in these schemes
  • giving Zone participants confidence that their investment case will not be undermined by subsequent projects outside a Zone
  • and still allowing market participants to connect outside of Renewable Energy Zones, without disrupting the coordinating efforts of the scheme
  • but it would also remove opportunities for subsequent-connecting generators to free-ride on transmission investments in these Zones, without contributing to them.

We think this can build the value in Renewable Energy Zones and, ultimately, get energy to customers as efficiently as possible at the lowest cost. It’s about the best bang for buck for everyone at this stage. We’re seeking to achieve a coordinated and efficient process over individualistic behaviour.

We are realistic about what success looks like and believe we can get there. We don’t want to let perfect be the enemy of good. However, it’s not done and dusted. Hearing your voices in support will really help us to get to an outcome, which, while not perfect, will be good, and better than the status quo.

Resilience

Having mentioned a market response to transmission access, I’ll move to our resilience theme, and how we go about keeping the system reliable and secure during this once-in-a-century build-out.

At the AEMC we are thinking about the market and looking at the settings in the short-, medium- and long-term and how they provide both investment and operational signals that support reliability.

We have three priority workstreams focusing on reliability as we transform to a very different energy market.

First, the Commission is in the midst of reviewing the Interim Reliability Measure, with the final report due at the end of this month. And we also have a consultation paper out for the Retailer Reliability Obligation.

Second, the Reliability Panel is currently considering the most appropriate form of expressing the reliability standard to encourage new investment that will deliver a reliability system at a level customers will value. That, too, has a consultation paper currently available.

Both the Interim Reliability Measure, and the Reliability Panel’s work, seek to deal with the emerging risk of low-probability but high-impact events, as we transition to a power system dominated by VRE, and a changing weather system affected by climate change.

The third area is one I wanted to explore a little further with you, as it pertains to a topic close to your hearts – pricing, and the impact price has on reliability and investment. The market price cap has traditionally been a mechanism designed to send long-term investment signals. 

The Reliability Panel has recommended that we progressively increase the market price cap and cumulative price threshold. The intention is to reach the level required to incentivise new entrant investment, consistent with the current reliability standard, by the final year of the review period.

The proposed changes are intended to encourage investment in the kind of new generation needed to ensure reliable energy for consumers as we move to supply most of the grid with variable renewables.

There are some strong opinions about this in the energy sector. It’s now the Commission’s job to consider whether that is indeed what an increase to the market price cap and cumulative price threshold would achieve.

We have confidence in the Panel’s analysis and judgment, but that does not mean the decision is pre-determined. We’re also conscious there were divergent views on the Panel. At the Commission, our role now is to test the proposals in a broader context. We will carefully consider whether there are net benefits to customers of increasing the market price settings.

I note the Panel’s work indicated the increased settings would deliver the reliability standard, but with an accompanying 3% price increase from 2025 to 2028. It’s also important to note that the Panel’s terms of reference were for the energy-only market.

In our considerations we will particularly focus on investigating retail price outcomes and interactions with government schemes.

For instance more investment should achieve better reliability and bring down average retail prices, compared to a situation without that investment, while government schemes supplement market outcomes and are paid by consumers or taxpayers, depending on the structure.

Some of the key questions we’ll be asking are:

  • where should those costs be borne, and
  • what are the exit paths for governments in these scenarios?

We released our consultation paper on increasing the cap last week and we will be listening closely to all our stakeholders – most certainly including the EUAA. For now, I’d ask you to read the paper, discuss the possibilities, share your thoughts, and allow us to do the work.

Innovation  

And that brings me to my final theme for the day – innovation.

In a world where daily we are exceeding some of the wildest dreams of energy inventors, no field is richer in innovation than Consumer Energy Resources. And the title is an important tip: not too long ago we called anything that wasn’t at utility level, DER – or distributed energy resources. You’ll still see that sometimes as people work out the distinctions in this new world.

But Consumer Energy Resources really tells the story – Australia’s energy transformation hinges on consumers. That means customers like you, personally, and like your businesses, as large energy users.

In fact, the transformation hinges on consumers doing more than just making their own power. The AEMO ISP and all our other modelling and rule development relies solidly on the idea of consumers being engaged in a two-way market. Innovation comes into play throughout that activity.

