RESTRUCTURING NETWORK TARIFFS IN THE NEM –

THE IMPORTANCE OF GETTING IT RIGHT

JOHN BRADLEY, ENA CEO

EASTERN AUSTRALIAN ENERGY MARKET OUTLOOK

17 SEPTEMBER 2015

ENA

ENA

ENA

Overview

1. What could the Future Grid look like ?

2. Ensuring a smooth transition – the Network

Transformation Roadmap

3. Important choices in network tariff reform

4. Incentivising Efficient Investment

5. The Value Proposition by Networks of the Future

ENA

ENA

Australia’s Great Energy Disruption

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2005-06 2006-06 2007-06 2008-06 2009-06 2010-06 2011-06 2012-06 2013-06 2014-06

MW

Reported Estimated

Australian solar panel uptake. Source: Australian PV Institute, http://pv-map.apvi.org.au/analyses [accessed 2 July 2015]

Comparison of low, medium and high consumption scenarios to 2024–25. Source: AEMO National Electricity Forecasting Report 2015

5

5.5

6

6.5

7

7.5

8

-

50,000

100,000

150,000

200,000

250,000

Res

iden

tial

an

d c

om

mer

cial

op

erat

ion

alco

nsu

mp

tio

n p

er c

apit

a (M

Wh

/yea

r)

Op

erat

ion

al c

on

sum

pti

on

(GW

h)

2014 - High 2014 - Medium 2014 - Low High Medium Low R+C/capita

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2005 2010 2015 2020 2025 2030 2035

20

14

US$

/kW

h

Cost of Lithium-ion battery packs. Source: Nykvist and Nilsson (2015)

100

125

150

175

200

225

250

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Mill

ion

ton

nes

of

carb

on

diox

ide

equi

vale

nt

Annual electricity sector Greenhouse gas emissions. Source: Department of Environment (2015) and Pitt & Sherry carbon emissions index

Solar

Emissions

Demand

Storage

ENA

Upending our Energy System

• AEMO: Solar PV capacity

to increase 500% to 2035

- Output ranging from 9.3%

(NSW) to 28% (SA) of

Energy

- Shifting peak to 7.30pm in

SA and Qld

• Within 10 years, Solar PV

output could exceed

Minimum Demand in

South Australia

ENA

Potentially diverse futures for Network Use…

CSIRO Scenario Analysis:

ENA The Network Transformation Roadmap

ENA The Network Transformation Roadmap

ENA The Network Transformation Roadmap

ENA

Traditional Tariffs - a Burning Platform

> Most network customers pay tariffs unrelated to cost.

> Increasingly peaky load profile & diverse network use…

> Widely recognised cross-subsidies

between customers - unintended

and unsustainable

– eg. $683 pa for A/C use at peak;

– $117 pa for north-facing solar PV; and

– $29 pa for west-facing solar PV. (NERA)

AEMC 2014 Residential Electricity Price Trends Report

ENA

ENA supports a National Approach to Key Issues

> A consistent, enduring policy and

regulatory environment without ‘ad

hoc’ jurisdictional intervention;

> A balanced approach to the economic

deployment of smart meters as part of

contestability reforms;

> Better information and decision

making tools for customers;

> Review of options to support

vulnerable customers including

concessions schemes;

> Retail Price Deregulation to encourage

innovation.

ENA

Most customers benefit - Vulnerable customers moreso

Source : Simshauser and Downer (2014) “On the inequity of flat-rate electricity

tariffs” AGL Applied Economic and Policy Research Source : Brattle Group, Architecting the future of dynamic pricing, ACCC Regulatory

Conference, August 2014

ENA

Best Performing Tariffs provide clear benefits to customers

Efficiency

> Incentivise efficient DER

investment, saving customers

$17.7 BN by 2034

Fairness

> Avoid unfair cross subsidies

to early adopters increasing

from $120 pa today to $655

per year.

Lower Bills

> Achieve $250 pa. saving in

av. residential electricity

bills by 2034.

No Price Shocks

> Avoid network price increases

which are 5 times higher than

necessary.

ENA: Towards a National Approach to Electricity Network Tariff Reform

ENA

Long-term risk to Consumers if we stand still…

Analysis of Inclining Block

Tariffs:

> Have Nots: By 2034, 1/3 of Residential customers remain without DER, paying bills up to $3000 pa.

Energeia analysis cited in : Towards a National Approach to Electricity Network Tariff Reform

ENA

Long-term risk to Consumers if we stand still…

Analysis of Inclining Block

Tariffs:

> Have Nots: By 2034, 1/3 of Residential customers remain without DER, paying bills up to $3000 pa.

> Haves: 2/3 of Residential Customers have DER and pay a bill which is $1270 less.

Energeia analysis cited in : Towards a National Approach to Electricity Network Tariff Reform

ENA

Long-term risk to Consumers if we stand still…

Analysis of Inclining Block

Tariffs:

> Have Nots: By 2034, 1/3 of Residential customers remain without DER, paying bills up to $3000 pa.

> Haves: 2/3 of Residential Customers have DER and pay a bill which is $1270 less.

> Cross Subsidy: Half the difference in average bill funds a cross subsidy to Residential customers with DER.

Energeia analysis cited in : Towards a National Approach to Electricity Network Tariff Reform

ENA

Public Policy Scorecheck :

ENA

…and ‘Opt-In’ unlikely to deliver fair outcomes

19

Take up low in

Victoria even by

international

standards (0.3%)

Under “opt-in”

customers with flat

load profiles continue

to subsidise peakier

users

Lost Opportunity: Almost 7 million additional solar and storage installations by 2035 – which usually means a smart meter.

