Ring fencing: Who should have power over your solar and storage?

For the observer of energy policy and regulation in Australia, it has been a busy start to the summer. Between the release of the Electricity Network Transformation Roadmap by CSIRO and Energy Networks Australia, the Preliminary Report of the Finkel Review, and the final AEMO review of the September blackout in South Australia, there has been much to analyse and debate.

Amongst all this commotion, it would be easy to miss a regulatory change by the Australian Energy Regulator: the new “ring fencing” guideline was released on 30 November 2016.

“Ring fencing” provisions are what allow electricity distribution networks, which have a regulated monopoly over distribution services, to operate in competitive, non-regulated parts of the system.

If the companies that have been granted monopoly rights over own poles and wires could also operate unfettered in other parts of the system, there would be a major risk of uncompetitive behaviour. At the same time, distributors need to be able to engage in some relatively small scale electricity generation and storage functions in order to manage the grid and ensure power quality.

“Ring fencing” provisions attempt to strike this balance by allowing distributors to operate in these competitive areas, provided these operations are walled off from the rest of the entity.

Getting this balance right is tricky. But in view of the risks, the new guideline still gives too much latitude to the networks, and may work against the interest of consumers.

This guideline effectively allows electricity networks to own a subsidiary that provides “contestable” energy products and services like behind the meter services, provided Chinese walls are established between it and the main company.

For a household or small business, such products and services could save money, or even make money. For example, they could switch-off non-critical appliances during peak price periods, or sell excess energy from batteries. These services are enabled by big data, “internet-of-things” connected appliances, and complex software that interfaces between the grid, the electricity market, and participating customers.

A discussion paper released by the Centre for Policy Development this week assesses the adaptability of networks to the increasing capacity of distributed solar, and the advent of the mass adoption of electricity storage.

Network businesses are poorly prepared. Their over-investment in poles and wires  to meet forecast increases in demand – forecasts the never eventuated – doubled the prices of their network services over the past 9 years.

With a few notable exceptions, network businesses have not taken advantage of new innovations and technologies – particularly distributed generation and storage – to reduce the need for such costly infrastructure investments.

In Victoria, they rolled out smart meters at great expense to the electricity customer, but have largely failed to share the benefits of this technology with the customer.

And now the AER has given them the go-ahead to acquire or create subsidiaries that switch air conditioners on and off in response to network demands, or determine when a battery charges from, or discharges to, the grid, dependent on market prices.

This is not a good thing.

The temptation to breach the guidelines and share data between the network and its subsidiary would be significant. Strict monitoring and enforcement would be required to prevent this happening.

Which is unfortunate, because the networks are only required to self-monitor and report compliance with the guideline to the Australian Energy Regulator once a year.

During stakeholder consultations in April and May, consumer advocates and generator-retailers came out hard against allowing ring-fenced subsidiaries to provide contested services, on the basis it would lead to reduced competition and curtail the market for innovative behind-the-meter services. The AER appears to not have heeded their advice.

Why does this matter?

With consumption of electricity from the grid likely to decline with rollout of even more rooftop solar and the uptake of batteries, it is possible that networks’ revenues will plateau and decline. With debts to service and shareholders to keep happy, networks will seek new revenue sources. Deploying subsidiaries to contestable markets may seem like the best way to keep the mothership afloat.

In this situation, is it credible to assume the subsidiary would always act in the best interests of the customer, even if this clashed with the interests of the network that (a) owns the subsidiary, and (b) is the network to which the customer is connected?

Considering network businesses have a history of failing customers on price and sharing the productivity benefits of technology, this is doubtful.

In its review of the Australian Energy market, the Finkel Review would do well to reappraise the regulation of networks. To this end, it is recommended that State/Territory and Federal energy ministers:

• Block networks or their ring-fenced entities from engaging in behind-the-meter services and other naturally competitive markets.
• Steer networks away from their new-found interest in competitive businesses, and their long-held practice of focussing investment on meeting peak demand events, towards strengthening grid resilience to extreme weather events, such as that experienced by South Australia in September.
• Tighten the regulations for valuation and treatment of network asset bases to reduce the incentives for over-investment. Grid augmentation should be the last resort after all competitive market solutions have been exhausted.

The Finkel Review’s Preliminary Report puts front and centre the reality that consumers are driving a technology-facilitated evolution of Australia’s electricity system. Behind-the-meter services have huge potential to reduce the burden of electricity bills, increase whole-of-grid resilience, and reduce greenhouse gas emissions. If the network businesses stymie this nascent market, this would be a major loss to both consumers and the climate.

Alexander Marks is the author of ‘Avoiding gridlock: policy directions for Australia’s electricity system’, a discussion paper released this week by the Centre for Policy Development, with support from Oxford University’s Sustainable Finance Programme.