If you were a domestic consumer audience, I’d certainly lead off with our recent work reviewing smart meters. That’s because their availability and functionality will be a crucial enabler for so much of our energy transformation. If you’re interested in metering, our final report will be out at the end of August and I’m very keen to share it.

However, you’re here today as major energy consumers with many more zeroes in your power bills than any of us personally want to imagine! And so, I’ll point you to other work that’s also innovative and exciting, and to some examples of the kind of initiatives we expect to see in front of you, in future.

Three of the tools we have developed, or are developing, with particularly strong business applications in Consumer Energy Resources are:

  • First, Rules that support innovations to integrate storage into the NEM
  • Second, Rules that unlock the benefits of flexible trading of consumer-resource generated energy for their owners and the NEM
  • And third, Rules that cater for scheduling at a ‘lite’ level - which will be a necessary addition to the market as we rely more and more on dispersed and disparate sources of renewable power and widespread storage.

All three of these concepts – integrated storage, flexible trading, and scheduled lite – offer opportunities for large users to manage their energy costs to an unprecedented degree.

Rather than go into the nitty-gritty of each rule, I thought I’d share a couple of examples of projects that have come to my attention that demonstrate the principles behind our rule changes, and may be enhanced as we finalise more of our Consumer Resource market innovations.

Shell smart energy hubs

Last October, ARENA announced $9.1 million in funding to Shell Energy Australia (Shell Energy) to support a project worth around $33 million in total.

It’s called ‘Commercialising Smart Energy Hubs’. Some of you may even be involved.

According to Shell and ARENA, this work acknowledges that flexible demand services have been limited due to perceived barriers. These include insufficient market revenue for customer return on investment, and the initial high cost of deploying equipment.

The project’s aim is to implement energy load control across at least 40 commercial and industrial customer sites to demonstrate an estimated 21.5 MW of flexible demand capacity.

Supermarkets and shopping centres in NSW, Queensland and Victoria will be involved because of the heating and cooling opportunities from their large thermal loads.

Supermarkets and shopping centres also, as many of you can attest, have a strong industry imperative to move to sustainable outcomes where possible.

Shell says they will build each participant a whole-of-site solution to optimise their energy system, including heating, ventilation and air conditioning, refrigeration, electric vehicle charging control, and onsite solar PV and storage.

As ARENA says, demand flexibility offers a way to reduce the load on the grid during busy periods, reducing energy costs, lowering peak demand and moving energy loads to when there are high amounts of renewable energy. It can be implemented in real-time in response to market signals, generation shortfalls or network constraints.

We understand that there’s a pilot underway at Chernside, with the aim of being the first shopping centre in Australia to be carbon neutral. If successful on a larger scale, the Shell Energy project aims to directly unlock 417 MW of flexible demand and be a catalyst to realise 1 GW of commercial and industrial flexible demand capacity across the NEM as soon as the end of 2025.

I believe this is the first C&I project ARENA has funded for whole-of-site optimisation. It shows the potential growth for energy demand management to deliver market, ancillary and customer benefits through the control of energy load.

Vicinity and Enel X

But maybe that model doesn’t sound right for your business, so here’s another idea to explore. In January, the property development group Vicinity Centres, and Enel X, which is an onsite battery storage and Virtual Power Plant service, announced a joint venture.

They plan to pilot onsite batteries at two of Vicinity’s centres: Broadmeadows Centre in Victoria and Lake Haven Centre in NSW. Together, their capacity is more than 5MW, and it’s expected to be in play by the middle of this year.

They say that their pilot expands on Vicinity’s existing energy strategy using solar, automated demand management, and now batteries, and aims to maximise energy production and reduce reliance on the grid. This appears to be an approach very much within the scope of our rule change proposals for unlocking flexible benefits.

Their project describes each party’s role as follows: Enel X is responsible for procuring, operating and optimising the batteries to generate the most value from the energy markets, while Vicinity provides access to its infrastructure and manages the engineering, procurement and construction process.

The participants say this project could help Vicinity reduce costs by optimising their batteries’ charge and discharge. They will store excess renewable energy when spot prices are low or negative, and generate when the local network is peaking, and prices are high. And then, Virtual Power Plant integration will introduce new revenue streams, such as frequency support, which helps to stabilise the grid.