Enrolment & retention rates for TOU tariffs – Nth

America

Source : The Brattle Group, Smart by Default, 2014

ENA

CSIRO

Insights from

Behavioural

Economics…

Excerpt from: Dr Karen Stenner | Behavioural Economics & Psychological Insights Team | Grids

& Energy Efficiency Systems Stream

ENA

Victorian Tariff Structures Statements due soon

Demand- based Tariffs

> Gradual phase-in of demand

charge: energy usage and/or

fixed components decline over

time

Some consumer group views on tariff

reform

If this [network tariff reform] is done effectively, it

will create great potential for consumers to take

better control of their energy consumption and

expenditure, potentially allowing many low income

and vulnerable consumers to save money on their

energy bills.

CALC, VCOSS, CUAC , October 2014

“Cost reflective network tariffs are a step toward

showing consumers the true cost of their actions.

Cost reflective tariffs will, ideally, allow those

consumers who use and value network capacity to

pay for it, and those that don’t to save money.”

CUAC, June 2015

ENA

Tariff signals that can be received and responded to…

> TSS Consultation: Networks will engage customers in tariff

design, implementation and transition

> ENA members working with Retailers to address barriers to

‘pass through’ – and simplify language and communication.

Jemena Infographic

ENA

Must haves in Policy & Regulation for Tariff Reform

Welcome:

> Recent progress for fairer, more efficient tariffs:

– COAG Energy Council support;

– AEMC rule change provides benefits in transparency and engagement

Outstanding:

> A contestable metering framework that allows commercial

contracting and risk management.

> Ability to Progress cost-reflectivity in the absence of smart meters.

> Complex reform will require consistent, enduring policy direction

ENA

Efficient Incentives

Demand tariffs

> Technology neutral

Growth in renewable capacity

> Solar installations could

average around 1,100 MW per

year or annual growth of over

11% pa (CAGR) for the next

twenty years.

Growth in renewable energy capacity

with demand tariffs

Source : SGSC, Part 2, The Business Case for Smart Grids in

Australia, July 2014;

Energeia, Network Pricing and Enabling Metering Analysis,

December 2014

24

ENA

Economic incentives for storage across supply

chain

Source: Ernst and Young:

Renewable Energy Country

Attractiveness Index June 2015

ENA

Australian Networks undertaking diverse storage trials

ENA

• Ausnet

• Grid Energy Storage System (1 MW /

1MWh) connected to urban 22kV

distribution feeder

• Residential Battery Storage Trial (6.6

kW)

• Citipower /Powercor

• Buninyong 2 MW/2MWh Battery

• Ergon

• Integrating Network Tariffs and

Customer Owned DER

• Centralised Energy Storage System

(CESS)

• Residential Utility Support System

(Ten 6 kVa, 20kWh)

• Grid Utility Support System (25 kW,

100kWh single phase)

• Energex

• Hot Water Storage to absorb PV

Output (Arana Hills)

• Electranet

• Energy Storage for Commercial

Renewable Integration (ESCRI)

• South Australian Power

Networks

• Australian Energy Storage Knowledge

Bank (University of Adelaide)

• Transgrid

• Idemand (400 kWh)

ENA

…and consumer storage is here…

• Price

• Aesthetic & Lifestyle

• Simplicity

• AC Plug and Play

ENA

Beyond the Meter

Services

Distribution Platform

Integrator

Energy Services

“Obligation to

Serve”

“Commitment

to Optimize”

Commodity Delivery

Distributed Energy

Production Services

Information

Services

Intelligent Grid

Operator

Pure-Play

Transport

(Traditional Grid

Model)

Distribution Platform

Integrator & Trader

New Resilience-Building

Business Models

Distributed System Platform Provider*

1

2 3

4

A

B

C

Accenture: Future Network Business Models

ENA

Progressive utilities are forging ahead in defining the pace

and depth of platform business model evolution

To move beyond an intelligent grid,

a platform integrator needs to be

able to make decisions on demand

and supply in real-time to optimise

whole-of-grid performance.

Extend key platforms:

Advanced DMS, MDM, OMS.

Further penetration of grid

automation and sensing with

real-time decision engines and

control optimization. DERs fully

integrated into grid.

BUSINESS MODEL ACTIONS

Strategic decisions needed for

scope of role and opportunities for

additional growth in new services

and energy solution.

RATIONALE

Distributed

Platform

Integrator

Distributed

Energy

Production

Services

Significant investment needs to be

made not only in trading system but

also to develop and test pricing

strategies with targeted customers.

Distributed

Platform

Integrator &

Trader

Dynamic integration with

demand drivers (e.g., demand

response, dynamic tariffs) to

enable transactions between

producers and consumers of

energy.

Extend services to include the

provision of DERs such as

solar PV, battery storage

through direct leasing or

partnership arrangements.

NY

State

REV

EXAMPLES

Trade Only – Limited Infras.

A

B

C

4

ENA

New Operating Principles for Progressive Business Models

• Being able to integrate all types of generation.

• Enabling consumers to provide services back to the grid.

• Offering enhanced or optional services, such as microgrid services

and other DER support services.

• Being agnostic about supply.

• Facilitating a retail market for consumers and third-party providers to

buy and sell services.

Foundational operating principles for the traditional grid model

Maintaining a

safe and

reliable grid

Increasing grid

efficiency

Optimizing

asset

utilisation

Support /

implement

public policies

Highly reliable

& resilient

energy

services

Identify most

cost-effective

ways of

achieving

outcomes

Future Business

Model Progressive

principles: