Electricity market reform – don’t hold your breath

Governments have been telling us for ten years they need to reform the electricity market to encourage reductions in peak demand and distributed power generation. It's time they actually did something.

In yesterday’s Climate Spectator we reported on the Australian Energy Market Commission’s recently released report Power of choice - giving consumers options in the way they use electricity. In that report the AEMC acknowledged a number of flaws with how our electricity market recognises and encourages the use of energy efficiency, customer-embedded generation and demand-response, as alternatives to adding new power stations and augmenting power poles and wires.

In short, the report makes a number of sound observations about areas requiring reform:

-- Prices, particularly for residential and small businesses, do not properly reflect costs over peak demand periods, and therefore inhibit cost-effective demand reduction technologies and actions. There is a need for smart meters to be rolled-out to the 88 per cent of small energy consumers that do not yet have one to enable prices to vary with the time of day.

-- More cost-reflective prices will need to be complemented with better information feedback and services for consumers because they lack the knowledge and time to evaluate how best to respond to more cost-reflective prices.

-- Small, customer-embedded generators connecting to the distribution network are unable to negotiate on a level playing field with monopoly network businesses around costs to connect to the network, and how much they should be paid for any electricity they export to the grid.

The problem though is that all of these areas for reform have been identified in multiple prior reviews stretching back almost a decade and very little has been done in response. To give you a feel for how overdue reform in this area is, I’ve provided snippets below of government reports over the past ten years that came to precisely the same conclusions as the recent AEMC report.

It has become apparent that fixing the underlying electricity market represents such a challenge for the AEMC and politicians that other measures are required. In particular, a mandated national energy savings and peak load reduction target appears to be our best hope of addressing energy waste in the short-term.  

Snippets from the past - Price signals do not reflect extra costs during peak periods and we need to roll out smart meters

2002 Council of Australian Governments Energy Market Review (“Parer Review”):

“Benefits result from retailers being able to more accurately charge consumers according to their time-of-day usage. Consumers would then potentially have the price signals available to them to engage more actively in load reduction, perhaps through energy efficiency measures and load shifting into cheaper periods for discretionary power uses. ... Installation of interval meters should be mandated for all consumers with the installation program to be achieved over the next 5 to 10 years.”

2004 Howard Government Energy White Paper

“These higher supply costs (associated with peak demand) are rarely directly reflected in customers’ costs, which tend to be averaged over a longer period. Hence demand side responses, whereby users adopt more energy-efficient technologies or shift their demands to less costly periods, are muted or non-existent.”

2007 April Ministerial Council on Energy Communique

“Council of Australian Government (COAG) endorsed a staged approach for the national mandated roll-out of electricity smart meters to areas where benefits outweigh costs.”

2008 June – Ministerial Council on Energy

“The cost-benefit analysis findings strongly support the benefits of an accelerated or mass roll-out approach in comparison with a new and replacement smart meter program.”

2011 Federal Government Draft Energy White Paper

“For the majority of electricity users, the time‐varying costs of energy supply and delivery cannot be properly allocated between different users because their meters cannot measure the time at which energy is used (instead measuring only a total amount of energy). Even among those with time‐of use metering, the meter may not be configured to allow time‐of‐use data collection and/or the information may not be presented in such a way as to inform choice and prompt a response by the consumer. ... It also leads to weak incentives for these households and businesses to efficiently manage their consumption. These inefficient price signals and lack of other regulatory measures (such direct load control) contribute to continuing growth in peak demand.”

Snippets from the past – Energy consumers require better information and feedback

2004 December Ministerial Council on Energy

They agreed to implement:

-- “Nationally consistent legislated regime for mandatory disclosure of energy performance of residential and commercial buildings in place no later than December 2007.”

-- “A requirement for energy retailers to provide benchmark data on household energy bills.”

What’s happened since then?

In 2010 we got mandatory energy performance disclosure for commercial buildings a few years late. But we’re still waiting on residential. They managed to get around to doing a regulatory impact statement in 2011, which told them that what they decided back in 2004 was a good idea. But the real estate agents lobby group has fought tooth and nail against implementing this and for what reason? Are people going to stop moving house because they have to pay a couple of hundred dollars to get its energy performance assessed?

As for benchmark data on energy bills to give households some idea of how they compared to other similar households – this has not been implemented in spite of a regulatory impact statement issued in March 2010 demonstrating the benefits outweighed costs.

It is also worth pointing out that the smart meter roll-out in Victoria has not been accompanied by in-house displays, nor have retailers or network businesses been prominently promoting energy displays to electricity consumers who have smart meters.

Snippets from the past – Customer embedded/distributed generators can’t negotiate on level playing field with monopoly networks

2002 Council of Australian Governments Energy Market Review (“Parer Review”):

-- “The various constraints on embedded generation are well known and relate, for example, to the nature of the charges imposed by distributors and the risk of having the investment optimised out of the regulated asset base. Various state regulators have sought to address these issues, but none has done so comprehensively.”

-- “An important problem is a lack of cost reflective network pricing which means that locational decisions [for generation] are distorted.”

-- “This [reform] would cover, among other things, issues to do with information disclosure on network capacity, the timeliness of responses to queries, and a methodology for calculating the contribution of embedded generation to network reliability.”

2004 Energy White Paper

-- “The Australian Government will also continue to pursue effective energy market reform, including ensuring national energy markets are more responsive to distributed generation (where generation is located close to demand) and demand side management (where energy users receive incentives for reducing use, especially at peak times). Making markets more efficient helps the economy and ensures greater flexibility in responding to any future emissions constraints. The Australian Government will work with the states and territories through the Ministerial Council on Energy to identify by December 2005, and act on, specific rule changes required in the National Electricity Market to maximise the benefits of distributed generation.”

-- “As a form of distributed generation, solar energy can reduce the need for transmission and distribution infrastructure—something not fully attributed in the market. Peak output from solar energy often coincides with peaks in demand for electricity”

2006 Ministerial Council on Energy– Impediments to the Uptake of Renewable and Distributed Energy Discussion Paper

-- “Distribution network price regulation may not appropriately reward and facilitate distributed generation (and demand-side response) as an alternative to network augmentation/development and a means of reducing network losses.”

-- “Network pricing pricing structures can distort locational incentives at transmission and distribution levels.”

-- “Lack of transparent cost-reflective pricing and appropriate metering inhibits more accurate reflection of the value of distributed generation in terms of managing network losses and constraints.”

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