If Vicinity expands across its other centres, the group says it has the potential to deploy more than 50MWh of battery storage or the equivalent of 5,000 home batteries.

We’re very encouraged when we see work like this ramping up participation in the transformation for a new range of consumers.

While we’re continuing our work to make space in the NEM for more and more innovative approaches, there are enormous opportunities for large customers on both sides of the meter, right now.

However, we can only make the opportunities possible – it’s your job to take them up. The energy transformation – now well underway – goes far beyond the concept of ‘sustainability strategy’ as you may have understood them in the past.

This should not be greenwashing – this is sensible business practice to manage costs and embed your business in a new and growing marketplace.

As regulators, we know we can learn a lot from projects like the ones I’ve mentioned, as well as hearing from you what barriers you perceive to participate. For example, the Shell project I mentioned includes the exploration of useful regulatory changes within:

  • the Wholesale Demand Response Mechanism (WDRM),
  • the Reliability and Emergency Reserve Trader (RERT)
  • and state-based certificates such as the NSW Peak Demand Reduction Scheme (PDRS).

We really welcome discussions of that kind.

Conclusion

Now, what messages do you take away from these updates – what are the next steps for you?

I hope what you’re hearing is that we are asking for you to lean in – when you help us, it makes it easier for us to help you.

And the help we’re seeking includes:

  • Responding to our consultation later this year, on embedding carbon targets into the national energy objectives.
  • Also, supporting the work we are doing on Transmission Access Reform: it may not be a perfect solution, but it is robust, and a necessary step to keep the transformation moving at pace.
  • And, letting us explore on the market price cap: we acknowledge the concerns some of you have raised, and we’re testing the proposal against the work we want it to achieve for resilience.
  • And, finally, getting actively involved in managing your energy costs through the many innovative Consumer Energy Resource opportunities being created, and let us know what else we can do in this space.

I hope I can return to you in 2024, to see how the next batch of dog years in energy terms have treated us all and to celebrate the way you will be embracing the many innovations coming to help us, thick and fast.

Thank you.

John Pierce's speech to EUAA Conference

06 October 2015

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

Download PDF version

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

~ENDS~

Power of Choice and other energy market reforms

14 October 2014

SPEECH BY COMMISSIONER NEVILLE HENDERSON AT 2014 EUAA CONFERENCE

Power of Choice and other energy market reforms

13 October 2014

DOWNLOAD PDF VERSION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As an example, a residential consumer using a large 5kW air-conditioner in peak times will cause about $1,000 a year in additional network costs compared with a similar energy user without an air-conditioner.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

First, moving the RET to a floating target, as opposed to a fixed GWh target. This would shift the allocation of demand risk away from consumers and more appropriately share it amongst investors – renewable and thermal – who are better placed to manage such risk and profit from efficient decisions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you.

ENDS

Strategic priorities for energy market development

16 October 2013

AEMC Chairman, John Pierce, presented a speech at the Energy Users Association of Australia. His speech discussed the AEMC’s strategic priorities for energy development, as well as two future rule changes that have direct relevance for consumers – a proposal to reform distribution pricing arrangements and a proposal to implement a demand response mechanism. 

Annual EUAA Conference 2013 – Empowerment through participation

AEMC Chairman, John Pierce, Speech

Where: Royal on the Park, Cnr Alice and Albert Sts, Brisbane

Date: 16 October 2013

Topic: Strategic priorities for energy market development

*****CHECK AGAINST DELIVERY*****

Download:

Speech

Introduction

My thanks to the Energy Users Association of Australia (EUAA) for the invitation to speak today. I should start by introducing my organisation for those who are not familiar with us.

The Australian Energy Market Commission was established in July 2005 as a national body with two principal functions: we make and amend rules for the National Electricity Market and for elements of natural gas markets. We also provide market development advice to the Standing Council on Energy and Resources. So our work consists of assessing rule changes, which can be initiated by anybody except ourselves, and carrying out reviews, which are commissioned by SCER.

The energy prices and other outcomes that we see as consumers are a combination of what happens in the competitive generation and retail sectors, what happens in the regulated network sectors, and of government policies which impact the energy sector. Think of the carbon price, RET and Feed-intariffs, for example.

