COAG must look beyond gold plating

Limiting gold plating of networks is a step in the right direction, but will not solve the longer-term problems facing the electricity sector. A new distributed energy market is needed to facilitate the uptake of efficient, low-emission technologies.

The increases in electricity prices over the last five or so years have resulted in a range of government responses, including a proposal to discuss solutions at this Friday’s COAG meeting. The most recent report is the Australian Energy Market Commission Power of Choice (PoC) Review’s Final Report.

This report was written well and truly in the context of the recent decreases in electricity use and the impact this has on utility revenue, especially that of networks. As a result, its recommendations reflect the difficult task of both reducing costs for consumers while maintaining payments for network operators, and in some cases the state governments which own them. The PoC report has two significant shortcomings, but a distributed energy market could overcome them.

A central theme of the PoC report is that energy efficiency that simply reduces average demand, without reducing peak demand, will reduce the distribution network’s utilisation and so increase the per unit costs of distribution – and so not result in savings for consumers. However this is only the case where network operators’ activities are restricted to operating networks. Allowing network operators to broaden their activities beyond network charges to the provision of a range of energy services could allow them to reduce electricity use while maintaining their revenue streams. This is especially important if electricity use continues to fall.

Another problem with the PoC report is the very limited attention given to real alternatives to the Network Determination process. The determinations are currently an extremely important component of the electricity supply system as they effectively lock in network investment for the next five years. This in turn locks in either higher electricity use or higher tariffs for consumers, or both.

As with other government reviews currently being undertaken or recently completed, distributed generation, energy efficiency and demand side management are seen as ‘add-ons’ to the existing supply-focussed market – which carries on essentially unchanged. However these distributed energy options are known as ‘disruptive technologies’, and when they are introduced into an established market, it is highly likely that existing business models will be forced to change and adapt. Mobile phones are a good case in point here, with the incumbents being forced to radically change their business models and in fact to rapidly expand into the new mode of operation.

Such changes can only take place in concert with the development of appropriate regulatory frameworks. Given that the distributed energy technologies will not be completely replacing the existing technologies, but will be integrated with them, the new regulatory arrangements will not only affect the distributed energy industry but the existing industry as well.

A fundamental principle under which such a ‘distributed energy market’ should operate is that of equal competition between supply-side and demand-side options at all levels: generation, networks and retail. There should also be competition between supply-side options and between demand-side options. This competition should be introduced both as part of the electricity market’s day-to-day operations as well as during the network determination process.

It is likely that over the longer term, rather than having a separate distributed energy market operating alongside the existing NEM, a single national distributed energy market will be required, encompassing all supply and demand side options.

The arrangements required for such competition on a day-to-day basis can be divided into three types:

i) Those related to the operation of the incumbents;

ii) Those related to the operation of the distributed energy market itself (and therefore new entrants); and

iii) Those that then stimulate the broader distributed energy market and enhance the operations of all participants.

Each of these can be further subdivided into those that remove barriers to a distributed energy market and those that enable participation in one. Examples of each of these types can be found either in operation or recommended, for example by the PoC Review. However, they are currently insufficient for a distributed energy market to develop and so more changes are required.

The introduction of competition into the network determinations could be achieved through a process based on integrated resource planning, which is currently used in the some parts of the United States and was examined in Australia when the NEM was being developed. It could also be used independently on an ongoing basis for particular network augmentations. The core principles are that it:

i) Considers a full range of feasible supply-side and demand-side options and assesses them against a common set of planning objectives and criteria;

ii) Is transparent and participatory throughout, meaning that parties other than the network operator can propose both supply-side and demand-side options;

iii) Is subject to oversight by an independent body; and

iv) Is subject to regular review.

This compares to the existing network determination process where a certain level of demand is assumed and the networks are then designed to meet that demand. Particular network augmentations undergo a similar process where the network operator generally designs the default network solution, then possibly calls for alternatives, then assesses them through an internal procedure. Of course, it is very important to recognise that there have been very good reasons why the current approach has been used. These reasons include the regulatory environment under which the networks currently operate, and where they are held responsible for security of supply and power quality.

Thus, while the Australian PV Association generally supports the Power of Choice report’s recommendations, they are limited by two key restrictions – the assumption that network operators’ activities are restricted to operating networks, and the very limited attention to real alternatives given to the network determination process.

While government and incumbent energy business responses to distributed energy can be designed to enable uptake of such technologies in a manner that minimises disruption, they may also be designed to restrict their uptake and therefore their potential long-term impact. If a transparent and fair approach is not taken, the incumbents could be exposed to an even greater level of disruption as their regulatory environment constrains their options and so leaves them exposed to potentially perverse customer behaviour beyond their control.

This is an area of ongoing research for the APVA and we hope to engage in a constructive manner with utilities and regulators in the development of a new distributed energy market, which will transform Australia’s energy sector and facilitate the uptake of new efficient, low-emission and customer-friendly technologies.

Dr Muriel Watt and Dr Robert Passey are representatives of the Australian PV Association.

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