Played by the electricity monopoly game

The Australian Energy Market Commission delivered its final verdict on how we might improve the efficiency of the energy market through getting consumers to adjust demand, rather than just add additional power plants, transformers and poles and wires.

As readers of Climate Spectator are most likely aware, the Australian government estimates that 25 per cent of retail electricity costs are derived from peak events that occur over a period of just 40 hours per year. In addition, a range of studies, including from the International Energy Agency, estimate that there is large potential for improvements in energy efficiency that could reduce carbon emissions whilst also delivering an attractive financial return.

Consequently a concerted effort to get consumers to better understand and reduce their energy usage could pay handsome dividends for consumers and society more generally. 

So will the AEMC's Power of Choice reforms allow us to tap the hitherto largely ignored opportunity of demand management?

In short, the AEMC's recommendations fall well short of capturing the efficiency gains available through greater use of demand-side solutions.

Its greatest weakness is that the reforms continue to entrench the monopoly power of network businesses. Network businesses remain judge and jury over deciding whether network upgrades or load reduction/embedded generation represent the best value for consumers, and how much they should pay for demand management. 

The report centres on how it might adjust the incentives facing network businesses so that they have a greater propensity to employ demand management instead of upgrading poles and wires. But instead of trying to force a square peg into a round hole, the AEMC should vest an independent statutory body with responsibility for acquiring non-network demand-side solutions where they represent superior value to upgrading network capacity.

Demand management is a contestable service amenable to multiple providers, unlike power lines which are a natural monopoly. In addition creating a demand management market separate to network businesses could also produce a form of competitive discipline on network businesses. On the other hand giving networks greater incentives to do demand management just perpetuates incentives for them to overestimate network capacity requirements and overestimate the costs of providing reliability. That way any demand management they might undertake is far easier to profit from and may even be completely illusory.   

But that's not to say the report doesn't represent progress. There are lots of worthwhile reforms, but it falls substantially short of what's ideal.

Here's a snapshot of the good and the bad from the report in the table below.