Yesterday the Australian Energy Market Commission finally released its long-anticipated Power of Choice draft report. It was worth the wait. It recommends the most wide-ranging suite of reforms to the electricity industry in a decade, covering the whole gamut of options for increasing the amount and effectiveness of demand side participation (DSP) in the national electricity market (NEM).
It is 192 pages packed with proposals – though refreshing written in language mostly intelligible even to non-geeks – so this is very much a “first pass” review. Bear in mind, too, that the objective of this review should also be enhanced by other regulatory processes currently underway. These include reliability and electric vehicle reviews, and proposals for changes to the National Electricity Rules relating to how networks calculate their cost of capital, and to overcoming barriers to connecting embedded generators.
The AEMC defines DSP as “the ability of consumers to make decisions regarding the quantity and timing of their energy consumption which reflects their value of the supply and delivery of electricity.” In practice, it covers whatever can be done on the consumer’s side of the meter – energy efficiency, demand management and decentralised or distributed generation.
In the context of rapidly rising bills, that’s become a critical political and policy issue. DSP is usually the cheapest way to meet peak and rising demand in particular, and often (but not always, as with load shifting) the cleanest. It’s not only an issue for consumers, though, so the draft report covers the whole supply chain from generators to consumers.
The AEMC’s DSP review began way back in 2007, and the previous stage disappointed many with its principal finding that the current regulatory framework “does not impede the use of DSP.” Not in theory, perhaps, but in practice it certainly does, and this third and final stage of the review has taken a broader approach, looking at how consumers can be more involved in the supply as well as obtaining more control over their the consumption.
From the perspective of a DSP advocate like TEC, it’s mostly good news. Among the headline reforms are a shift to more cost-reflective pricing – that is, time of use rather than flat tariffs, with protections for vulnerable consumers; allowing third parties – demand aggregators like EnerNOC – to enter the market to sell demand reductions at peak times; allowing split metering, so consumers could, for instance sell their solar to and buy or sell their electric vehicle power to or from someone other than their usual retailer; and greater incentives for networks to reduce peak and overall demand instead of building more poles and wires.
Let’s look on the last of these proposals, as it’s one of the thorniest issues in energy sector: how to decouple volume from profit, so networks and retailers can make a buck from encouraging consumers to use less, not more, electricity.
The AEMC essentially proposes to change the currently under-utilised demand management and embedded generation connection incentive scheme “to provide an appropriate return for DSP projects which deliver a net cost saving to consumers.” One way it proposes to make this scheme more attractive is by allowing networks “to earn a share of any additional market benefits” as well as recovering its costs. The rest of the market benefits would flow to consumers – something Ausgrid in particular has been arguing for in its recent submissions.
And where a DSP project delays or defers the need for capital investment, distribution businesses could be allowed to retain the value of capex savings for a sufficient number of years to make it more profitable than investing in new infrastructure.
The AEMC also proposes to address the issue of business profits being dependent upon actual volumes via amendments to Chapter 6 of the Rules to provide greater guidance on how network businesses should set their tariffs to reflect their costs – in effect, using time of use tariffs to reflect the actual cost of augmentation, instead of covering these costs by increasing overall volumes.
Finally on the network incentives issue, the AEMC, as rule-maker, is at odds in this report with the Australian Energy Regulator, the rule-enforcer, over the issue of whether revenue or price caps give greater incentives for DSP. The former favours price caps, the latter revenue caps. This is a decision that the AER is currently grappling with in relation to its determinations for the NSW and ACT networks for 2014-19. While the AER favours revenue caps, the networks are fiercely opposed. This decision can effectively make a billion dollars worth of difference to network revenue – and eventually retail prices – over a five year period
It is debatable whether, in the absence of specific demand management targets or obligations, these proposals will be sufficient to prevent future gold plating of the kind identified by the AEMC. But since no-one has come up with any magic bullet solutions to the problem of decoupling, they are worth a try. (In our last submission the TEC suggested the creation of what amounts to a tender process, under the auspices of the Australian Energy Regulator, for supply or demand side responses where network constraints arise, instead of networks being the default providers, but that idea hasn’t been taken up by the AEMC.)
On the downside, the AEMC seeks to put the kybosh on the proposed National Energy Savings Initiative. It argues that there is no clear scheme design option that could not be gamed and push prices up. We don’t agree, and tend to see this conclusion as a reflection of the regulators’ capture by the prevailing neoliberal economic ideology that sees any talk of targets and obligations as creeping socialism, rather than as a necessary external intervention to quicken and consolidate comprehensive reform of a market culture that will in many respects seek to retain the status quo.
The other main concern we have is the snail’s pace of reform. Five years for one unfinished market review is too long, and it is likely to take another two years before any changes to the rules can be implemented. Meanwhile, prices will continue to rise, new technologies will continue to have a hard time being introduced, and existing market participants will continue to have a stranglehold on revenue and consumers.
Nevertheless, TEC has been working for more DSP in the NEM since 2004, and is heartened to see that some of the cheapest and most effective ways to constrain prices while also reducing emissions and wasteful expenditure are now being taken seriously by regulators. They will also be a test of whether the power businesses are ready to mature into more socially responsible entities; or will they scream like spoilt children when some of their toys are taken away?
Submissions can be made to the AEMC by 10 October: go to www.aemc.gov.au and look for “Power of choice.”
This article was orginally written by Mark Byrne; the energy market advocate at the Total Environment Centre. Publshed with pemission.
