Public policy issues in the

electricity sector in Australia

OECD/DAF/COMP/WP2:

Hearing on Radical Innovation in the Electricity Sector,

19 June 2017

The views in this presentation are the views of Darryl Biggar and are not necessarily the official views of the Australian Government, including the ACCC and the AER.

Brief overview of the Australian NEM

Wholesale market • Five minute energy-only compulsory

pool with a high price ceiling; • Regional (not nodal) pricing; Five

prices determined across 5 states; • Separate markets for frequency

control ancillary services;

Regulated networks • Transmission and network

businesses structurally separated; • Regulated by the Australian Energy

Regulator; • Five-year regulatory cycle, building –

block model and incentives;

Retail market • End-customers purchase electricity

from retailers; • With most states customers have a

choice of retailer; • The ACCC is carrying out an inquiry

into the effectiveness of competition in the retail market.

Governance and Institutions • Electricity is a state responsibility

(not federal); governing body is the COAG Energy Council;

• Rule making body (AEMC) • Market operator (AEMO) • Regulation and competition

enforcement (AER)

An electricity sector under pressure

Rapid innovation, especially in distributed energy

resources and ICT; increasing customer expectations for control and self-generation

Pressure for rapid decarbonisation and

integration of intermittent renewable generation

Increasing network charges; concerns over affordability;

price shock

Policy uncertainty, especially over carbon

policy; retirement of coal plant

Some reliability and security events and “near misses” “We are at a critical

turning point …” – Finkel review

Significant increases in the price for natural gas

Issue #1: Distribution network pricing

• End-customers face poor

incentives for use and

investment…

• We want to achieve

efficient usage of and

investment in distributed

resources…

• But distribution networks

are priced in a time-

averaged and geograph-

ically-averaged manner.

Improving distribution network pricing is one of the most important policy issues facing the sector today (and possibly ever!)

Issue #1: Distribution network pricing

• Ideally network prices

would vary dynamically in

time and space, reflecting

the losses and congestion

on the distribution

network…

• Distribution network tariffs

in Australia are required to

be “cost-reflective”… but

are not yet fully dynamic

• This would probably

require a new distribution

market operator…

Issue #1: Distribution network pricing

• There has been some

interest in Australia in

establishing peer-to-peer

trade (perhaps using

Blockchain)

• But the proposed

schemes ignore the

potential for congestion

on the distribution

network…

• There is a feed-in tariff for

solar PV but this is much

lower than the typical

retail price for electricity

and flat (not dynamic)

Issue #2: Structural separation?

• The reforms which

established the NEM

separated the trans-

mission and distribution

networks from generation

and retailing

• Should distribution

networks today be

allowed to provide

competitive services?

Issue #2: Structural separation?

• The problems are well known:

• Anticompetitive

discrimination

– Favourable terms and conditions

of access

– Favourable access to information

– Favourable treatment in the

operation or investment decisions

of the regulated firm…

• Cross-subsidisation

• WP2 is familiar with

these arguments from

its work on structural

separation across a

range of industries

Experience in the US electricity industry

US FTC: “Several years of industry experience

now appear to confirm this concern that

discrimination remains in the provision of

transmission services by utilities that continue

to own both generation and transmission …

… We support FERC’s assessment that

behavioural rules have not provided the degree

of competitive benefits that FERC sought to

engender when it introduced competition in

wholesale electric power markets…”

There is an on-going debate in Australia…

“… we would not rely on a ring fence alone but rather prohibit network businesses from carrying out activities in very closely related competitive energy services…”

“…there is a strong incentive for networks to hinder competition in alternative services …”

“We have doubts whether measures short of full structural separation will provide the level playing field that is needed…”

Issue #3: Governance and Institutions

• The reforms to the electricity sector were built around the principle of relying on competition and markets where that is feasible…

• But around the world there are signs of a loss in confidence in markets to deliver good economic outcomes in the electricity sector…

Issue #3: Governance and Institutions

• In Australia there has been increasing political pressure for governments to take action, which may undermine markets and private investment.

• The public policy processes in the sector were designed for slow, deliberate reform, but may not be agile enough in the context of the sector transformation which further undermines confidence…

Conclusion

• Radical innovation in the electricity sector is placing the existing policy frameworks under pressure…

• The challenge for policy-makers is developing a policy environment which is flexible, market-based and able to adapt to innovation in the sector…

• There are a number of policy issues to address including network pricing reforms and structural separation…

• Maintaining confidence of government and the market through this change process is one of the challenges…

A myriad of policy issues

Decentralisation of generation; Smart appliances; Smart Metering;

Storage; Electric Vehicles; Environmental objectives

Distribution network pricing

Pricing embedded generation; peer-

to-peer trade

Integration of DER into short-term and long-term

forecasting and planning

Market power issues Retail market issues

Stranded assets; death spiral; limits of

regulation

Structural separation of competitive and

non-competitive sectors

Markets for ramp rate and

inertia

Regulation of micro-grids and stand-alone

networks

Co-ordination of private and network

investment Regulatory governance and government

confidence in the market