One of the things we do each year is publish a report on the drivers of expected price movements. This shows that network prices and the combined effect of governments’ policies have been major drivers. At the end of 2012 major changes were made to the Rules governing the economic regulation of network businesses. The AER is currently developing guidelines to give effect to these rule changes, and the first regulatory determinations to occur under the new rules will be in NSW and ACT in mid-2014. For Queensland, the first determinations will be in place by mid-2015.

At the beginning of this Rule change process and numerous times since we have said that network price outcomes were a function of the Rules, how the Rules are applied and the corporate governance of the network businesses. It is also a function of how reliability standards are determined. The Commission has recently published advice on a national framework for determining reliability targets for distribution networks and is close to finalising advice dealing with the transmission sector.

This morning I would like to talk about the AEMC’s strategic priorities for energy development, which we have developed in consultation with industry and consumers, and will underpin our advice to SCER and our approach to rule making.

I would then like to focus on two proposed rule changes that have direct relevance for consumers, including large energy users like those represented here today — a proposal to reform distribution price structure arrangements and a proposal to implement a demand response mechanism.

Strategic priorities for energy market development

The topic of your annual conference also resembles one of the AEMC’s three strategic priorities for energy market development that we proposed in a discussion paper in April this year. That discussion paper set out a consumer priority, a gas priority and a market priority.

We aimed to build as much consensus as possible as to what the key priorities for energy market development should be. This involved a series of well-attended stakeholder workshops, a public forum and a discussion paper. We talked to a range of stakeholders – including individual consumers and consumer representative bodies – about their key concerns for the sector to help identify priority areas for our future work program.

We are due to publish the final report next week where we will confirm our three priorities. In brief:

The consumer priority is about strengthening consumer participation in energy markets. This includes providing greater opportunities for consumers to effectively participate in the monopoly network sector (through participation in regulatory processes, for example – I believe Andrew will talk more about that after the tea break) and to participate in competitive retail and generation markets, perhaps more directly. The two rule changes I will talk about shortly are part of our work program under this priority.

The gas priority is about the development of gas market trading mechanisms, the need to examine the efficiency in downstream market arrangements. That is, it is about the mechanisms through which gas is traded (the means of exchange), rather than upstream supply issues, which are outside of the AEMC’s remit. Though the two are obviously related.

At the end of September the AEMC published a gas market scoping study, which provides an overview of changes in the east coast gas market. The study revealed that the existing gas market and regulatory arrangements have served us well, but that the scale of the changes which are occurring in the gas sector means that it is now important to evaluate whether they continue to be well suited to the new environment in which they are now placed, taking into account the commercial and practical needs of participants.

The market priority, is somewhat of an overarching priority, concerned with the way market, regulatory and policy environments interact and impact prices and investment. This reflects the importance of predictable but flexible market arrangements, and of open and transparent processes for change. This priority emphasises the importance of policy decisions taking account of impacts on all sectors they are likely to affect. We are most likely to get integrated policy outcomes when decisions are take in a transparent manner and after full consultation with all affected parties.

Overlaying all of these things though is the underlying rationale for the market and regulatory arrangements that we have – productivity growth in a sector that is so vital to Australia’s longer term potential economic growth.

For those that have been around long enough to recognise the relationship between the microeconomic and competition policy objectives and the domestic energy sectors; - perhaps many of the issues that have arisen in the sector over the last few years owe their origin to those links not being front of mind.

Rule changes

The rule changes I would like to focus on today fall into the two areas where the AEMC has most influence, namely the regulated and competitive sectors.

The first relates to how network costs are reflected in price structures. The second represents a greater opportunity for users to directly offer demand reductions into the wholesale market at the prevailing spot price.

These two projects are yet to commence and they represent an opportunity to engage with the AEMC over the coming months as we consult on whether and how to implement the changes. We will be asking for views and information from any interested stakeholder about how we can better promote the long term interests of consumers through these rule changes.

Both projects were recommendations of the AEMC’s Power of Choice review, which presented a package of recommendations to Commonwealth, state and territory ministers in November last year. The package focuses on supporting consumers of all sizes to actively participate in the energy market. It offers a suite of options to help consumers manage their electricity consumption and, in turn, their electricity expenditure. It short, the objective is consistent with the theme of your conference on “Empowerment through participation.”

Flexible pricing

The AEMC’s Power of Choice review made a series of recommendations to move towards more efficient and flexible pricing. A key part of this involves changing the way distribution networks structure their tariffs. We have made changes through the network regulation rule change that will affect the size of the distribution cost pie. How the resulting pie is then sliced between consumers depends on the way in which network tariffs are structured. The rule change request from SCER on distribution pricing arrangements is designed to tackle this latter issue.

Distribution tariff reform

SCER submitted the rule change request last month after considering the evidence that there are significant costs and foregone opportunities arising from the absence of clear price signals to consumers.

The rules currently provide a framework and guiding principles for how network businesses should structure their network tariffs. The proposed rule change would amend these principles and other provisions to encourage more efficient network price structures. It would require network charges to be based on the drivers of network costs as far as possible so that consumers are paying prices that reflect the impact of their consumption decisions on network costs.

The SCER rule change also seeks to build in greater consultation between distributors and their customers in structuring their prices. Part of this would involve distributors consulting with consumers in developing a pricing structure policy to accompany the distributor’s regulatory proposal. In assessing the rule change, we will be considering how to include a conversation about the structure of tariffs throughout the regulatory process, rather than the structure just coming out at the end of the process.

It is important that, when distributors develop new pricing structures and charges, consumers are engaged and have an understanding of any changes so that they can make informed choices and decisions. The AEMC recognised this in the Power of Choice review, and proposed that there should be a greater role for consumers and retailers to review pricing options set by network businesses. This has also been raised by IPART in a separate rule change request to the AEMC, which we will be considering in tandem with the SCER request.

The main benefits of changes of this nature may be felt over the medium to long term. They could shrink the size of the pie further, as changing consumption patterns in response to new prices will focus infrastructure investment where it is needed and valued most. But consumers with a flat load profile or those who have some flexibility to respond to the new prices will also tend to benefit in the shorter term by shrinking the size of the slice they have to pay for.

We plan to publish a consultation paper early next month and I encourage you to provide submissions to inform us of your views on these important issues. I would also note that this rule change is part of a broader package. SCER is pursuing a wide range of reforms aimed at ensuring that network infrastructure is built, priced and utilised effectively.

Demand response mechanism

Power of Choice offered another recommendation which could provide opportunities for large energy consumers to reduce their expenditure. We recommended the introduction of a new demand response mechanism, which would allow consumers, or third parties acting on consumers’ behalf, to directly participate in the wholesale market and to receive the spot price as a reward for reducing demand.

Some consumers find it feasible to physically adjust their consumption in response to spot prices under specific contractual arrangements such as interruptible tariffs, spot pass-through and scheduled demand. However, these involve a degree of risk, transaction and ‘hassle’ costs that are difficult to manage for many commercial and industrial users.

Under our proposed mechanism, demand resources would be treated in a similar way to generation, and would be paid the wholesale electricity spot price for reducing demand.

At the request of SCER, AEMO has been tasked with drafting a rule change proposal to give effect to the mechanism.

AEMO has developed a detailed design proposal covering the design principles including metering, the baseline consumption methodology, settlement and prudentials, reporting and governance. The document is available on the AEMO website.

We anticipate that AEMO will submit the rule change proposal to the AEMC by December 2013. The EUAA has recognised the benefits a mechanism like this could offer for consumers and I would encourage you to participate in the AEMC’s process on this rule change, as the proposed mechanism could provide a significant revenue stream for businesses that have some flexibility in their electricity use.

Concluding remarks

I have focussed on these two rule changes as they are still somewhat in the formative stages, and both have the potential to materially affect the electricity expenditure of end users. I would of course encourage you all to engage with the AEMC’s consultation processes for these two rule changes once they are initiated.

We expect a consultation paper on distribution pricing principles to be published in November. A consultation paper for demand response mechanism will likely be published later in 2014, depending on the outcome of AEMO’s processes.

The rule changes form a part of the Commission’s wider work program, all of which is aimed at improving long term outcomes for energy consumers. Our rule change and review processes represent an important opportunity for energy users to get involved in shaping future outcomes in the market. The value of our work will be greater if we are exposed to a variety of views in assessing proposals against the national electricity, retail and gas objectives.

Thank you again for the opportunity to address you all today.

Subscribe to EUAA Annual Energy Conference